ANNUAL REPORT INFORME ANUAL 20 1 7 CONTENTS ÍNDICE Letter from the Executive Chairman .................................................................................. 1 Letter from the President & Chief Executive Officer ................................................. 2 25-Year Historical Financial Summary .............................................................................. 6 Management & Board of Directors ..................................................................................... 8 Carta del Presidente Ejecutivo de la Junta de Directores ....................................... 9 Carta del Presidente y Principal Oficial Ejecutivo ..................................................... 10 Resumen Financiero Histórico (25 años) ....................................................................... 14 Gerencia y Junta de Directores ....................................................................................... 16 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 United States 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 los 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 popular.com/en/ investor-relations/annual-reports/ El Formulario 10-K, el proxy y otra información financiera están disponibles en popular.com/ accionistas/informe-anual/ ANNUAL MEETING The 2018 Annual Stockholders’ Meeting of Popular, Inc. will be held on Tuesday, May 8, at 9:00 a.m. at the penthouse of the Popular Center Building, San Juan, Puerto Rico. REUNIÓN ANUAL La Reunión Anual de Accionistas 2018 de Popular, Inc., se llevará a cabo el martes 8 de mayo, a las 9:00 a.m. en el piso PH de Popular Center, San Juan, Puerto Rico. While I have officially been a part of Popular for 41 years, Popular has been, and will be, a part of me for my entire life. After 26 years as Popular’s CEO, in July of 2017 I assumed the position of Executive Chairman and was proud to see my colleague and friend, Ignacio Alvarez, named as the new CEO by the Board of Directors. Serving as the CEO for over two decades has undoubtedly been one of the most rewarding experiences of my life. It is immensely gratifying to see an organization that is not only financially strong, but that remains committed to fulfilling the needs of our customers, caring for our employees and taking an active role in the communities we serve. The values that have guided us since our beginnings 125 years ago are stronger than ever today, and it fills me with pride that Popular is, particularly in Puerto Rico, a symbol of excellence and progress. I am grateful to all my colleagues for being a constant source of inspiration, to our clients for their trust and to you, fellow shareholders, for your support throughout all of these years. With Popular on a solid position, the time was right for both Ignacio and me to assume our new roles. Since he joined Popular in 2010 as General Counsel, and more recently as President and COO, Ignacio demonstrated he has the experience, the skills and the vision to lead this organization. It is a privilege for me to continue serving Popular from a different position and it is exciting to collaborate with Ignacio and his team as they take Popular into the future. The vision and the strategy are clear, and the energy is evident. While I have officially been a part of Popular for 41 years, Popular has been, and will be, a part of me for my entire life. From a special vantage point, I have witnessed this organization thrive during good times and persevere and strengthen in challenging ones. The response of all our colleagues in the aftermath of the 2017 hurricanes is the most recent example of the spirit that makes Popular a successful and unique organization. I am confident that Popular’s best days lie ahead. Sincerely, RICHARD L. CARRIÓN Executive Chairman Popular, Inc. 2017 ANNUAL REPORT | 1 POPULAR, INC. YEAR IN REVIEW Dear Shareholders: It is an honor to provide my first annual compared to $358 million in the approximately $1.5 billion in retail auto shareholder update as Popular’s CEO, a previous year. The adjusted results for loans and $340 million in commercial position that I was privileged to assume 2017 were adversely affected by the loans. We anticipate the transaction in July of 2017. impact of the hurricanes on provision, to close during the second quarter of revenues and expenses, which totaled 2018 and be accretive to earnings. I am grateful and humbled by the confidence the Board of Directors and Richard have placed in me. Richard is in many ways the founder of the modern Popular, helping it evolve during his tenure as CEO from a much smaller bank $73 million, net of income tax, and a $38 million loan loss provision expense, net of income tax, related to our taxi medallion portfolio in the U.S. acquired in 2015 as part of the Doral transaction. Despite concerns about Puerto Rico’s economic and fiscal situation, for the first nine months of 2017, the price of Popular’s shares roughly correlated to the movement of the U.S. KBW in Puerto Rico to a diversified financial Credit quality remained stable during Regional Bank Index, albeit with a services institution that currently ranks 2017. In Puerto Rico, our credit metrics higher volatility. However, the price of among the top 50 in the United States. for the first eight months of the year our share was severely affected by the As everyone knows, 2017 was an eventful year for Popular and for Puerto Rico. Barely three months after I became CEO, two major hurricanes, Irma and Maria, were stable despite a weak economy. impact of Hurricane Maria, closing the Year-end results include the effect year at $35.49, 19% lower than 2016 of the loan payment moratorium and below our U.S. Peers and the KBW granted to consumer and commercial Regional Bank Index. Nevertheless, this borrowers after the hurricanes, which performance compared favorably to struck the Virgin Islands and Puerto Rico paused inflows into delinquent status. in the span of two weeks, leaving a trail In our U.S. operation, excluding the of destruction in their wake. Throughout impact of the taxi medallion portfolio, this difficult period, we demonstrated the asset quality remained strong. other Puerto Rican banks. I am happy to report that our share price has increased 21% through the first eight weeks of 2018. power and resilience of our organization by continuing to serve our clients in an incredibly challenging environment. During the first quarter of 2017, we executed a series of actions that reflect the strength of our capital position. In 2017, we achieved net income of $108 We increased the quarterly common million, compared with $217 million in stock dividend from $0.15 per share 2016. Our 2017 results include a $168 to $0.25 per share and completed the million expense related to the impact of repurchase of $75 million in common the U.S. tax reform on the deferred tax stock. Our capital base remains strong, asset (DTA) of our U.S. operation. Net closing the year with a Common Equity income in 2016 included, among other Tier 1 ratio of 16.3%. We mobilized to restore operations, support our colleagues in need and assist the most affected communities. The hurricanes devastated critical infrastructure, leaving the entire 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. In February 2018, we announced an population without access to electricity, agreement to acquire and assume from water and telecommunications in Reliable Financial Services, Inc. and its aftermath. Further complicating Reliable Finance Holding Company, matters, the severe damage to roads both subsidiaries of Wells Fargo & and the scarcity of fuel delayed initial Company, certain assets and liabilities recovery efforts and hindered the After adjusting for the impact of related to Wells Fargo’s auto finance supply of basic necessities such as these items, among others, adjusted business in Puerto Rico. As part of food, medicines and drinking water. net income for 2017 was $276 million, the transaction, Popular will acquire Against this backdrop, as soon as 2 | POPULAR, INC. it was safe, we mobilized to restore the payout of the annual statutory operations, support our colleagues Christmas bonus to employees in in need and assist the most affected Puerto Rico and the U.S. and British communities. Virgin Islands. In Puerto Rico, cash became in many We also mobilized quickly to help cases the only viable payment method severely impacted communities by due to the impact that the lack of launching the Embracing Puerto Rico electricity and telecommunications fund, which today has commitments had on the point-of-sale (POS) and of more than $6 million, including our automatic teller machines (ATMs) initial contribution of $1 million. We are networks. To help stabilize the situation, grateful for the generous donations of we provided access to cash and other many business partners and friends essential banking services through our that enabled us to deliver immediate ATM and branch network as quickly relief to the areas most affected by the as possible. Despite many operational disaster. The fund, which is managed challenges, thanks to the remarkable by our foundation, Fundación Banco efforts of our colleagues, we opened Popular, is now focused on helping the first branches within 72 hours of community-based organizations imp- Hurricane Maria’s landfall. Thereafter, lement innovative solutions to pressing the number of branches and ATMs social problems. In Puerto Rico, our deposit balances increased by $4.3B and our customer base by 31K. with the renovation or relocation of eight branches, which has helped spur branch deposit growth. • We continued making headway in simplifying our technology in operation increased consistently, reaching 124 or 74% and 333 or 52%, respectively, within four weeks of the storm’s passing. In addition, as owners of the most extensive ATM network on the Island, we waived all ATM fees for several weeks after the storm to all customers, including those of other financial institutions. On the credit side, we provided relief to our customers by offering a principal and interest payment moratorium on residential, consumer and commercial loans and waived late payment fees. At the same time, we made it a priority to take care of our colleagues during this difficult time. Among many While much of the discussion of 2017 infrastructure and migrating trans- naturally centers on the hurricanes, the year also included other important accomplishments: • In Puerto Rico, we continued to improve our leading market position. Notwithstanding the pro- tracted economic recession and the effects of the hurricanes, our deposit balances increased by $4.3 billion and our customer base by 31,000. We also achieved growth in several portfolios, such as commercial loans and auto loans. • In the United States, we grew actions to digital channels to achieve greater efficiencies and deliver a superior customer experience. Digital deposit transactions sur- passed 40% of total deposits in both Puerto Rico and the United States. • We also expanded our efforts to attract, develop and retain the best talent in the markets we serve. We launched and strengthened initiatives in areas such as training, diversity and inclusion and wellness. We look forward to 2018, aware of the challenges, but ready to seize commercial loans by 16%, launched opportunities that will undoubtedly initiatives, we increased the Employee a private banking initiative, and arise. The Puerto Rico economy Emergency Fund to offer financial strengthened our mortgage orig- remains the most significant headwind assistance to those who suffered ination unit. We continued the we face. An environment that was severe damages, and we accelerated transformation of our retail network already extremely complex due to the 2017 ANNUAL REPORT | 3 POPULAR, INC. YEAR IN REVIEW fiscal and public debt situation has hurricanes. We now have a unique become even more challenging after opportunity to make significant the hurricanes. Processes that were changes in areas such as energy, underway will have to be adjusted to housing, health and education. As reflect the post-hurricane reality. the leading financial institution on In the months following the hurricanes, economic activity was inevitably impacted mainly due to delays in the restoration of electricity in Puerto Rico. Nevertheless, we are heartened to the Island, Popular is ready to play an important role, as we have done throughout our history, in efforts to build a stronger and more sustainable Puerto Rico. see signs that the economic situation Our U.S. business continues to be on the Island has begun to stabilize, strategically important to Popular Fit for the Future Strengthening our foundation by attracting and developing our talent around the capabilities needed for the future and enhancing our internal controls to effectively manage risks This framework ensures that we consistently balance our focus between present and future needs, and helps us identify the necessary steps to achieve with several metrics – such as our as the main source of diversification our strategic goals. customers’ debit card purchases and of risk, expansion of revenues, and auto sales – returning to pre-storm potential growth. We remain focused levels. There has also been a great deal on diversifying our loan portfolio, of discussion of an acceleration of out- strengthening our deposit franchise, migration after the hurricanes. While driving fee income, and transforming the increase is undeniable, estimates our retail network. I take this opportunity to express my gratitude to our Board of Directors and my colleagues for their extraordinary response to the crisis brought about by the hurricanes. Managing responsibilities at Popular while tending to difficult situations in their home, our employees in Puerto In December 2017, we unveiled a new strategic framework founded on a vision to deliver an excellent customer Rico and the U.S. and British Virgin experience by offering financial Islands responded heroically, and we solutions in a simple way. This vision is could not have achieved what we did supported by four strategic pillars: Sustainable and Profitable Growth Identifying sustainable and profitable growth opportunities Simplicity Simplifying our company by streamlining our processes and technological platform to reduce costs Customer Focus Creating a customer- focused service culture with a consistent experience across channels without their dedication and hard work. The support of our colleagues in the mainland United States was also very important throughout those trying months. I also want to thank Néstor O. Rivera, former head of the Retail Banking Group, who retired in 2017 after a long and successful career at Popular spanning close to 50 years. Néstor’s legacy will endure, as he worked to grow our Puerto Rico branch network, helped shape Popular’s technology strategy and mentored generations of leaders who learned the importance of our values and organizational culture through his counsel and example. Luis vary considerably, and it still is unclear how many of those who have left the Island will eventually return as the situation continues to stabilize. In the end, the solution to the migration issue is to accelerate economic growth in Puerto Rico. The pace of economic recovery will be heavily dependent on the speed of the remaining power restoration and on the magnitude and timing of funds flowing into Puerto Rico from federal agencies and insurance companies. These funds, which are estimated to exceed $25 billion, are likely to have a stimulative effect on the economy on the short to medium term. Puerto Rico’s longer-term economic prospects will hinge on the decisions regarding Puerto Rico’s rebuilding. The Island was facing serious structural problems before the impact of the 4 | POPULAR, INC. COMMITTED TO OUR CLIENTS, COLLEAGUES AND COMMUNITIES In September 2017, Puerto Rico and the Virgin Islands suffered the catastrophic impact of two major hurricanes in the span of two weeks, destroying structures, devastating the natural landscape and leaving entire populations without access to electricity, water, telecommunications, medical services and basic supplies. Popular demonstrated its unwavering commitment to its clients, employees and communities, rapidly restoring access to banking services and reaching out to those who needed it most. Cestero, who joined Popular in 1995 and has close to 20 years of experience in the Retail Banking Group, assumed leadership of this group after Nestor’s retirement. Luis has proven his deep knowledge of the business, and, more importantly, has demonstrated strong leadership skills, earning the respect of everyone around him. Popular is today a much stronger organization than it was before the 2017 hurricanes. We worked as a team, adapted to change, developed creative solutions and responded decisively. We demonstrated all that we can achieve when we have a shared purpose. We begin 2018, year in which we celebrate our 125th anniversary, Our Customers Access to cash and other basic banking services despite operational challenges Operating 31% of branches and 24% of ATMs one week after Hurricane Maria; reached 92% and 82%, respectively, by year-end. Reestablished call center operations on September 25; resumed 24/7 service on October 23. Offered uninterrupted online and mobile banking services. committed to preserving the spirit Relief and support and the attitudes that allowed us to not only face 2017’s challenges, but to become a better organization as a result of them. We do not need a crisis to show our very best. Our colleagues, our customers, our communities and our shareholders expect, deserve and will get our best, every day. Sincerely, Implemented a payment moratorium for credit cards, personal loans, auto loans and mortgages. Waived ATM fees for 25 days to our customers and customers of other financial institutions. Opened seven hubs across the island to offer commercial clients work spaces with Internet access. Offered customers and the general public guidance on insurance and FEMA claims processes. OUR PEOPLE Financial Assistance Wellness and support Distributed water, food vouchers and packages with basic supplies to employees in need. Established childcare centers for in our main employees’ children buildings. Temporarily lifted restrictions in the medical insurance plan to ensure care in urgent cases, extended our On Site Health and Wellness Center services to employees’ dependents and coordinated specialized programs to address emotional aspects. OUR COMMUNITIES Embracing Puerto Rico Established the Embracing Puerto Rico fund with an initial contribution of $1 million; has reached $6.1 million in commitments. Completed 35 missions to distribute over 800k pounds of basic provisions, impacting over 140k individuals Currently focused on projects that will stabilize communities by providing access to clean water, solar energy and jump-starting Puerto Rico’s economic recovery. Increased the Employee Emergency Fund and deployed over $800k to employees who suffered major losses. Supported various initiatives, such as United for Puerto Rico and Somos Una Voz. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. Advanced payroll the week of the hurricane and accelerated the payout of the Christmas bonus. Offered bank-owned properties to colleagues who needed housing. Moving into a new phase of actions, centered our communities across the Island into long-term recovery. transitioning on 25-YEAR HISTORICAL FINANCIAL SUMMARY (Dollars in millions, except per share data) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Selected Financial Information Net Income (Loss) $109.4 $124.7 $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 Assets Gross Loans Deposits Stockholders’ Equity Market Capitalization 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 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 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 18,097.8 834.2 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 $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 Return on Average Assets (ROAA) 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% Return on Average Common Equity (ROACE) Per Common Share1 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% Net Income (Loss) - Basic $4.18 $4.59 $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 Net Income (Loss) - Diluted Dividends (Declared) Book Value Market Price Assets by Geographical Area Puerto Rico United States Caribbean and Latin America Total Traditional Delivery System Banking Branches Puerto Rico Virgin Islands United States2 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 and Popular Risk Services 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 4.18 1.20 4.59 1.25 5.24 1.54 6.69 1.83 31.86 34.35 39.52 43.98 7.51 2.00 51.83 8.26 2.50 9.19 3.00 9.85 3.20 10.87 3.80 59.32 57.54 69.62 79.67 13.05 4.00 91.02 17.36 5.05 96.60 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 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% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 165 8 32 205 58 26 8 92 297 234 8 11 253 166 8 34 208 73 28 10 111 319 262 8 26 296 166 8 40 214 91 31 9 3 134 348 281 8 38 327 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 196 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 Employees (full-time equivalent) 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 6 | POPULAR, INC. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $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 $107.7 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 44,277.3 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 24,942.5 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 35,453.5 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 5,103.9 $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 $3,622.4 1.23% 1.17% 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 17.60% 17.12% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% $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 17.92 6.20 19.74 6.40 12.41 6.40 (2.73) (45.51) 6.40 4.80 2.39 0.20 109.45 118.22 123.18 121.24 63.29 38.91 288.30 211.50 179.50 106.00 51.60 22.60 55% 43% 2% 53% 45% 2% 52% 45% 3% 59% 38% 3% 64% 33% 3% 65% 32% 3% (0.62) - 36.67 31.40 74% 23% 3% 1.44 - 37.71 13.90 74% 23% 3% 2.35 5.78 (3.08) - 39.35 20.79 - 44.26 28.73 - 40.76 34.05 73% 24% 3% 72% 25% 3% 80% 17% 3% 8.65 0.30 48.79 28.34 75% 22% 3% 2.06 0.60 $1.02 $1.02 1.00 49.60 49.51 43.82 35.49 75% 23% 2% 76% 22% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 179 8 139 173 8 101 185 8 96 183 9 94 175 9 92 171 9 90 168 9 47 173 9 50 171 9 51 168 9 51 326 282 289 286 276 270 224 232 231 228 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 421 749 568 59 163 790 194 8 136 338 191 8 142 341 196 8 147 351 212 158 134 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 9 351 689 292 633 280 631 97 423 583 61 181 825 605 65 192 862 615 69 187 871 605 74 176 855 10 33 6 1 1 1 9 61 343 571 77 136 784 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 9 17 2 5 2 1 1 9 14 2 5 2 1 1 55 344 58 344 59 335 59 329 46 270 46 278 37 268 34 262 624 17 138 779 613 20 135 768 597 20 134 751 599 22 132 753 602 21 83 706 622 21 87 730 635 20 101 756 633 22 110 765 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 7,784 1Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2Excludes a Banco Popular de Puerto Rico branch operating in New York. 2017 ANNUAL REPORT | 7 POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS Senior Management Team RICHARD L. CARRIÓN Executive Chairman Popular, Inc. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. CAMILLE BURCKHART Executive Vice President & Chief Information and Digital Officer Innovation, Technology & Operations Group Popular, Inc. LUIS CESTERO Executive Vice President Retail Banking Group Banco Popular de Puerto Rico MANUEL A. CHINEA Executive Vice President Popular, Inc. Chief Operating Officer Popular Community Bank JAVIER D. FERRER Executive Vice President, Chief Legal Officer & Corporate Secretary General Counsel & Corporate Matters Group Popular, Inc. JUAN O. GUERRERO Executive Vice President Financial and Insurance Services Group Banco Popular de Puerto Rico GILBERTO MONZÓN Executive Vice President Individual Credit Group Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Executive Vice President Administration Group Popular, Inc. ELI S. SEPÚLVEDA Executive Vice President Commercial Credit Group Banco Popular de Puerto Rico LIDIO V. SORIANO Executive Vice President & Chief Risk Officer Corporate Risk Management Group Popular, Inc. CARLOS J. VÁZQUEZ Executive Vice President & Chief Financial Officer Popular, Inc. Board of Directors RICHARD L. CARRIÓN Executive Chairman Popular, Inc. IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. JOAQUÍN E. BACARDÍ, III Chairman Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ President & Chief Executive Officer FRG, Inc. 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 Aunque oficialmente he formado parte de Popular por 41 años, Popular ha sido, y continuará siendo, una parte de mí por toda mi vida. Después de 26 años como CEO de Popular, en julio del 2017 asumí el cargo de Presidente Ejecutivo de la Junta de Directores y me llenó de orgullo ver a mi compañero y amigo, Ignacio Álvarez, designado por la Junta como el nuevo CEO. Servir de CEO por más de dos décadas ha sido, sin duda alguna, una de las experiencias más gratificantes de mi vida. Siento una gran satisfacción al ver una organización que no solo es financieramente fuerte, sino que permanece comprometida con atender las necesidades de nuestros clientes, cuidar de nuestros empleados y asumir un papel activo en las comunidades que servimos. Los valores que nos han guiado desde nuestros inicios hace 125 años son hoy más fuertes que nunca, y me enorgullece que Popular es, particularmente en Puerto Rico, un símbolo de excelencia y progreso. Agradezco a mis colegas por ser una fuente constante de inspiración, a nuestros clientes por su confianza y a ustedes, mis compañeros accionistas, por su apoyo a través de todos estos años. Con Popular en una posición sólida, éste era el momento indicado para que Ignacio y yo asumiéramos nuevos roles. Desde que se unió a Popular en el 2010, y más recientemente como presidente y COO, Ignacio demostró que tiene la experiencia, las destrezas y la visión para liderar esta organización. Es un privilegio para mí continuar sirviendo a Popular desde una posición diferente y estoy sumamente entusiasmado de colaborar con Ignacio y su equipo mientras trazan el futuro de Popular. La visión y la estrategia están claras, y la energía es evidente. Aunque oficialmente he formado parte de Popular por 41 años, Popular ha sido, y continuará siendo, una parte de mí por toda mi vida. Desde un punto de vista especial, he sido testigo de cómo esta organización prospera en tiempos buenos y persevera y se fortalece en tiempos difíciles. La respuesta de nuestros colegas a la crisis provocada por los huracanes del 2017 es el ejemplo más reciente del espíritu que hace a Popular una organización exitosa y única. No tengo duda de que los mejores días de Popular están por delante. Sinceramente, RICHARD L. CARRIÓN Presidente Ejecutivo de la Junta de Directores Popular, Inc. 2017 INFORME ANUAL | 9 POPULAR, INC. RESUMEN DEL AÑO Estimados accionistas: Es un honor presentar mi primer informe a los accionistas como Principal Oficial Ejecutivo (CEO) de Popular, una posición que tuve el privilegio de asumir en julio de 2017. Agradezco humildemente la confianza que la Junta de Directores y Richard han puesto en mí. Richard es, en muchos aspectos, el fundador del Popular moderno. Durante sus años como CEO, ayudó a evolucionar la organización de un banco mucho más pequeño en Puerto Rico a una institución de servicios financieros diversificados que hoy se encuentra entre las 50 principales en los Estados Unidos. Como todos sabemos, el 2017 fue un año retante para Popular y para Puerto Rico. Luego de tan solo tres meses de ser CEO, dos huracanes de gran magnitud, Irma y María, azotaron las Islas Vírgenes y Puerto Rico en menos de dos semanas, dejando a su paso una extensa destrucción. Durante este momento difícil, demostramos la fuerza y resiliencia de nuestra organización, sirviendo a nuestros clientes en un ambiente increíblemente desafiante. relacionado En el 2017 alcanzamos un ingreso neto de $108 millones, comparado con $217 millones en el 2016. Nuestros resultados para el 2017 incluyen un gasto de $168 millones como resultado del impacto de la reforma contributiva federal sobre nuestro activo de contribuciones diferidas a nuestras operaciones en Estados Unidos. El ingreso neto en el 2016 incluyó, entre otros eventos significativos, el efecto 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. Luego de ajustar para excluir el impacto de estas partidas, entre otras, el ingreso neto ajustado para el 2017 fue de $276 millones, comparado con $358 millones en el año anterior. Los resultados ajustados del 2017 se afectaron negativamente por el impacto de los huracanes en la provisión, en ingresos y en gastos, que alcanzó $73 millones, netos de contribuciones, y a una provisión para pérdidas en préstamos de $38 millones, netos de contribuciones, relacionada a nuestra cartera de préstamos para licencias de taxis en los Estados Unidos adquirida como parte de la transacción de Doral. La calidad de crédito permaneció estable durante el 2017. En Puerto Rico, los indicadores para los primeros ocho meses del año se mantuvieron estables a pesar de la debilidad de la economía. Las métricas para el fin de año incluyen el efecto de la moratoria de pagos de préstamos ofrecida a clientes individuales y comerciales tras el paso de los huracanes, que suspendió temporeramente el que estos fuesen considerados como delincuentes. En la los Estados Unidos, excluyendo cartera de licencias de taxi, la calidad del crédito se mantuvo fuerte. Durante el primer trimestre del 2017, tomamos una serie de acciones que reflejan la fortaleza de nuestra posición de capital. Aumentamos el dividendo trimestral de $0.15 a $0.25 por acción común y recompramos $75 millones de acciones comunes. Nuestra base de capital continúa fuerte, terminando el año con una relación de capital básico (Common Equity Tier 1) de 16.3%. En febrero del 2018, anunciamos un acuerdo para adquirir y asumir ciertos activos y pasivos de Reliable Financial Inc. y Reliable Finance Services, Holding Company, subsidiarias de Wells Fargo & Company, relacionados a su negocio de financiamiento de autos en Puerto Rico. Como parte de la transacción, Popular adquirirá aproximadamente $1,500 millones en préstamos de auto y $340 millones en préstamos comerciales. Anticipamos que la transacción se completará en el segundo trimestre del 2018 y que contribuirá positivamente a los ingresos de la corporación. A pesar de las preocupaciones relacionadas a la situación fiscal y económica de Puerto Rico, durante los primeros nueve meses del 2017, el precio de las acciones de Popular tuvo un movimiento parecido al Índice Regional de Bancos de KBW en los Estados Unidos, aunque más volátil. Sin embargo, el precio de nuestras acciones se vio severamente afectado por el impacto del huracán María, cerrando el año en $35.49, 19% más bajo que en el 2016 y por debajo de nuestros bancos pares en Estados Unidos y del Índice Regional de Bancos de KBW. No obstante, este desempeño compara favorablemente con el de otros bancos en Puerto Rico. Me complace informar que el precio de la acción ha aumentado un 21% durante las primeras ochos semanas del 2018. Nos movilizamos para restablecer nuestras operaciones, apoyar a aquellos compañeros que lo necesitaban y a asistir a las comunidades más afectadas. Los huracanes devastaron infraes- tructura crítica, dejando tras su paso a la población entera sin acceso a 10 | POPULAR, INC. electricidad, agua y telecomunicaciones. Complicando aún más la situación, los daños severos a las carreteras y la escasez de combustible obstaculizaron la distribución de bienes básicos como alimentos, medicamentos y agua potable. En este contexto, tan pronto como fue seguro, nos movilizamos para restablecer nuestras operaciones, apoyar a aquellos compañeros que lo necesitaban y a asistir a las comunidades más afectadas. abrimos En Puerto Rico, el dinero en efectivo se convirtió en muchos casos en el único método de pago viable debido al impacto que la falta de electricidad y telecomunicaciones tuvo en las redes de puntos de venta y de cajeros automáticos. Para ayudar a estabilizar la situación, proporcionamos acceso a efectivo a través de nuestras sucursales y cajeros automáticos a la mayor brevedad posible. A pesar de múltiples retos operacionales, las primeras sucursales 72 horas después del embate del huracán María. A partir de ese momento, el número de sucursales y cajeros automáticos en operación aumentó consistentemente, alcanzando 124 o 74% y 333 o 52%, respectivamente, semanas después del paso del huracán. Además, como dueños de la red de cajeros automáticos más extensa en la isla, eliminamos todos los cargos por uso de los cajeros automáticos durante varias semanas después del huracán a todos los clientes, incluyendo a aquellos de otras instituciones financieras. En el lado de crédito, brindamos alivio a nuestros clientes, ofreciendo una moratoria de pago de interés y principal en los préstamos hipotecarios, personales y comerciales y suspendiendo los cargos por pagos tardíos. cuatro A la misma vez, establecimos como una prioridad apoyar a nuestros compañeros durante ese momento difícil. Entre muchas iniciativas, aumentamos el Fondo de Emergencia de Empleados para ofrecer asistencia financiera a empleados que sufrieron daños severos, y aceleramos el pago del bono anual de Navidad establecido por ley a los empleados en Puerto Rico y las Islas Vírgenes estadounidenses y británicas. afectadas, También, nos movilizamos rápida- mente para ayudar a comunidades lanzando severamente el fondo Abrazando a Puerto Rico, que hoy tiene compromisos de más de $6 millones, incluyendo nuestra contribución inicial de $1 millón. Agradecemos las donaciones generosas de muchos socios y amigos que nos permitieron llevar socorro inmediato a las áreas más afectadas por el desastre. El fondo, que es manejado por la Fundación Banco Popular, ahora está enfocado en apoyar a organizaciones comunitarias en la implantación de soluciones innovadoras a problemas sociales apremiantes. Aunque gran parte de la discusión del 2017 naturalmente gira alrededor de los huracanes, durante el año también alcanzamos otros logros importantes: • En Puerto Rico, continuamos forta- leciendo nuestra posición de liderazgo en el mercado. A pesar de la recesión económica prolongada y del efecto de los huracanes, nuestros balances de depósitos aumentaron por $4,300 millones y nuestra base de clientes por 31,000. Alcanzamos crecimiento, además, en varias carteras, como las de préstamos comerciales y préstamos de auto. • En los Estados Unidos, aumentamos los préstamos comerciales por 16%, lanzamos una iniciativa de banca privada y fortalecimos nuestra unidad de originación hipotecaria. En Puerto Rico, nuestros balances de depósitos aumentaron por $4,300 millones y nuestra base de clientes por 31K. la transformación Continuamos de nuestra red de sucursales, remodelando o relocalizando ocho de estas, lo que ha ayudado a promover el crecimiento de depósitos en las sucursales. • Seguimos progresando en la simplifi- cación de nuestra infraestructura de tecnología y en la migración de transacciones a canales digitales, para alcanzar mayores eficiencias y ofrecer una experiencia superior a nuestros clientes. Los depósitos a través de canales digitales sobrepasaron el 40% del total de depósitos, tanto en Puerto Rico como los Estados Unidos. • Además, nuestros expandimos esfuerzos por atraer, desarrollar y retener el mejor talento en los mercados que servimos. Lanzamos y fortalecimos iniciativas en áreas como adiestramientos, diversidad e inclusión y bienestar. Comenzamos el 2018 con entusiasmo, conscientes de los retos, pero listos las oportunidades para aprovechar que sin duda surgirán. La economía de Puerto Rico continúa siendo el desafío principal que enfrentamos. Un entorno que era complicado de por sí debido a la situación fiscal y de la deuda pública, 2017 INFORME ANUAL | 11 POPULAR, INC. RESUMEN DEL AÑO se tornó aún más retante tras el paso de los huracanes. Procesos que ya habían comenzado tendrán que ser ajustados para reflejar una nueva realidad. impactó los meses posteriores a los En la actividad económica huracanes, inevitablemente por se demoras en el restablecimiento del servicio eléctrico en Puerto Rico. Sin embargo, nos alienta ver señales de que la situación económica en la isla ha comenzado a estabilizarse. Algunas métricas, como las compras de nuestros clientes con tarjetas de débito y las ventas de autos, ya están regresando a los niveles previos a los huracanes. Se ha discutido mucho sobre la aceleración de la emigración después de los huracanes. Aunque el aumento es innegable, los estimados varían considerablemente y todavía no está claro cuántos de los que se fueron de la Isla regresarán eventualmente, a medida que la situación continúe estabilizándose. A fin de cuentas, la solución para el tema de migración es acelerar el crecimiento económico en Puerto Rico. El ritmo de la recuperación económica dependerá en gran parte de la rapidez con que se restablezca el servicio eléctrico restante, así como la magnitud y la velocidad del flujo de los fondos de las agencias federales y de las compañías de seguros hacia Puerto Rico. Estos fondos, que se estima excederán los $25,000 millones, posiblemente servirán de estímulo a la economía a corto y mediano plazo. futuro económico de Puerto El largo plazo dependerá de Rico a las decisiones que se tomen sobre durante el proceso de reconstrucción. La isla enfrentaba serios problemas estructurales antes del impacto de los huracanes. Ahora tenemos una 12 | POPULAR, INC. oportunidad única para hacer cambios significativos en áreas como energía, vivienda, salud y educación. Como la principal institución financiera en la isla, Popular está listo para jugar un papel importante, como hemos hecho a través de nuestra historia, en los esfuerzos por construir un Puerto Rico más fuerte y sustentable. Nuestro negocio en los Estados Unidos continúa teniendo una importancia fuente estratégica como nuestra principal de diversificación de riesgo, expansión de ingresos y potencial de crecimiento. Seguimos enfocados en diversificar nuestra cartera de préstamos, generar ingresos que no provienen de intereses y transformar nuestra red de sucursales. En diciembre del 2017, develamos un nuevo marco estratégico fundamen- tado en una visión de brindar una experiencia excelente a nuestros clientes, ofreciéndoles soluciones financieras de una forma sencilla. Esta visión se apoya en cuatro pilares estratégicos: Crecimiento rentable y sostenible Identificar oportunidades de crecimiento rentable y sostenible Sencillez Simplificar nuestra organización, optimizando nuestros procesos y nuestra plataforma tecnológica para reducir costos Enfoque en el cliente Crear una cultura enfocada en el servicio al cliente y proveer una experiencia consistente a través de todos los canales Preparados para el futuro Fortalecer nuestra organización, atrayendo y desarrollando nuestro talento alrededor de las capacidades necesarias para el futuro y enfatizando nuestros controles internos para manejar efectivamente el riesgo. Este marco asegura que consis- tentemente balanceemos nuestro enfoque necesidades entre presentes y futuras, y nos ayuda los pasos necesarios a para alcanzar nuestros objetivos estratégicos. identificar las Aprovecho esta oportunidad para expresar mi agradecimiento a la Junta de Directores y a mis compañeros por su respuesta extraordinaria ante la crisis provocada por los huracanes. No hubiésemos logrado lo que hicimos sin la dedicación y trabajo de nuestros empleados en Puerto Rico y las Islas Vírgenes estadounidenses y británicas, quienes respondieron de forma heroica, responsabilidades manejando en Popular a la vez que atendían situaciones difíciles en sus hogares. El apoyo de nuestros compañeros en los Estados Unidos también fue de mucho valor a través de esos meses tan complicados. sus Quiero agradecer también a Néstor jefe del O. Rivera, anteriormente Grupo de Banca Individual, quien se retiró en el 2017 luego de una larga y exitosa carrera en Popular abarcando cerca de 50 años. El legado de Néstor perdurará, pues trabajó para crecer nuestra red de sucursales en Puerto Rico, ayudó a forjar la estrategia de tecnología de Popular y sirvió de mentor a generaciones de líderes que COMPROMETIDOS CON NUESTROS CLIENTES, COMPAÑEROS Y COMUNIDADES En septiembre del 2017, Puerto Rico y las Islas Vírgenes enfrentaron el impacto catastrófico de los poderosos huracanes Irma y María en un periodo de dos semanas, destruyendo estructuras, devastando el paisaje natural y dejando a poblaciones enteras sin acceso a electricidad, agua, telecomunicaciones, servicios médicos y suministros básicos. Popular demostró su compromiso inquebrantable con sus clientes, empleados y comunidades, restableciendo rápidamente el acceso a servicios bancarios y ofreciendo ayuda a los más necesitados. Nuestros Clientes Acceso a efectivo y a otros servicios bancarios básicos a pesar de retos operacionales Operando 31% de las sucursales y los cajeros automáticos 24% de una semana luego del Huracán María; alcanzamos 92% y 82%, respectivamente, para fin de año. Restablecimos la operación del centro de llamadas el 25 de septiembre; reanudamos el servicio 24/7 el 23 de octubre. Ofrecimos servicio ininterrumpido a través del Internet y dispositivos móviles. Alivio y apoyo Implantamos una moratoria para crédito, préstamos tarjetas de personales, préstamos de auto e hipotecas. Eliminamos los cargos en cajeros automáticos por 25 días a clientes instituciones nuestros y de otras financieras. Abrimos siete centros a través de la isla para ofrecer a nuestros clientes comerciales lugares de trabajo con acceso al Internet. Ofrecimos asesoría a clientes y al público general sobre el proceso de reclamación a FEMA y a compañías de seguro. Nuestra Gente Asistencia Financiera Ofrecimos propiedades del banco a empleados que necesitaban un hogar. Bienestar y apoyo Distribuimos agua, vales de comida y paquetes con suministros básicos a empleados necesitados. Establecimos centros de cuido de niños para los hijos de empleados en nuestros edificios principales. Suspendimos temporeramente las restricciones en el plan médico para asegurar cuidado en casos urgentes, extendimos el servicio de nuestro Centro Interno de Salud y Bienestar a los dependientes de nuestros empleados y coordinamos programas especiales para atender aspectos emocionales. Nuestras Comunidades Abrazando a Puerto Rico Establecimos el fondo Abrazando a Puerto Rico con una contribución inicial de $1 millón; ha alcanzado $6.1 millones en compromisos. Completamos 35 misiones para dis- libras de tribuir más de 800,000 suministros básicos, impactando más de 140,000 individuos. en Enfocados proyectos para estabilizar comunidades a través de acceso a agua potable y energía solar, y para fomentar la recuperación económica de Puerto Rico. aprendieron la importancia de nuestros valores y cultura organizacional a través de su consejo y ejemplo. Luis Cestero, quien se unió a Popular en el 1995 y tiene aproximadamente 20 años de experiencia en el Grupo de Banca Individual, asumió el liderato del grupo tras el retiro de Néstor. Luis ha demostrado su profundo conocimiento del negocio y, aún más importante, sus cualidades como líder, ganándose el respeto de todos los que le rodean. Popular es hoy una organización mucho más fuerte de lo que era antes de los huracanes del 2017. Trabajamos en equipo, nos adaptamos al cambio, desarrollamos soluciones creativas y respondimos decisivamente. Demos- tramos todo lo que podemos lograr cuando tenemos un propósito común. Comenzamos el 2018, año en el que celebramos nuestro 125 aniversario, comprometidos con preservar el las actitudes que nos espíritu y permitieron no solo enfrentar los retos del 2017, sino fortalecernos como resultado de ellos. No necesitamos una crisis para mostrar lo mejor de nosotros. nuestros compañeros, Nuestros clientes, nuestras comunidades y nuestros accionistas esperan, merecen y recibirán lo mejor de nosotros, todos los días. Sinceramente, IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. Aumentamos el Fondo de Emergencia de Empleados y distribuimos más de $800,000 a empleados que sufrieron pérdidas severas. Adelantamos la nómina la semana del huracán y aceleramos el pago del bono de Navidad. Apoyamos varias iniciativas, como Unidos por Puerto Rico y Somos una Voz. Evolucionando a una nueva fase enfocada en transicionar nuestras comunidades en una recuperación a largo plazo. 2017 INFORME ANUAL | 13 25 AÑOS RESUMEN FINANCIERO HISTÓRICO (Dólares en millones, excepto información por acción) Información Financiera Seleccionada 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Ingreso neto (Pérdida Neta) $109.4 $124.7 $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 Activos Préstamos Brutos Depósitos 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 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 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 Capital de Accionistas 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 Valor agregado en el mercado $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 Rendimiento de Activos Promedio (ROAA) 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% Rendimiento de Capital Común Promedio (ROACE) Por Acción Común1 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% Ingreso neto (Pérdida Neta) - Básico $4.18 $4.59 $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 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 Unidos2 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 y Popular Risk Services Popular Insurance Agency, U.S.A. Popular Insurance V.I. E-LOAN EVERTEC Subtotal Total Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico Islas Vírgenes Estados Unidos Total Empleados (equivalente a tiempo completo) 14 | POPULAR, INC. 4.18 1.20 4.59 1.25 5.24 1.54 6.69 1.83 31.86 34.35 39.52 43.98 7.51 2.00 51.83 8.26 2.50 9.19 3.00 9.85 3.20 10.87 3.80 59.32 57.54 69.62 79.67 13.05 4.00 91.02 17.36 5.05 96.60 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 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% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 165 8 32 205 58 26 8 92 297 234 8 11 253 166 8 34 208 73 28 10 166 8 40 214 91 31 9 3 111 319 134 348 262 8 26 296 281 8 38 327 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 196 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 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $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 $107.7 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 44,277.3 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 24,942.5 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 35,453.5 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 5,103.9 $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 $3,622.4 1.23% 1.17% 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 17.60% 17.12% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% $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 17.92 6.20 19.74 6.40 12.41 6.40 (2.73) (45.51) 6.40 4.80 2.39 0.20 (0.62) - 1.44 - 109.45 118.22 123.18 121.24 63.29 38.91 36.67 37.71 288.30 211.50 179.50 106.00 51.60 22.60 31.40 13.90 55% 43% 2% 53% 45% 2% 52% 45% 3% 59% 38% 3% 64% 33% 3% 65% 32% 3% 74% 23% 3% 74% 23% 3% - 39.35 20.79 73% 24% 3% 2.35 5.78 (3.08) - - 8.65 0.30 2.06 0.60 $1.02 $1.02 1.00 44.26 40.76 48.79 49.60 49.51 28.73 34.05 28.34 43.82 35.49 72% 25% 3% 80% 17% 3% 75% 22% 3% 75% 23% 2% 76% 22% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 179 8 139 173 8 101 185 8 96 183 9 94 175 9 92 171 9 90 168 9 47 173 9 50 171 9 51 168 9 51 326 282 289 286 276 270 224 232 231 228 192 8 128 328 183 114 43 18 15 30 9 2 1 1 5 194 8 136 338 191 8 142 341 196 8 147 351 212 158 134 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 9 421 749 351 689 292 633 280 631 97 423 568 59 163 790 583 61 181 825 605 65 192 862 615 69 187 871 605 74 176 855 10 33 6 1 1 1 9 61 343 571 77 136 784 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 9 17 2 5 2 1 1 9 14 2 5 2 1 1 55 344 58 344 59 335 59 329 46 270 46 278 37 268 34 262 624 17 138 779 613 20 135 768 597 20 134 751 599 22 132 753 602 21 83 706 622 21 87 730 635 20 101 756 633 22 110 765 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 7,784 1Los 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. 2Excluye una sucursal de Banco Popular de Puerto Rico en Nueva York. 2017 INFORME ANUAL | 15 POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES Gerencia RICHARD L. CARRIÓN Presidente Ejecutivo de la Junta de Directores Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. CAMILLE BURCKHART Vicepresidenta Ejecutiva y Principal Oficial de Informática y Estrategia Digital Grupo de Innovación, Tecnología y Operaciones Popular, Inc. LUIS CESTERO Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico MANUEL A. CHINEA Vicepresidente Ejecutivo Popular, Inc. Principal Oficial de Operaciones Popular Community Bank JAVIER D. FERRER Vicepresidente Ejecutivo, Principal Oficial Legal y Secretario Corporativo Grupo de Consejería General y Asuntos Corporativos Popular, Inc. JUAN O. GUERRERO Vicepresidente Ejecutivo Grupo de Servicios Financieros y Seguros Banco Popular de Puerto Rico GILBERTO MONZÓN Vicepresidente Ejecutivo Grupo de Crédito a Individuo Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Vicepresidente Ejecutivo Grupo de Administración Popular, Inc. ELI S. SEPÚLVEDA Vicepresidente Ejecutivo Grupo de Crédito Comercial Banco Popular de Puerto Rico LIDIO V. SORIANO Vicepresidente Ejecutivo y Principal Oficial de Riesgo Grupo Corporativo de Manejo de Riesgo Popular, Inc. CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo y Principal Oficial Financiero Popular, Inc. Junta de Directores RICHARD L. CARRIÓN Presidente Ejecutivo de la Junta de Directores Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. JOAQUÍN E. BACARDÍ, III Presidente de la Junta de Directores Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER Presidente Ballester Hermanos, Inc. JOHN W. DIERCKSEN Principal Greycrest, LLC MARÍA LUISA FERRÉ Presidenta y Principal Oficial Ejecutiva FRG, Inc. 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 Financial Review and Supplementary Information Management’s Discussion and Analysis of Financial Condition and Results of Operations Statistical Summaries 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, 2017 and 2016 Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements 2 76-80 81 82 84 85 86 87 88 89 POPULAR, INC. 2017 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. 2017 ANNUAL REPORT 3 4 12 20 20 24 24 26 27 27 28 31 31 34 35 35 37 37 39 39 40 46 51 72 73 73 76 76 77 78 80 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 - 2017 Annual Report” (“the report”) should be considered an integral part of this MD&A. Inc’s 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 (“Popular,” 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 conditions, capital adequacy and liquidity, the effect of legal and regulatory proceedings and new accounting standards financial condition and results of on the Corporation’s operations, the impact of Hurricanes Irma and Maria on us, and the anticipated impact of our acquisition and assumption, if consummated, of certain assets and liabilities of Reliable Financial Services and Reliable Finance Holding Company, subsidiaries of Wells Fargo & Company, related to Wells Fargo’s retail auto loan and commercial auto dealership financing business in Puerto Rico (the “Reliable Transaction”). All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions are generally intended to identify forward- looking statements. based on management’s Forward-looking statements are not guarantees of future current performance and are involve certain risks, expectations and, by their nature, uncertainties, 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 or decline in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve and, in Puerto Rico, where a significant portion of our business in concentrated; the impact of Hurricanes Irma and Maria on the economies of Puerto Rico and the U.S. and British Virgin Islands, and on our customers and our business, including the impact of measures taken by us in particular, the performance of to address customer needs; 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 Commonwealth’s fiscal and economic condition on the value and performance of our portfolio of Puerto Rico government securities and loans to governmental entities, as well as on our commercial, mortgage and consumer loan portfolios where private borrowers could be directly affected by governmental action; 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 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 as a result of cyberattacks or otherwise, including those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, and other third parties providing services to us; and risks if consummated. Other related to the Reliable Transaction, possible results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the housing prices, the job market, consumer confidence and spending habits which may level of non-performing assets, charge-offs and provision expense; risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. Moreover, the outcome of legal among other could cause events or things, factors affect, that the POPULAR, INC. 2017 ANNUAL REPORT 3 and regulatory 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. All forward-looking statements included in this report are based upon information available to the Corporation as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, management assumes no obligation to update or revise any such forward- looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. The description of the Corporation’s business and risk factors contained in Item 1 and 1A of its Form 10-K for the year ended December 31, 2017 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, Inc. 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, Inc. marketed deposit accounts under its name for the benefit of BPNA until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. Commencing in July 2017, the E-LOAN brand is being used by BPPR to offer personal loans through an online platform. Note 41 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 16.10% 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 4 POPULAR, INC. 2017 ANNUAL REPORT services 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 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, 2017, the Corporation recorded approximately $34.1 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2017 were $215.3 million. Refer to Note 17 to the consolidated financial the for Corporation’s investments under the equity method. information of statements additional SIGNIFICANT EVENTS Entry into an Agreement to Acquire Wells Fargo’s Auto Finance Business in Puerto Rico On February 14, 2018, Banco Popular de Puerto Rico entered into an agreement to acquire and assume from Reliable Financial Services, Inc. and Reliable Finance Holding Company, subsidiaries of Wells Fargo & Company (“Wells Fargo”), certain assets and liabilities related to Wells Fargo’s auto finance business in Puerto Rico (“Reliable”). As part of the transaction, Banco Popular will acquire approximately $1.5 billion in retail auto loans and $340 million in commercial loans. The acquired auto loan portfolio has credit characteristics that are similar to Banco Popular’s existing self-originated portfolio. Banco Popular will also acquire certain other assets and assume certain liabilities of Reliable. The purchase price for the all-cash transaction is expected to be approximately $1.7 billion, reflecting an aggregate discount of 4.5% on the assets to be acquired. Banco Popular will fund the purchase price with existing liquidity. The transaction is to the receipt by the parties of any further not subject to satisfaction of customary regulatory approvals. Subject closing conditions, Popular anticipates the transaction to close during the second quarter of 2018 and be accretive to earnings. On or after closing, Reliable employees will become employees of Banco Popular. Reliable will continue operating independently as a division of Banco Popular for a period of time after closing to provide continuity of service to Reliable customers while allowing Popular to assess best practices before Popular Auto’s integrating operations. operations with Reliable’s Hurricanes Irma and Maria During September 2017, Hurricanes Irma and Maria (the “hurricanes”), impacted Puerto Rico, the U.S. and British Virgin Islands, causing extensive damage and disrupting the markets in which Banco Popular de Puerto Rico (“BPPR”) does business. On September 6, 2017, Hurricane Irma made landfall in the USVI and the BVI as a Category 5 hurricane on the Saffir- Simpson scale, causing catastrophic wind and water damage to the islands’ infrastructure, homes and businesses. Hurricane Irma’s winds and resulting flooding also impacted certain municipalities of Puerto Rico, causing the failure of electricity infrastructure in a significant portion of the island. While hurricane Irma also struck Popular’s operations in Florida, neither our operations nor those of our clients in the region were materially impacted. electrical power, other basic utility Two weeks later, on September 20, 2017, Hurricane Maria, made landfall in Puerto Rico as a Category 4 hurricane, causing extensive destruction and flooding throughout Puerto Rico. Following the passage of Hurricane Maria, all Puerto Rico was left without and infrastructure services (such as water, communications, ports and other transportation networks) were severely curtailed and the government imposed a mandatory curfew. The hurricanes caused a significant disruption to the island’s economic activity. and Most wholesalers, financial institutions, manufacturing facilities and hotels, were closed for several days. establishments, including business retailers remains Puerto Rico and the USVI were declared disaster zones by President Trump due to the impact of the hurricanes, thus making them eligible for Federal assistance. Notwithstanding the significant recovery operation that is underway by the Federal, state and local governments, as of the date of this report, many businesses and homes in Puerto Rico and the and remain without power, other basic utility USVI infrastructure and many businesses are partially operating or remain closed and others have permanently closed. Electronic transactions, a significant source of revenue for the bank, declined significantly in the months following the hurricanes as a result of the lack of power and telecommunication services. Several reports indicate that the hurricanes have also accelerated the outmigration trends that Puerto Rico was experiencing, with many residents moving to the mainland United States, either on a temporary or permanent basis. significantly impacted, tax revenues. Employment The damages caused by the hurricanes are substantial and have had a material adverse impact on economic activity in Puerto Rico, as reflected by, among other things, the slowdown in production and sales activity and the reduction in the government’s levels are also expected to decrease at least in the short-term. It is still, however, too early, to fully assess and quantify the extent of the damage caused by the hurricanes, as well as their long-term economic impact on economic activity. Furthermore, the hurricanes severely damaged or destroyed buildings, homes and other structures, impacting the value of such properties, some is generally insured, of which may serve as collateral to our loans. While our the value of such insured collateral structures, as well as other structures unaffected by the hurricanes, may be significantly impacted. Although some of the impact of the hurricanes, including its short-term impact on economic activity, may be offset by recovery and reconstruction activity and the influx of Federal emergency funds and private insurance proceeds, it is too early to know the amount of Federal and private insurance money to be received and whether such transfers will significantly offset the negative economic, fiscal and demographic impact of the hurricanes. business continuity Prior to the hurricanes, the Corporation had implemented its action program. Although the Corporation’s business critical systems experienced minimal outages as a result of the storms, the Corporation’s physical operations in Puerto Rico, the USVI and the BVI, including its branch and ATM networks, were materially disrupted by the storms mostly due to lack of electricity and communication as well as limited accessibility. After the hurricanes, Popular has worked diligently to provide service to the Puerto Rico and Virgin Islands markets, including reopening retail locations and providing assistance to the communities it serves. A priority for Popular has been to maintain cash in its branches and ATM’s and to mobilize its workforce to ensure continuity of service to its customers and that of other financial institutions. Popular has implemented initiatives to provide assistance to individuals and several businesses impacted by the hurricanes. Actions taken by Popular, directly or through its affiliated P.R. and U.S.-based foundations, include: Payment Moratoriums. Payment moratoriums for eligible customers in mortgage, consumer, auto and commercial loans, subject to certain terms and conditions. Fee Waivers. The waiver of certain fees and service charges, including late-payment charges and ATM transaction fees in hurricane-affected areas. Other Initiatives. Employee Relief. Popular increased the Employee Relief Fund to $750,000 to assist affected employees. Popular also assisted employees by providing means to obtain water, food and other supplies, child care services, orientation on how to submit claims to the Federal Emergency Management Agency (“FEMA”) and other special offers. Charitable Corporation’s philanthropic arms, Fundación Banco Popular and the Popular Community Bank Foundation, launched relief efforts for the victims of hurricane Irma and Maria, through the “Embracing Puerto Rico” and “Embracing the Islands” campaigns, to which the Popular has donated $1.2 million. As needs unfold, Foundations are expected to direct funding to address immediate and long-term needs arising from the impact of the hurricanes. Popular also contributed to “Unidos por Puerto Rico”, a fundraising campaign spearheaded by Puerto Rico’s First Lady and was one of two sponsors of the “Somos Una The POPULAR, INC. 2017 ANNUAL REPORT 5 Voz” concert that has raised over $35 million for earthquake victims in Mexico and hurricane victims in Texas, Florida, Puerto Rico and the Caribbean. Fundación Banco Popular is leveraging the relationships it has developed with non-profit organizations and community leaders throughout its almost 40-year history, delivering assistance directly to those who need it most. During the fourth quarter of 2017, the Corporation continued normalizing its operations after the impact of the hurricanes. The government’s restoration of the electric and telecommunication services in the areas in which our branch factor leading the network operates was the most critical operate Corporation conditions. Reconstruction of the island’s electric infrastructure and restoration of the telecommunications network remain the most critical recovery from the for Puerto Rico’s hurricanes. challenges improved under to and operational disruption in the Corporation’s mortgage origination, servicing and loss mitigation activities. These resulted in a decrease in revenue of approximately $31 million when compared to pre-hurricane levels. While significant progress has been made in economic and transactional activity since September, the continued impact on transactional and collection based revenues will depend on the speed at which electricity, telecommunications and general merchant services can be restored across the region. We expect the financial the hurricanes to continue to impact the in future periods. For additional Corporation’s earnings information of impact associated with the hurricanes, refer to Note 2 to the accompanying Financial Statements. Also, refer to the Net Interest Income, Non-Interest Income, Operating Expenses and Credit Quality sections in this MD&A for additional discussions of the hurricanes in the Corporation’s financial statements. the impact of Financial impact of the hurricanes During the year ended December 31, 2017, the Corporation recorded $88.0 million in pre-tax hurricane-related expenses, including an incremental provision for loan losses of $67.7 million, which includes $5.8 million for the covered loan portfolio. These amounts are net of amounts receivable for related insurance claims of $1.1 million related to physical damages to the Corporation’s premises, equipment and other real estate owned (“OREO”). Refer to additional information on Note 2 to the Financial Statements, Hurricanes Irma and Maria, and the Provision for Loan Losses and Operating Expenses sections of this MD&A. In addition to the incremental provision and direct operating expenses, results for the year ended December 31, 2017 were impacted by the hurricanes in the form of a reduction in revenue resulting from reduced merchant transaction activity, the waiver of certain late fees and service including ATM transaction fees, to businesses and charges, consumers in hurricane-affected areas, as well as the economic Tax Cuts and Jobs Act On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Trump. The Act, among other things, reduced the maximum corporate tax rate from 35% to 21% in the U.S. As a result, during the fourth quarter of 2017 the Corporation recorded an income tax expense of $168.4 million, related to the write-down of the deferred tax asset (“DTA”) from its U.S. operations. The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. 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. 6 POPULAR, INC. 2017 ANNUAL REPORT Table 1 - Selected Financial Data (Dollars in thousands, except per common share data) CONDENSED STATEMENTS OF OPERATIONS 2017 Years ended December 31, 2015 2014 2016 2013 Interest income Interest expense Net interest income Provision for loan losses: Non-covered loans Covered loans Non-interest income Operating expenses Income tax expense (benefit) 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 $ 1,725,944 $ 1,634,573 $ 1,603,014 $ 1,633,543 $ 1,647,940 303,366 1,344,574 212,518 1,422,055 194,031 1,408,983 223,980 1,501,964 688,471 945,072 319,682 5,742 419,167 1,257,196 230,830 107,681 – 107,681 $ 103,958 $ 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 1.02 $ – 1.02 $ 1.02 $ – 1.02 $ 1.00 $ 49.51 35.49 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 28.73 101,966,429 102,045,336 102,068,981 103,275,264 103,377,283 103,790,932 102,967,186 103,124,309 103,618,976 102,848,792 102,848,792 103,476,847 102,693,685 103,061,475 103,397,699 $ $ $ $ $ $ $ $ 23,511,293 $ 23,062,242 $ 23,045,308 $ 22,366,750 $ 22,799,878 29,741,099 31,451,081 36,266,993 35,186,305 24,571,382 26,778,582 4,291,861 2,757,334 4,176,349 4,704,862 33,713,158 37,613,742 29,066,010 2,339,399 5,278,477 37,668,573 41,404,139 33,182,522 2,000,840 5,345,244 29,897,273 35,181,857 24,647,355 3,514,203 4,555,752 $ 24,942,463 $ 23,435,446 $ 23,129,230 $ 22,053,217 $ 24,706,719 640,555 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 5,105,324 540,651 34,861,193 38,661,609 30,496,224 2,055,477 5,197,957 623,426 40,680,553 44,277,337 35,453,508 2,023,485 5,103,905 601,792 29,594,365 33,086,771 24,807,535 2,994,761 4,267,382 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 4.28% 0.26 1.96 16.30 19.22 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 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. POPULAR, INC. 2017 ANNUAL REPORT 7 $216.7 million and $895.3 million, for 2016 and 2015, respectively. The Corporation’s results for the year ended December 31, 2017, include the impact of an income tax expense of $168.4 million related to the impact of the Federal Tax Cuts and Job Act on the Corporation’s U.S. deferred tax asset during the fourth quarter of 2017 and the expenses related to Hurricanes Irma and Maria of approximately $88 million, on a pre-tax basis, during the third and fourth quarters of 2017. Net income for the year ended December 31, 2016 amounted to $216.7 million. The Corporation’s results include two unfavorable arbitration review board the impact of 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 true-up obligation owed to the FDIC at the end of the loss- share previously 2020 incorporated in the net damages claimed in the arbitration. agreements recoveries and in Net income from continuing operations of $895.3 million 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 securities; a write-down of the 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. operations for Excluding the impact of the above mentioned transactions, detailed in Tables 46 through 48, the Adjusted net income for the year ended December 31, 2017 was $276.0 million, compared to $358.1 million for 2016 and $374.8 million for 2015. 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 2017, 2016 and 2015. 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 net income provides meaningful information to investors about the Corporation’s ongoing the underlying performance of 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, 2017, 2016 and 2015. 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, 2017 as compared with the same periods in 2016 and 2015, 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, 2017 The Corporation’s net income for the year ended December 31, 2017 amounted to $107.7 million, compared to a net income of 8 POPULAR, INC. 2017 ANNUAL REPORT 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 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 revenues (expenses) Provision (reversal) for loan losses Total revenues (expenses) less provision (reversal) for loan losses Years ended December 31, 2015 2016 2017 $148,033 $ 175,207 $208,779 (469) 3,136 2,454 (10,201) (239) 8,433 2,405 (11,700) – (5,892) (31,338) (33,413) (136,197) (4,824) (66,238) 15,658 73,205 (13,836) 9,559 – 1,714 (10,066) (207,779) 20,062 137,967 (32,572) 228,841 16,336 (3,318) 54,113 $121,631 $ (29,254) $174,728 [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 2017 amounted to $ 148 million versus $ 175 million in 2016, reflecting a yield of 8.59% versus 8.99%, for each year, 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 $ 10 million for 2017, compared to an expense of $ 208 million for 2016. 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. An increase in estimated cash flows will reduce any allowance for loan losses established after the acquisition and Years ended December 31, 2016 2017 2015 $1,724 49 $1,949 191 $2,333 362 The discussion that then 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. follows provides highlights of for the Corporation’s ended December 31, 2017 compared to the results of operations of 2016. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 3 presents a five-year the components of net income (loss) as a percentage of average total assets. results of operations summary of the year POPULAR, INC. 2017 ANNUAL REPORT 9 Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets 2017 2016 2015 2014 2013 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 3.63% 3.78% 4.00% 2.69% 3.71% (0.69) (0.79) 0.23 0.06 – – (0.04) (0.02) – – (0.05) (0.05) (0.01) – 0.06 (0.02) 1.29 1.05 (1.67) 0.21 0.02 – (0.15) (0.10) (0.04) (0.23) 2.47 (0.45) 0.15 – – 0.02 (0.05) – (0.55) 1.22 (0.77) 0.09 – – 0.12 (0.12) 0.01 (0.29) 1.29 3.86 (3.04) 4.12 (3.34) 0.82 0.56 0.26 – 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 0.26% 0.58% 2.54% (0.89)% 1.65% 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 for the year ended December 31, 2017 was $1.5 billion, an increase of $79.9 million when compared to 2016. On a taxable equivalent basis, net interest income increased by $101.3 million. Net interest margin decreased by 23 basis points to 3.99% in 2017, compared to 4.22% in 2016. On a taxable equivalent basis, net interest margin was 4.28% in 2017, compared to 4.48% in 2016. In the low interest rate environment that has prevailed in the past years, the mix and overall size of our earning assets and the cost of funding those assets, although accretive to net interest income, has negatively impacted the Corporation’s net interest margin. 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 $325.4 million for the year ended December 31, 2017, compared with $170.0 million for 2016. The increase in the provision was mainly due to the impact of the hurricanes on the Corporation’s loan portfolios, as previously described, as well as a higher provision for the taxi medallion portfolio. Credit metrics in 2017 were impacted by the relief initiatives implemented by the Corporation related to the hurricanes, including the loan payment moratorium. Non-performing assets, excluding covered loans and OREO, at December 31, 2017 were $720 million, a decrease of $18 million when compared with December 31, 2016. The decrease was mainly reflected in the other real estate (“OREO”) category, which decreased by approximately $11 million, mainly in residential properties at BPPR and write-downs related to Hurricane Maria. 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, 10 POPULAR, INC. 2017 ANNUAL REPORT Non-interest income for the year ended December 31, 2017 amounted to $419.2 million, an increase of $121.2 million, when compared with 2016. The increase was mainly due to a favorable variance in FDIC loss share (expense) income of $197.7 million as a result of a charge of $136.2 million related to the arbitration award recorded during 2016 and lower fair value adjustments to the true-up payment obligation which were mainly impacted by changes in the discount rate. 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 amounted to $1.3 billion for the year 2017, relatively flat when compared to 2016. Refer to the Operating Expenses section of this MD&A for additional information. Income tax expense amounted to $230.8 million for the year ended December 31, 2017, compared with an income tax expense of $78.8 million for the previous year. As previously described, during the fourth quarter of 2017, the Corporation recognized an income tax expense of $168.4 million resulting from the impact of the Federal Tax Cuts and Jobs Act in the Corporation’s income tax expense. Refer to the Income Taxes section in this MD&A and Note 39 to the consolidated financial statements for additional information on income taxes. At December 31, 2017, the Corporation’s total assets were $44.3 billion, compared with $38.7 billion at December 31, 2016, an increase of $5.6 billion. The increase is mainly driven by an increase in the Corporation’s money market investments of $2.4 billion and in the investment securities available-for-sale portfolio by $2.0 billion driven by the increase in deposits loans held-in-portfolio increased by balances. Also, $1.5 billion due mainly to growth in the commercial and the construction loan portfolios at BPNA and the increase in loans mortgage loans at BPPR due to the rebooking of previously pooled into GNMA securities. Refer to the Statement of Condition Analysis section of this MD&A for additional information. Deposits amounted to $35.5 billion at December 31, 2017, compared with $30.5 billion at December 31, 2016. Table 15 presents a breakdown of deposits by major categories. The increase in deposits was mainly from higher retail and commercial savings, NOW deposits, demand deposits from the Puerto Rico public sector and retail and commercial checking accounts at BPPR. The Corporation’s borrowings remained relatively flat at $2.0 billion at December 31, 2017, compared to $2.1 billion at December 31, 2016. Refer to Note 20 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. 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 $5.1 billion at December 31, 2017, compared with $5.2 billion at December 31, 2016. The decrease was mainly related to the impact of the common stock repurchase of $75 million completed during the first quarter of 2017 and higher accumulated other comprehensive loss by $30 million principally in unrealized losses on securities available-for-sale. The Corporation and its banking subsidiaries continue to be well-capitalized at December 31, 2017. The Common Equity Tier 1 Capital ratio at December 31, 2017 was 16.30%, compared to 16.48% at December 31, 2016. In summary, during 2017, in spite of the significant impact of the hurricanes in Puerto Rico and the USVI, the Corporation reflected strong results, evidenced by an increase in net interest income, year over year, the continued growth of the U.S. portfolios and a solid capital position. The Corporation also continued to benefit from its stake in EVERTEC and BHD León, the second largest bank in the Dominican Republic. Hurricanes Irma and Maria have had and continue to have an impact on the people and communities in which the Corporation does business. The Corporation will continue to monitor the effects of these hurricanes on its operations and clients. Popular, as the leading financial institution in Puerto Rico, is committed to partnering with our neighbors and communities to aid in the rebuilding process. The Corporation continues to seek to capitalize on growth opportunities, such as the recently announced agreement to acquire the Reliable auto finance business. We look forward to the benefits from this acquisition and will continue to employ our strategy to strengthen our organization and deliver strong, sustainable results in the future. 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. 2017 ANNUAL REPORT 11 Table 4 - Common Stock Performance Market Price Low High Cash Dividends Declared per Share Book Value Per Share $49.51 Dividend Yield [1] 2.57% Price/ Earnings Ratio 34.79x Market/Book Ratio 71.68% $36.71 43.12 42.69 45.75 $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 $32.29 35.27 37.18 38.46 $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 $0.25 0.25 0.25 0.25 $0.15 0.15 0.15 0.15 $0.15 0.15 – – $ $ – – – – – – – – 49.60 1.87 21.27 88.35 48.79 0.97 3.27 58.09 40.76 N.M. (11.06) 83.54 44.26 N.M. 4.95 64.91 2017 4th quarter 3rd quarter 2nd quarter 1st quarter 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 Based on the average high and low market price for the four quarters. [1] 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 3 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, consideration. mortgage servicing rights and contingent 12 POPULAR, INC. 2017 ANNUAL REPORT 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 characteristics of the instrument. to the valuation, as well as the contractual 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 rates, Corporation uses 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 31 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At December 31, 2017, approximately $ 10.2 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 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, consisted principally 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 $ 7 million at December 31, 2017, of which $ 1 million were Level 3 assets and $ 6 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. Level 3 to Level 2 due to a change in valuation technique from an internally-prepared pricing matrix and discounted cash flow model, respectively, to a bond’s theoretical value. 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, and 2015. The Corporation’s policy is to recognize transfers as of the end of the reporting period. Trading Account Securities and Investment Securities Available-for-Sale The majority of the values for trading account securities and investment securities available-for-sale are obtained from third- party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year ended December 31, 2017, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers. including the relative liquidity of Inputs are evaluated to ascertain that they consider current market conditions, the market. When a market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the pricing service provider relies on specific information including dialogue with brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on similar securities, to draw correlations based on the characteristics of the evaluated for any reason the pricing service provider instrument. If cannot observe data required to feed its model, it discontinues pricing the instrument. During the year ended December 31, 2017, none of the Corporation’s investment securities were to pricing discontinuance by the pricing service subject 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. During the year ended December 31, 2017, certain MBS and CMO’s amounting to $4.3 million, were transferred from Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end POPULAR, INC. 2017 ANNUAL REPORT 13 of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures pricing review of market methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. changes, and Refer to Note 31 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 10. 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 collateral dependent method is generally used for the impairment determination on commercial and construction loans since the expected realizable value of the loan is based the upon the proceeds received from the liquidation of 14 POPULAR, INC. 2017 ANNUAL REPORT collateral property. For commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash flow to use the discounted cash flow valuation method. 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 rates used may change to time based on management’s estimates. from time For additional information on the Corporation’s policy of its impaired loans, refer to Note 3. 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 3. 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: • Option 1 – Since the credit portion of the fair value discount is associated with an expectation of cash flows that an acquirer does not expect to receive over the life of the loan, it does not appear appropriate to accrete that portion over the life of the loan as doing so could eventually overstate the acquirer’s expected value of the loan and ultimately result in recognizing income (i.e. through the accretion of the yield) on a portion of the loan it does not expect the Corporation does not believe this is an appropriate method to apply. to receive. Therefore, • Option 2 – The Corporation believes analogizing to ASC Subtopic 310-30 is the more appropriate option to follow in accounting for the credit portion of the fair value discount. By doing so, the loan is only being accreted up to the value that the acquirer expected to receive at acquisition of the loan. Based on the above, the Corporation elected Option 2 – the ASC Subtopic 310-30 approach to the outstanding balance for 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. 2017 ANNUAL REPORT 15 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 and 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 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 16 POPULAR, INC. 2017 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 U.S. 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: U.S. 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 39. 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. 2017 ANNUAL REPORT 17 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, 2017 and 2016. Refer to Note 39 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 $4.6 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, 18 POPULAR, INC. 2017 ANNUAL REPORT test involves comparing the fair value of an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. Under applicable accounting standards, goodwill impairment the goodwill analysis is a two-step test. The first step of impairment the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit 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 each reporting unit 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 the transaction between market participants orderly 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 the impairment 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. at At December 31, 2017, goodwill amounted to $627 million. Note 18 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 2017, refer to Note 18. 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 obligations. Detailed postretirement information on the Plans and related valuation assumptions are included in Note 33 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, 2017 was $767.5 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 each 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 each plan’s expected asset allocation for the year 2018 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 4.1% for long government/credit at January 1, 2018. A range of expected investment returns is developed, and this range relies both on forecasts and on broad- market returns, 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 2018 to 5.5% for the Banco Popular de Puerto Rico Retirement Plan and to 6.0% for the Tax Qualified Retirement Restoration Plan. Expected rates of return of 6.50% and 6.88% had been used for 2017 and 2016, respectively, for both plans. 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. The expected return can be materially impacted by a change in the plan’s asset allocation. Pension expense for the Plans amounted to $5.0 million in 2017. The total pension expense included a benefit of $42.8 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 2018 from 5.5 % to 5.25% would increase the projected 2018 expense for the Banco Popular de Puerto Rico Retirement by the Corporation’s approximately $1.8 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 31. 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 $49.4 million at December 31, 2017. 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 3.56% for the Banco Popular de Puerto Rico Retirement Plan, 3.54% for the Tax Qualified Retirement Restoration Plan, 3.55% for the Benefit Restoration Plan and 3.62% for the Retiree Health Care Benefit Plan to determine the benefit obligations at December 31, 2017. A 50 basis point decrease to each of the rates in the December 31, 2017 Willis Towers Watson RATE: Link (10/90) Model as of the beginning of 2018 would increase the projected 2018 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.2 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, 2017. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $170.7 million at December 31, 2017 using an equivalent single discount rate of 3.62%. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. POPULAR, INC. 2017 ANNUAL REPORT 19 Note 33 to the consolidated financial statements provides the assumed rates information on the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have on specified cost components and the postretirement benefit obligation of the Corporation. considered by interest influence net including loan fees, STATEMENT OF OPERATIONS ANALYSIS Net Interest Income Net interest income is the difference between the revenue less the generated from earning assets, interest cost of deposits and borrowed money. Several risk factors might income including the economic environment in which we operate, market driven events, changes in volumes, repricing characteristics, loans fees collected, moratoriums granted on loan payments and delay charges, loans, as well as strategic decisions made by the Corporation’s management. Net interest income for the year ended December 31, 2017 was $1.5 billion compared to $1.4 billion in 2016. Net interest income, on a taxable equivalent basis, for the year ended December 31, 2017 was $1.6 billion compared to $1.5 billion in 2016. interest collected on nonaccrual The average key index rates for the years 2015 through 2017 were as follows: Prime rate Fed funds rate 3-month LIBOR 3-month Treasury Bill 10-year Treasury FNMA 30-year 2017 2016 2015 4.10% 3.51% 3.26% 0.39 1.00 0.74 1.26 0.31 0.94 1.84 2.33 2.57 3.09 0.13 0.32 0.04 2.13 2.92 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, 2017 Interest included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC Subtopic 310-30, of $19.0 million, related to those items, compared to $18.3 million for the same period in 2016. During the fourth quarter of 2017, after hurricanes Irma and Maria, the Corporation waived certain late fees and charges to businesses and consumers which affected the results of these line items during the moratorium period. 20 POPULAR, INC. 2017 ANNUAL REPORT components of Table 5 presents the the different Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2017, as compared with the same period in 2016, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin decreased by 23 basis points to 3.99% in 2017, compared to 4.22% in 2016 mainly due to the mix in the asset composition, as balances have increased in lower yielding bond and money market investments. On a taxable equivalent basis, net interest margin was 4.28% in 2017, compared to 4.48% in 2016. In the low interest rate environment that has prevailed in the past years, the mix and overall size of our earning assets and the cost of funding those assets, although accretive to net interest income, has negatively impacted the Corporation’s net interest margin. Net interest income increased by $79.9 million year over year. On a taxable equivalent basis, net interest income increase of $21.4 million in the taxable equivalent adjustment is directly related to a higher volume of tax exempt investments in Puerto Rico. The main reasons for the variances in net interest income on a taxable equivalent basis were as follows: increased by $101.3 million. The • Higher interest income from money market investments due to both an increase in volume of funds available to invest, mainly related to an increase in Puerto Rico government deposits, and to recent increases in rates by the U.S. Federal Reserve. Average rate of such portfolios for the year increased 62 basis points when compared to the same period in 2016; • Higher interest income from investment securities mainly from higher volumes, particularly on U.S. Treasuries and mortgage-backed securities related to recent purchases; and • Higher income from commercial and construction loans; due to a higher volume of loans in the U.S. and improved yields in Puerto Rico mostly related to the effect on the variable rate portfolio of the above-mentioned rise in interest rates. These positive variances were partially offset by: • Lower interest income from mortgage loans due to lower average balances driven to lower lending activity, the above-mentioned waiver of late payment fees to clients and portfolio run-off in Puerto Rico and the U.S.; • Lower interest income from loans acquired in the Westernbank FDIC-assisted transaction (‘WB Loans”) related to the normal portfolio run-off, as well as lower yields; and • Higher interest expense on deposits mainly due to higher volumes in most categories, predominantly the increase in deposits from the Puerto Rico government and higher volumes in the U.S. to fund loan growth. These increases were partially offset by a lower average volume of brokered certificates of deposits and lower cost of interest bearing deposits resulting from a higher proportion of low cost deposits both in Puerto Rico and the U.S. volume of deposits mainly in Puerto Rico. These assets carry a lower yield when compared to in loans, therefore affecting the asset composition and lowering the yield on earning assets; components of Table 6 presents the the different Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2016, as compared with the same period in 2015, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin decreased by 26 basis points to 4.22% in 2016, compared to 4.48% in 2015 mainly driven by 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 Puerto Rico 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 income increased by $17.4 million. The main reasons for these variances were as follows: interest • Higher volume and investment securities by $2.2 billion due to a higher from money market, trading • Higher volume from commercial and construction loans driven by loan growth in the U.S.; and • 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: • 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; • Lower volume from mortgage loans due to lower origination activity in Puerto Rico and accelerate run-off of the mortgage portfolio in the U.S.; and • 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. POPULAR, INC. 2017 ANNUAL REPORT 21 Table 5 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP) Average Volume Average Yields / Costs 2017 2016 Variance 2017 2016 Variance Years ended December 31, (In millions) $ 4,481 9,594 83 $ 3,104 $1,377 2,172 (42) 7,422 125 1.15% 0.53% 0.62% Money market investments 2.74 7.20 Investment securities Trading securities 0.02 0.62 2.72 6.58 Interest 2016 2017 Variance (In thousands) Variance Attributable to Rate Volume $ 51,496 $ 262,468 5,953 16,428 $ 35,068 60,513 201,955 (2,290) 8,243 $25,835 $ 9,233 52,034 (3,007) 8,479 717 14,158 10,651 3,507 2.26 2.13 0.13 trading securities 319,917 226,626 93,291 35,031 58,260 Total money market, investment and 9,971 829 742 6,506 3,739 9,203 726 660 6,701 3,823 21,787 1,724 21,113 1,949 23,511 23,062 768 103 82 (195) (84) 674 (225) 449 5.19 5.64 6.35 5.53 10.59 6.27 8.59 6.44 5.08 5.38 6.71 5.54 10.42 6.25 8.99 6.49 0.11 0.26 (0.36) (0.01) 0.17 0.02 (0.40) (0.05) Loans: Commercial Construction Leasing Mortgage Consumer Sub-total loans WB loans 517,334 46,758 47,112 360,037 395,818 467,208 39,079 44,283 371,451 398,411 1,367,059 148,033 1,320,432 175,207 50,126 7,679 2,829 (11,414) (2,593) 46,627 (27,174) 10,497 1,912 (2,479) (608) 3,402 39,629 5,767 5,308 (10,806) (5,995) 12,724 (7,592) 33,903 (19,582) Total loans 1,515,092 1,495,639 19,453 5,132 14,321 $37,669 $33,713 $3,956 4.87% 5.11% (0.24)% Total earning assets $1,835,009 $1,722,265 $112,744 $40,163 $ 72,581 $10,116 8,103 7,625 $ 7,020 $3,096 575 (285) 7,528 7,910 25,844 22,458 3,386 452 1,549 763 1,576 (311) (27) 27,845 24,797 3,048 7,339 2,485 6,608 2,308 731 177 0.37% 0.39% (0.02)% 0.25 1.10 0.01 0.06 0.24 1.04 Interest bearing deposits: NOW and money market [1] Savings Time deposits $ 37,497 $ 20,217 84,150 27,548 $ 18,002 82,027 9,949 2,215 2,123 $ (228) $ 10,177 1,636 (3,294) 579 5,417 0.55 1.27 4.93 0.80 0.57 1.02 4.89 0.86 (0.02) Total deposits 0.25 0.04 Short-term borrowings Other medium and long-term debt 141,864 127,577 14,287 5,725 76,392 7,812 77,129 (2,087) (737) (0.06) Total interest bearing liabilities 223,981 212,518 11,463 5,768 1,212 (21) 6,959 8,519 (3,299) (716) 4,504 Demand deposits Other sources of funds $37,669 $33,713 $3,956 0.59% 0.63% (0.04)% Total source of funds 223,981 212,518 11,463 6,959 4,504 4.28% 4.48% (0.20)% taxable equivalent basis (Non-GAAP) 1,611,028 1,509,747 101,281 $33,204 $ 68,077 Net interest margin/ income on a 4.07% 4.25% (0.18)% Net interest spread Taxable equivalent adjustment 109,065 87,692 21,373 3.99% 4.22% (0.23)% non-taxable equivalent basis (GAAP) $1,501,963 $1,422,055 $ 79,908 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. 22 POPULAR, INC. 2017 ANNUAL REPORT Table 6 - 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 (0.02) (0.62) (0.20) 0.15 0.05 – 0.04 Loans: Commercial Construction Leasing Mortgage Consumer Sub-total loans WB loans 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 0.01 0.15 0.23 0.89 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) Non-interest bearing 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)% Net interest margin/income on a taxable equivalent basis (Non-GAAP) 4.25% 4.53% (0.28)% Net interest spread 1,509,747 1,492,389 17,358 $ (9,416) $ 26,774 Taxable equivalent adjustment 87,692 83,406 4,286 4.22% 4.48% (0.26)% Net interest margin/ income non-taxable equivalent basis (GAAP) $1,422,055 $1,408,983 $ 13,072 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. 2017 ANNUAL REPORT 23 Provision for Loan Losses loan losses totaled The Corporation’s total provision for $325.4 million for the year ended December 31, 2017, compared with $170.0 million for 2016 and $241.5 million for 2015. The provision for loan losses for the non-covered loan portfolio ended $319.7 million for December 31, 2017, compared to $171.1 million for the year ended December 31, 2016, an increase of $148.6 million. totaled year the for The provision for the Puerto Rico loan losses non-covered portfolio amounted to $241.7 million for the year ended December 31, 2017, compared to $155.9 million for the year ended December 31, 2016. The increase of $85.8 million was mainly related to the $61.8 million provision related to the best estimate of the impact caused by the hurricanes on the Puerto Rico loan portfolios, coupled with higher net charge-offs by $28.4 million, driven by an increase of $13.8 million and $10.6 million in the consumer and mortgage portfolios, respectively. At December 31, 2017, within the total reserve for reserve of the Corporation maintained a loan losses $117.6 million for non-covered loans, based on the best estimate of the impact of the hurricanes on the Corporation’s loan portfolios. This reserve is based on the near mid-range of the estimated credit losses related to the hurricanes, which management had initially estimated to be in the range of $70 million to $160 million. The impact to the provision for loan losses of $61.8 million related to the hurricanes represents the difference between management’s best estimate of these losses and the amount already included as part of the reserves such as unemployment for and factors deterioration in economic activity, which amounted to approximately $60 million. The consumer net charge-offs increase was in part related to the $7.1 million recovery in 2016 from the sale of previously charged-off credit cards and personal loans. These increases were partially offset by a decrease of $6.5 million related to the 2017 annual review of the allowance for loan losses methodology, while for the year 2016 the review resulted in an increase of $9.4 million. environmental compared to $15.3 million for The provision for loan losses for the U.S. operations amounted to $77.9 million for the year ended December 31, ended 2017, December 31, 2016. The increase of $62.6 million was largely related to higher reserves for the U.S. taxi medallion purchased credit impaired portfolio and an increase of $1.9 million related to the 2017 ALLL annual review. The effects of the 2016 annual review were immaterial for BPNA. the year The provision for loan losses for the covered portfolio amounted to $5.7 million for the year ended December 31, 2017, compared to a reversal of provision of $1.1 million for same period of the previous year. The increase of $6.8 million was mainly due to a $5.8 million provision for which estimated cash flows were adjusted to reflect the payment moratorium implemented during the fourth quarter of 2017 related to the estimated impact of the hurricanes. The effects of the annual 24 POPULAR, INC. 2017 ANNUAL REPORT review of the components of the allowance for loan losses methodology were immaterial for the covered loans portfolio in 2017 and 2016. 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 and 2015 annual recalibration was immaterial for BPNA. 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 loss loans that were previously covered by the commercial 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. 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, 2017, non-interest income increased by $121.2 million when compared with the previous year, principally due to: • Favorable variance in FDIC loss share (expense) income of $197.7 million as a result of a charge of $136.2 million related to the arbitration award recorded during 2016 and lower fair value adjustments to the true-up payment obligation which were mainly impacted by changes in the discount rate. Refer to Table 2 for a breakdown of FDIC loss share expense by major categories. This positive variance was partially offset by the following: • Lower service charge on deposits accounts by $7.1 million due to lower transactional cash management billings primarily due to the effects of Hurricane Maria; a as fees • Lower other service fees by $17.5 million mainly by lower contingency insurance commissions of $7.5 million; lower debit card fees at BPPR due to lower volume of transactions; and lower credit card fees due to waivers offered as part of the hurricanes relief efforts; result of lower • Lower mortgage banking activities by $31.0 million in part due to $9.9 million in lower mortgage servicing fees, which are recognized as loan payments are collected, due to lower mortgage payments from the moratoriums offered as part of the hurricanes relief efforts; higher unfavorable fair value adjustments on mortgage servicing rights by $11.2 million; and lower net gain on sale of loans. Refer to Note 12 for additional details on mortgage banking activities; impairment • Higher other-than-temporary losses on investment securities by $8.1 million due to the other- charge of $8.3 million than-temporary impairment recorded during the second quarter of 2017 on senior Puerto Financing Corporation Tax (“COFINA”) bonds classified as available-for-sale; and Sales Rico • Unfavorable variance in gain on loans held-for-sale of $8.7 million as a result of the sale of a non-accrual public sector loan during 2016. For the year ended December 31, 2016, non-interest income decreased by $221.6 million when compared with the previous year, principally due to: • Unfavorable variance (expense) income of $227.8 million, due to a $136.2 million write- related to the indemnification asset down to the in FDIC loss-share the arbitration decision, an unfavorable change in the true-up impact of payment obligation which includes $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 the offset partially indemnification asset; and lower mirror amortization impairment lower by of • 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. These negative variances were partially offset by the following: • 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 • Favorable variance in trading account (loss) profit of $3.9 million principally resulting from favorable fair value adjustments of P.R. government bonds; • 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 • 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 POPULAR, INC. 2017 ANNUAL REPORT 25 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 Amortization of intangibles Goodwill and trademark impairment losses Restructuring costs Total operating expenses Personnel costs to average assets Operating expenses to average assets Employees (full-time equivalent) Average assets per employee (in millions) Years ended December 31, 2017 2016 2015 2014 2013 $ 313,394 70,099 47,533 53,204 $ 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 40,459 484,230 487,476 477,519 418,679 428,697 89,194 65,142 43,382 14,415 199,873 11,763 66,437 292,488 22,466 58,445 26,392 – 48,540 26,201 39,612 51,726 117,539 9,378 – – 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 12,144 3,801 – 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 – – – $1,257,196 $1,255,635 $1,288,221 $1,193,684 $1,214,019 1.17% 3.04 7,784 5.32 $ 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 $ Operating expenses for the year ended December 31, 2017 increased by $1.6 million, when compared with the previous year, mostly due to: disaster relief activities and communications in response to the hurricanes and higher credit card reward expense; and • Higher net occupancy expenses by $3.5 million due to higher repair and maintenance expense and higher energy costs due to the hurricanes impact; • Higher equipment expense by $2.9 million due to higher software and maintenance expenses; • Higher business promotions by $5.4 million mainly due to higher sponsorship, promotion and donations related to 26 POPULAR, INC. 2017 ANNUAL REPORT • Higher other operating expenses by $27.1 million as a result of a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software that was discontinued by the cost Corporation; higher sundry losses by $3.6 million; higher provision for unused commitments by $2.6 million; a write-down of $3.6 million on premises and equipment and other costs related to Hurricanes Irma and Maria. a project for These negative variances were partially offset by: • Lower professional fees by $30.6 million mainly due to lower related to the FDIC arbitration proceedings, which were resolved during 2016, and lower expenses related to programming, processing and other technology services; legal fees • Lower amortization of intangibles by $2.8 million mainly due to core deposits intangible fully amortized in 2016 at BPPR; • A goodwill impairment charge of $3.8 million at the securities subsidiary during 2016, recorded as part of the Corporation’s annual goodwill impairment analysis. 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: • 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; • 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 • A decrease in restructuring cost by $18.4 million in connection with the reorganization of BPNA. These positive variances were partially offset by: • 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 • 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 • A goodwill impairment charge of $3.8 million at the securities subsidiary, recorded as part of the Corporation’s annual goodwill impairment analysis. INCOME TAXES For the year ended December 31, 2017, the Corporation recorded income tax expense of $230.8 million, compared to $78.8 million for the previous year. The results for the year ended December 31, 2017 include an income tax expense of $168.4 million as a result of the enactment of the Federal Tax Cuts and Jobs Act, primarily from the write down of the DTA of the Corporation’s U.S. operations, as a result of the reduction of the U.S. federal corporate income tax rate from a maximum rate of 35% to a single tax rate of 21%. The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. At December 31, 2017, the Corporation had a deferred tax asset amounting to $1.0 billion, net of a valuation allowance of $0.4 billion. The DTA related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion. The Government of Puerto Rico’s draft fiscal plan, submitted in February to the PROMESA Oversight Board, proposes to enact local comprehensive tax reform during the first half of calendar year 2018 with the intention of spurring economic development, lowering the cost of doing business and making Puerto Rico more competitive. The proposed tax reform seeks to, among other things, reduce individual and corporate income tax rates and gradually eliminate, over a two year period, the business-to-business sales and use tax. Maximum corporate tax rates in particular would be reduced from a current rate of 39% to a rate lower than 30%. The proposed changes to the tax code, including the reductions in income tax rates, are subject to the approval of Oversight Board due to their expected fiscal impact, which the government estimates at approximately $757 million. The Oversight Board has publicly asserted that any tax reform initiative must be revenue neutral. A reduction in corporate tax rates to 29%, if approved, would result in a write down of the Corporation’s DTA related to its P.R. operations of approximately $190 million, with a corresponding charge to the Corporation’s income tax expense. If such a reduction in the Corporation’s DTA from its P.R. operations would have occurred as of December 31, 2017, Common Equity Tier 1 Capital and Total Regulatory Capital would have been reduced by an approximate 24 bps and 25 bps, respectively. On a forward-looking basis, a reduction of the maximum corporate income tax rate to 29% could result in a reduction in the Corporation’s effective tax rate of between 3% and 4%. Refer to Note 39 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on DTA balances. Fourth Quarter Results The Corporation recognized a net loss of $102.2 million for the quarter ended December 31, 2017, compared with a net loss of $4.1 million for the same quarter of 2016. The results for the fourth quarter of 2017 reflect an income tax expense of $168.4 million related to the impact of the Federal Tax Cuts and Jobs Act on the Corporation’s U.S. deferred tax asset. These results also include net pre-tax expenses and provision (reversal) for loan losses amounting to $8.6 million related to the impact of Hurricanes Irma and Maria. 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. POPULAR, INC. 2017 ANNUAL REPORT 27 Net interest income for the fourth quarter of 2017 amounted to $387.2 million, compared with $355.4 million for the fourth quarter of 2016. The increase in net interest income was primarily due to higher income from investment securities due to higher average balances of funds available to invest due to increases in deposit balances, mainly in Puerto Rico. This was partially offset by higher cost of deposits, due to higher average balances as mentioned above. The provision for loan losses amounted to $71.5 million for the quarter compared to ended December 31, 2017, $41.4 million for the fourth quarter of 2016. The increase of $30.1 million is reflected at BPPR by $16.6 million mainly related to auto loans, partially offset by a decline in the provision for commercial and mortgage loans, and at BPNA by $13.5 million mainly related to the taxi medallion portfolio and higher net charge offs. Non-interest income (expense) amounted to $86.1 million for the quarter ended December 31, 2017, compared with $(0.2) million for the same quarter in 2016. The favorable 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 recorded in 2016. Also, the fourth quarter of 2017 reflected a reduction in revenues related to Hurricanes Irma and Maria, including lower credit card late payment fees due to waivers for hurricane relief initiatives, lower mortgage servicing fees from lower collections related to the loan moratoriums and a higher provision for indemnity reserves, including $3.4 million related to the estimated hurricane losses. the loss Operating expenses totaled $322.0 million for the quarter ended December 31, 2017, compared with $320.9 million for the same quarter in the previous year. The increase reflects approximately $7.5 million in expenses related to the impact of including personnel costs, occupancy and the hurricanes, business promotions as well as higher operational loses, which were partially offset by lower professional fees, mainly legal costs, and lower OREO expenses. Income tax expense amounted to $182.1 million for the quarter ended December 31, 2017, compared with income tax benefit of $1.8 million for the same quarter of 2016. The results for the fourth quarter include an income tax expense of the $168.4 million from the write down of Corporation’s U.S. operations, as a result of the Tax Cuts and Jobs Act, which reduced the maximum federal corporate tax rate from 35% to 21%. the DTA of 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 41 to the consolidated financial statements. The Corporate group reported a net loss of $60.6 million for the years ended December 31, 2017 and 2016. for Highlights on the earnings results the reportable segments are discussed below: Banco Popular de Puerto Rico The Banco Popular de Puerto Rico reportable segment’s net income amounted to $312.4 million for the year ended December 31, 2017, compared with $230.1 million for the year ended December 31, 2016. The principal that contributed to the variance in the financial results included the following: factors • Higher net interest income by $55.1 million impacted by higher interest income on money market investments by $34.2 million due to an increase in volume of funds available to invest, mainly related to an increase in Puerto Rico government deposits, and to recent increases in interest rates. Also, higher interest income on investment securities by $34.7 million driven by higher volumes of mortgage-backed securities and U.S. Treasury securities. These variances were partially offset by lower interest income on loans by $12.6 million driven by normal portfolio run-off of WB loans, lower average balances of mortgage portfolio due to lower lending activity and waiver of late payments fees; offset by improved yields from commercial and construction portfolio driven by the effect on the variable portfolio of the abovementioned rise in rates. The net interest margin in 2017 was 4.32% compared to 4.61% in the prior year. The reduction in margin is driven by earning asset allocation; • Higher provision for loans losses by $98.2 million driven by the provision related to the estimate of the impact caused by the hurricanes on the Puerto Rico loan portfolios, higher net charge-offs, mainly in consumer and mortgage portfolios, and the impact of adjusting cash flows the aforementioned payment moratorium. These unfavorable variances were partially offset by a decrease related to the allowance for loan losses methodology annual review; • Higher non-interest income by $120.8 million mainly due portfolio covered reflect the to of to: 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 the reportable segments. For managerial reporting support • Favorable variance in FDIC loss share (expense) income by $197.7 million driven by the impact of arbitration award charges of $136.2 million recorded in prior year and by lower fair value adjustment to the true-up payment obligation, 28 POPULAR, INC. 2017 ANNUAL REPORT which were mainly impacted by changes in the discount rate; repairs and maintenance expense associated with hurricanes impact; Partially offset by: • Lower service charges on deposits accounts by $7.5 million driven by lower transactional cash management fees primarily related to the effects of Hurricane Maria; • Lower other service fees by $17.6 million mostly due to lower insurance fees resulting from lower contingency commissions of $7.5 million, lower debit card fees driven by lower volume of transactions, and lower credit card fees due to waivers provided as part of the hurricanes relief efforts; • Lower income from mortgage banking activities by $31.1 million driven by a higher unfavorable fair value adjustment on MSRs, lower mortgage from fees, servicing securitization transactions; and lower net gains • Unfavorable variance in gain (loss) on sale and valuation adjustment on investment securities of $8.0 million principally resulting from other- than-temporary impairment losses on senior Puerto Rico Sales Tax Financing Corporation (COFINA) bonds; • Lower net gain on sale of loans by $8.7 million mainly due to the gain on the sale of a non-accrual public sector loan during 2016; and • Unfavorable variance in expense to indemnity reserves of $3.4 million driven by higher credit recourse reserve, including the estimated impact of the Hurricane Maria; • Lower operating expenses by $1.9 million, mainly due to: • Lower personnel cost by $3.4 million mostly driven by lower commissions expense; • Favorable variance $29.9 million in of professional fees due to lower legal fees related to the FDIC arbitration proceedings resolved in 2016, to programming, processing and other technology services; and expenses related lower and • Lower amortization of intangibles by $6.7 million mainly due to the impact in 2016 results of the core deposits intangible fully amortized and goodwill impairment charge; Partially offset by: • Higher net occupancy expense by $3.2 million mostly driven by higher energy costs and higher due • An increase of $2.9 million in business promotions sponsorship, to promotions and donations related to disaster relief activities and communications in response to the hurricanes, and higher credit cards reward expenses; higher • Unfavorable variance of $3.1 million in FDIC deposit insurance due to asset growth; • Higher OREO expense by $3.1 million due to higher write-downs on commercial and mortgage properties and higher mortgage properties expenses; partially offset by a favorable variance in net gains on sale of foreclosed asset; and • Increase of $24.8 million in other operating expenses driven by a write-down of $7.6 million related to capitalized software cost charged-off on a discontinued project, higher sundry losses by $6.5 million due to higher operational and mortgage servicing losses, and $5.0 million of other costs related to Hurricanes Irma and Maria, including a premises and equipment write-down of $3.6 million; • Favorable variance in income tax expense by $2.9 million mainly due to a lesser amount of reversal of reserves for uncertain tax positions than in previous year. The Banco Popular de Puerto Rico reportable segment’s net income amounted to $230.1 million for the year ended December 31, 2016, compared with $318.4 million for the year ended December 31, 2015. The main factors that contributed to the unfavorable variance of $88.3 million in the financial results included the following: • 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 by higher securities by $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. The reduction in margin is driven by earning asset allocation; from investment income • 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; • Lower non-interest income by $221.4 million mainly due to: • Unfavorable variance share (expense) income by $227.8 million due to a the $136.2 in FDIC loss write-down million to POPULAR, INC. 2017 ANNUAL REPORT 29 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 • Lower income from mortgage banking activities by $25.4 million driven by an unfavorable fair value adjustment on MSRs and lower gains from securitization transactions; Partially offset by: • 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; • Favorable variance in trading account (loss) profit of $3.7 million principally resulting from favorable fair value adjustments of Puerto Rico government obligations; • 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 • 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; • Lower operating expenses by $13.4 million, mainly due to: • 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: • 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 • An increase of $12.1 million in professional fees mostly driven by higher legal fees mainly related to the FDIC arbitration proceedings and higher technology lower fees, partially collections and appraisal fees; offset by • Lower income tax expense by $40.4 million mainly due to lower taxable income and the reversal of reserves for uncertain tax positions. Banco Popular North America For the year ended December 31, 2017, the reportable segment loss of of Banco Popular North America reported net $147.6 million, compared with a net income of $47.3 million for the year ended December 31, 2016. The principal factors that contributed to the variance in the financial results included the following: • Higher net interest income by $22.5 million mainly due to higher interest income from loans by $30.5 million principally driven by higher volume from commercial and higher volume and yield from construction loans, and higher interest income from investment securities by $4.6 million due to higher average balances and yield. These favorable variances were partially offset by lower yields from commercial loans and higher interest expense from deposits by $12.4 million driven by higher volume and cost of money market deposits and time deposits. The BPNA reportable segment’s net interest margin was 3.51% for 2017 compared with 3.64% for the same period in 2016; • Unfavorable variance in the provision for loan losses by $62.7 million driven by portfolio growth, higher net charge-offs and higher reserves for the U.S. taxi medallion purchased credit impaired portfolio; • Lower non-interest income by $1.2 million mostly due to the reversal of a loan indemnification reserve recorded in 2016; • Lower operating expenses by $2.7 million driven by a decrease in other operating expenses by $3.5 million due to lower operational losses, and lower OREO expense by $1.6 million due lower commercial properties expenses, including the impact of insurance reimbursements of $1.0 million. These favorable variances were partially offset by higher business promotion by $2.8 million including driven advertising, promotions and direct mailing due to new initiatives; and higher marketing expenses, by • Income taxes unfavorable variance of $155.0 million mainly driven by the partial write-down of the deferred tax asset because of the impact of the Tax Cuts and Jobs Act. The Act reduces the maximum federal Corporate tax rate, thus resulting in lower realizable benefit at lower taxable rates. 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 30 POPULAR, INC. 2017 ANNUAL REPORT 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 unfavorable variance of $601.3 million in the financial results included the following: • Unfavorable variance in the provision for loan losses by $14.6 million driven by portfolio growth and higher net charge-offs; offset by • 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; • 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 $2.3 million due to higher medical insurance claims, 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 • 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. total $44.3 assets were STATEMENT OF FINANCIAL CONDITION ANALYSIS Assets The Corporation’s billion at December 31, 2017, compared to $38.7 billion at December 31, 2016 due mainly to an increase in investments as a result of the deployment of additional funds from deposit growth. Refer to the Corporation’s Consolidated Statements of Financial Condition at December 31, 2017 and 2016 included in this 2017 Annual Report. Also, refer to the Statistical Summary 2013-2017 in this MD&A for Condensed Statements of Financial Condition for the past five years. Money market, trading and investment securities Money market investments totaled $5.3 billion at December 31, 2017 compared to $2.9 billion at December 31, 2016. The increase was mainly at BPPR due to higher liquidity driven by an increase in deposits. Trading account securities amounted to $43 million at December 31, 2017, compared to $60 million at December 31, 2016. The decrease was at the BPPR segment, mainly mortgage- backed securities. Refer to the Market / Interest Rate Risk section of 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 $10.3 billion at December 31, 2017, compared to $8.3 billion at 2016. The increase of $2.0 billion was mainly at BPPR due to purchases of U.S. Treasury securities and mortgage-backed agency pools driven by an increase in funds available to invest from increased liquidity, as discussed above. Table 8 provides a breakdown of the Corporation’s portfolio of investment and held-to-maturity (“HTM”) on a combined basis. Also, Notes 7 and 8 to the Consolidated Financial Statements provide additional to the Corporation’s investment securities AFS and HTM. information with respect available-for-sale securities (“AFS”) Table 8 - Breakdown of Investment Securities Available-for- Sale and Held-to-Maturity (In thousands) U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations Mortgage-backed securities Equity securities Others Total investment securities AFS December 31, 2017 December 31, 2016 $ 3,928,164 $2,136,620 608,933 711,850 99,364 118,798 943,819 4,688,662 1,815 1,802 1,221,600 4,105,332 2,122 11,585 and HTM $10,272,559 $8,307,907 Loans Refer to Table 9 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented separately in Table 9. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. 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 loans. As of December 31, 2017, the Corporation’s covered loans portfolio amounted to $517 million, comprised mainly of residential mortgage loans. total The Corporation’s loan portfolio amounted to $24.9 billion at December 31, 2017, compared to $23.4 billion at December 31, 2016. Refer to Note 9 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales. POPULAR, INC. 2017 ANNUAL REPORT 31 Table 9 - Loans Ending Balances (in thousands) Loans not covered under FDIC loss sharing agreements: Commercial Construction Legacy [1] Lease financing Mortgage Consumer 2017 2016 At December 31, 2015 2014 2013 $11,488,861 880,029 32,980 809,990 7,270,407 3,810,527 $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 Total non-covered loans held-in-portfolio 24,292,794 22,773,747 22,346,115 19,404,451 21,611,866 Loans covered under FDIC loss sharing agreements: Commercial Construction Mortgage Consumer Loans covered under FDIC loss sharing agreements – – 502,930 14,344 517,274 – – 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 2,542,662 2,984,427 Total loans held-in-portfolio 24,810,068 23,346,625 22,992,230 21,947,113 24,596,293 Loans held-for-sale: Commercial Construction Legacy [1] Mortgage Consumer Total loans held-for-sale Total loans – – – 132,395 – 132,395 – – – 88,821 – 88,821 45,074 95 – 91,831 – 137,000 309 – 319 100,166 5,310 106,104 603 – – 109,823 – 110,426 $24,942,463 $23,435,446 $23,129,230 $22,053,217 $24,706,719 [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. securitization activity during the fourth quarter of 2017 at BPPR due to operational delays caused by Hurricane Maria. Covered loans The covered loans portfolio amounted to $517 million at December 31, 2017, compared to $573 million at December 31, 2016. The decrease of $56 million is due to loan resolutions and the normal portfolio run-off. Refer to Table 9 for a breakdown of 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. loans increased held-in-portfolio Non-covered loans by non-covered The $1.5 billion from December 31, 2016 mainly driven by growth in the commercial and construction loan portfolios at BPNA by $0.7 billion and an increase of $0.8 billion in mortgage loans at BPPR due to the rebooking of loans previously pooled into GNMA securities. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the Corporation with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. The loans held-for-sale portfolio increased by $44 million loan from December 31, 2016, due to lower volume of 32 POPULAR, INC. 2017 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, 2017 2016 $1,738,329 142,605 (288,013) $1,592,921 (70,129) $1,974,501 169,748 (405,920) $1,738,329 (68,877) $1,522,792 $1,669,452 [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 $507 million as of December 31, 2017 (December 31, 2016 - $563 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, 2017 2016 $1,010,087 (142,605) 13,233 $1,112,458 (169,748) 67,377 $ 880,715 $1,010,087 Table 12 sets forth the activity in the FDIC loss share asset for the years ended December 31, 2017, 2016, and 2015. Table 12 - Activity of Loss Share Asset (In thousands) Balance at beginning of year Amortization of loss share indemnification asset Credit impairment losses to be covered under loss sharing agreements Reimbursable expenses Net payments from FDIC under loss sharing agreements Arbitration decision charge Other adjustments attributable to FDIC loss sharing agreements Balance at end of period Balance due to the FDIC for recoveries on covered assets [1] Balance at end of period Years ended December 31, 2015 2016 2017 $ 69,334 (469) 3,136 2,454 (22,589) – (5,550) $ 310,221 (10,201) (239) 8,433 (102,596) (136,197) (87) $ 542,454 (66,238) 15,658 73,205 (247,976) – (6,882) $ 46,316 $ 69,334 $ 310,221 (1,124) (27,578) (5,570) $ 45,192 $ 41,756 $ 304,651 [1] Balance due to the FDIC for recoveries on covered assets for the years ended December 31, 2016 and 2015 amounting to $27.6 million and $5.6 million, respectively, was included in other liabilities in the accompanying Consolidated Statement of Condition. 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. The Corporation revises its expected cash flows and estimated credit losses on a quarterly basis. 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 reduced to the expected reimbursement amount from the FDIC (amortization). In contrast, an increase to non-interest income is recognized as a result of increases in expected reimbursements due estimates (accretion). Table 13 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount). to higher loss POPULAR, INC. 2017 ANNUAL REPORT 33 Table 13 - Activity in the Remaining FDIC Loss Share Asset Amortization (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, 2015 2016 2017 $ 4,812 (469) (2,781) $ 26,100 (10,201) (11,087) $ 53,095 (66,238) 39,243 $ 1,562 $ 4,812 $ 26,100 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 accretion results in a positive impact to non-interest income, particularly FDIC loss share (expense) income. Other real estate owned Other real estate owned represents real estate property received in satisfaction of debt. At December 31, 2017, OREO decreased to $189 million from $213 million at December 31, 2016 mainly in residential properties at BPPR and the write-down of $2.7 million for damages associated with Hurricane Maria. Refer to Note 15 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 16 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at December 31, 2017 and 2016. Other $154 million from December 31, 2016 to December 31, 2017, due mostly to a reduction in the U.S. operations net deferred tax asset due to the write-down taken as a result of the impact of the Act. Refer to Note 39 to the Consolidated Financial Statements for additional information. assets decreased by Accrued income receivable Accrued income receivable increased by $76 million mainly due to interest accrued but not yet collected resulting from the loan payment moratorium. Liabilities The Corporation’s liabilities were $39.2 billion at December 31, 2017, compared to $33.5 billion at December 31, 2016. Refer to the Corporation’s Consolidated Statements of Financial Condition included in this Form 10-K. total Mortgage servicing assets Mortgage servicing assets decreased by $29 million to $168 million principally driven by unfavorable changes in fair value and runoff of the servicing portfolio. Deposits and Borrowings The composition of the Corporation’s financing to total assets at December 31, 2017 and 2016 is included in Table 14. Table 14 - Financing to Total Assets (In millions) Non-interest bearing deposits Interest-bearing core deposits Other interest-bearing deposits Repurchase agreements Other short-term borrowings Notes payable Other liabilities Stockholders’ equity N.M. – Not meaningful. Deposits at The Corporation’s December 31, 2017, compared to $30.5 billion at December 31, 2016. The deposits increase of $5.0 billion was mainly due to an increase in retail and commercial savings, NOW deposits, deposits totaled billion $35.5 34 POPULAR, INC. 2017 ANNUAL REPORT December 31, December 31, % increase (decrease) % of total assets 2016 from 2016 to 2017 2016 2017 2017 $ 8,491 22,394 4,569 391 96 1,536 1,696 5,104 $ 6,980 18,776 4,740 480 1 1,575 912 5,198 21.6% 19.3 (3.6) (18.5) N.M. (2.5) 86.0 (1.8) 19.2% 18.0% 50.6 10.3 0.9 0.2 3.5 3.8 11.5 48.6 12.3 1.2 – 4.1 2.4 13.4 demand deposits from the Puerto Rico public sector and retail and commercial checking accounts at BPPR. Refer to Table 15 for a breakdown of the Corporation’s deposits at December 31, 2017 and 2016. 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 remained relatively flat at $2.0 billion at December 31, 2017, compared to $2.1 billion at December 31, 2016. Refer to Note 20 to the Consolidated Financial information on the Corporation’s borrowings. Also, refer to the Off-Balance Sheet Arrangements and Other Commitments section in this MD&A information on the Corporation’s contractual for additional obligations. Statements detailed for Other liabilities The Corporation’s other liabilities amounted to $1.7 billion at December 31, 2017, an increase of $0.8 billion when compared to December 31, 2016. The increase was due to an increase in the liability for GNMA loans sold with a repurchase option of $0.8 billion due to an increase in delinquency resulting from the moratorium, as noted above. Stockholders’ Equity Stockholders’ equity totaled $5.1 billion at December 31, 2017, compared to $5.2 billion at December 31, 2016. The decrease was mainly related to the impact of the common stock repurchase plan of $75 million completed during the first quarter of 2017 and higher accumulated other comprehensive loss by $30 million principally in unrealized losses on securities available-for-sale. 2017 2016 2015 2014 2013 $12,460,081 15,054,242 424,307 7,411,140 103,738 $ 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 $35,453,508 $30,496,224 $27,209,723 $24,807,535 $26,711,145 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 25 for a detail of accumulated other comprehensive loss, an integral component of stockholders’ equity. 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 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 2013 through 2017 under the regulatory guidance applicable during those years. Note 24 to the consolidated information on the financial Corporation’s regulatory capital requirements, including the regulatory capital ratios of its depository institutions, BPPR and BPNA. The Corporation continues to exceed the well- capitalized guidelines under the federal banking regulations. statements presents further POPULAR, INC. 2017 ANNUAL REPORT 35 Table 16 - Capital Adequacy Data (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 2017 2016 At December 31, 2015 2014 2013 $ 4,226,519 $ 4,121,208 4,049,576 (A) (A) $ 4,226,519 758,746 $ 4,121,208 748,007 $ 4,049,576 642,833 $ 3,849,891 272,347 $ 4,464,742 296,813 $ 4,985,265 $ 4,869,215 $ 4,692,409 $ 4,122,238 $ 4,761,555 $25,935,696 $25,001,334 $24,987,144 $21,233,902 $23,318,674 $42,185,805 $37,785,070 $34,253,625 $32,250,173 $34,746,137 16.30% 16.30 19.22 10.02 12.91 11.48 22.73 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) 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 decrease in the CET1 capital ratio, Tier 1 capital ratio and total capital ratio on December 31, 2017 compared to December 31, 2016 was mostly due to the common stock repurchase of $75 million during the first quarter of 2017, the transition period impact on deferred tax assets and higher risk weighted assets by $0.9 billion mainly driven by an increase of $1.5 billion in loans held-in-portfolio which included growth in commercial and construction loans and higher mortgage loans due to the rebooking of loans previously pooled into GNMA securities; partially offset by this year’s earnings. The decrease in leverage ratio compared to 2016 was mainly due to the increase in average total assets driven by increases in investment balances and higher loans held-in-portfolio. 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 Corporation’s ratios presented in Table 16 show that the Corporation was “well capitalized” for regulatory purposes, the highest classification, under Basel III for 2017, 2016 and for all other years presented under Basel I. BPPR and BPNA were also well-capitalized for all years presented. 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 face constraints on the capital conservation buffer will 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 (In thousands) At December 31, 2016 2017 Common stockholders’ equity $5,053,745 $5,147,797 AOCI related adjustments due to opt-out election Goodwill, net of associated deferred 307,619 280,330 tax liability (DTL) (561,604) (554,614) Intangible assets, net of associated DTLs Deferred tax assets and other deductions (28,538) (25,662) (544,703) (726,643) Common equity tier 1 capital $4,226,519 $4,121,208 Common equity tier 1 capital to risk- weighted assets 16.30% 16.48% 36 POPULAR, INC. 2017 ANNUAL REPORT 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, 2017 and 2016. Table 18 - Reconciliation Tangible Common Equity and Assets (In thousands, except share or per share information) Total stockholders’ equity Less: Preferred stock Less: Goodwill Less: Other intangibles At December 31, 2017 2016 $ 5,103,905 (50,160) (627,294) (35,672) $ 5,197,957 (50,160) (627,294) (45,050) Total tangible common equity $ 4,390,779 $ 4,475,453 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 $ 44,277,337 (627,294) (35,672) $ 38,661,609 (627,294) (45,050) $ 43,614,371 $ 37,989,265 10.07% 11.78% of period 102,068,981 103,790,932 Tangible book value per common share $ 43.02 $ 43.12 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 its the financial needs of to meet customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 26 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements. 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 specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations. services Purchase obligations legal and binding include major contractual obligations outstanding at the end of 2017, 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 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, 2017, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, are presented in Table 19. POPULAR, INC. 2017 ANNUAL REPORT 37 Table 19 - Contractual Obligations (In thousands) 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, 2017, the Corporation’s liability on its pension, restoration and postretirement benefit plans amounted to approximately $220 million, compared with $244 million at December 31, 2016. 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 $6.3 million for 2018. 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 33 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 At December 31, 2017, the liability for uncertain tax positions was $7.3 million, compared with $7.4 million as of the end of 2016. 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 Table 20 - Off-Balance Sheet Lending and Other Activities (In thousands) Commitments to extend credit Commercial letters of credit Standby letters of credit Commitments to originate or fund mortgage loans Total 38 POPULAR, INC. 2017 ANNUAL REPORT Less than 1 year $3,941,152 390,921 96,208 253,793 88,929 31,886 1,295 $4,804,184 Payments Due by Period 3 to 5 years $1,292,255 – – 23,189 32,948 49,082 3,794 $1,401,268 1 to 3 years $2,233,815 – – 718,090 95,534 58,005 3,069 $3,108,513 After 5 years $ 47,656 – – 522,642 11,798 107,986 10,484 $700,566 Total $ 7,514,878 390,921 96,208 1,517,714 229,209 246,959 18,642 $10,014,531 the tax authorities. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty. Under the statute of limitations, the liability for uncertain tax positions expires as follows: 2018 - $1.1 million, 2019 - $1.1 million, 2020 - $1.5 million, 2021 - $1.1 million, and 2022 - $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 including could amount interests. to approximately $4.6 million, The Corporation also utilizes lending-related financial instruments in the normal course of business to accommodate its customers. The Corporation’s the financial needs of 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 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. in making those commitments future actual The following table presents the contractual amounts related lending and other to the Corporation’s off-balance sheet activities at December 31, 2017: Amount of commitment - Expiration Period Years 2023 - Years 2021 - Years 2019 - thereafter 2022 2020 $43,266 $150,099 $499,905 – – 1,749 – – 26,768 – – 564 $43,266 $150,099 $528,986 2018 $6,871,688 367 6,865 14,733 $6,893,653 Total $7,564,958 2,116 33,633 15,297 $7,616,004 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 shared responsibility by all employees. • 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. 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 • Credit Risk – Potential for default or loss resulting from an obligor’s failure to meet the terms of any contract with the Corporation or any of its subsidiaries, or failure otherwise to perform as agreed. Credit risk arises from all activities where success depends on counterparty, issuer, or borrower performance. • Interest Rate Risk (“IRR”) – 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 affecting bank lending and borrowing activities (basis risk); the spectrum of maturities (yield curve risk); and from interest related options embedded in bank products (options risk). from changing rate relationships across • 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. • 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. • Compliance Risk – Potential violations of or non-conformance with laws, regulations, or prescribed practices. for loss resulting from rules, activities, • Regulatory and Legal Risk – Risk of negative impact to business regulatory earnings 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 • Strategic Risk – Potential for loss arising from adverse business decisions or implementation of business decisions. Also, it incorporates how management analyzes strategic external direction of the Corporation. improper impact factors that the • Reputational Risk – Potential for loss arising from negative public opinion. 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, POPULAR, INC. 2017 ANNUAL REPORT 39 risks; and monitor and infrastructure implementing measurement measure risk mechanisms 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. to achieve effective 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 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: • 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 • ALCO (Asset the policies and approves / Liability Management Committee) – Oversees and processes designed to ensure sound market risk and balance sheet strategies, including the interest rate, liquidity, investment and trading policies. The ALCO monitors the capital position and plan for the Corporation and approves all capital management strategies, including capital market transactions and capital distributions. The ALCO also monitors forecasted results and their impact on capital, liquidity, and net interest margin of the Corporation. • ORCO (Operational Risk Committee) – Monitors operational risk management activities to ensure the development and consistent application of operational risk policies, processes and procedures that measure, limit and manage the Corporation’s operational risks while the maintaining the effectiveness and efficiency of operating and businesses’ processes. 40 POPULAR, INC. 2017 ANNUAL REPORT • Compliance Committees regulatory compliance activities to ensure to compliance with legal and regulatory requirements and the Corporation’s policies. – Monitors • 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 liquidity and strengthening controls 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, including but not the Corporation’s liquidity 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. in the portfolio classified investment Most of the assets subject to market valuation risk are securities as available-for-sale. Refer to Notes 7 and 8 for further information on the investment portfolio. Investment securities classified as available-for-sale amounted to $10.2 billion as of December 31, 2017. Other assets subject risk include loans held-for-sale, which amounted to $132 million, mortgage servicing rights (“MSRs”) which amounted to $168 million and securities to $43 million, as of December 31, 2017. “trading”, which amounted to market classified as Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $ 165 million at December 31, 2017. Management believes that market risk is currently not a material source of risk at the Corporation. A significant portion of the Corporation’s financial activities is concentrated in Puerto Rico, which has been going through a fiscal and economic crisis and was recently impacted by two major hurricanes. 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, management objectives, market and policy constraints. expectations Management utilizes various tools to assess IRR, including simulation modeling, static gap analysis, and Economic Value of Equity (EVE). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. Simulation modeling is prepared for a five-year period, which in conjunction with the EVE analysis, provides Management a better view of long term IRR. Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs. 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. 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 on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at December 31, 2017 and December 31, 2016, assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon: the estimates do not contemplate actions Table 21 - Net Interest Income Sensitivity (One Year Projection) (Dollars in thousands) Change in interest rate +400 basis points +200 basis points -200 basis points December 31, 2017 December 31, 2016 Amount Change Percent Change Amount Change Percent Change $ 409,924 205,011 (169,126) 25.57% 12.79 (10.55) $236,945 121,181 (35,314) 16.52% 8.45 (2.46) At December 31, 2017, the simulations showed that the Corporation maintains an asset-sensitive position. This is primarily due to (i) a high level of money market investments rates, that are highly sensitive to changes in interest (ii) approximately 36% of the Corporation’s loan portfolio being comprised of Prime and Libor-based loans, and (iii) low elasticity of the Corporation’s core deposit base. The increase in sensitivity from December 31, 2016 in the +200 and +400 POPULAR, INC. 2017 ANNUAL REPORT 41 scenarios is mainly driven by an increase in money market investments of $2.4 billion, from $2.9 billion at December 31, 2016 to $5.3 billion at December 31, 2017, that was due to growth in public fund deposits. The increase in sensitivity in the -200 scenario is also driven by the increase in money market investments that reflect full changes in rates across all scenarios, combined with the increases in the Federal Funds Target Rate in March, June and December of 2017 by the Federal Reserve, which led to an increase in the magnitude of the -200 basis points scenario. 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, 2017 By repricing dates After nine months but within one year After six months but within nine months After one year but within two years After two years Non-interest bearing funds Total Assets: Money market investments Investment and trading securities Loans Other assets Total Liabilities and stockholders’ equity: Savings, NOW and money market and other interest bearing demand deposits Certificates of deposit Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Notes payable Non-interest bearing deposits Other non-interest bearing liabilities Stockholders’ equity $ 5,253,880 $ 1,095 $ – $ 144 $ – $ – $ – $ – $ 5,255,119 350,910 6,108,555 – 561,495 1,927,714 – 443,103 1,066,908 – 492,766 895,105 – 454,022 864,266 – 1,784,665 6,352,412 2,802,305 10,435,687 – – 43,598 10,482,971 841,923 24,942,463 3,596,784 3,596,784 11,713,345 2,490,304 1,510,011 1,388,015 1,318,288 4,586,970 16,788,099 4,482,305 44,277,337 1,838,755 1,244,174 698,716 533,993 977,758 938,105 900,376 773,633 830,141 632,216 2,737,789 11,464,150 2,105,583 1,287,174 – 19,447,685 7,514,878 – 210,555 106,820 59,437 – – – 14,109 – 1,000 35,000 11,026 60,000 102,857 – 56,164 – 82,749 – 607,564 1,208 674,996 – – – 390,921 96,208 1,536,356 – – – – – – – – – – – – – – – – – – – – – 8,490,945 8,490,945 1,696,439 5,103,905 1,696,439 5,103,905 Total $ 3,294,484 $1,385,555 $2,138,157 $1,730,173 $1,545,106 $4,632,527 $14,260,046 $ 15,291,289 $44,277,337 Interest rate sensitive gap Cumulative interest rate 8,418,861 1,104,749 (628,146) (342,158) (226,818) (45,557) 2,528,053 (10,808,984) sensitive gap 8,418,861 9,523,610 8,895,464 8,553,306 8,326,488 8,280,931 10,808,984 Cumulative interest rate sensitive gap to earning assets 21.16% 23.93% 22.35% 21.49% 20.92% 20.81% 27.16% – – – – – 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 rate fluctuations and counterparty credit adjustments which could have a positive or negative effect in the Corporation’s earnings. 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 42 POPULAR, INC. 2017 ANNUAL REPORT securities since prepayments collateralized mortgage mortgage-backed lower obligations, prepayments could extend) the weighted average life of these portfolios. could shorten (or and Table 23, which presents the maturity distribution of prepayment consideration assets, takes into earning assumptions. Table 23 - Maturity Distribution of Earning Assets As of December 31, 2017 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 $ 5,255,119 2,231,726 – $ 5,764,403 $ – 35,044 – $2,250,573 $ – 32,185 $ 5,255,119 10,313,931 3,268,192 673,750 327,166 1,142,910 1,322,623 6,734,641 792,433 1,977,853 35,920 482,824 1,502,551 2,128,257 6,127,405 243,502 2,029,730 165,292 – 314,923 61,173 2,571,118 244,595 1,350,617 3,579 – 195,928 3,630,558 5,180,682 262,437 1,864,269 1,318 – 735,114 21,776 2,622,477 163,173 10,490,661 879,859 809,990 3,891,426 7,164,387 23,236,323 1,706,140 $15,013,919 $12,135,310 $2,850,757 $7,693,692 $2,817,835 $40,511,513 (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, performed quarterly, require the continued usage of key assumptions and estimates. Management must apply judgment to develop its estimates of cash flows for those covered loans given the impact of home price and property value changes, changes in interest rates and loss severities and prepayment speeds. Decreases in the expected cash flows by pool will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses, while increases in the expected cash flows of a pool will generally result in an increase in interest income over the remaining life of the loan, or pool of loans. Trading The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto trading Rico and Popular Securities. Popular Securities’ activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” “TBA” related market and (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 hedging the At December 31, 2017, the Corporation held trading representing securities with a fair value of $43 million, approximately 0.1% of the Corporation’s total assets, compared with $60 million and 0.2%, respectively, at December 31, 2016. As shown in Table 24 the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage POPULAR, INC. 2017 ANNUAL REPORT 43 activities described above, which at December 31, 2017 were investment grade securities. As of December 31, 2017, the trading portfolio also included $1.3 million in Puerto Rico government obligations and shares of closed-end funds that invest primarily in Puerto Rico government obligations ($2.6 million as of December 31, 2016). Trading instruments fair value, with changes resulting from are recognized at Table 24 - Trading Portfolio 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 years ended December 31, 2017 and December 31, 2016, respectively. Table 24 provides the composition of the trading portfolio at December 31, 2017 and December 31, 2016. (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 $0.2 million for the last week in December 31, 2017. 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 interest in its 44 POPULAR, INC. 2017 ANNUAL REPORT December 31, 2017 Weighted Average Yield [1] Amount December 31, 2016 Weighted Average Yield [1] Amount $29,280 529 159 529 12,690 $43,187 5.40% 5.74 0.28 12.58 3.25 4.84% $42,746 1,321 1,164 602 13,972 $59,805 4.85% 5.27 5.51 12.35 3.03 4.52% value. Refer to Note 29 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities. The Corporation’s derivative activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these hedges is monitored to ascertain that the Corporation is reducing market risk as expected. Derivative transactions are generally executed with instruments with a high correlation to 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 that are linked to these hedged assets and instruments liabilities. Management will assess if circumstances warrant liquidating or replacing the derivatives position in the hypothetical event that high correlation is reduced. Based on at the Corporation’s derivative December 31, 2017, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations. instruments outstanding Certain derivative contracts also present credit risk and liquidity risk because the counterparties may not comply with the terms of the contract, or the collateral obtained might be illiquid or become so. The Corporation controls credit risk limits and monitoring procedures, and through approvals, through master netting and collateral agreements whenever of the fair value guidance, 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 value measurements the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2017, inclusion of the credit risk in the fair value of the derivatives resulted in a net gain of $0.1 million (2016 – net loss of $0.5 million; 2015 – net loss of $0.5 million), which consisted of a gain of $0.2 million (2016 – loss of $ 0.9 million; 2015 – loss of $ 0.8 million) resulting from the Corporation’s credit standing adjustment and a loss of $0.1 million (2016 – gain of $ 0.4 million; 2015 – gain of $0.3 million) from the assessment of the counterparties’ credit risk. At December 31, 2017, the Corporation had $94 thousand (2016 – $ 4 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, 2017 and 2016. 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, 2017 amounted to $ 99 million (2016—$ 105 million). Refer to Note 29 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, 2017 and 2016. 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 and markets mostly instruments 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. customers. These products to Following is a description of the most significant of the Corporation’s derivative activities that are not designated for hedge accounting. Refer to Note 29 to the consolidated financial statements for additional quantitative and qualitative information on these derivative instruments. At December 31, 2017, the Corporation had outstanding $ 2 million (2016 - $ 113 million) in notional amount of interest rate swap agreements, which were not designated as accounting hedges. These swaps were entered in the Corporation’s capacity its customers and their as an intermediary on behalf of offsetting swap position. For the year ended December 31, 2017, the impact of the mark-to-market of interest rate swaps not designated as accounting hedges was a net increase in earnings of approximately $ 0.1 million, recorded in the other operating income category of the consolidated statement of operations, of earnings compared with approximately $ 0.3 million, in 2016 and 2015. increase an At December 31, 2017, the Corporation had $71 million (2016 - $0.7 million) in notional amount of forward contracts outstanding not designated as accounting hedges with a positive fair value of $ 161 thousand (2016 - $9 thousand). For the the year ended December 31, 2017, mark-to-market of the forward contracts not designated as accounting hedges was a reduction to non-interest income of $ 1.5 million (2016 - loss of $ 0.2 million; 2015 - loss of $ 0.4 million), which was included in the category of mortgage banking activities in the consolidated statement of operations. the impact of to its linked to these indexes Furthermore, the Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation offers certificates of deposit with returns retail customers, principally in connection with individual retirement accounts (IRAs), and certificates of deposit. At December 31, 2017, these deposits amounted to $ 66 million (2016 - $ 70 million), or less than 1% (2016 – less than 1%) of the Corporation’s total deposits. 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 customer’s principal In these certificates, The risk of issuing certificates of deposit with returns tied to economically hedged by the applicable indexes is the POPULAR, INC. 2017 ANNUAL REPORT 45 Corporation. BPPR and BPNA purchase indexed options from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposit issued by these banking subsidiaries. By hedging the risk in this manner, the effective cost of these deposits is fixed. The contracts have a maturity and an index equal to the terms they are economically of 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, 2017, the notional indexed options on deposits approximated $ 70 million (2016 - $ 73 million) with a fair value of $ 16 million (asset) (2016 - $ 13 million) while the embedded options had a notional value of $ 66 million (2016 - $ 70 million) with a fair value of $ 14 million (liability) (2016 - $ 11 million). amount of the Refer to Note 29 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2017 and 2016. Foreign Exchange in BHD León in the The Corporation holds an interest Dominican Republic, which is an investment accounted for under the equity method. The Corporation’s carrying value of the equity interest in BHD León approximated $135 million at December 31, 2017. 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, 2017, the Corporation had approximately $43 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, 46 POPULAR, INC. 2017 ANNUAL REPORT compared with an unfavorable adjustment of $40 million at December 31, 2016 and $36 million at December 31, 2015. Liquidity The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its finance expected future growth and financial obligations, 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 including approving relevant risk limits and liquidity risk, policies. The Board has delegated the monitoring of these risks to the RMC and the ALCO. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the corporate wide Corporate Treasury Division coordinates liquidity management and activities with the reportable segments, oversees policy breaches and manages the and Operational Risk escalation process. The Financial the independent Management Division is monitoring and reporting of adherence with established policies. responsible for strategies An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and its ability to obtain regulatory changes, could also affect 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 liquidity position and that of the banking subsidiaries. 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. 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. During the year ended December 31, 2017, the Corporation declared dividends on its common stock of $ 102.1 million and completed a $75 million privately negotiated accelerated share repurchase transaction. Refer to additional information on Note 23 – Stockholder’s equity. Deposits, borrowing arrangements. funds for the Corporation, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funding 80% of the Corporation’s total assets at December 31, 2017 and 79% at December 31, 2016. The ratio of total ending loans to deposits was 70% at December 31, 2017, compared to 77% at December 31, 2016. In addition to traditional deposits, the Corporation maintains At December 31, 2017, these borrowings consisted primarily of $ 391 million in assets sold under agreement to repurchase, $726 million in advances with the FHLB, $439 million in junior subordinated deferrable interest debentures (net of debt related to trust preferred securities and issuance $446 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 20 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) Given the widespread level of disruption to basic infrastructure and commercial activity in the regions impacted by the passage of hurricanes Irma and Maria, BPPR decided to adopt certain measures to assist its customers in affected areas. These measures include the waiver of certain fees and charges, such as late payment charges and ATM transaction fees, and a temporary payment moratorium to eligible borrowers across most loan portfolios during which BPPR will continue to accrue interest on the loans. These measures, while important to assist in the recovery of our customers post-hurricane, will negatively impact our results of operations and liquidity. For example, the waiver of fees and other charges negatively impacted the Corporation’s revenues for the third quarter and fourth quarters of 2017. The moratorium impacts our liquidity not only due to principal and interest payments that BPPR did not receive during the period, but also as a result of loans serviced by the Corporation where we are required to advance to the owners the payment of principal and interest on a scheduled basis even when such payment is not collected from the borrower. Management believes that the liquidity impact of these measures is not significant in light of BPPR’s existing liquidity resources and that BPPR has sufficient liquidity to meet anticipated cash flow obligations. Deposits at BPPR as of December 31, 2017 were higher by approximately $2.0 billion than as of the end of the second quarter of 2017. Management will continue to monitor the effect of the moratorium as the period comes to an end and the loan repayment schedule is resumed. The following sections provide further information on the Corporation’s major funding activities and needs, as well as the and available risks involved in these activities. A detailed description of the credit, Corporation’s borrowings including its terms, is included in Note 20 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. lines of Banking Subsidiaries Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and BPNA), or “the banking subsidiaries,” include retail and commercial deposits, brokered deposits, unpledged investment securities, mortgage loan securitization, and, to a lesser extent, loan sales. In addition, the Corporation the maintains borrowing facilities with the FHLB and at discount window of the Federal Reserve Board (the “FRB”), 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, 2017, BPPR declared cash dividends of $192 million, a portion of which was used by Popular, Inc. for the payments of the cash dividends on its outstanding common stock and to complete the repurchase of $75 million in treasury stock as part of the privately negotiated accelerated share repurchase transaction completed during the first quarter of 2017, as mentioned above. During the year ended December 31, 2017, BPNA declared a dividend of $10.4 million to Popular North America, its holding company, who in turn declared a $10.4 million dividend to Popular, Inc. 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 FRB and FHLB, in addition to liquid unpledged securities. The 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. POPULAR, INC. 2017 ANNUAL REPORT 47 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 the Corporation’s banking subsidiaries are federally all of 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 brokered excluding $100,000, 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 stable and low-cost funds. Core deposits totaled $ 30.9 billion, or 87% of total deposits, at December 31, 2017, compared with $25.8 billion, or 84% of total deposits, at December 31, 2016. Core deposits financed 76% of the Corporation’s earning assets at December 31, 2017, compared with 76% at December 31, 2016. Certificates of deposit with denominations of $100,000 and over at December 31, 2017 totaled $ 4.1 billion, or 11% of total deposits (December 31, 2016 - $4.1 billion, or 14% of total deposits). Their distribution by maturity at December 31, 2017 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 $1,270,163 442,833 799,514 1,555,793 $4,068,303 Average deposits, including brokered deposits, for the year ended December 31, 2017 represented 88% of average earning assets, compared with 86% and 85% for the years ended December 31, 2016 and 2015, respectively. Table 26 summarizes average deposits for the past five years. Table 26 - Average Total Deposits (In thousands) 2017 For the years ended December 31, 2014 2015 2016 2013 Non-interest bearing demand deposits $ 7,338,455 $ 6,607,639 $ 6,146,504 $ 5,533,649 $ 5,728,228 Savings accounts 8,268,969 7,528,057 7,027,238 6,733,195 6,792,137 NOW, money market and other interest bearing demand accounts 9,958,772 7,024,810 5,446,933 4,824,402 5,738,189 Certificates of deposit: Under $100,000 $100,000 and over Certificates of deposit Other time deposits Total interest bearing deposits Total average deposits 31, 2017 approximately At December the Corporation’s assets were financed by brokered deposits (December 31, 2016 – 2%). The Corporation had $ 0.5 billion in brokered deposits at December 31, 2017 (December 31, 2016 – $0.6 billion). In the event that any of the Corporation’s 1% of 48 POPULAR, INC. 2017 ANNUAL REPORT 2,455,073 4,127,668 6,582,741 1,033,585 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 25,844,067 22,458,371 20,632,079 19,113,706 21,044,147 $33,182,522 $29,066,010 $26,778,583 $24,647,355 $26,772,375 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 repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral. deposits, The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At December 31, 2017 and December 31, 2016, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.9 billion, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $726 million at December 31, 2017 and $673 million at December 31, 2016. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At December 31, 2017 the credit facilities authorized with the FHLB were collateralized by $4.9 billion in loans held-in-portfolio (December 31, 2016 - $4.9 billion). Refer to Note 20 to the Consolidated Financial Statements for additional information on the terms of FHLB advances outstanding. At December 31, 2017 and December 31, 2016, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.1 billion and $1.2 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, 2017, this credit facility with the Fed was collateralized by $2.0 billion of loans held-in-portfolio (December 31, 2016 - $2.3 billion). the At December 31, 2017, management believes that banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances, 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 the value of securities requirements. To the extent securities that 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. 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, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings. cash on hand, investment include 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, 2017, PIHC received $192 million in dividends from BPPR, $12 million in dividends from PIBI, $10.4 million in dividends from PNA and $3.5 million in dividends from EVERTEC’s parent company. PIHC also received $0.5 million in distributions from its investment in PRB Investors LP, an equity method investment, and $19.5 million in dividends from its non-banking subsidiaries. In addition, during the year ended December 31, 2017 Popular International Bank received $11.8 million in dividends from its investment in BHD Leon. During the year ended December 31, 2017, PNA received $10.4 million in dividends from BPNA. Another use of liquidity at the parent holding company is the payment of dividends on its outstanding stock. During the year ended December 31, 2017, the Corporation declared quarterly dividends on its outstanding common stock of $0.25 per share, for a total of $ 102.1 million and completed a $75 million privately negotiated accelerated share repurchase transaction. Refer to additional information on Note 23 – Stockholder’s equity. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $3.7 million for the year ended December 31, 2017. 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 the ratings are below “investment grade” which affects Corporation’s ability to raise funds in the capital markets. The the cash needs of POPULAR, INC. 2017 ANNUAL REPORT 49 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 $886 million at December 31, 2017, compared with $884 million at December 31, 2016. 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, 2017 are presented in Table 27. Table 27 - Distribution of BHC’s Notes Payable by Contractual Maturity Year 2018 2019 2020 2021 2022 Later years Total (In thousands) $ – 446,873 – – – 439,351 $886,224 As indicated previously, issue new registered debt in the capital markets during the year ended December 31, 2017. the BHC did not The BHCs liquidity position continues to be adequate with investments and other sources of sufficient cash on hand, liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future. sources of funding for Non-banking subsidiaries The principal the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, 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 50 POPULAR, INC. 2017 ANNUAL REPORT 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. 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 $3.2 billion at December 31, 2017 and $3.7 billion at December 31, 2016. 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. 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 two major real estate market and the recent hurricanes. 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. impact of 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, raising management has financing under stress scenarios when important sources of adopted contingency plans for that fully available are usually temporarily are funds for using alternate funding unavailable. These plans call 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 FRB. 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 $12 million in deposits at December 31, 2017 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 $10 thousand at December 31, 2017, with the Corporation providing collateral totaling $94 thousand 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 levels securing the recourse obligations. Also, as collateral discussed in Note 26 to the Consolidated Financial Statements, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements to secure such require the Corporation to post collateral recourse obligations if the institution’s required credit ratings recourse obligations are not maintained. Collateral pledged by the Corporation to amounted to approximately secure $48 million at December 31, 2017. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results. credit risk 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 such as with regulatory controlling the concentrations exposure to lower credit quality assets, and limiting growth in, and loan-to-value considering guidance, ratios), factors POPULAR, INC. 2017 ANNUAL REPORT 51 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. credit The significant changes in the economic conditions and the resulting changes in the borrower’s profile over the past several years requires the Corporation to continue to focus on the identification, monitoring and managing of its credit risk. The 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, and extensions credit support requires commitments, which is generally in the form of real estate and personal property, cash on deposit and other highly liquid instruments. collateral to that in the detail The Corporation’s Credit Strategy Committee (“CRESCO”) is management’s top policy-making body with respect to credit- related matters and credit strategies. CRESCO reviews the activities of each subsidiary, it deems appropriate, to ensure a proactive and coordinated management of credit granting, credit exposures and credit procedures. CRESCO’s principal functions include reviewing the adequacy of the allowance for loan losses and periodically approving appropriate provisions, monitoring compliance with charge-off policy, establishing portfolio diversification standards, yield and quality standards, reporting establishing credit 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. exposure 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 52 POPULAR, INC. 2017 ANNUAL REPORT the portfolio, the CCRMD monitors credit underwriting standards. Also, including performs ongoing monitoring of potential areas of concern for specific borrowers and/or geographic regions. During the past years, the CCRMD has strengthened its quantitative measurement capabilities, part of continued improvements risk management processes. to the credit 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 the Corporate Loan Review Department Review Unit at (“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 loans, of by CLRD documentation. The monitoring 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 corrective actions, if necessary, that help in maintaining a 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 At December 31, 2017, the Corporation’s credit exposure was centered in its $24.9 billion total loan portfolio, which represented 61% of assets. The portfolio composition for the last five years is presented in Table 9. earning its The Corporation issues certain credit-related off-balance sheet financial instruments including commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For these financial instruments, the contract amount represents the credit risk the counterparty to perform in associated with failure of accordance with the terms and conditions of the contract and the decline in value of the underlying collateral. The credit risk associated with these financial instruments varies depending on the counterparty’s creditworthiness and the value of any collateral held. Refer to Note 27 to the consolidated financial statements and to the Contractual Obligations and Commercial Commitments section of this MD&A for the Corporation’s involvement in these credit-related activities. At December 31, 2017, the Corporation maintained a reserve of approximately $10 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit (2016 - $9 million). 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 29 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 7 securities and 8 for available-for-sale investment securities portfolio held by the Corporation at December 31, 2017 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, 312 have an aggregate exposure of $10 million or more. At December 31, 2017, highly leveraged transactions and credit facilities to finance real estate ventures or business acquisitions amounted to $246 million (2016 – $195 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 are 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 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 $95 million in December 31, 2017. 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 During the month of September, Hurricanes Irma and Maria made landfall causing extensive destruction in Puerto Rico, the U.S. and British Virgin Islands. These natural disasters left unprecedented destruction causing a collapse of the electric, water and telecommunication systems, leaving the population with huge challenges in light of an already fragile economy prior to the hurricanes. Restoration of the island’s electric infrastructure and the telecommunications network, as well as the speed of remain the most critical challenges for Puerto Rico’s recovery from the hurricanes. Power outage has extended much longer than expected, causing people to migrate off-island and business disruptions, among other issues. Power generation is currently at approximately such restoration, POPULAR, INC. 2017 ANNUAL REPORT 53 85% of normal electricity production, up from 30% at the end of October, now reaching 87% of all customers. During the fourth quarter of 2017, a loan payment moratorium was granted to consumer and commercial borrowers in response to the effects of the hurricanes. The Corporation continues to assess the impact of the hurricanes on its customers and potential credit losses. As of December 31, 2017, the key measures used to evaluate and monitor the Corporation’s asset quality have been affected by the payment moratorium, and the temporary suspension of collection and foreclosure activities after the hurricanes. 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 41 to the Consolidated Financial Statements. and revenue assets Commonwealth of Puerto Rico A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), which continues to be in a severe economic and fiscal crisis and was recently significantly impacted by two major hurricanes. Hurricanes Impact During the month of September 2017, Hurricanes Irma and Maria, two major hurricanes, caused extensive destruction in Puerto Rico, disrupting the primary market in which BPPR does business. Most relevant, Hurricane Maria made landfall on September 20, 2017, causing severe wind and flood damage to infrastructure, homes and businesses throughout Puerto Rico. Following the passage of Hurricane Maria, all Puerto Rico was left without and infrastructure services (such as water, communications, ports and other transportation networks) were severely curtailed and the government imposed a mandatory curfew. The hurricanes caused significant disruption to the island’s economic activity. Most and wholesalers, financial institutions, manufacturing facilities and hotels, were closed for several days. electrical power, other basic utility establishments, including business retailers Puerto Rico was declared a disaster zone by President Trump due to the impact of the hurricanes, thus making it eligible for Federal assistance. Notwithstanding the significant recovery operation that has been carried out by Federal, state and local governments during the past five months, and which is still underway, as of the date of this report, approximately 13% of the clients of the government’s electric utility company remain without power (according to the government’s estimates), and number of businesses are operating partially or remain closed, while others have permanently closed. Electronic transactions, a significant source of revenue for BPPR, declined significantly in the months following the 54 POPULAR, INC. 2017 ANNUAL REPORT a of of as the lack result levels. power hurricanes and telecommunication services, but have already returned to pre-hurricane the hurricanes have also accelerated the outmigration trends that Puerto Rico was experiencing, with many residents moving to the mainland United States, either on a temporary or permanent basis. indicate reports Several that The damages caused by the hurricanes are substantial and have had a material adverse impact on economic activity in Puerto Rico. As further discussed below, the government’s Proposed Fiscal Plan (as defined below) estimates an 11% decrease in real gross national product (“GNP”) in fiscal year 2018 (July 2017-June 2018), as well as a steep decrease in the government’s tax revenues. It is still, however, too early to fully assess and quantify the extent of the damage caused by the hurricanes, as well as their long-term impact on economic activity. For a discussion of the impact of the hurricanes on the Corporation’s operations and financial results during 2017, refer to Note 2 – Hurricanes impact, on the accompanying financial statements. For additional discussion of risk factors related to the impact of the hurricanes, see Item 1A of this report. the hurricanes, Fiscal and Economic Crisis Even before the Commonwealth was experiencing a severe fiscal and economic 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. The Commonwealth’s deficits were historically covered with bond financings, from Government Development Bank for Puerto Rico (“GDB”), and other extraordinary one-time revenue measures, as well through the deferment of the cost of certain legacy obligations, such as pensions. loans Notwithstanding the implementation of a number of extraordinary measures aimed at increasing revenues, reducing expenditures, and managing the government’s liquidity, the Commonwealth’s structural imbalance between revenue and expenditure and its unfunded legacy obligations, coupled with the Commonwealth’s inability to access the capital markets, eventually resulted in the Commonwealth and certain of its instrumentalities being unable to pay scheduled debt payments services. A while moratorium on most debt service payments has been in place 2016 and, as further discussed below, the Commonwealth and several of its instrumentalities are currently pursuing debt restructuring proceedings under Titles III or VI of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”). government continuing provide to Following the hurricanes, the Commonwealth and its instrumentalities have had to incur significant extraordinary expenditures, while experiencing a substantial decrease in tax and other revenues. The Commonwealth’s municipalities are also facing similar challenges. Such circumstances have aggravated the enduring fiscal and economic crisis and have further strained the government’s liquidity, notwithstanding the receipt of significant Federal assistance. The government has announced that it will need to obtain loans from the Federal government in order to continue financing the recovery efforts and to provide necessary, interim support to the Puerto Rico Electric Power Authority (“PREPA”) and the Puerto Rico Aqueduct and Sewer Authority (“PRASA”). Furthermore, the Legislative Assembly recently enacted legislation to authorize the government to make loans of up to $550 million and $80 million to PREPA and PRASA, respectively, in order to cover the expected liquidity shortfalls of such entities, which provide essential electric power and water services to the residents of Puerto Rico. On February 19, 2018, the federal judge restructuring proceedings under Title III of PROMESA (further discussed below) authorized PREPA to obtain a $300 million emergency loan from the Commonwealth. Such loan is expected to provide temporary liquidity relief to PREPA to allow for recovery efforts further service interruptions. The to continue and prevent it will need to implement a Government anticipates that number of additional extraordinary measures to address its many challenges, some of which are described in the Proposed Fiscal Plan (further discussed below). presiding pending debt over the Economic Performance Puerto Rico entered into recession in the fourth quarter of fiscal year 2006. Puerto Rico’s GNP has thereafter contracted in real terms every year between fiscal year 2007 and fiscal year 2016 (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). The last Puerto Rico Planning Board estimates, released in April 2017 (before the impact of the hurricanes), project GNP to further contract by 1.7% and 1.5% during fiscal years 2017 and 2018, respectively. The latest Economic Activity Index issued by GDB, which is an indicator of general economic activity and not a direct measurement of GNP, reflected a 2.1% reduction in the average for fiscal year 2017, compared to the prior fiscal year. During the first six months of fiscal year 2018 (July 2017- December 2017), the Economic Activity Index reflected a 9.4% average reduction compared to the corresponding figure for fiscal year 2017. As discussed above, Hurricanes Irma and Maria have had a material adverse impact on economic activity that is likely to be reflected in further reductions to GNP and the Economic Activity Index during fiscal year 2018. The Puerto Rico economy could also be adversely impacted as a result of the enactment by the U.S. Congress of the Tax Cuts and Jobs Act of 2017, which imposes a 12.5% tax on income generated from patents and licenses held by companies outside of the United States, including those operating in Puerto Rico. Such new tax could affect Puerto Rico’s ability to attract or retain foreign corporations engaged in manufacturing, a dominant sector in the Puerto Rico economy. Considering these factors, the Proposed Fiscal Plan estimates an 11% contraction in real GNP for fiscal year 2018. created a seven-member Enactment of PROMESA PROMESA, which was enacted by the Federal government in June 2016, federally-appointed oversight board (the “Oversight Board”) with ample powers over the fiscal and economic affairs of the Commonwealth, its instrumentalities, and municipalities. On August 2016, President Obama appointed the seven voting members of the Oversight Board. Pursuant to PROMESA, the Oversight Board will 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. its instrumentalities The Oversight Board has designated the Commonwealth and “covered entities” under as all of PROMESA. None of the Commonwealth’s municipalities, however, have been designated as covered entities as of the date of this report. Such designation has several implications under PROMESA. First, it means that the Governor has 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 entities may not issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to their debts without the prior approval of the Oversight Board. Finally, they could also potentially be eligible to use the restructuring processes provided by PROMESA. One of such restructuring processes, 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 agrees, that agreement can bind all other creditors in such category. The other one, 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 in established PROMESA, including the approval of the Oversight Board. requirements certain Fiscal Plans Commonwealth Fiscal Plan. As required by PROMESA, the government submitted a fiscal plan to the Oversight Board, which the Oversight Board certified, with certain amendments, on March 2017 (the “Original Fiscal Plan”). The Original Fiscal Plan, its instrumentalities, estimated that, absent the revenue enhancing and expense reduction measures set forth therein and assuming the payment of debt service as contracted, the Commonwealth’s 10-year budget gap would reach approximately $66.9 billion. the Commonwealth and several of covering POPULAR, INC. 2017 ANNUAL REPORT 55 the Original Fiscal Plan projected that Assuming the successful implementation of all measures set the forth therein, Commonwealth and the other entities covered by the fiscal plan would only have $7.8 billion available for the payment of debt service during said 10-year period (compared to $35 billion of contractual debt recognizing the need for thus significant debt restructuring and/or write downs. service), a (i) plan prepare new fiscal As a result of the aftermath of Hurricanes Irma and Maria, on October 31, 2017, the Oversight Board requested that the government revising macroeconomic driver effects on revenue and expenses, (ii) adapting fiscal/structural reform measures and schedule based on feasibility and recovery timeline, and (iii) integrating recovery funds and reimbursement timing with the capital plan. The government submitted such revised fiscal plan to the Oversight Board on January 24, 2018 and, on February 5, 2018, the Oversight Board sent a letter to Governor Rosselló calling for certain revisions to the revised plan. The government submitted a further revised fiscal plan on February 12, 2018 (the “Proposed Fiscal Plan”). The Oversight Board is in the process of reviewing the Proposed Fiscal Plan and has stated that it expects to certify a fiscal plan for the Commonwealth by March 30, 2018. The fiscal plan that is ultimately certified for the Commonwealth, however, may vary significantly from the Proposed Fiscal Plan. The Proposed Fiscal Plan, which covers a 6-year period, estimates an 11% contraction in real GNP during fiscal year 2018, followed by 5 years of economic growth. It also projects that the Commonwealth will have a cash flow surplus of approximately $3.4 billion over such period, excluding the payment of any debt service (compared to a $4.8 billion cash flow surplus projected by the Original Fiscal Plan for the same period, excluding the payment of debt service). The economic performance and cash flow projections take into account the adverse impact of the hurricanes on the economy and government revenues, which is expected to be partially offset by the positive impact of increased federal support, significant reconstruction spending, and structural reforms. The Proposed Fiscal Plan includes illustrative estimates of the implied debt the Commonwealth and the instrumentalities capacity of covered by the plan, based on a range of interest rates and assuming a 30-year term. Such estimates reaffirm the need for significant debt and/or write-downs. The Proposed Fiscal Plan does not take any position as to the repayments to any particular class of allocation of debt creditors. Pursuant the Commonwealth will need a liquidity facility in fiscal year 2018 to finance the recovery effort and to provide necessary, interim support to PREPA and PRASA. Finally, the Proposed Fiscal Plan includes a number measures intended to be implemented including by the government to reduce the financing gap, the public-private efforts, centralization of to the Proposed Fiscal Plan, government’s procurement consolidations, partnerships, restructuring agency the 56 POPULAR, INC. 2017 ANNUAL REPORT appropriations reductions in implementation improvement of services provided by municipalities. the and the healthcare of tax collections, and the consolidation of incentives, reforms, and tax provided subsidies Neither the Original Fiscal Plan nor the Proposed Fiscal Plan contemplate a restructuring of the debt of Puerto Rico’s municipalities. Both plans, however, as part of their expense reduction measures, contemplate the gradual reduction of budgetary to municipalities, which constitute a material portion of the operating revenues of certain municipalities. The Proposed Fiscal Plan contemplates that such subsidies will be reduced by 80% of current levels by fiscal year 2023. Pursuant to the Proposed Fiscal Plan, the reduction in direct payments to municipalities could be offset by a modernized property tax regime that will focus on updated property values and improved tax collections, and on the regionalization of services through the implementation of a new county structure. Furthermore, according to the Proposed is also considering a county Fiscal Plan, support fund of $100 million per year, with a sunset in fiscal year 2023, to incentivize and enable the transition into the new county structure. The Proposed Fiscal Plan is publicly available at the website of the Puerto Rico Fiscal Agency and Financial Advisory Authority. the government Other Fiscal Plans. Pursuant to PROMESA, the Oversight Board also requested and approved fiscal plans for (i) GDB, (ii) and Transportation Authority, Puerto Rico Highways (iii) PREPA, (iv) PRASA and (v) the Public Corporation for the Supervision and Insurance of Cooperatives. All such fiscal plans reflected that the applicable government entity is unable to pay its financial obligations in full, thus recognizing the need for debt relief. Moreover, following the hurricanes, the Oversight Board requested that the government submit new fiscal plans for such entities. The government submitted revised fiscal plans for PREPA and PRASA on January 24, 2018, and the Oversight Board sent a letter to Governor Rosselló calling for certain revisions to the same on February 5, 2018. Further revised fiscal plans for PREPA and PRASA were submitted by the government to the Oversight Board and are currently being reviewed by the Oversight Board. PREPA’s certified fiscal plan, as well as the most recent public draft of the fiscal plan for PREPA, assume changes to the treatment of the municipal contribution in lieu of taxes, which could result in increased electricity expenses for municipalities. The Oversight Board has stated that it intends to certify fiscal plans for PREPA and PRASA by March 30, 2018. The fiscal plans ultimately certified by the Oversight Board for PREPA and PRASA may vary significantly from the most recent versions of the fiscal plans for such entities submitted by the government to the Oversight Board. GDB’s certified fiscal plan (a revised fiscal plan for GDB has not yet been submitted to the Oversight Board) contemplates the wind-down of GDB’s operations and the distribution of the cash flows of GDB’s loan portfolio among its creditors (including depositors). Pursuant to the Restructuring Support Agreement, dated May 15, 2017, entered into by and among GDB and a significant portion of its financial creditors (the “GDB RSA”), GDB noteholders and municipal depositors would be eligible to exchange their claims against GDB for one of three tranches of bonds to be issued by a new government entity and which would have varied upfront exchange ratios (ranging from 55% to 75%) and coupon rates (ranging from 3.5% to 7.5%). The new bonds would be payable from payments received in respect of certain assets to be transferred by GDB to such new government entity (consisting largely of municipal loans). The legality of the modification of GDB’s financial obligations outlined in the GDB RSA is currently being challenged in court by certain dissenting municipalities with deposits in GDB. the Oversight Board, on behalf of Pending Title III and Title VI Proceedings the On May 3, 2017, Commonwealth, filed a petition in the U.S. District Court for the District of Puerto Rico to restructure the Commonwealth’s liabilities under Title III of PROMESA. The Oversight Board has subsequently filed analogous petitions with respect to COFINA, ERS, HTA and PREPA. As of the date of this report, the plans of adjustment for said entities’ debts have not been filed. Based on the projection of funds available for debt service under the applicable fiscal plans, however, the restructuring is expected to result in significant discounts on creditor recoveries. On July 12, 2017, the Oversight Board conditionally authorized GDB to pursue the modification of its financial obligations outlined in the GDB RSA pursuant to Title VI of PROMESA. 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. While PROMESA provides a process to address the Commonwealth’s fiscal crisis, the length and complexity of the Title III proceedings for the Commonwealth and various of its the adjustment measures required by the instrumentalities, fiscal plans and the impact of Hurricanes Irma and Maria suggest a risk of further significant economic contraction. In addition, the measures taken to address the fiscal crisis and those that will 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. This, in turn, results in reductions in consumer spending that may also adversely impact our interest and non-interest revenues. If the Commonwealth’s global or local economic conditions worsen or the Government of Puerto Rico and the Oversight Board are unable to post-hurricane adequately manage recovery efforts and pre-existing fiscal crisis, including by consummating an orderly 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. For additional discussion of risk factors related to the impact of the hurricanes, see Item 1A of this report. At December 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 484 million, which is fully outstanding at year-end (compared to a direct exposure of approximately $584 million, of which $529 million was the outstanding at December 31, 2016). Deterioration of Commonwealth’s fiscal and economic situation, including any negative ratings implications, could further adversely affect the value of our Puerto Rico government obligations, resulting in losses to us. Of the amount outstanding, $ 435 million consists of loans and $ 49 million are securities ($459 million and $70 million, respectively, at December 31, 2016). All of the amount outstanding at December 31, 2017 were obligations from various Puerto Rico municipalities. In most cases, these were “general obligations” of a municipality, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or a municipality, to which the applicable municipality has pledged other the revenues. At December 31, 2017, 74% of Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. Although the 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 to Note 27 – instrumentalities and municipalities, Commitments and contingencies. “special obligations” of refer During the third quarter of 2017, the Corporation sold all of its Puerto Rico Sales Tax Financing Corporation (“COFINA”) bonds at a gain of approximately $0.1 million. The Corporation had recorded an other-than-temporary impairment charge of $8.3 million in respect of those bonds during the second quarter of 2017 as a result of the Title III proceeding in respect of COFINA and the non-payment of interest on the COFINA bonds in June 2017 pursuant to a court order issued in such proceeding. the filing of In addition, at December 31, 2017, the Corporation had $386 million in indirect exposure to loans or securities issued or guaranteed by Puerto Rico governmental entities, but whose principal source of repayment are non-governmental entities. In such obligations, entity guarantees any shortfall in collateral in the event of borrower default ($406 million at December 31, 2016). These included the Puerto Rico governmental POPULAR, INC. 2017 ANNUAL REPORT 57 $310 million in residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority (“HFA”), an entity that has been designated as a covered entity under PROMESA (December 31, 2016 - $326 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. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of HFA, he has not exercised this power as of the date hereof. Also, at December 31, 2017, the Corporation had $44 million in Puerto Rico housing bonds issued by HFA, which are secured by second mortgage loans on Puerto Rico residential properties, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $25 million of commercial real estate notes issued by government entities, but payable from rent paid by private parties ($43 million, $6 million and $31 million December 31, 2016, respectively). BPPR’s commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers or have other relationships with the government. These borrowers could be negatively affected by the fiscal measures to be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs. BPPR also has a significant amount of deposits from the Commonwealth, its instrumentalities, and municipalities. The amount of such deposits may fluctuate depending on the financial condition and liquidity of such entities, as well as on the ability of BPPR to maintain these customer relationships. United States Virgin Islands The Corporation has operations in the United States Virgin Islands (the “USVI”) and has credit exposure to USVI government entities. The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations, and was also severely impacted by Hurricanes Irma and María. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities. To the extent that the fiscal condition of the USVI continues to deteriorate, the U.S. Congress or the Government of the USVI may enact legislation allowing for the restructuring of the financial obligations of USVI government entities or imposing a including by making PROMESA stay on creditor remedies, applicable to the USVI. 58 POPULAR, INC. 2017 ANNUAL REPORT At December 31, 2017, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $82 million, of which approximately $73 million is outstanding. Of the amount outstanding, approximately (i) $43 million represents loans to the West Indian Company LTD, a government-owned company that owns and operates a cruise ship pier and shopping mall complex in St. Thomas, (ii) $14 million represents loans to the Virgin Islands Water and Power Authority, a public corporation of the USVI that operates USVI’s water production and electric generation plants, and (iii) $16 million represents loans to the Virgin Islands Public Finance Authority, a public corporation of the USVI created for the purpose of raising capital for public projects. U.S. Government As further detailed in Notes 7 and 8 to the Consolidated Financial Statements, a substantial portion of the Corporation’s securities investment to the U.S. in the form of U.S. Government sponsored Government entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $1.7 billion of residential mortgages and $88 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2017. represented exposure 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, 2017. 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 that were not 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. Non-performing assets, excluding covered loans and OREO, decreased by $18 million when compared with December 31, 2016, mainly attributed to lower Puerto Rico OREOs of $10 million, mostly related to the temporary suspension of foreclosure activities after the hurricanes. Non-performing $7 million from decreased loans held-in-portfolio December 31, 2016, mostly driven by lower Puerto Rico mortgage NPLs of $11 million, impacted by lower inflows as a result of the payment moratorium. by Table 28 - Non-Performing Assets At December 31, 2017, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $449 million in the Puerto Rico operations and $36 million in the U.S. operations. These figures compare to $467 million in the Puerto Rico operations and $21 million in the U.S. operations In addition to the non-performing loans included in Table 28 at December 31, there were $155 million of non-covered performing 2017, loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performing and are considered impaired, compared with $169 million at December 31, 2016. at December 31, 2016. (Dollars in thousands) BPPR BPNA Popular, Inc. BPPR BPNA Popular, Inc. BPPR BPNA Popular, Inc. December 31, 2017 December 31, 2016 December 31, 2015 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”), $ 161,226 $ 3,839 $ 165,065 $159,655 $ 3,693 $163,348 $177,902 $ 3,914 $181,816 3,550 3,649 3,009 351,471 58,304 – 3,039 2,974 321,549 58,330 – – 2,974 306,697 40,543 – 3,337 3,062 329,907 58,261 – – 3,062 318,194 51,597 3,550 – 3,009 337,933 52,440 – 3,039 – 14,852 17,787 – 3,337 – 11,713 6,664 – 3,649 – 13,538 5,864 511,440 – 39,517 – 550,957 – 532,508 – 25,407 – 557,915 – 574,834 44,696 26,965 473 601,799 45,169 excluding covered OREO 167,253 2,007 169,260 177,412 3,033 180,445 151,439 3,792 155,231 Total non-performing assets, excluding covered assets Covered loans and OREO [3] $ 678,693 $41,524 $ 720,217 $709,920 $28,440 $738,360 $770,969 $31,230 $802,199 40,571 22,948 22,948 40,571 36,044 36,044 – – – Total non-performing assets $ 701,641 $41,524 $ 743,165 $745,964 $28,440 $774,404 $811,540 $31,230 $842,770 Accruing loans past-due 90 days or more [4] [5] $1,225,149 $ – $1,225,149 $426,652 $ – $426,652 $446,725 $ – $446,725 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 2.27% 2.45% 2.69% 2.23% $ 29,920 2.41% $ 29,385 2.63% $ 27,644 [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, 2017 and December 31, 2016 (December 31, 2015 - $45 million in commercial loans and $95 thousand in construction loans). [3] The amount consists of $3 million in non-performing loans accounted for under ASC Subtopic 310-20 and $20 million in covered OREO at December 31, 2017 (December 31, 2016 - $4 million and $32 million, respectively; December 31, 2015 - $4 million and $37 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. 2017 ANNUAL REPORT 59 [5] [4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $272 million at December 31, 2017 (December 31, 2016 - $282 million; December 31, 2015 - $349 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. The balance of these loans includes $840 million related to the rebooking of loans previously pooled into GNMA securities, in which the Corporation had a buy-back option as further described below. These balances include $178 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2017 (December 31, 2016 - $181 million; December 31, 2015 - $164). Furthermore, the Corporation has approximately $58 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 30, 2016 - $68 million; December 31, 2015 - $70 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 Total non-performing loans held-in-portfolio, excluding covered loans Non-performing loans held-for-sale [2] Other real estate owned (“OREO”), excluding covered OREO Total non-performing assets, excluding covered assets Covered loans and OREO [3] Total non-performing assets December 31, 2014 December 31, 2013 BPPR BPNA $257,910 13,812 – 3,102 295,629 40,930 611,383 225 119,144 $ 2,315 – 1,545 – 9,284 5,956 19,100 18,674 16,356 Popular, Inc. $260,225 13,812 1,545 3,102 304,913 46,886 630,483 18,899 135,500 BPPR BPNA $186,097 18,108 – 3,495 206,389 33,166 447,255 489 105,206 $ 92,956 5,663 15,050 – 26,292 10,732 150,693 603 30,295 Popular, Inc. $279,053 23,771 15,050 3,495 232,681 43,898 597,948 1,092 135,501 $730,752 148,099 $54,130 – $784,882 148,099 $552,950 197,388 $181,591 – $734,541 197,388 $878,851 $54,130 $932,981 $750,338 $181,591 $931,929 Accruing loans past-due 90 days or more [4] [5] $447,990 $ – $447,990 $418,028 $ – $418,028 Excluding covered loans: [6] Non-performing loans to loans held-in-portfolio Including covered loans: Non-performing loans to loans held-in-portfolio Interest lost 3.25% 2.95% $ 23,413 2.77% 2.55% $ 29,766 [1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment. [2] Non-performing loans held-for-sale consist of $14.0 million in mortgage loans, $309 thousand in commercial loans and $4.5 million in consumer loans at December 31, 2014 (December 31, 2013 - $603 thousand in commercial loans and $489 thousand in mortgage loans). [3] The amount consists of $18 million in non-performing loans accounted for under ASC Subtopic 310-20 and $130 million in covered OREO at December 31, 2014 (December 31, 2013 - $29 million and $168 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. [4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $516 million at December 31, 2014 (December 31, 2013 - $751 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 $125 million and $115 million, respectively, of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2014 and December 31, 2013. [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. 60 POPULAR, INC. 2017 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. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the issuer with an offsetting liability. As of December 31, 2017, loans past due 90 days or more include approximately $840 million in loans previously pooled into GNMA securities with a buy-back option. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium as part of the hurricane relief efforts, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. 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 $7.6 billion at December 31, 2017, of which $2.1 billion was secured with owner occupied properties, compared with $7.2 billion and $2.0 billion, respectively, at December 31, 2016. CRE non-performing loans, excluding covered loans, amounted to $124 million at December 31, 2017, compared with $130 million at December 31, 2016. The CRE non-performing loans ratios for the BPPR and BPNA segments were 2.77% and 0.10%, respectively, at December 31, 2017, compared with 2.83% and 0.07%, respectively, at December 31, 2016. 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, 2017 and 2016, are presented below. Table 29 - Loan Delinquencies (Dollars in thousands) 2017 Commercial Construction Legacy Leasing Mortgage Consumer Covered loans Loans held-for-sale Total Loans delinquent 30 days or more $ 364,679 170 3,747 14,687 1,926,939 156,289 82,764 1,829 $2,551,104 Total loans $11,488,861 880,029 32,980 809,990 7,270,407 3,810,527 517,274 132,395 $24,942,463 Total delinquencies as a percentage of total loans Loans delinquent 30 days or more 3.17% 0.02 11.36 1.81 26.50 4.10 16.00 1.38 10.23% $ 456,318 1,668 4,516 11,037 1,260,403 167,852 110,336 459 $2,012,589 2016 Total loans $10,798,507 776,300 45,293 702,893 6,696,361 3,754,393 572,878 88,821 $23,435,446 Total delinquencies as a percentage of total loans 4.23% 0.21 9.97 1.57 18.82 4.47 19.26 0.52 8.59% 31, the For year ended December total 2017, non-performing loan inflows, excluding consumer loans, decreased by $77 million, or 17%, when compared to the inflows for the year ended in 2016. Inflows of non-performing the BPPR segment decreased by loans held-in-portfolio at $60 million, or 15%, compared to the inflows for the year ended 2016, mostly related to lower mortgage inflows of $59 million, payment moratorium implemented after the hurricanes. Under the loan moratorium, prompted the by although the repayment schedule was modified, certain borrowers continued to make payments, having an impact on the respective delinquency status. Inflows of non-performing loans held-in-portfolio at the BPNA segment decreased by $17 million, or 36%, from the same period in 2016, mostly driven by lower commercial inflows of $13 million. Refer to Note 9 to the consolidated financial statements for more information on loan delinquencies. POPULAR, INC. 2017 ANNUAL REPORT 61 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 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, 2017 BPNA Popular, Inc. BPPR $ 477,849 $ 18,743 $ 496,592 341,196 – 29,899 785 371,095 785 (40,260) (89,896) (220,966) (46) (919) (26,732) (40,306) (90,815) (247,698) $ 467,923 $ 21,730 $ 489,653 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 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 Table 32 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans) For the year ended December 31, 2017 BPPR BPNA Popular, Inc. $159,655 $ 3,693 $163,348 78,469 – 8,071 4 (6,282) (37,380) (33,236) – (117) (7,812) 86,540 4 (6,282) (37,497) (41,048) $161,226 $ 3,839 $165,065 (In thousands) Beginning balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs 62 POPULAR, INC. 2017 ANNUAL REPORT 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 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 34 - Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans) (In thousands) Beginning balance - NPLs Plus: New non-performing loans Less: Loans returned to accrual status / loan collections Ending balance - NPLs For the year ended December 31, 2017 BPPR BPNA Popular, Inc. $ – 99 (99) $ – $– – – $– $ – 99 (99) $ – Table 35 - 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) $ – $ – $ – POPULAR, INC. 2017 ANNUAL REPORT 63 Table 36 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans) (In thousands) Beginning balance - NPLs Plus: New non-performing loans Advances on existing non-performing loans Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections Ending balance - NPLs For the year ended December 31, 2017 BPNA Popular, Inc. BPPR $ 318,194 $ 11,713 $ 329,907 262,628 – 21,714 662 284,342 662 (33,978) (52,516) (187,631) (46) (775) (18,416) (34,024) (53,291) (206,047) $ 306,697 $ 14,852 $ 321,549 Table 37 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans) 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 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 Less: Non-performing loans transferred to OREO Non-performing loans charged-off Loans returned to accrual status / loan collections 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 composition of and risk loan type characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors. loan losses on a quarterly basis. the portfolio by The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is 64 POPULAR, INC. 2017 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 [4] Provision for loan losses - Discontinued operations Non-covered loans 2017 Covered loans Total Non-covered loans 2016 Covered loans Total Non-covered loans 2015 Covered loans Total $510,301 $30,350 $540,651 $502,935 $34,176 $537,111 $519,719 $ 82,073 $601,792 319,682 5,742 325,424 171,126 (1,110) 170,016 217,458 24,020 241,478 – – – – – – – – – 829,983 36,092 866,075 674,061 33,066 707,127 737,177 106,093 843,270 Charged-offs: BPPR Commercial [4] Construction Leasing Mortgage Consumer Discontinued operations 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 Discontinued operations 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 49,591 3,588 8,407 78,121 109,252 – 248,959 36,399 897 1,223 19,926 – 58,445 85,990 3,588 8,407 897 79,344 129,178 – 307,404 27,196 6,211 1,637 3,177 19,119 – 57,340 2,242 7 2,627 983 4,404 – 10,263 29,438 6,218 1,637 2,627 4,160 23,523 – 67,603 – – – 4,049 122 – 4,171 – – – – – – – – – – 4,049 122 – 4,171 – – – 1,313 10 – 1,323 – – – – – – – – – – – 1,313 10 – 1,323 49,591 3,588 8,407 82,170 109,374 – 253,130 36,399 897 1,223 19,926 – 58,445 85,990 3,588 8,407 897 83,393 129,300 – 311,575 27,196 6,211 1,637 4,490 19,129 – 58,663 2,242 7 2,627 983 4,404 – 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 – 10,263 11,625 29,438 6,218 1,637 2,627 5,473 23,533 – 68,926 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 – 12,976 104,709 POPULAR, INC. 2017 ANNUAL REPORT 65 (Dollars in thousands) Non-covered loans 2017 Covered loans Total Non-covered loans 2016 Covered loans Total Non-covered loans 2015 Covered loans Total Net loans charged-offs (recoveries): BPPR Commercial Construction Leasing Mortgage Consumer Discontinued operations 22,395 (2,623) 6,770 74,944 90,133 – Total BPPR net charged-offs 191,619 – – – 2,736 112 – 2,848 – – – – – – – – – – – 2,736 112 – 2,848 – – 22,395 (2,623) 6,770 77,680 90,245 – 20,755 (2,021) 3,888 64,316 76,306 – 194,467 163,244 34,157 (7) (1,730) 240 15,522 – 48,182 56,552 (2,630) 6,770 (1,730) 77,920 105,767 – 242,649 – – (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 – – – – – – – – – – – 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 (3,313) – (1,913) 1,933 9,254 – 5,961 17,442 (2,021) 3,888 (1,913) 68,965 85,560 – 171,921 5,445 (3,842) – (2,760) 1,279 5,649 – 326 70,048 (886) 3,303 (2,760) 52,270 89,525 – 211,500 – – – – – – – 31,432 20,386 – – 5,228 11 – 57,057 (35,779) (1,823) – 13,037 (13,037) 34,157 (7) (1,730) 240 15,522 – 48,182 56,552 (2,630) 6,770 (1,730) 75,184 105,655 – 239,801 – – 105,322 19,500 3,303 56,219 83,887 – 268,231 (3,842) – (2,760) 1,279 5,649 – 326 101,480 19,500 3,303 (2,760) 57,498 89,536 – 268,557 (37,602) – 537,111 118,072 419,039 $ $ $ 590,182 $33,244 109,091 $ – 481,091 $33,244 $ $ $ 623,426 109,091 514,335 $ $ $ 510,301 $30,350 111,377 $ – 398,924 $30,350 $ $ $ 540,651 111,377 429,274 $ $ $ 502,935 $ 34,176 118,072 $ – 384,863 $ 34,176 $ $ $ $24,292,794 22,909,181 $24,810,068 23,448,298 $22,773,747 22,373,143 $23,346,625 22,980,546 $22,346,115 21,497,403 $22,992,230 22,925,237 2.43% 21.99 1.05 2.46x 1.33 1.40% 2.51% 22.12 2.24% 35.84 2.32% 35.67 2.25% 30.25 1.03 2.57x 1.34 1.39% 0.76 3.02x 1.01 0.76% 0.75 3.14x 0.99 0.74% 0.98 2.38x 1.03 1.01% 107.12 112.47 91.47 96.23 83.57 2.34% 28.05 1.17 2.00x 0.90 1.05% 88.68 BPNA Commercial Construction Legacy [1] Mortgage Consumer Discontinued operations Total BPNA net charged-offs 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 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 [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] For the year ended December 31, 2017, includes the elimination of an incremental $6.0 million provision for loan losses and corresponding charge-off related to the inter-company transfer of a loan between BPPR and Popular, Inc., its bank holding company, the impact of which is eliminated in the consolidated results of the Corporation in accordance with U.S. GAAP. 66 POPULAR, INC. 2017 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) - Discontinued operations 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. Recoveries: Commercial Construction Leasing Legacy [1] Mortgage Non-covered loans [4] $538,463 223,999 2014 Covered loans $102,092 46,135 Total [4] $640,555 270,134 Non-covered loans [4] $ 621,701 536,710 2013 Covered loans $108,906 69,396 Total [4] $ 730,607 606,106 (6,764) 755,698 – 148,227 (6,764) 903,925 (3,543) 1,154,868 – 178,302 (3,543) 1,333,170 70,402 1,722 6,028 45,389 122,400 245,941 16,628 8,071 3,517 15,948 4,452 48,616 87,030 1,722 6,028 8,071 48,906 138,348 4,452 294,557 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 34,741 36,223 – 9,156 (2,589) 77,531 – – – – – – 34,741 36,223 – – 9,156 (2,589) – 77,531 1,835 8,537 – 714 291 11,377 – – – – – – – 1,835 8,537 – – 714 105,143 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 4,424 112,266 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 43,598 15,399 2,528 21,320 4,034 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 – – – – – – – 816 5,621 – – 65 140,689 46,486 6,034 60,097 117,568 370,874 26,117 17,423 10,155 21,622 38,957 114,274 166,806 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 44,414 21,020 2,528 21,320 4,099 POPULAR, INC. 2017 ANNUAL REPORT 67 (Dollars in thousands) Consumer Discontinued operations Total recoveries 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] 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 [4] 29,528 9,997 114,454 39,382 (3,509) 3,961 44,000 96,655 180,489 1,105 (237) (9,070) 1,196 12,165 (5,545) (386) 40,487 (3,746) 3,961 (9,070) 45,196 108,820 (5,545) 180,103 (35,674) 2014 Covered loans 291 – 11,377 32,906 27,686 – 8,442 (2,880) 66,154 – – – – – – – 32,906 27,686 – – 8,442 (2,880) – 66,154 – (20,202) 519,719 – $82,073 140,141 $ 5 379,578 $82,068 $ $ $ $ $ $ Total [4] 29,819 9,997 125,831 Non-covered loans [4] 41,674 20,052 148,605 2013 Covered loans 71 – 6,573 27,607 34,108 – 10,614 3,881 76,210 – – – – – – – 27,607 34,108 – – 10,614 3,881 – 76,210 – Total [4] 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) 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 – $102,092 103,506 $ 293 434,957 $101,799 $ $ $ – 640,555 103,799 536,756 $ $ $ 72,288 24,177 3,961 52,442 93,775 246,643 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) 601,792 140,146 461,646 $19,404,451 19,990,182 $21,947,113 22,760,961 $21,611,866 21,354,143 $24,596,293 24,581,862 2.68% 38.86 0.90 2.89x 1.17 1.05% 82.43 2.74% 33.82 1.08 2.44x 1.04 1.13% 2.49% 36.93 1.19 2.12x 0.85 2.50% 2.60% 31.99 1.34 1.94x 0.86 2.45% 92.82 90.05 103.78 [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. 68 POPULAR, INC. 2017 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, 2017, 2016 and 2015: Table 39 - Net Charge-Offs (Recoveries) to Average Loans HIP (Non-covered loans) Commercial Construction Leasing Legacy Mortgage Consumer Total December 31, 2017 December 31, 2016 December 31, 2015 BPPR BPNA Popular Inc. BPPR BPNA Popular Inc. BPPR BPNA Popular Inc. 0.31% 0.88% (2.88) 0.91 – 1.30 2.77 – – (4.30) 0.03 3.17 1.13% 0.82% 0.51% (0.32) 0.91 (4.30) 1.15 2.82 1.05% 0.28 (1.98) 0.59 – 1.09 2.31 (0.11)% – – (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% Net charge-offs, excluding covered loans, for the year ended December 31, 2017, increased by $70.6 million, when compared to the year ended December 31, 2016, and by $28.3 million, when compared to the year ended December 31, 2015. Increase from 2016 was mainly driven higher U.S. commercial net charge-offs of $37 million, mainly related to the U.S. taxi medallion portfolio. Table 40 - Composition of ALLL December 31, 2017 (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 $ $ $ 36,982 323,455 11.43% $ $ – – –% 178,683 $ 8,362 $ $ $ – – –% $ 475 $ 1,456 $ 48,832 $ 518,275 $ 22,802 $ 104,237 32.62% 9.42% 21.88% 798 $ 11,516 $ 114,790 $ 166,942 $ $ $ 109,091 947,423 11.51% 481,091 loans [1] $11,165,406 $880,029 $32,980 $808,534 $6,752,132 $3,706,290 $23,345,371 General ALLL to loans held-in-portfolio, excluding impaired loans [1] Total ALLL Total non-covered loans held-in-portfolio [1] 1.60% 0.95% 2.42% 1.42% 1.70% 4.50% 2.06% $ 215,665 $ 8,362 $ 798 $ 11,991 $ 163,622 $ 189,744 $ 590,182 $11,488,861 $880,029 $32,980 $809,990 $7,270,407 $3,810,527 $24,292,794 ALLL to loans held-in-portfolio [1] 1.88% 0.95% 2.42% 1.48% 2.25% 4.98% 2.43% [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, 2017, the general allowance on the covered loans amounted to $33.2 million. POPULAR, INC. 2017 ANNUAL REPORT 69 Table 41 - 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. Table 42 - 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] 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 $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. 70 POPULAR, INC. 2017 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 2017 2016 At December 31, 2015 2014 2013 % 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 47.3% $202.7 9.5 3.6 1.3 0.2 7.7 3.3 147.9 29.9 141.2 15.7 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% 1.0 1.0 2.5 30.9 18.2 100.0% $510.3 100.0% $502.9 100.0% $519.7 100.0% $538.4 100.0% (Dollars in millions) Commercial Construction Legacy Leasing Mortgage Consumer Total [1] ALLL $215.7 8.4 0.8 12.0 163.6 189.7 $590.2 [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, 2017, the allowance for loan losses, increased by $80 million when compared with December 31, 2016, mostly driven by an increase in the Puerto Rico segment of $50 million. At December 31, 2017, the allowance for loan losses at the BPPR segment increased by $50 million to $518 million, or 2.87% of non-covered loans held-in-portfolio, compared with $468 million, or 2.73% of non-covered loans held-in-portfolio, at December 31, 2016. The allowance for loan losses was $470 million, or 2.67% of non-covered loans held-in-portfolio, the at December 31, 2015. As of December 31, 2017, Corporation had made a provision charge of $61.8 million to increase the environmental factors reserve to $117.6 million, for non-covered loans, based on management’s best estimate of the impact of the hurricanes on the ability of the borrowers to repay their loans. Management will continue to carefully assess and review the exposure of the portfolios to hurricane-related factors, economic trends and their effect on credit quality. The Corporation may adjust these estimates as more information becomes available. This increase was offset by a $6.5 million net decrease resulting from the annual review of the components of the ALLL models. The ratio of the allowance to non-performing loans held-in-portfolio was 101.30% at December 31, 2017, compared with 87.88% at December 31, 2016 and 81.75% at December 31, 2015. loan losses at The allowance for the BPNA segment increased by $30 million to $72 million, or 1.16% of loans held-in-portfolio, compared with $42 million, or 0.75% of loans held-in-portfolio, at December 31, 2016, and $33 million, or 0.69% of loans held-in-portfolio, at December 31, 2015, driven by higher reserves for the U.S. taxi medallion portfolio. Total to taxi medallion charge-offs amounted during 2017 $36.1 million. The U.S. operation continued to reflect positive results with strong growth and favorable credit quality metrics, once the impact of the taxi medallion portfolio acquired from the FDIC in the assisted sale of Doral Bank is excluded. The effect of the annual review of the allowance methodology was a decrease of $1.9 million for the BPNA segment. The ratio of the the allowance to non-performing loans held-in-portfolio at BPNA segment was 182.40% at December 31, 2017, compared with 166.56% at December 31, 2016 and 123.43% at December 31, 2015. Covered loans portfolio The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $33 million at December 31, 2017, compared to $30 million at December 31, 2016. This increase was mainly due to a $5.8 million provision related to adjustments to the estimated cash flows of purchased credit impaired loans accounted for under ASC 310-10 to reflect the payment moratorium offered to certain eligible borrowers on the previous quarter. 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 the individually evaluated for Corporation records an increase in the FDIC loss share asset for impairment. Concurrently, inherent reserve losses) for POPULAR, INC. 2017 ANNUAL REPORT 71 the expected reimbursement from the FDIC under the loss sharing agreements. Troubled debt restructurings The Corporation’s TDR loans, excluding covered loans, amounted to $1.3 billion at December 2017, increasing by $12 million, or approximately 1%, from December 31, 2016. TDRs in accruing status increased by $36 million from December 31, 2016, due to sustained borrower performance, while non-accruing TDRs decreased by $24 million. Refer to Note 10 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 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 impairment requirements at December 31, 2017 and December 31, 2016. Table 44 - 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, 2017 Total Impaired Loans – Held-in-portfolio (HIP) Count 112 Outstanding Principal Balance Impaired Loans with Appraisals Over One- Year Old [1] $267,302 30% 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, 2016 Total Impaired Loans – Held-in-portfolio (HIP) Count 118 Outstanding Principal Balance Impaired Loans with Appraisals Over One- Year Old [1] $283,782 8% 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. 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 itself 72 POPULAR, INC. 2017 ANNUAL REPORT 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 senior To monitor and control operational risk and mitigate related losses, the Corporation maintains a system of comprehensive policies and controls. The Corporation’s Operational Risk Committee (ORCO), which is composed of level representatives from the business lines and corporate functions, provides executive oversight to facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the Corporation. The FORM Division, within the Corporation’s Risk Management Group, serves as ORCO’s operating arm and is responsible for establishing baseline processes to measure, monitor, limit and manage operational risk. In addition, the Auditing Division provides oversight about policy compliance and ensures adequate attention is paid to correct the identified issues. segment Operational risks fall into two major categories: business specific and corporate-wide affecting all business lines. The primary responsibility for the day-to-day management of business specific risks relies on business unit managers. Accordingly, business unit managers are responsible for ensuring that appropriate risk containment measures, including 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- level of review is applied to effective levels. An additional 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 4, “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 the “adjusted net income” of the Corporation and excludes the impact of certain transactions on the results of income is a its operations. Adjusted net non-GAAP financial measure. Management believes that the information to income provides meaningful adjusted net the of underlying investors Corporation’s ongoing operations. performance about the Tables 46, 47 and 48 present a reconciliation of reported ended income years the for results to Adjusted net December 31, 2017, 2016 and 2015. Table 46 - Adjusted Net Income for the Year Ended December 31, 2017 (Non-GAAP) (In thousands) U.S. GAAP Net income Non-GAAP Adjustments: Impact of the Tax Cuts and Jobs Act [1] Adjusted net income (Non-GAAP) Pre-tax Income tax effect Impact on net income – 168,358 $107,681 168,358 $276,039 [1] On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into law by the President of the United States. The Act, among other things, reduced the maximum federal Corporate Tax rate from 35% to 21%. The adjustments reduced the DTA related to the Corporation’s U.S. operations as a result of lower realizable benefit at the lower tax rate. POPULAR, INC. 2017 ANNUAL REPORT 73 Table 47 - 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. 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%. [3] Represents the arbitration decision denying BPPR’s request for reimbursement in certain shared loss claims. 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%. [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. Table 48 - 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. 74 POPULAR, INC. 2017 ANNUAL REPORT [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. POPULAR, INC. 2017 ANNUAL REPORT 75 Statistical Summary 2013-2017 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 76 POPULAR, INC. 2017 ANNUAL REPORT 2017 2016 At December 31, 2015 2014 2013 $ 402,857 $ 362,394 $ 363,674 $ 381,095 $ 423,211 – 5,255,119 5,255,119 43,187 10,178,738 93,821 167,225 132,395 24,423,427 517,274 130,633 623,426 24,186,642 45,192 547,142 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 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 23,955,738 948,608 519,516 169,260 180,445 155,231 135,500 135,501 19,595 213,844 168,031 1,991,323 627,294 35,672 $44,277,337 32,128 138,042 196,889 2,145,510 627,294 40,050 $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 $ 8,490,945 26,962,563 35,453,508 $ 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 26,711,145 390,921 96,208 1,536,356 1,696,439 – 39,173,432 479,425 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 50,160 1,042 4,298,503 1,194,994 (90,142) (350,652) 5,103,905 $44,277,337 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 Statistical Summary 2013-2017 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 (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves FDIC loss-share (expense) income Other non-interest income Total non-interest income Operating expenses: Personnel costs All other operating expenses Total operating expenses 2017 For the years ended December 31, 2014 2015 2016 $1,478,765 51,495 191,197 4,487 $1,459,720 16,428 152,011 6,414 $1,458,706 7,243 126,064 11,001 1,725,944 223,980 1,501,964 319,682 5,742 1,634,573 212,518 1,422,055 171,126 (1,110) 1,603,014 194,031 1,408,983 217,458 24,020 1,176,540 1,252,039 1,167,505 25,496 334 (8,299) (817) (420) (22,377) (10,066) 435,316 419,167 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 2013 $1,481,096 3,464 141,807 21,573 1,647,940 303,366 1,344,574 536,710 69,396 738,468 71,657 7,966 – (13,483) (52,708) (37,054) (82,051) 896,686 791,013 484,230 772,966 487,476 768,159 477,519 810,702 418,679 775,005 428,697 793,293 1,257,196 1,255,635 1,288,221 1,193,684 1,221,990 Income (loss) from continuing operations, before income tax Income tax expense (benefit) 338,511 230,830 294,340 78,784 398,825 (495,172) (132,231) 58,279 307,491 (251,327) Income (loss) from continuing operations Income (loss) from discontinued operations, net of income tax $ 107,681 – $ 215,556 1,135 $ 893,997 1,347 $ (190,510) $ 558,818 40,509 (122,980) Net Income (Loss) $ 107,681 $ 216,691 $ 895,344 $ (313,490) $ 599,327 Net Income (Loss) Applicable to Common Stock $ 103,958 $ 212,968 $ 891,621 $ (317,213) $ 595,604 POPULAR, INC. 2017 ANNUAL REPORT 77 Statistical Summary 2013-2017 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 2017 2016 2015 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate $ 4,480,651 $ 2,969,635 51,496 1.15% $ 3,103,390 $ 49,916 1.68 1,567,364 16,428 0.53% $ 2,382,045 $ 21,835 1.39 921,249 7,243 0.30% 13,559 1.47 667,140 13,593 2.04 810,568 15,743 1.94 1,278,469 21,962 1.72 111,455 7,409 6.65 127,694 8,496 6.65 159,110 11,776 7.40 5,667,586 178,110 9,593,926 82,673 182,485 3.22 9,065 5.09 262,468 2.74 5,953 7.20 21,787,574 1,367,059 6.27 148,033 8.59 1,723,719 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 23,511,293 1,515,092 6.44 23,062,242 1,495,639 6.49 23,045,308 1,503,493 6.52 $37,668,543 $1,835,009 4.87% $33,713,162 $1,722,265 5.11% $31,451,081 $1,686,420 5.36% 3,735,596 $41,404,139 – $41,404,139 3,900,580 $37,613,742 – $37,613,742 – – 3,735,224 $35,186,305 – $35,186,305 – – – – $18,218,583 $ 7,625,484 452,205 1,548,635 57,714 0.32% $14,548,307 $ 84,150 1.10 5,725 1.27 76,392 4.93 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% 72,261 0.89 7,512 0.73 78,986 4.57 223,981 0.80 – – 27,844,907 8,214,703 36,059,610 – 36,059,610 5,344,529 212,518 0.86 – – 24,797,769 7,535,742 32,333,511 1,754 32,335,265 5,278,477 194,031 0.83 – – 23,389,412 7,089,940 30,479,352 2,091 30,481,443 4,704,862 $41,404,139 $37,613,742 $35,186,305 $1,611,028 $1,509,747 $1,492,389 0.59% 4.28% 0.63% 4.48% 0.62% 4.74% 109,065 $1,501,963 87,692 $1,422,055 83,406 $1,408,983 * 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. 78 POPULAR, INC. 2017 ANNUAL REPORT Statistical Summary 2013-2017 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 2014 Interest Average Rate Average Balance 2013 Interest Average Rate $ 1,305,326 $ 264,393 2,006,170 4,224 4,730 31,913 0.32% $ 1,036,495 $ 3,464 0.33% 1.79 1.59 37,429 1,273,766 1,505 28,926 4.02 2.27 188,125 13,450 7.15 172,403 12,295 7.13 3,231,806 195,139 5,885,633 339,563 19,595,972 2,770,779 22,366,751 101,650 10,265 162,008 20,914 1,239,469 293,610 1,533,079 3.15 5.26 2.75 6.16 6.33 10.60 6.85 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 Total interest earning assets/Interest income $ 29,897,273 $ 1,720,225 5.75% $ 29,741,099 $ 1,710,452 5.75% Total non-interest earning assets Total assets from continuing operations Total assets from discontinued operations Total assets 3,758,897 $ 33,656,170 1,525,687 $ 35,181,857 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 $ $ 11,557,597 7,556,109 1,886,662 1,627,541 22,627,909 6,409,810 29,037,719 1,588,386 30,626,105 4,555,752 Total liabilities and stockholders’ equity $ 35,181,857 4,362,183 $ 34,103,282 – – 2,163,711 – – $ 36,266,993 30,187 74,900 67,376 516,008 688,471 $ 0.26% $ 11,243,095 7,956,922 0.99 2,571,875 3.57 1,719,985 31.70 3.04 – – 23,491,877 6,390,174 29,882,051 2,208,593 32,090,644 4,176,349 $ 36,266,993 31,080 93,777 38,430 140,079 303,366 0.28% 1.18 1.49 8.14 1.29 – – Net interest income on a taxable equivalent basis $ 1,031,754 $ 1,407,086 Cost of funding earning assets Net interest margin Effect of the taxable equivalent adjustment Net interest income per books 2.30% 3.45% 1.02% 4.73% 86,682 $ 945,072 62,512 $ 1,344,574 * 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. 2017 ANNUAL REPORT 79 Statistical Summary 2016-2017 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 2017 2016 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 securities Other-than-temporary impairment losses on investment securities Trading account (loss) profit Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss-share income (expense) Other non-interest income Operating expenses Income (loss) from continuing operations before income tax Income tax expense (benefit) $ 445,333 $435,883 $428,733 $415,995 $ 411,044 $407,299 $412,210 $404,020 51,608 53,612 55,639 57,712 53,897 58,117 51,659 54,254 387,216 70,001 1,487 (1,853) 378,171 157,659 3,100 5,239 374,479 49,965 2,514 10,741 362,098 42,057 (1,359) 11,369 355,405 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 50 – (137) 103 – 253 19 162 30 349 1,583 – (8,299) (655) – (278) – (1,627) – (113) (209) 1,117 – (162) – (420) – – – 8,549 – (304) (11,075) 2,614 96,532 321,955 (6,406) (3,948) 105,553 317,088 (2,930) (475) 118,392 306,835 (1,966) (8,257) 114,839 311,318 (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 79,904 182,058 698 (19,966) 131,958 35,732 125,951 33,006 (7,006) (1,766) 62,649 15,839 121,433 32,446 117,264 32,265 (Loss) income from continuing operations $(102,154) $ 20,664 $ 96,226 $ 92,945 $ (5,240) $ 46,810 $ 88,987 $ 84,999 Income from discontinued operations, net of tax Net (loss) income – – – – $(102,154) $ 20,664 $ 96,226 $ 92,945 $ 1,135 – (4,105) $ 46,810 $ 88,987 $ 84,999 – – Net (loss) income applicable to common stock $(103,085) $ 19,734 $ 95,295 $ 92,014 $ (5,036) $ 45,880 $ 88,056 $ 84,068 Net (loss) income per common share - basic Net (loss) income per common share - diluted Dividends Declared per Common Share $ $ $ (1.01) $ 0.19 $ 0.94 $ 0.89 $ (0.05) $ 0.44 $ 0.85 $ (1.01) $ 0.19 $ 0.94 $ 0.89 $ (0.05) $ 0.44 $ 0.85 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.15 $ 0.15 $ 0.15 $ 0.81 0.81 0.15 Selected Average Balances (In millions) Total assets Loans Interest earning assets Deposits Interest-bearing liabilities Selected Ratios Return on assets Return on equity $ 43,252 $ 41,703 $ 41,071 $ 39,546 $ 39,086 $ 38,091 $ 37,371 $ 35,892 22,986 31,937 27,338 23,481 23,548 38,031 33,503 26,692 23,830 39,496 34,905 29,075 23,042 34,201 29,411 25,129 23,309 37,327 32,940 27,665 23,077 35,262 30,637 25,868 23,353 35,775 31,340 23,660 23,144 33,431 28,857 24,679 (0.94)% 0.20% 0.94% 0.95% (0.04)% 0.49% 0.96% 0.95% (7.67) (0.38) 1.47 6.58 3.46 7.13 7.24 6.80 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. 80 POPULAR, INC. 2017 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, 2017. 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, 2017 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, 2017, as stated in their report dated March 1, 2018 which appears herein. Ignacio Alvarez President and Chief Executive Officer Carlos J. Vázquez Executive Vice President and Chief Financial Officer POPULAR, INC. 2017 ANNUAL REPORT 81 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Popular, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial condition of Popular, Inc. and its subsidiaries (“the Corporation”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Corporation’s management is responsible for these consolidated 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 the Corporation’s consolidated financial statements and on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. 82 POPULAR, INC. 2017 ANNUAL REPORT Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 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, 2018 CERTIFIED PUBLIC ACCOUNTANTS (OF PUERTO RICO) License No. LLP-216 Expires Dec. 1, 2019 Stamp E299588 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report We have served as the Corporation’s auditor since 1971, which includes periods before the Corporation became subject to SEC reporting requirements. POPULAR, INC. 2017 ANNUAL REPORT 83 POPULAR, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2017 December 31, 2016 (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 2017 - $84,303; 2016 - $75,576) Other investment securities, at lower of cost or realizable value (realizable value 2017 - $170,539; 2016 - $170,890) Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss-sharing agreements with the FDIC Loans covered under loss-sharing agreements with the FDIC Less – Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss-share asset Premises and equipment, net Other real estate not covered under loss-sharing agreements with the FDIC Other real estate covered under loss-sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Total liabilities Commitments and contingencies (Refer to Note 27) Stockholders’ equity: Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding Common stock, $0.01 par value; 170,000,000 shares authorized; 104,238,159 shares issued (2016 - 104,058,684) and 102,068,981 shares outstanding (2016 - 103,790,932) Surplus Retained earnings Treasury stock - at cost, 2,169,178 shares (2016 - 267,752) 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. 84 POPULAR, INC. 2017 ANNUAL REPORT $ 402,857 $ 362,394 – 5,255,119 5,255,119 625 42,562 393,634 9,785,104 93,821 167,225 132,395 24,423,427 517,274 130,633 623,426 24,186,642 45,192 547,142 169,260 19,595 213,844 168,031 1,991,323 627,294 35,672 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 $44,277,337 $38,661,609 $ 8,490,945 26,962,563 35,453,508 390,921 96,208 1,536,356 1,696,439 $ 6,980,443 23,515,781 30,496,224 479,425 1,200 1,574,852 911,951 39,173,432 33,463,652 50,160 50,160 1,042 4,298,503 1,194,994 (90,142) (350,652) 5,103,905 1,040 4,255,022 1,220,307 (8,286) (320,286) 5,197,957 $44,277,337 $38,661,609 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 36) Mortgage banking activities (Refer to Note 12) Net gain and valuation adjustments on investment securities Other-than-temporary impairment losses on investment securities Trading account loss Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss-share (expense) income (Refer to Note 37) 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 Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Goodwill impairment charge Restructuring costs Total operating expenses Income from continuing operations before income tax Income tax expense (benefit) Income from continuing operations Income from discontinued operations, net of tax Net Income Net Income Applicable to Common Stock Net Income per Common Share – Basic Net income from continuing operations Net income from discontinued operations Net Income per Common Share – Basic Net Income per Common Share – Diluted Net income from continuing operations Net income from discontinued operations Net Income 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, 2017 2016 2015 $1,478,765 51,495 191,197 4,487 1,725,944 $1,459,720 16,428 152,011 6,414 1,634,573 $1,458,706 7,243 126,064 11,001 1,603,014 141,864 5,724 76,392 223,980 1,501,964 319,682 5,742 1,176,540 153,709 217,267 25,496 334 (8,299) (817) (420) (22,377) (10,066) 64,340 419,167 484,230 89,194 65,142 43,382 292,488 22,466 58,445 26,392 48,540 117,539 9,378 – – 1,257,196 338,511 230,830 107,681 – $ 107,681 127,577 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 $ 103,958 $ 212,968 $ 891,621 1.02 – 1.02 1.02 – 1.02 1.00 $ $ $ 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 $ $ $ POPULAR, INC. 2017 ANNUAL REPORT 85 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2016 (In thousands) 2017 2015 $107,681 $216,691 $895,344 (3,078) (8,465) 22,428 (3,800) (45,156) 8,299 (334) (1,295) 1,888 (29,513) (853) (30,366) (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) $ 77,315 $153,291 $868,330 Years ended December 31, 2016 2015 2017 $ 3,301 (8,744) 1,482 4,831 (1,559) 67 505 (736) $ (853) $ 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 Net income Other comprehensive loss before tax: Foreign currency translation adjustment Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service credit Unrealized holding losses on investments arising during the period Other-than-temporary impairment included in net income Reclassification adjustment for gains 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 (expense) benefit Total other comprehensive loss, net of tax Comprehensive income, 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 on investments arising during the period Other-than-temporary impairment included in net income Reclassification adjustment for gains included in net income Unrealized net losses on cash flow hedges Reclassification adjustment for net losses included in net income Income tax (expense) benefit The accompanying notes are an integral part of these consolidated financial statements. 86 POPULAR, INC. 2017 ANNUAL REPORT POPULAR, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands) 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 Net income Issuance of stock Dividends declared: Common stock Preferred stock Common stock purchases Common stock reissuance Stock based compensation Other comprehensive loss, net of tax Transfer to statutory reserve Balance at December 31, 2017 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 $1,036 $50,160 $4,196,458 $ 253,717 895,344 $ (4,117) $(229,872) 2 6,224 169 (31,076) (3,723) (2,086) 102 26,305 (26,305) (27,014) Total $4,267,382 895,344 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 2 6,945 107,681 (102,136) (3,723) 4,518 (13) 4,896 (81,938) 82 27,135 (27,135) (30,366) 107,681 6,947 (102,136) (3,723) (77,420) 69 4,896 (30,366) – $1,042 $50,160 $4,298,503 $1,194,994 $(90,142) $(350,652) $5,103,905 Years ended December 31, 2015 2016 2017 2,006,391 2,006,391 2,006,391 104,058,684 179,475 103,816,185 242,499 103,614,553 201,632 104,238,159 (2,169,178) 104,058,684 (267,752) 103,816,185 (197,209) 102,068,981 103,790,932 103,618,976 POPULAR, INC. 2017 ANNUAL REPORT 87 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Goodwill impairment losses Amortization of intangibles Depreciation and amortization of premises and equipment Net accretion of discounts and amortization of premiums and deferred fees Impairment losses on long-lived assets Other-than-temporary impairment on investment securities Fair value adjustments on mortgage servicing rights FDIC loss-share expense (income) Adjustments to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax expense (benefit) Loss (gain) on: Disposition of premises and equipment Sale and valuation adjustments of investment securities Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities Sale of 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 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 (to) 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 Mortgage servicing rights purchased Acquisition of premises and equipment Proceeds from sale of: Premises and equipment and other productive assets 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, including reissuance of treasury shares Dividends paid Net payments for repurchase of common stock Payments related to tax withholding for share-based compensation Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period The accompanying notes are an integral part of these consolidated financial statements. Years ended December 31, 2017 2016 2015 $ 107,681 $ 216,691 $ 895,344 325,424 – 9,378 48,364 (22,310) 4,784 8,299 36,519 10,066 22,377 (34,083) 207,428 4,281 (334) (16,670) 21,715 (244,385) 69,464 (315,522) 501,618 (75,802) (50,508) 2,549 (13,100) 28,279 527,831 635,512 170,016 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 (2,364,902) (710,125) (357,706) (4,139,762) – (29,672) (3,407,779) – (14,130) (2,014,315) (750) (40,847) 2,023,295 6,232 – 1,227,966 4,588 11,122 1,362,712 4,856 46,341 14,992 30,265 (398,676) 415 (535,534) – (7,679) – – – 8,694 – (62,697) 5,259 9,021 (267,205) 141,363 (535,445) – 98,518 – – – 907 – (100,320) 9,753 96,540 (5,348,736) 8,897 83,357 (3,444,006) 4,954,105 (88,505) 95,008 (95,607) 55,000 7,016 (95,910) (75,664) (1,756) 4,753,687 40,463 362,394 402,857 $ 3,286,428 (282,719) – (254,816) 165,047 7,437 (65,932) (563) (1,623) 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) (1,021) (963) (925,895) (17,421) 381,095 363,674 During the year ended December 31, 2017 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the years ended December 31, 2016 and 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations. 88 POPULAR, INC. 2017 ANNUAL REPORT Notes to Consolidated Financial Statements Note 1 - Nature of Operations Note 2 - Hurricanes Impact Note 3 - Summary of Significant Accounting Policies Note 4 - New Accounting Pronouncements Note 5 - Restrictions on Cash and Due from Banks and Certain Securities Note 6 - Securities Purchased under Agreements to Resell Note 7 - Investment Securities Available-For-Sale Note 8 - Investment Securities Held-to-Maturity Note 9 - Loans Note 10 - Allowance for Loan Losses Note 11 - FDIC Loss Share Asset and True-Up Payment Obligation Note 12 - Mortgage Banking Activities Note 13 - Transfers of Financial Assets and Mortgage Servicing Assets Note 14 - Premises and Equipment Note 15 - Other Real Estate Owned Note 16 - Other Assets Note 17 - Investment in Equity Investees Note 18 - Goodwill and Other Intangible Assets Note 19 - Deposits Note 20 - Borrowings Note 21 - Offsetting of Financial Assets and Liabilities Note 22 - Trust Preferred Securities Note 23 - Stockholders’ Equity Note 24 - Regulatory Capital Requirements Note 25 - Other Comprehensive Loss Note 26 - Guarantees Note 27 - Commitments and Contingencies Note 28 - Non-consolidated Variable Interest Entities Note 29 - Derivative Instruments and Hedging Activities Note 30 - Related Party Transactions Note 31 - Fair Value Measurement Note 32 - Fair Value of Financial Instruments Note 33 - Employee Benefits Note 34 - Net Income per Common Share Note 35 - Rental Expense and Commitments Note 36 - Other Service Fees Note 37 - FDIC Loss Share (Expense) Income Note 38 - Stock-Based Compensation Note 39 - Income Taxes Note 40 - Supplemental Disclosure on the Consolidated Statements of Cash Flows Note 41 - Segment Reporting Note 42 - Subsequent Events Note 43 - Popular, Inc. (Holding company only) Financial Information Note 44 - Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities 90 90 91 102 106 106 107 110 112 120 135 137 137 140 141 142 142 142 145 145 149 150 151 152 154 155 157 164 166 169 174 181 186 193 193 194 194 194 196 200 200 203 203 207 POPULAR, INC. 2017 ANNUAL REPORT 89 In Puerto Rico, Note 1 - Nature of operations Popular, Inc. (the “Corporation”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States and the Caribbean. 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 specialized through insurance financing, 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. Note 41 to the consolidated financial statements presents information about the Corporation’s business segments. services and Note 2 - Hurricanes impact During September 2017, Hurricanes Irma and Maria (the “hurricanes”), impacted Puerto Rico, the U.S. and British Virgin Islands, causing extensive damage and disrupting the markets in which Banco Popular de Puerto Rico (“BPPR”) does business. On September 6, 2017, Hurricane Irma made landfall in the USVI and the BVI as a Category 5 hurricane on the Saffir- Simpson scale, causing catastrophic wind and water damage to the islands’ infrastructure, homes and businesses. Hurricane Irma’s winds and resulting flooding also impacted certain municipalities of Puerto Rico, causing the failure of electricity infrastructure in a significant portion of the island. While hurricane Irma also struck Popular’s operations in Florida, neither our operations nor those of our clients in the region were materially impacted. electrical power, other basic utility Two weeks later, on September 20, 2017, Hurricane Maria, made landfall in Puerto Rico as a Category 4 hurricane, causing extensive destruction and flooding throughout Puerto Rico. Following the passage of Hurricane Maria, all Puerto Rico was and left without infrastructure services (such as water, communications, ports and other transportation networks) were severely curtailed and the government imposed a mandatory curfew. The hurricanes caused a significant disruption to the island’s economic activity. Most and wholesalers, financial institutions, manufacturing facilities and hotels, were closed for several days. establishments, including business retailers Puerto Rico and the USVI were declared disaster zones by President Trump due to the impact of the hurricanes, thus making them eligible for Federal assistance. Notwithstanding the significant recovery operation that is underway by the Federal, state and local governments, as of the date of this report, many businesses and homes in Puerto Rico and the 90 POPULAR, INC. 2017 ANNUAL REPORT remains significantly impacted, remain without power, other basic utility and USVI and many infrastructure businesses are partially operating or remain closed. Electronic transactions, a significant source of revenue for the bank, declined significantly as a result of the lack of power and telecommunication services. Several reports indicate that the hurricanes have also accelerated the outmigration trends that Puerto Rico was experiencing, with many residents moving to the mainland United States, either on a temporary or permanent basis. While it is too early to assess and quantify the full extent of the damage caused by the hurricanes, as well as their long-term impact on economic activity, the damages are substantial and have, at least in the short-term, had a material adverse impact on economic activity, as reflected by, among other things, the slowdown in production and sales activity and the reduction in the government’s tax revenues. Employment levels have also decreased in the short-term and could continue to decline as a result of the impact of the hurricanes on economic activity and outmigration trends. Furthermore, the hurricanes severely damaged or destroyed buildings, homes and other structures, impacting the value of such properties, some of which may serve as collateral to our loans. While our collateral is generally insured, the value of such insured structures, as well as other structures unaffected by the hurricanes, may be significantly impacted. Although some of the impact of the hurricanes, including its short-term impact on economic activity, may be offset by recovery and reconstruction activity and the influx of Federal emergency funds and private insurance proceeds, it is too early to know the amount of Federal and private insurance such transfers will money to be received and whether and significantly demographic impact of the hurricanes. the negative economic, offset fiscal business continuity Prior to the hurricanes, the Corporation had implemented its action program. Although the Corporation’s business critical systems experienced minimal outages as a result of the storms, the Corporation’s physical operations in Puerto Rico, the USVI and the BVI, including its branch and ATM networks, were materially disrupted by the storms mostly due to lack of electricity and communication as well as limited accessibility. During the fourth quarter of 2017, the Corporation continued normalizing its operations after the impact of the hurricanes, pursuant to the government’s partial restoration of the electric and telecommunications services in the areas in which operates. Reconstruction of the island’s electric infrastructure and restoration of the telecommunications network remain the most critical recovery from the for Puerto Rico’s hurricanes. Corporation’s challenges network branch the The following summarizes the estimated impact on the Corporation’s earnings for the year ended December 31, 2017 as a result of the impact caused by Hurricanes Irma and Maria, net of estimated insurance receivables of $1.1 million. further adjustments to these estimates as more information becomes available. (In thousands) Provision for loan losses [1] Provision for indemnity reserves on loans sold Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Business promotion Donations Other sponsorship and promotions expenses Total business promotion Professional fees Communications OREO expenses Other expenses Write-down of premises and equipment Other operating expense Total other expenses Total operating expenses Total pre-tax hurricane expenses Year ended December 31, 2017 $67,615 $ 3,436 $ 1,841 2,905 531 1,248 2,372 3,620 167 33 2,893 3,626 1,365 4,991 $16,981 $88,032 [1] Includes $5.8 million in provision for covered loans. Provision for Loan Losses Damages associated with Hurricanes Irma and Maria impacted certain of the Corporation’s asset quality measures, including higher delinquencies and non-performing loans. Payment channels, collection efforts and loss mitigation operations were interrupted as a result of the hurricanes. At December 31, 2017, within the total allowance for loan losses the Corporation maintained a reserve of $117.6 million, for non-covered loans, based on the best estimate of the impact of the hurricanes on the Corporation’s loan portfolios. This reserve is based on the near mid-range of the estimated credit losses related to the hurricanes, which management had initially estimated to be in the range of $70 million to $160 million. The impact to the provision for loan losses of $67.6 million, including $5.8 million for covered loans, related between to management’s best estimate of these losses and the amount already included as part of the reserves for environmental factors such as unemployment and deterioration in economic activity, which amounted to approximately $60 million. This provision includes $5.6 million for the portfolio of purchased credit impaired loans, accounted for under ASC 310-30, for which the estimated cash flows were adjusted to reflect a payment moratorium offered to certain eligible borrowers during the third quarter of 2017. The Corporation may make hurricanes represents difference the the Indemnity reserve The Corporation services a portfolio of loans amounting to $1.5 billion at December 31, 2017 which were previously sold by the Corporation with credit recourse. The Corporation has estimated additional losses associated with the potential repurchase liability of loans subject to credit recourse as a result of the hurricanes. For the year 2017, the provision for loans indemnity reserves of $22.4 million included sold for $3.4 million to account these estimated losses. At for December 31, 2017, the reserve for loans subject to credit recourse amounted to $58.8 million. Operating Expenses The Corporation has recorded year to date expenses related to structural damages of $6.5 million, net of the related insurance receivable of $1.1 million. The results also include other operating expenses for costs such as donations, debris removal, fuel satellite telecommunications, personnel support and other ancillary costs associated with hurricane recovery efforts. for backup generators, Revenue Reduction In addition to the previously mentioned incremental provision and direct operating expenses, results for the year 2017 were impacted by the hurricanes in the form of a reduction in revenue resulting from reduced merchant transaction activity, the waiver of certain late fees and service charges to businesses and consumer in hurricane-affected areas, as well as the economic and operational disruption on the Corporation’s mortgage originations, servicing and loss mitigation activities. While significant progress has been made in economic and transactional activity since September, the continued impact on transactional and collection based revenues will depend on the speed at which electricity, telecommunications and general merchant services can be restored across the region. Note 3 - Summary of significant accounting policies The accounting and financial reporting policies of Popular, Inc. and its conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. “Corporation”) subsidiaries (the The following is a description of the most significant of these policies: Principles of consolidation The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and In transactions have been eliminated in consolidation. accordance with the consolidation guidance for variable interest POPULAR, INC. 2017 ANNUAL REPORT 91 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. from the Federal Deposit Insurance Corporation (“FDIC”), as receiver (the “Doral Bank Transaction”). The Corporation determined that acquisition constituted a business combination as defined by the Financial Accounting Standards Board (“FASB”) Codification (“ASC”) Topic 805 “Business Combinations”. this in other recorded operating Unconsolidated investments, in which there is at least 20% ownership, are generally accounted for by the equity method which the Corporation exercises significant influence, with earnings income. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in other operating income. Those investments in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are accounted for by the equity method unless the investor’s the limited partner may have interest virtually no influence over partnership operating and financial policies. received. Limited partnerships is so “minor” that are Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements. liabilities control. Also, in the acquiree at Business combinations Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and any noncontrolling interest the acquisition date are measured at their fair values as of the acquisition date. The acquisition date is the date the acquirer obtains arising from assets or noncontractual contingencies are measured at their acquisition date at fair value only if it is more likely than not that they meet liability. Acquisition-related the definition of an asset or restructuring costs that do not meet certain criteria of exit or disposal activities are expensed as incurred. Transaction costs are expensed as incurred. Changes in income tax valuation allowances for acquired deferred tax assets are recognized in earnings to the measurement period as an adjustment to income tax expense. Contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value of the contingent consideration are recognized in earnings unless the arrangement is a hedging instrument for which changes are initially recognized in other comprehensive income. subsequent There were no significant business combinations during 2017 and 2016. requires management Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of and America assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. to make estimates Fair value measurements The Corporation determines the fair values of its financial instruments based on the fair value framework established in the guidance for Fair Value Measurements in ASC Subtopic 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value which are (1) quoted market prices for active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. liabilities identical assets or in The guidance in ASC Subtopic 820-10 also addresses measuring fair value in situations where markets are inactive and transactions are not orderly. Transactions or quoted prices for assets and liabilities may not be determinative of fair value when transactions are not orderly, and thus, may require adjustments to estimate fair value. Price quotes based on transactions that are not orderly should be given little, if any, weight in measuring fair value. Price quotes based on transactions that are orderly shall be considered in determining fair value, and the weight given is based on facts and 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. On February 27, 2015, BPPR, in alliance with other bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank (“Doral”) Covered assets to loss sharing agreements with the FDIC, Assets subject including certain loans and other real estate properties, are 92 POPULAR, INC. 2017 ANNUAL REPORT labeled “covered” on the consolidated statements of financial the notes to the consolidated condition and throughout financial statements. Loans acquired in the Westernbank FDIC- assisted transaction, except for credit cards, which remain 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: • 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 that could not have been reasonably unusual event anticipated has occurred. An investment in debt securities is considered impaired if the fair value of the investment is less than its amortized cost. For other-than-temporary impairments the Corporation assesses if it has both the intent and the ability to hold the security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. An 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. • Debt and equity securities classified as trading securities are reported at fair value, with unrealized gains and losses included in non-interest income. net • 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 considered other-than-temporary securities reduce the value of the asset, and the estimated loss is accumulated taxes, that are in of recorded in non-interest income. For debt securities, the Corporation assesses whether (a) it has the intent to sell the debt security, or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security is recognized. In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total 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. • 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 on securities considered other-than-temporary, available-for-sale, held-to-maturity investment 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 POPULAR, INC. 2017 ANNUAL REPORT 93 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 the includes documents relationship and strategy for undertaking Prior to entering a hedge transaction, the Corporation formally between hedging instruments and hedged items, as well as the risk management various hedge objective transactions. This process linking all derivative 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 the methodologies 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. are Loans Loans held-in-portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable classified loans as 94 POPULAR, INC. 2017 ANNUAL REPORT future is a management judgment which is determined based loan, business strategies, current market upon the type of 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. Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual is interest deemed generally income on commercial uncollectible) in any event, not 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 365 days past due. However, in the case of a collateral dependent loan individually evaluated for impairment, the excess of the the collateral recorded investment over the fair value of (portion 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 180 days past due. The Corporation discontinues the recognition of interest on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. (“VA”) when 15-months Department of Veterans Affairs 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 is generally payments of principal or 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 charged-off when 180 days in arrears. Commercial and consumer overdrafts are generally charged-off no later than 60 days past their due date. interest. Income 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 the purchase 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. 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 loans acquired in Westernbank FDIC-assisted 310-30 to all 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, conditions, portfolio concentrations, distressed economic 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 POPULAR, INC. 2017 ANNUAL REPORT 95 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 9 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 the index and source type. Once the pools are defined, Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset. the pool reasonably 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 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 a reduction of any allowance for loan losses established after the acquisition and then as an increase in the accretable yield for the loans prospectively. Decreases in expected cash flows after the acquisition date are 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 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 96 POPULAR, INC. 2017 ANNUAL REPORT 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 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 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 10 to the consolidated financial statements. According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual the loan agreement. Current information and events include “environmental” factors, e.g. existing industry, geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of the loan is likely to occur. terms of The Corporation defines commercial and construction impaired loans as borrowers with total debt greater than or equal to $1 million with 90 days or more past due, as well as all loans whose terms have been modified in a 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 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 impairment. Commercial evaluated thus for loans impairment smaller balance homogeneous that are groups of (e.g. mortgage and collectively evaluated for consumer loans), it specifically requires that loan modifications considered troubled debt restructurings (“TDRs”) be analyzed under its provisions. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan is collateral dependent. The fair value of the collateral is generally based on appraisals. Appraisals may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the 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) either annually or every two years depending on the total exposure of the borrower. As a general reviews the Corporation appraisals as part of the underwriting and approval process and also for credits considered impaired. procedure, internally and the appraisal requests updated reports 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 involves a degree of its debt that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; (v) based on estimates and projections that only encompass the borrower’s current business capabilities, it is forecasted that the entity- specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity; and (vi) absent the current modification, the borrower cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. The 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 sustained reasonable period (at performance) and the loan yields a market rate. twelve months of least A loan may be restructured in a troubled debt restructuring into two (or more) loan agreements, for example, Note A and Note B. Note A represents the portion of the original loan principal amount that is expected to be fully collected along with contractual interest. Note B represents the portion of the original loan that may be considered uncollectible and charged-off, but the obligation is not forgiven to the borrower. Note A may be returned to accrual status provided all of the conditions for a TDR to be returned to accrual status are met. The modified loans are considered TDRs and thus, are evaluated under the framework of ASC Section 310-10-35 as long as the loans are not part of a pool of loans accounted for under ASC Subtopic 310-30. Refer to Note 10 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) The FDIC loss initially 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 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 POPULAR, INC. 2017 ANNUAL REPORT 97 are recognized in non-interest The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to loss share protection. As such, for covered loans accounted pursuant to ASC Subtopic 310-30, decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, income prospectively over the life of the FDIC loss sharing agreements. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date is accreted into income, a reduction of the related indemnification asset is 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 (expense) income in the consolidated statements of operations. Refer to Note 11 for additional information on the FDIC loss share indemnification asset and true-up payment obligation. Transfers and servicing of financial assets The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the Corporation surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in ASC Topic 860 are met: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of these criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under the applicable accounting guidance, as sales, recognizing a deferred tax asset or liability on the transaction. For transfers of financial assets that satisfy the conditions to be accounted for as sales, the Corporation derecognizes all recognizes all assets obtained and liabilities assets incurred in consideration as proceeds of the sale, including sold; 98 POPULAR, INC. 2017 ANNUAL REPORT 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 loan for an amount equal to 100% of the remaining principal balance of the unconditional ability to repurchase the delinquent loan, the Corporation is deemed to have regained effective control over the loan and recognizes the loan on its balance sheet as well as an offsetting liability, regardless of the Corporation’s intent to repurchase the loan. the Corporation has loan. Once the 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 servicer the All 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. 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 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 arrangements rent on escalations 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 construction other real estate property with a book value equal to or 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 annually. 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 POPULAR, INC. 2017 ANNUAL REPORT 99 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. 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 26 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 to policy adjustments cancellations. to commissions earned relating to agreements resell. However, It is the Corporation’s policy to take possession of securities purchased under the counterparties to such agreements maintain effective control over such securities, and accordingly those securities are not reflected in the Corporation’s consolidated statements of financial condition. The Corporation monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of financial condition. The Corporation may require counterparties to deposit return collateral pledged, when collateral or additional appropriate. stated at cost, Software 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 100 POPULAR, INC. 2017 ANNUAL REPORT is revenue banking Income Recognition - Investment banking revenues and commissions follows: Investment underwriting fees at the time the underwriting is completed and income is reasonably determinable; corporate finance advisory fees as earned, according to the terms of the specific contracts; and sales commissions on a trade-date basis. Commission income securities transactions are recorded on a trade-date basis. and expenses related to customers’ recorded as Foreign exchange Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The 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. Refer to the disclosure of accumulated other comprehensive The Corporation accounts for the taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues). loss included in Note 25. Income taxes The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. and liabilities tax assets The guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50 percent) that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically by the Corporation based on the more likely than not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, the future taxable income exclusive of taxable reversing temporary differences and carryforwards, income in carryback years and tax-planning strategies. In is given to making such assessments, evidence that can be objectively verified. significant weight The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns and future profitability. The Corporation’s accounting for deferred tax consequences represents management’s best estimate of those future events. to by taxing challenge Such tax positions Positions taken in the Corporation’s tax returns may be subject authorities upon the examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest on income tax uncertainties is classified within income tax expense in the statement of operations; while the penalties, if any, are accounted for as other operating expenses. are both initially 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 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). POPULAR, INC. 2017 ANNUAL REPORT 101 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 takes 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 4 - New accounting pronouncements Recently Issued Accounting Standards Updates FASB Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income The FASB issued ASU 2018-02 in February 2018, which allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. These stranded tax effects result from recognizing in income the impact of changes in tax rates even when the related tax effects were recognized in accumulated other comprehensive income. The amendments also require certain disclosures about stranded tax effects. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. As of December 31, 2017, the Corporation maintained a full valuation allowance on the deferred tax assets, which were recognized in accumulated other comprehensive income related to its U.S. operations. As such, the Corporation does not anticipate that the adoption of this accounting pronouncement will have a material impact on its consolidated statements of financial condition and results of operations. However, the Corporation will continue to evaluate the impact of this ASU until its planned adoption date of January 1, 2019. FASB Accounting Standards Update (“ASU”) 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 The FASB issued ASU 2018-01 in January 2018, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 after the effective date. 102 POPULAR, INC. 2017 ANNUAL REPORT The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since it does not have any land easements that have not been previously accounted for as leases under Topic 840. accounting FASB Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities The FASB issued ASU 2017-12 in August 2017, which makes more financial and nonfinancial hedging strategies eligible for assess hedge effectiveness the other requirement for entities to recognize hedge ineffectiveness each reporting period for and requiring presentation of the changes in fair value of cash flow hedges in the same income statement line item(s) as the earnings effect of the hedged items when the hedged item affects earnings. and changes how companies cash flow hedges eliminating things, among by, The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in this Update should be applied using a modified retrospective approach as of the adoption date. The Corporation will be impacted by the simplified application of hedge accounting. The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since hedge ineffectiveness has been immaterial to the Corporation and the earnings effect of the hedges and the hedged items are already presented in the same income statement line item. FASB Accounting Standards Update (“ASU”) 2017-11, Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception The FASB issued ASU 2017-11 in July 2017, which changes the classification analysis certain equity-linked financial instruments with down round features. When determining whether these instruments should be classified as liabilities or equity, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. For EPS purposes, the effect of the down round feature should be recognized as a dividend when triggered. of The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in this Update may be applied using either a modified retrospective retrospective approach or approach. full a The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since it does not have any outstanding equity-linked financial instruments with a down round feature. FASB Accounting Standards Update (“ASU”) 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting The FASB issued ASU 2017-09 in May 2017, which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since it is not customary for the Corporation to modify the terms or conditions of its share-based payment awards. FASB Accounting Standards Update (“ASU”) 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities The FASB issued ASU 2017-08 in March 2017, which amends the amortization period for certain callable debt securities held at a premium by shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in this Update should be applied on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since the premium of purchased callable debt securities is not significant. FASB Accounting Standards Update (“ASU”) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost The FASB issued ASU 2017-07 in March 2017, which requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost and prospectively for cost component. capitalization of service the the The Corporation does not expect that the limitation to capitalize only the service cost component of the net periodic benefit cost will have a material impact on its consolidated statement of operations. Upon adoption, the Corporation will segregate the presentation of the service cost from the other components of net periodic benefit costs, all which are currently reported within personnel costs in its accompanying consolidated statement of operations. 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 nonfinancial assets, the definition of in substance financial sales of assets, and impacts 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 impairment will now be the current guidance. Goodwill amount by which a reporting unit’s carrying value exceeds its POPULAR, INC. 2017 ANNUAL REPORT 103 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 Upon adoption of this standard, if the carrying amount of the any of Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill. the reporting units exceeds fair value, its 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. 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 104 POPULAR, INC. 2017 ANNUAL REPORT 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. 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 December 15, 2017. Early adoption is permitted, but the 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- effect adjustment recorded in retained earnings as of the beginning of the period of adoption. that The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations. Therefore, this guidance in any intra-entity transfers of assets other than inventory completed after the effective date. the Corporation will consider FASB Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments The FASB issued ASU 2016-15 in August 2016, which addresses specific cash flow issues with the objective of reducing existing diversity in practice, which may lead to a difference transactions between operating, financing or investing activities. Among other things, the guidance provides an accounting policy election for classifying distributions received from equity method investees and clarifies the application of the predominance principle. classification of in the 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. 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 conditions in making these determinations. ASU 2016-13 prospectively replaces this approach with a forward- looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and the reasonable 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. supportable forecasts affect that and ASU 2016-13 requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. expands disclosure also 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. continued its The Corporation has evaluation and implementation efforts for ASU 2016-13, Financial Instruments – Credit Losses, and has established a cross-discipline governance structure. A CECL Working Group, with members from different areas within the organization, has been created and assigned the responsibility of assessing the impact of the issues, standard, evaluating the the new guidance to current credit related other determine evaluating interpretative loss models against necessary changes and any implementation activities. The Working Group provides periodic updates to the CECL Steering Committee, which has oversight responsibilities for the implementation efforts. The Corporation plans to adopt ASU 2016-13 on January 1, 2020 using a modified retrospective approach. Although early adoption is permitted beginning in the first quarter of 2019, the to make that election. The Corporation does not expect 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”) 2016-02, 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 guidance for operating leases today. The new standard requires leases using an approach that lessors to account is for substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. expense lease 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 that is, POPULAR, INC. 2017 ANNUAL REPORT 105 the Corporation does not have any financial Currently, the the fair value option. liabilities under Corporation does not expect to be significantly impacted by the changes in the accounting for equity investments under the revised guidance. In addition, Note 5 - 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 $ 1.4 billion at December 31, 2017 (December 31, 2016 - $ 1.2 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, 2017, the Corporation held $41 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, 2016 - $31 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 6 - Securities purchased under agreements to resell The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. The Corporation is permitted by contract to repledge the securities, and has agreed to resell to the counterparties the same or substantially similar securities at the maturity of the agreements. The fair value of the collateral securities held by the Corporation on these transactions at December 31, was as follows: (In thousands) Not repledged Total 2017 2016 $– $– $27,388 $27,388 expects to be entitled in exchange for those goods or services. A five-step process is defined to achieve this core principle. The new guidance also requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments of these Updates are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. considerations. The Corporation’s implementation efforts regarding ASU 2014-09, Revenue from Contracts with Customers, included a scoping analysis of revenue streams and related costs, reviewing the associated contracts, evaluating the timing of when revenues are currently being recognized in light of when the performance obligations are fulfilled and assessing principal vs. agent its implementation efforts during the fourth quarter of 2017. There will be no material changes in the timing of when revenues are recognized. Although there will be changes on the presentation of certain costs in the broker-dealer subsidiary, these changes in presentation are not material to the Corporation’s financial statements. The Corporation adopted this guidance on January 1, 2018 using the modified retrospective approach. The Corporation concluded FASB Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities The FASB issued ASU 2016-01 in January 2016, which primarily affects the accounting for equity investments and financial liabilities under the fair value option as follows: require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; simplify the impairment assessment of equity investments without readily determinable fair values; require changes in fair value due to instrument-specific credit risk to be presented separately in other comprehensive income for financial liabilities under the fair value option; and clarify that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with the entity’s other deferred tax assets. In addition, the ASU also impacts the financial presentation 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. 106 POPULAR, INC. 2017 ANNUAL REPORT Note 7 - Investment securities available-for-sale The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2017 and 2016. (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 Within 1 year After 1 to 5 years Total obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions After 1 to 5 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 After 5 to 10 years Total other At December 31, 2017 Gross unrealized losses Gross unrealized gains Fair value Weighted average yield $ 8 – 281 289 21 22 43 – – – 173 57 2,789 3,019 8 206 2,390 19,493 22,097 776 13 13 $ 2,101 26,319 191 $ 1,110,698 2,523,797 293,669 1.06% 1.55 2.24 28,611 3,928,164 1.46 818 3,518 4,336 59 59 – 75 526 26,431 27,032 – 211 3,765 69,071 73,047 – – – 275,507 333,426 608,933 6,609 6,609 40 17,070 35,717 890,926 943,753 492 14,594 337,786 4,335,790 4,688,662 1,815 802 802 1.26 1.48 1.38 2.30 2.30 2.60 2.90 2.31 2.01 2.03 4.23 3.50 2.21 2.46 2.44 8.21 3.62 3.62 Amortized cost $ 1,112,791 2,550,116 293,579 3,956,486 276,304 336,922 613,226 6,668 6,668 40 16,972 36,186 914,568 967,766 484 14,599 339,161 4,385,368 4,739,612 1,039 789 789 Total investment securities available-for-sale[1] $10,285,586 $26,237 $133,085 $10,178,738 1.96% [1] Includes $6.6 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $5.6 billion serve as collateral for public funds. POPULAR, INC. 2017 ANNUAL REPORT 107 (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. 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, 2017 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 $ 1,389,619 2,925,277 669,715 5,299,936 10,284,547 1,039 $ 1,386,737 2,895,496 667,974 5,226,716 10,176,923 1,815 $10,285,586 $10,178,738 108 POPULAR, INC. 2017 ANNUAL REPORT During the year ended December 31, 2017, the Corporation sold equity securities and obligations from the Puerto Rico government and its political subdivisions. The proceeds from these sales were $ 15.0 million. During the year ended December 31, 2016, the Corporation sold mortgage-backed securities, equity securities and obligations from the Puerto Rico government and its political subdivisions. The proceeds from these sales were $ 5.3 million. Gross realized gains and losses on the sale of investment securities available-for-sale for the years ended December 31, 2017, 2016 and 2015 were as follows: (In thousands) Gross realized gains Gross realized losses Net realized gains on sale of investment securities available-for-sale Years ended December 31, 2015 2016 2017 $346 (12) $378 – $226 (85) $334 $378 $141 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, 2017 and 2016. (In thousands) Less than 12 months Gross unrealized losses Fair value U.S. Treasury securities Obligations of U.S. Government sponsored entities Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligations - federal agencies Mortgage-backed securities $2,608,473 214,670 6,609 153,336 1,515,295 $14,749 1,108 59 2,110 12,529 Total investment securities available-for-sale in an unrealized At December 31, 2017 12 months or more Gross unrealized losses Fair value $1,027,066 376,807 – 595,339 2,652,359 $ 13,862 3,228 – 24,922 60,518 Total Fair value $3,635,539 591,477 6,609 748,675 4,167,654 Gross unrealized losses $ 28,611 4,336 59 27,032 73,047 loss position $4,498,383 $30,555 $4,651,571 $102,530 $9,149,954 $133,085 (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 As of December 31, 2017, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $133 million, driven mainly by U.S. Treasury securities, collateralized mortgage obligations, and mortgage-backed securities. 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 to consider various factors, analysis requires management 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 POPULAR, INC. 2017 ANNUAL REPORT 109 the Corporation would be required to sell the debt security before a forecasted recovery occurs. At December 31, 2017, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analysis performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. During the quarter ended June 30, 2017, the Corporation recognized an other-than-temporary impairment charge of $8.3 million on Puerto Rico Sales Tax Financing Corporation (“COFINA”) bonds classified as subsequently sold by the available-for-sale. These were Corporation during the third quarter of 2017, at a gain of approximately $0.1 million. At December 31, 2017, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the investments securities prior to recovery of their amortized cost basis. 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 Puerto Rico government and its fiscal and economic political situation, together with, among other factors, the moratorium declared on the payment of principal and interest on subdivisions. Puerto Rico’s recorded, was obligations of certain Puerto Rico government securities, including those issued or guaranteed by the Commonwealth, led management to conclude that the unrealized losses on this security was other-than-temporary. The security, for which an other-than-temporary impairment was sold during the fourth quarter of 2016, resulting in a realized gain of $30 thousand. The proceeds from this sale were $882 thousand. The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer held-to-maturity in which the aggregate amortized cost of such securities), securities equity. This exceeds information excludes securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer. available-for-sale stockholders’ (includes 10% of and 2017 2016 (In thousands) FNMA Freddie Mac Amortized cost $3,621,537 1,358,708 Fair value $3,572,474 1,335,685 Amortized cost $3,255,844 1,381,197 Fair value $3,211,443 1,361,933 Note 8 - Investment securities held-to-maturity The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2017 and 2016. (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, 2017 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Weighted average yield $ 3,295 15,485 29,240 44,734 92,754 67 67 500 500 1,000 $ – – – 3,834 3,834 $ 79 4,143 8,905 222 $ 3,216 11,342 20,335 48,346 5.96% 6.05 3.89 1.93 13,349 83,239 3.38 4 4 – – – – – 7 – 7 71 71 493 500 993 5.45 5.45 1.96 2.97 2.47 Total investment securities held-to-maturity [1] $93,821 $3,838 $13,356 $84,303 3.37% [1] Includes $92.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral. 110 POPULAR, INC. 2017 ANNUAL REPORT (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 Total investment securities held-to-maturity [1] At December 31, 2016 Amortized cost Gross unrealized gains Gross unrealized losses Fair value $ 1,865 8,583 10,869 52,223 73,540 Weighted average yield 5.90% 6.02 6.20 1.91 3.49 $ 1,240 5,957 7,766 8,892 23,855 – – 78 78 5.45 5.45 3 39 42 $23,897 997 961 1,958 $75,576 1.65 2.44 2.05 3.46% $ 3,105 14,540 18,635 59,747 96,027 74 74 1,000 1,000 2,000 $98,101 $ – – – 1,368 1,368 4 4 – – – $1,372 [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. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer. The following table presents the aggregate amortized cost and fair value of investment securities held-to-maturity at December 31, 2017 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 $ 3,709 11,842 20,406 48,346 $84,303 $ 3,795 15,985 29,307 44,734 $93,821 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, 2017 and 2016: (In thousands) Obligations of Puerto Rico, States and political subdivisions Other Total investment securities held-to-maturity in an unrealized loss position (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, 2017 12 months or more Total Fair value $– – Gross unrealized losses $– – Fair value $35,696 743 Gross unrealized losses $13,349 7 Fair value $35,696 743 Gross unrealized losses $13,349 7 $– $– $36,439 $13,356 $36,439 $13,356 Less than 12 months Fair value $31,294 491 Gross unrealized losses $1,702 9 At December 31, 2016 12 months or more Total Fair value $30,947 1,217 Gross unrealized losses $22,153 33 Fair value $62,241 1,708 Gross unrealized losses $23,855 42 position $31,785 $1,711 $32,164 $22,186 $63,949 $23,897 POPULAR, INC. 2017 ANNUAL REPORT 111 As indicated in Note 7 to these Consolidated Financial Statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis. The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at December 31, 2017 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $49 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from, and have a lien on, certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality and issuing municipalities are required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligations bonds. The portfolio also includes approximately $44 million in securities for which the underlying source of payment is not the central government, but in which a government instrumentality provides a guarantee in the event of default. The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security held-to-maturity was other- than-temporarily impaired at December 31, 2017. Further deterioration of the fiscal crisis of the Government of Puerto Rico or of Puerto Rico’s economy could further affect the value of these securities, resulting in losses to the Corporation. The securities Corporation does not have the intent held-to-maturity and it the that Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis. to sell is more likely than not Refer to Note 27 for additional information on the Corporation’s exposure to the Puerto Rico Government. on for pools based aggregated Note 9 - 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 similar into loans were characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC- 112 POPULAR, INC. 2017 ANNUAL REPORT assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued. The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential mortgage loans, as explained in Note 11. During the year ended December 31, 2017, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $460 million, consumer loans of $311 million, commercial loans of $2 million and leases of $2 million, compared to purchases (including repurchases) of mortgage loans of $619 million, consumer loans of $164 million and commercial loans of $51 million, during the year ended December 31, 2016. The Corporation performed whole-loan sales involving approximately $64 million of residential mortgage loans during the year ended December 31, 2017 (December 31, 2016 - $83 million). There were no sales of commercial and construction loans during the year ended December 31, 2017. For the year excluding the bulk sale of ended December 31, 2016, Westernbank loans with a carrying value of approximately $100 million, the Corporation sold commercial and construction loans with a carrying value of approximately $47 million. Also, during the year ended December 31, 2017, the Corporation securitized approximately $376 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage- backed securities and $86 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $613 million and $163 million, respectively, during the year ended December 31, 2016. 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, 2017 and 2016, 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 (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 Other Total December 31, 2017 Puerto Rico Past due 30-59 days $ – 39,617 7,997 3,556 – 217,890 10,223 7,319 438 13,926 24,405 537 $ 60-89 days 426 131 2,291 1,251 – 77,833 1,490 90 days or more $ 1,210 28,045 123,929 40,862 170 1,596,763 2,974 $ Total past due 1,636 67,793 134,217 45,669 170 1,892,486 14,687 4,464 395 6,857 5,197 444 18,227 257 19,981 5,466 16,765 30,010 1,090 40,764 35,068 17,746 $ Current 144,763 2,336,766 1,689,397 2,845,658 95,199 4,684,293 795,303 1,063,211 4,997 1,181,548 815,745 139,842 Non-covered loans HIP Puerto Rico $ 146,399 2,404,559 1,823,614 2,891,327 95,369 6,576,779 809,990 1,093,221 6,087 1,222,312 850,813 157,588 $325,908 $100,779 $1,854,649 $2,281,336 $15,796,722 $18,078,058 December 31, 2017 U.S. mainland Past due 60-89 days 90 days or more $ – 1,186 – 5,278 – 6,148 417 2 3,675 2,149 – $ 784 1,599 862 97,427 – 14,852 3,039 11 14,997 2,779 – 30-59 days $ 395 4,028 2,684 1,121 – 13,453 291 3 4,653 3,342 – Total past due $ 1,179 6,813 3,546 103,826 – 34,453 3,747 16 23,325 8,270 – Loans HIP U.S. mainland $1,210,693 1,688,311 318,975 1,004,983 784,660 693,628 32,980 Current $1,209,514 1,681,498 315,429 901,157 784,660 659,175 29,233 84 158,760 289,732 319 100 182,085 298,002 319 $29,970 $18,855 $136,350 $185,175 $6,029,561 $6,214,736 POPULAR, INC. 2017 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, 2017 Popular, Inc. Past due $ 30-59 days 395 43,645 10,681 4,677 – 231,343 10,223 291 7,322 5,091 17,268 24,405 537 $ 60-89 days 426 1,317 2,291 6,529 – 83,981 1,490 417 4,466 4,070 9,006 5,197 444 $ 90 days or more 1,994 29,644 124,791 138,289 170 1,611,615 2,974 3,039 $ Total past due 2,815 74,606 137,763 149,495 170 1,926,939 14,687 3,747 Current $ 1,354,277 4,018,264 2,004,826 3,746,815 879,859 5,343,468 795,303 29,233 18,238 15,254 22,760 5,466 16,765 30,026 24,415 49,034 35,068 17,746 1,063,295 163,757 1,471,280 815,745 140,161 Non-covered loans HIP Popular, Inc. [1] [2] $ 1,357,092 4,092,870 2,142,589 3,896,310 880,029 7,270,407 809,990 32,980 1,093,321 188,172 1,520,314 850,813 157,907 Total $355,878 $119,634 $1,990,999 $2,466,511 $21,826,283 $24,292,794 [1] Non-covered loans held-in-portfolio are net of $131 million in unearned income and exclude $132 million in loans held-for-sale. [2] Includes $7.1 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.6 billion were pledged at the Federal Home Loan Bank (“FHLB”) as collateral for borrowings, $2.0 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings and $0.5 billion serve as collateral for public funds. [3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. December 31, 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 60-89 days $ – 4,785 5,014 2,638 – 136,558 1,356 8,752 65 7,918 7,217 294 $ 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 $ 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 $ 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 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 $484,707 $174,597 $1,074,451 $1,733,755 $15,434,669 $17,168,424 (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 114 POPULAR, INC. 2017 ANNUAL REPORT (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 Total December 31, 2016 U.S. mainland Past due 30-59 days $ 5,952 1,992 2,116 960 – 15,974 833 8 2,908 2,547 – – $33,290 60-89 days – $ 379 540 610 – 5,272 346 28 1,055 1,675 – – $9,905 90 days or more 206 $ 1,195 472 101,257 – 11,713 3,337 30 4,762 1,864 – 8 $124,844 Total past due $ 6,158 3,566 3,128 102,827 – 32,959 4,516 66 8,725 6,086 – 8 $168,039 Current $1,058,138 1,353,750 240,617 828,106 690,742 746,902 40,777 92 243,450 234,521 9 180 $5,437,284 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 $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 $517,997 $ 60-89 days – 5,164 5,554 3,248 – 141,830 1,356 346 8,780 1,120 9,593 7,217 294 $184,502 $ 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 $1,199,295 $ Total past due 7,054 158,390 134,106 156,768 1,668 1,260,403 11,037 4,516 39,189 8,975 46,838 51,978 20,872 $1,901,794 Current $ 1,231,782 3,763,211 1,901,114 3,446,082 774,632 5,435,958 691,856 40,777 1,061,576 251,551 1,343,946 774,623 154,845 $20,871,953 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 $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. The level of delinquencies for mortgage loans as of December 31, 2017 was impacted by the loan moratorium implemented by the Corporation as part of its hurricane relief measures. Although the repayment schedule was modified as part of the moratorium, certain borrowers continued to make payments, having an impact on the respective delinquency status. Also, loans with a delinquency status of 90 days past due as of December 31, 2017 include approximately $840 million in loans previously pooled into GNMA securities. Under the GNMA program, issuers such as BPPR have the option but not these loans subject the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, to the repurchase option are required to be reflected on the financial statements of the Bank with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. Management will continue to monitor the effect of the moratorium as the period comes to an end and the loan repayment schedule is resumed. POPULAR, INC. 2017 ANNUAL REPORT 115 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, 2017 and December 31, 2016. Accruing loans past due 90 days or more consist primarily of credit cards, Federal Housing Administration (“FHA”) / U.S. Department of Veterans Affairs (“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, 2017 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] $ 1,115 $ – $ 784 $– $ 1,899 $ – 18,866 101,068 40,177 306,697 2,974 – – – 19,460 5,466 15,617 – – 685 1,204,691 – – 18,227 257 141 – 1,148 1,599 862 594 14,852 – 3,039 11 14,997 2,779 – – – – – – – – – – – – – 20,465 101,930 40,771 321,549 2,974 3,039 11 14,997 22,239 5,466 15,617 – – 685 1,204,691 – – 18,227 257 141 – 1,148 Total [2] $511,440 $1,225,149 $39,517 $– $550,957 $1,225,149 [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. [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. The balance of these loans increased by $760 million due mainly to the rebooking of loans previously pooled into GNMA securities. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the Bank with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. These balances include $178 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, 2017. Furthermore, the Corporation has approximately $58 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. 116 POPULAR, INC. 2017 ANNUAL REPORT (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 by $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. [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. The components of the net financing leases receivable at At December 31, 2017, future minimum lease payments are December 31, 2017 and 2016 were as follows: expected to be received as follows: (In thousands) 2017 2016 (In thousands) Total minimum lease payments Estimated residual value of leased property $681,198 $601,317 (unguaranteed) 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 246,248 9,496 126,797 810,145 12,000 210,761 8,309 117,296 703,091 7,677 $798,145 $695,414 2018 2019 2020 2021 2022 and thereafter Total $ 44,986 56,421 121,121 173,305 285,365 $681,198 Covered loans The following tables present the composition of loans by past due status at December 31, 2017 and 2016 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, 2017 30-59 days $16,640 518 60-89 days $5,453 147 $17,158 $5,600 Past due 90 days or more $59,018 988 $60,006 Total past due $81,111 1,653 Current $421,818 12,692 $82,764 $434,510 Covered loans HIP [1] $502,929 14,345 $517,274 [1] Includes $279 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral. POPULAR, INC. 2017 ANNUAL REPORT 117 (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. The following table presents covered loans in nonperforming status and accruing loans past due 90 days or more by loan class at December 31, 2017 and 2016. (In thousands) Mortgage Consumer Total [1] December 31, 2017 December 31, 2016 Non-accrual loans Accruing loans past due 90 days or more Non-accrual loans Accruing loans past due 90 days or more $3,165 188 $3,353 $– – $– $3,794 121 $3,915 $– – $– [1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income if the loan is accruing interest. over the life of the loans, Covered loans accounted for under ASC Subtopic 310-20 amounted to $10 million at December 31, 2017 (December 31, 2016 - $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 that were 310-30 (“credit 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, 2017 Carrying amount Non-credit impaired loans Credit impaired loans $ 909,389 88,130 – 542,182 16,900 1,556,601 (64,520) $14,035 – 170 21,357 758 36,320 (5,609) December 31, 2016 Carrying amount Non-credit impaired loans Credit impaired loans Total $ 923,424 88,130 170 563,539 17,658 $ 985,181 103,476 – 587,949 18,775 1,592,921 (70,129) 1,695,381 (61,855) $14,440 – 1,668 25,781 1,059 42,948 (7,022) Total $ 999,621 103,476 1,668 613,730 19,834 1,738,329 (68,877) Carrying amount, net of allowance $1,492,081 $30,711 $1,522,792 $1,633,526 $35,926 $1,669,452 [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 $507 million as of December 31, 2017 and $563 million as of December 31, 2016. 118 POPULAR, INC. 2017 ANNUAL REPORT The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $1.9 billion at December 31, 2017 (December 31, 2016–$2.1 billion). At December 31, 2017, 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 the Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the years ended December 31, 2017 and 2016, were as follows: (In thousands) Beginning balance Accretion Change in expected cash flows Ending balance (In thousands) Beginning balance Accretion Collections / loan sales / charge-offs [1] Ending balance [2] Allowance for loan losses ASC 310-30 Westernbank loans Activity in the accretable yield Westernbank loans ASC 310-30 For the year ended December 31, 2017 Credit impaired loans Non-credit impaired loans Total December 31, 2016 Credit impaired loans Non-credit impaired loans Total $1,001,908 (139,557) 13,486 $ 8,179 (3,048) (253) $1,010,087 (142,605) 13,233 $1,105,732 (162,983) 59,159 $ 6,726 (6,765) 8,218 $1,112,458 (169,748) 67,377 $ 875,837 $ 4,878 $ 880,715 $1,001,908 $ 8,179 $1,010,087 Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30 For the year ended December 31, 2017 Credit impaired loans Non-credit impaired loans Total December 31, 2016 Credit impaired loans Non-credit impaired loans Total $1,695,381 139,557 (278,337) $1,556,601 (64,520) $42,948 3,048 (9,676) $36,320 (5,609) $1,738,329 142,605 (288,013) $1,898,146 162,983 (365,748) $1,592,921 (70,129) $1,695,381 (61,855) $ 76,355 6,765 (40,172) $ 42,948 (7,022) $1,974,501 169,748 (405,920) $1,738,329 (68,877) Ending balance, net of ALLL $1,492,081 $30,711 $1,522,792 $1,633,526 $ 35,926 $1,669,452 [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 $507 million as of December 31, 2017 (December 31, 2016- $563 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 $556 million at December 31, 2017 (December 31, 2016 - $700 million). At December 31, 2017, 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, 2017 and 2016 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, 2017 December 31, 2016 $278,896 11,218 (32,516) 76,175 $333,773 $221,128 17,635 (35,030) 75,163 $278,896 POPULAR, INC. 2017 ANNUAL REPORT 119 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 18) 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, 2017 December 31, 2016 $562,695 – 18,824 32,516 (97,963) $516,072 (49,376) $466,696 $564,050 (4,707) 36,221 35,030 (67,899) $562,695 (22,431) $540,264 Note 10 - Allowance for loan losses The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses (“ALLL”) to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date. allowance The accounting guidance provides for the recognition of a loss loans. The for groups of homogeneous determination for general reserves of the allowance for loan losses includes the following principal factors: • Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity. • Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process. the base loss with the recent loss trend adjustment was mainly concentrated in the leasing, credit cards, personal, auto and mortgage loan portfolios for 2017 and in the leasing, auto, other consumer loan and commercial and industrial loan portfolios for 2016. For the period ended December 31, 2017, 3% (December 31, 2016 - 0.11 %) 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 consumer portfolios for 2017 and commercial multifamily portfolio for 2016. • 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 As discussed in Note 2 - Hurricanes impact, during the year ended December 31, 2017, an incremental provision expense of $67.6 million which includes $5.8 million in provision for covered loans, was made to the allowance for loan losses based on management’s best estimate of the impact of the hurricanes loan portfolios and the ability of on the Corporation’s borrowers to repay their loans, taking into consideration currently available information and the already challenging economic environment in Puerto Rico prior to the hurricanes. Refer to Note 2 for additional information. For the period ended December 31, 2017, 69% (December 31, 2016–38%) 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 During the fourth quarter of 2017, 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 120 POPULAR, INC. 2017 ANNUAL REPORT 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 December 31, 2017 and resulted in a net decrease to the allowance for loan losses of $4.9 million for the non-covered portfolio. The effect of the aforementioned updates was immaterial for the covered loans portfolio. Management made the following revisions to the ALLL models during the fourth quarter of 2017: • Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on indicators and economic selected credit each applicable loan segment. During the fourth quarter of 2017, the environmental factor models used to account for and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. in current changes credit for The effect of the recalibration to the environmental factors adjustment resulted in a decrease to the allowance for loan losses of $6.5 million and offset by an increase of $1.6 million at December 31, 2017, related to the non-covered BPPR and BPNA segments, respectively. The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the years ended December 31, 2017 and 2016. For the year ended December 31, 2017 Puerto Rico - Non-covered loans (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 non-covered loans Non-covered loans held-in-portfolio excluding impaired Commercial Construction Mortgage Leasing Consumer Total $ 189,686 4,240 (49,591) 27,196 $ 171,531 $ 36,982 $ 134,549 $ 1,353 (2,690) (3,588) 6,211 $ 1,286 $ – $ 1,286 $ 143,320 90,705 (78,121) 3,177 $ 7,662 11,099 (8,407) 1,637 $ 125,963 138,385 (109,252) 19,119 $ 159,081 $ 11,991 $ 174,215 $ 46,354 $ 475 $ 21,849 $ 112,727 $ 11,516 $ 152,366 $ 323,455 $ – $ 509,033 $ 1,456 $ 99,180 $ $ $ $ $ 467,984 241,739 (248,959) 57,340 518,104 105,660 412,444 933,124 loans Total non-covered loans held-in-portfolio 6,942,444 $7,265,899 95,369 $95,369 6,067,746 808,534 3,230,841 17,144,934 $6,576,779 $809,990 $3,330,021 $18,078,058 (In thousands) Allowance for credit losses: Beginning balance 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 For the year ended December 31, 2017 Puerto Rico - Covered loans Commercial Construction Mortgage Leasing Consumer Total $ $ $ $ $ $ – – – – – – – – – – $ $ $ $ $ $ – – – – – – – – – – $ $ $ $ $ 30,159 5,098 (4,049) 1,313 32,521 – 32,521 – $ $ $ $ $ 502,929 $ 502,929 $ – – – – – – – – – – $ $ $ $ $ 191 644 (122) 10 723 – 723 – $ $ $ $ $ 30,350 5,742 (4,171) 1,323 33,244 – 33,244 – 14,345 517,274 $ 14,345 $ 517,274 POPULAR, INC. 2017 ANNUAL REPORT 121 (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, 2017 U.S. Mainland Commercial Construction Mortgage Legacy Consumer Total $ $ $ $ 12,968 65,323 (36,399) 2,242 $ 8,172 (1,103) – 7 $ 4,614 167 (1,223) 983 $ 1,343 (2,275) (897) 2,627 $ 15,220 15,831 (19,926) 4,404 44,134 $ 7,076 $ 4,541 – $ – 44,134 $ 7,076 $ 2,478 $ 2,063 $ $ $ 798 $ 15,529 – $ 953 798 $ 14,576 $ $ $ $ 42,317 77,943 (58,445) 10,263 72,078 3,431 68,647 $ – 4,222,962 $4,222,962 $ – 784,660 $784,660 $ 9,242 684,386 $ – 32,980 $ 5,057 475,449 $ 14,299 6,200,437 $693,628 $32,980 $480,506 $6,214,736 (In thousands) Commercial Construction Mortgage Legacy Leasing Consumer Total For the year ended December 31, 2017 Popular, Inc. 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 $ $ $ $ $ 202,654 69,563 (85,990) 29,438 $ 9,525 (3,793) (3,588) 6,218 $ 178,093 95,970 (83,393) 5,473 $ 1,343 (2,275) (897) 2,627 $ 7,662 11,099 (8,407) 1,637 $ 141,374 154,860 (129,300) 23,533 215,665 $ 8,362 $ 196,143 36,982 $ – $ 48,832 178,683 $ 8,362 $ 147,311 323,455 $ – $ 518,275 $ $ $ $ 798 $ 11,991 $ 190,467 – $ 475 $ 22,802 798 $ 11,516 $ 167,665 – $ 1,456 $ 104,237 $ $ $ $ $ 540,651 325,424 (311,575) 68,926 623,426 109,091 514,335 947,423 loans 11,165,406 880,029 7,255,061 32,980 808,534 3,720,635 23,862,645 Total loans held-in-portfolio $11,488,861 $880,029 $7,773,336 $32,980 $809,990 $3,824,872 $24,810,068 (In thousands) Allowance for credit losses: Beginning balance Provision (reversal of provision) Charge-offs Recoveries Net recoveries (write-downs) 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 Total non-covered loans held-in-portfolio 6,863,795 $7,202,217 85,558 $85,558 5,419,012 701,076 3,154,641 16,224,082 $5,916,500 $702,893 $3,261,256 $17,168,424 122 POPULAR, INC. 2017 ANNUAL REPORT For the year ended December 31, 2016 Puerto Rico - Covered Loans Commercial Construction Mortgage Leasing Consumer Total (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 $– – – – $– $– $– $– – $– $– – – – $– $– $– $– – $– $ 33,967 (1,092) (3,524) 808 $ 30,159 $ – $ 30,159 $ – 556,570 $556,570 $– – – – $– $– $– $– – $– $ $ $ $ 209 (18) (19) 19 191 $ 34,176 (1,110) (3,543) 827 $ 30,350 – $ – 191 $ 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 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 $ 3,912 4,260 – – $ 8,172 $ 4,985 1,562 (2,506) 573 $ 2,687 (3,257) (535) 2,448 $ 11,520 12,954 (13,430) 4,176 $ 4,614 $ 1,343 $ 15,220 – $ – $ 2,182 $ – $ 672 12,968 $ 8,172 $ 2,432 $ 1,343 $ 14,548 $ $ $ $ 33,012 15,266 (17,586) 11,625 42,317 2,854 39,463 $ – 3,596,290 $3,596,290 $ – 690,742 $690,742 $ 8,876 770,985 $ – 45,293 $ 2,839 490,298 $ 11,715 5,593,608 $779,861 $45,293 $493,137 $5,605,323 For the year ended December 31, 2016 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 recoveries (write-downs) Ending balance Specific ALLL General ALLL Loans held-in-portfolio: Impaired loans Loans held-in-portfolio excluding impaired $ $ $ $ $ 196,833 18,894 (63,601) 46,159 4,369 $ 8,869 (2,279) (3,103) 5,124 914 $ 167,279 79,779 (74,105) 5,140 – $ 2,687 (3,257) (535) 2,448 – $ 10,993 557 (6,151) 2,263 – $ 150,450 76,322 (119,753) 34,193 162 202,654 $ 9,525 $ 178,093 $ 1,343 $ 7,662 $ 141,374 42,375 $ – $ 44,610 $ – $ 535 $ 23,857 160,279 $ 9,525 $ 133,483 $ 1,343 $ 7,127 $ 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 loans 10,460,085 776,300 6,746,567 45,293 701,076 3,661,247 22,390,568 Total loans held-in-portfolio $10,798,507 $776,300 $7,252,931 $45,293 $702,893 $3,770,701 $23,346,625 POPULAR, INC. 2017 ANNUAL REPORT 123 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 (charge-offs) recoveries Balance at end of period Impaired loans ASC 310-30 Westernbank loans For the years ended December 31, 2017 December 31, 2016 $ 68,877 13,496 (12,244) $ 70,129 $63,563 1,342 3,972 $68,877 The following tables present loans individually evaluated for impairment at December 31, 2017 and December 31, 2016. December 31, 2017 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 $ 206 $ 206 $ 32 $ – $ – $ 206 $ 206 $ 32 101,485 102,262 23,744 11,454 27,522 112,939 129,784 23,744 127,634 43,493 450,226 1,456 33,676 62,488 2,007 1,009 153,495 46,918 504,006 1,456 33,676 62,488 2,007 1,009 10,221 2,985 46,354 475 5,569 15,690 425 165 24,634 14,549 58,807 – 57,219 23,977 75,228 – – – – – – – – – 152,268 58,042 509,033 1,456 33,676 62,488 2,007 1,009 210,714 70,895 579,234 1,456 33,676 62,488 2,007 1,009 10,221 2,985 46,354 475 5,569 15,690 425 165 Total Puerto Rico $823,680 $907,523 $105,660 $109,444 $183,946 $933,124 $1,091,469 $105,660 December 31, 2017 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 Recorded investment Unpaid principal balance Impaired Loans - Total Unpaid principal balance Recorded investment Related allowance $ 6,774 $ 8,439 $2,478 $2,468 $3,397 $ 9,242 $11,836 $2,478 3,530 542 3,542 542 722 231 761 224 780 224 4,291 766 4,322 766 722 231 Total U.S. mainland $10,846 $12,523 $3,431 $3,453 $4,401 $14,299 $16,924 $3,431 124 POPULAR, INC. 2017 ANNUAL REPORT December 31, 2017 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 $ 206 $ 206 $ 32 $ – $ – $ 206 $ 206 $ 32 101,485 102,262 23,744 11,454 27,522 112,939 129,784 23,744 127,634 43,493 457,000 1,456 33,676 3,530 63,030 2,007 1,009 153,495 46,918 512,445 1,456 33,676 3,542 63,030 2,007 1,009 10,221 2,985 48,832 475 5,569 722 15,921 425 165 24,634 14,549 61,275 – – 761 224 – – 57,219 23,977 78,625 – – 780 224 – – 152,268 58,042 518,275 1,456 33,676 4,291 63,254 2,007 1,009 210,714 70,895 591,070 1,456 33,676 4,322 63,254 2,007 1,009 10,221 2,985 48,832 475 5,569 722 15,921 425 165 (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 Total Popular, Inc. $834,526 $920,046 $109,091 $112,897 $188,347 $947,423 $1,108,393 $109,091 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. 2017 ANNUAL REPORT 125 December 31, 2016 U.S. mainland Impaired Loans With No Allowance Impaired Loans - With an Allowance Unpaid principal balance $ 7,971 Recorded investment $ 6,381 Related allowance $ 2,182 Recorded investment $ 2,495 2,421 39 $ 8,841 2,429 39 $ 10,439 667 5 $ 2,854 300 79 $ 2,874 December 31, 2016 Popular, Inc. Unpaid principal balance $ 3,369 315 79 $ 3,763 Impaired Loans - Total Unpaid principal balance $ 11,340 Recorded investment $ 8,876 Related allowance $ 2,182 2,721 118 $ 11,715 2,744 118 14,202 667 5 $ 2,854 $ Impaired Loans - With an Allowance Unpaid principal balance 82 $ Recorded investment 82 $ Related allowance 34 $ Impaired Loans With No Allowance Recorded investment – $ Unpaid principal balance – $ Impaired Loans - Total Unpaid principal balance $ 82 Recorded investment 82 $ Related allowance 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 $826,707 169,013 49,301 474,220 1,817 37,464 2,429 66,082 2,117 991 $908,563 13,007 4,797 44,610 535 5,588 667 16,960 474 168 $111,377 31,962 7,828 73,246 – – 300 79 – – $129,350 50,094 11,478 91,175 – – 315 79 – – $182,772 163,596 54,690 506,364 1,817 37,464 2,721 66,161 2,117 991 $956,057 219,107 60,779 565,395 1,817 37,464 2,744 66,161 2,117 991 $1,091,335 13,007 4,797 44,610 535 5,588 667 16,960 474 168 $111,377 (In thousands) Mortgage Consumer: HELOCs Personal Total U.S. mainland (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 Total Popular, Inc. The following tables present the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2017 and 2016. For the year ended December 31, 2017 (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 Total Popular, Inc. 126 POPULAR, INC. 2017 ANNUAL REPORT Puerto Rico U.S. Mainland Popular, Inc. Average recorded investment 130 $ 117,182 156,890 60,466 504,709 1,642 36,109 – 64,467 2,065 915 $944,575 Interest income recognized Average recorded investment $ 4 4,745 4,939 1,899 12,661 – – – – – – $24,248 $ – – – – 9,006 – – 2,964 505 – – $12,475 Interest income recognized $ – – – – 200 – – – – – – $200 Average recorded investment 130 $ 117,182 156,890 60,466 513,715 1,642 36,109 2,964 64,972 2,065 915 $957,050 Interest income recognized $ 4 4,745 4,939 1,899 12,861 – – – – – – $24,448 (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 For the year ended December 31, 2016 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 Modifications Troubled debt related (“TDRs”) restructurings to non-covered loan portfolios amounted to $ 1.3 billion at December 31, 2017 (December 31, 2016 - $ 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, 2017 (December 31, 2016 - $8 million). At December 31, 2017, the mortgage loan TDRs include $449 million guaranteed by U.S. sponsored entities at BPPR, compared to $407 million at December 31, 2016. A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. For a summary of the accounting policy related to TDRs, refer to the summary of significant accounting policies included in Note 3 to these consolidated financial statements. 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, 2017 and December 31, 2016. Popular, Inc. Non-Covered Loans December 31, 2017 December 31, 2016 (In thousands) Accruing Non-Accruing Total Accruing Non-Accruing Total Commercial Mortgage Leases Consumer Total $ 161,220 803,278 863 93,916 $1,059,277 $ 59,626 126,798 393 12,233 $199,050 Related Allowance $ 32,472 48,832 475 22,802 $ 220,846 930,076 1,256 106,149 $ 176,887 744,926 1,383 100,277 $1,258,327 $104,581 $1,023,473 Popular, Inc. Covered Loans Related Allowance $ 40,810 44,610 535 23,857 $ 260,044 871,997 1,817 112,719 $1,246,577 $109,812 $ 83,157 127,071 434 12,442 $223,104 (In thousands) Mortgage Total December 31, 2017 December 31, 2016 Accruing Non-Accruing Total Allowance Accruing Non-Accruing Total Related Related Allowance $2,658 $2,658 $3,227 $3,227 $5,885 $5,885 $– $– $2,950 $2,950 $2,580 $2,580 $5,530 $5,530 $– $– POPULAR, INC. 2017 ANNUAL REPORT 127 The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2017 and 2016. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation. Popular, Inc. For the year ended December 31, 2017 Reduction in interest rate Extension of maturity date Combination of reduction in interest rate and extension of maturity date Other Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total 4 4 3 55 – 491 – 757 – 32 2 17 40 39 1 – 14 6 5 1 1,346 125 Popular, Inc. For the year ended December 31, 2016 – – – 348 9 5 8 2 4 – 376 – – – 125 – 537 1 3 1 1 668 Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial 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 – 842 128 POPULAR, INC. 2017 ANNUAL REPORT The following tables present by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2017 and 2016. Popular, Inc. For the year ended December 31, 2017 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total 6 21 43 567 10 1,033 23 768 10 34 2,515 $ 2,172 5,356 2,655 69,084 347 9,283 2,504 12,884 2,043 2,014 $ 2,032 5,346 4,786 64,552 347 10,196 2,421 12,911 1,999 2,014 $ 146 313 507 4,108 101 1,241 299 3,027 362 72 $108,342 $106,604 $10,176 Popular, Inc. For the year ended December 31, 2016 (Dollars in thousands) Loan count Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Increase (decrease) in the allowance for loan losses as a result of modification Commercial real estate non-owner occupied Commercial real estate owner occupied Commercial and industrial Mortgage Leasing Consumer: Credit cards 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 $ 5,109 894 242 6,822 8 2,042 296 3,548 54 17 $19,032 POPULAR, INC. 2017 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, 2017 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 Mortgage Leasing Consumer: Credit cards HELOCs Personal Auto Other Total Popular, Inc. Defaulted during the year ended December 31, 2017 Loan count Recorded investment as of first default date 3 4 5 110 4 369 1 139 5 1 641 $ 543 1,912 636 10,112 146 3,286 97 3,461 103 9 $20,305 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 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”. 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. 130 POPULAR, INC. 2017 ANNUAL REPORT Watch (Scale 9) - Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than average levels of supervision and attention from Loan Officers. requires average above risk, Special Mention (Scale 10) - Loans classified as special that deserve mention have potential weaknesses management’s close attention. left uncorrected, 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 obligor or of the collateral pledged, if any. Loans 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 annual comprehensive credit process reviews of all lending 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, determine the current risk, evaluate the 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, recommends corrective actions, that help in if necessary, 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. 2017 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, 2017 and 2016. December 31, 2017 Watch Special Mention Substandard Doubtful Loss Sub-total Pass/ Unrated Total $ 1,387 $ 1,708 $ 6,831 $ 327,811 335,011 307,579 $ – – – – $ 9,926 $ 136,473 $ 146,399 970,401 1,434,158 2,404,559 243,966 453,546 1,026,710 110 2,748 – – – 429 – – 429 $1,029,997 215,652 108,554 660,925 4,122 3,564 – – – 659 – – 659 $669,270 354,990 241,695 911,095 1,545 155,074 1,926 18,227 257 20,790 5,446 16,324 61,044 $1,130,684 2,124 471 2,595 – – – – – – – – – $2,595 – 126 126 – – 1,048 – – – 20 440 460 $ 1,634 816,732 804,392 2,601,451 5,777 161,386 2,974 18,227 257 21,878 5,466 16,764 62,592 $2,834,180 1,006,882 2,086,935 4,664,448 89,592 6,415,393 807,016 1,823,614 2,891,327 7,265,899 95,369 6,576,779 809,990 1,074,994 5,830 1,200,434 845,347 140,824 3,267,429 $15,243,878 1,093,221 6,087 1,222,312 850,813 157,588 3,330,021 $18,078,058 $ 11,808 $ 6,345 $ 7,936 $ 46,523 16,561 37,178 28,183 4,019 90,533 36,858 – 688 30,893 603 54,402 8,294 – 426 8,590 123,935 177,639 54,276 14,852 3,302 – – – – – $ 128,079 – – – – – $ 63,122 11 6,084 2,069 – 8,164 $ 258,233 $ 13,195 $ 8,053 $ 14,767 374,334 351,572 344,757 272,149 457,565 1,117,243 36,968 2,748 688 – – – 429 – – 429 $1,158,076 246,545 109,157 715,327 12,416 3,564 426 – – – 659 – – 659 $732,392 363,580 365,630 1,088,734 55,821 169,926 3,302 1,926 18,238 6,341 22,859 5,446 16,324 69,208 $1,388,917 – – – – – – – – – – – – – – – – $ $ 2,124 471 2,595 – – – – – – – – – – $2,595 $ – – – – – – – – $ 26,089 $ 1,184,604 $ 1,210,693 100,262 1,588,049 1,688,311 67,666 128,557 322,574 99,428 14,852 4,416 251,309 876,426 3,900,388 685,232 678,776 28,564 318,975 1,004,983 4,222,962 784,660 693,628 32,980 – 8,914 704 – 9,618 $ 9,618 11 14,998 2,773 – 17,782 $ 459,052 89 167,087 295,229 319 462,724 $ 5,755,684 100 182,085 298,002 319 480,506 $ 6,214,736 $ – – – 126 126 – – – 1,048 – 8,914 704 20 440 10,078 $11,252 $ 36,015 $ 1,321,077 $ 1,357,092 1,070,663 3,022,207 4,092,870 884,398 932,949 2,924,025 105,205 176,238 4,416 2,974 18,238 15,255 24,651 5,466 16,764 80,374 $3,293,232 1,258,191 2,963,361 8,564,836 774,824 7,094,169 28,564 807,016 1,075,083 172,917 1,495,663 845,347 141,143 3,730,153 $20,999,562 2,142,589 3,896,310 11,488,861 880,029 7,270,407 32,980 809,990 1,093,321 188,172 1,520,314 850,813 157,907 3,810,527 $24,292,794 (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 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. 2017 ANNUAL REPORT The following table presents the weighted average obligor risk rating at December 31, 2017 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 11.16 11.06 11.28 11.16 11.17 11.00 Substandard 11.00 11.04 11.10 11.82 11.59 11.00 11.11 5.89 6.99 7.14 7.11 7.06 7.76 Pass 7.28 6.74 7.14 6.17 6.80 7.70 7.93 POPULAR, INC. 2017 ANNUAL REPORT 133 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 – 3,448 493,137 $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. 134 POPULAR, INC. 2017 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 (Scales 11 and 12) Substandard 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 (Scales 1 through 8) Pass 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 [1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction. Note 11 - 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 Credit impairment losses to be covered under loss sharing agreements Reimbursable expenses Net payments from FDIC under loss sharing agreements Arbitration decision charge Other adjustments attributable to FDIC loss sharing agreements Balance at end of period Balance due to the FDIC for recoveries on covered assets[1] Balance at end of period Years ended December 31, 2017 $ 69,334 (469) 3,136 2,454 (22,589) – (5,550) $ 46,316 (1,124) $ 45,192 2016 $ 310,221 (10,201) (239) 8,433 (102,596) (136,197) (87) $ 69,334 (27,578) $ 41,756 2015 $ 542,454 (66,238) 15,658 73,205 (247,976) – (6,882) $ 310,221 (5,570) $ 304,651 [1] Balance due to the FDIC for recoveries on covered assets for the years ended December 31, 2016 and 2015 amounting to $27.6 million and $5.6 million, respectively, was included in other liabilities in the accompanying Consolidated Statement of Condition. (including construction) and consumer The loss-share component of the arrangements applicable to loans commercial expired during the quarter ended June 30, 2015. The agreement provides for reimbursement of recoveries 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 the quarter ended June 30, 2020. 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, 2017 is 7.2 years. 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 POPULAR, INC. 2017 ANNUAL REPORT 135 disposition of all covered assets under the loss-share agreements, in the event losses on the loss-share agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss-sharing agreements during which the loss-sharing provisions of the applicable loss-sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared- loss loans and shared-loss assets at the beginning and end of such period times 1%). Of shared-loss payments, the four components used to estimate the true-up payment obligation (intrinsic loss estimate, asset discount, cumulative and period servicing 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. The following table provides the fair value and the undiscounted amount of the true-up payment obligation at December 31, 2017 and 2016. (In thousands) December 31, 2017 December 31, 2016 Carrying amount (fair value) Undiscounted amount $164,858 $188,958 $153,158 $188,258 The increase in the fair value of the true-up payment obligation was principally driven by a decrease in the discount 136 POPULAR, INC. 2017 ANNUAL REPORT rate from 5.97% in 2016 to 5.47% in 2017 due to a lower risk premium. 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 provisions 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 • 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, • exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge- offs with respect to the covered assets; • use reasonable commercially to maximize recoveries with respect to losses on single family shared- loss assets and best efforts to maximize collections with respect to commercial shared-loss assets; efforts • retain sufficient staff to perform the duties under the loss- share agreements; • adopt and implement accounting, reporting, systems with respect record- to the keeping and similar commercial shared-loss assets; • comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan; • provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets; • file monthly and quarterly certificates with the FDIC and amount of charge-offs losses, the specifying recoveries; and • maintain books and records sufficient to ensure and document compliance with the terms of the loss-share agreements. Note 12 - Mortgage banking activities Income from mortgage banking activities includes mortgage earned in connection with administering servicing fees 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 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: Unrealized gains (losses) on outstanding derivative positions Realized losses on closed derivative positions Total trading account loss Total mortgage banking activities Years ended December 31, 2015 2016 2017 $ 48,300 (36,519) $ 58,208 (25,336) $59,461 (7,904) 11,781 17,088 32,872 26,976 51,557 35,336 184 (3,557) (3,373) (1) (3,309) 17 (5,108) (3,310) (5,091) $ 25,496 $ 56,538 $81,802 Note 13 - 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 26 to the and servicing rights. As securities seller, a result of incurred as No liabilities were these securitizations during the years ended December 31, 2017 and 2016 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $15.2 million and $24.6 million, respectively, during the years ended December 31, 2017 and 2016 related to the residential mortgage loan securitized. 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, 2017 and 2016: (In thousands) Assets Investments securities available for sale: 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 Proceeds obtained during the year ended December 31, 2017 Level 1 Level 2 Level 3 Initial fair value $– $– $– – $– $– $– $ 16,049 $ 16,049 $376,186 69,798 $445,984 $ – $462,033 $ $ $ $ – – – – – $6,898 $6,898 $ 16,049 $ 16,049 $376,186 69,798 $445,984 $ 6,898 $468,931 POPULAR, INC. 2017 ANNUAL REPORT 137 (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 During the year ended December 31, 2017, the Corporation retained servicing rights on whole loan sales involving approximately $49 million in principal balance outstanding (2016 - $70 million), with net realized gains of approximately $1.7 million (2016 - $2.3 million). All loan sales performed during the years ended December 31, 2017 and 2016 were without credit recourse agreements. The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value. The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. among other and late fees, 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 The following table presents the changes in MSRs measured using the fair value method for the years ended December 31, 2017 and 2016. (In thousands) 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 Residential MSRs December 31, 2017 December 31, 2016 $196,889 7,661 (15,308) (2,225) $211,405 10,835 (17,482) (3,109) (18,986) – (4,745) (15) $ 168,031 $ 196,889 [1] Represents the change due to collection / realization of expected cash flow over time. loans Residential mortgage serviced for others were $16.1 billion at December 31, 2017 (2016 - $18.0 billion), which in part was impacted by a reduction of $840 million in mortgage loans at BPPR due to the rebooking of loans previously pooled into GNMA securities. 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. These servicing fees are credited to income when they are those weighted average collected. At December 31, 2017, 138 POPULAR, INC. 2017 ANNUAL REPORT mortgage servicing fees were 0.28% (2016 – 0.30%). 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, 2017 and 2016 were as follows: Years ended December 31, 2017 December 31, 2016 Prepayment speed Weighted average life (in years) Discount rate (annual rate) 4.5% 10.8 11.0% 5.2% 10.2 11.0% Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and 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, 2017, the Corporation serviced $1.5 billion (2016 - $1.7 billion) in residential mortgage loans with credit recourse to the Corporation. Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time loans meet GNMA’s specified delinquency that 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, 2017, the Corporation had recorded $840 million in mortgage loans on its consolidated statements of financial condition related to this individual Originated MSRs Purchased MSRs December 31, December 31, December 31, December 31, 2017 $73,951 7.3 5.1% $ (1,503) $ (2,976) 11.5% $ (3,091) $ (5,971) 2016 $88,056 7.8 4.6% $ (1,668) $ (3,590) 11.5% $ (3,851) $ (7,699) 2017 $94,080 6.5 5.7% $ (2,070) $ (3,999) 11.0% $ (3,785) $ (7,235) 2016 $108,833 6.9 4.8% $ (2,051) $ (4,400) 11.0% $ (4,369) $ (8,778) buy-back option program (2016 - $49 million). While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium. 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 December 31, 2017, the Corporation repurchased approximately $160 million of mortgage loans under the GNMA buy-back option program (2016 - $224 million). The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these loans, mostly related to principal and severely delinquent interest advances. Furthermore, due to their guaranteed nature, the 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. Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation, including its own loan portfolio, ended December 31, 2017 and 2016, 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 POPULAR, INC. 2017 ANNUAL REPORT 139 (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 2017 Total principal amount of loans, net of unearned Principal amount 60 days or more past due Net credit losses (recoveries) $11,488,861 880,029 32,980 809,990 8,891,107 3,810,527 517,274 1,488,305 132,395 $24,810,068 $ 305,281 170 3,456 4,464 2,193,772 101,666 65,606 497,304 872 $2,176,239 $ 56,552 (2,630) (1,730) 6,770 76,235 105,655 2,848 1,051 – $242,649 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 Note 14 - 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 2017 2016 10-50 2-10 3-10 $120,519 $120,519 523,438 319,394 77,915 920,747 524,901 516,758 309,294 76,637 902,689 514,892 395,846 387,797 30,777 35,665 $547,142 $543,981 Depreciation and amortization of premises and equipment for the year 2017 was $48.4 million (2016 - $46.9 million; 2015 - $47.5 million), of which $23.7 million (2016 - $22.6 million; 2015 - $22.9 million) was charged to occupancy expense and $24.7 million (2016 - $24.3 million; 2015 - $24.6 million) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $26.6 million (2016 - $27.8 million; 2015 - $28.1 million). 140 POPULAR, INC. 2017 ANNUAL REPORT (In thousands) Balance at beginning of period Write-downs in value [1] Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Ending balance (In thousands) Balance at beginning of period Write-downs in value Additions Sales Other adjustments Transfer to non-covered status [1] Ending balance Note 15 - Other real estate owned The following tables present the activity related to Other Real Estate Owned (“OREO”), for the years ended December 31, 2017, 2016 and 2015. During the second quarter of 2015, the Corporation completed a bulk sale of $37 million of covered OREOs. [1] Includes $2.7 million related to the damages from Hurricane Maria, of which $1.3 million were for commercial and $1.4 million for residential. For the year ended December 31, 2017 Non-covered OREO Commercial/Construction Non-covered OREO Mortgage Covered OREO Mortgage $20,401 (5,011) 8,918 (2,765) (132) $21,411 $ 32,471 (2,909) 7,372 (15,894) (639) $ 20,401 $160,044 (16,876) 70,763 (68,145) 2,063 $ 32,128 (3,311) 9,912 (16,273) (2,861) Total $212,573 (25,198) 89,593 (87,183) (930) $147,849 $ 19,595 $188,855 $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 For the year ended December 31, 2016 Non-covered OREO Commercial/Construction Non-covered OREO Mortgage Covered OREO Mortgage 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. 2017 ANNUAL REPORT 141 Note 16 - Other assets The caption of other assets in the consolidated statements of financial condition consists of the following major categories: (In thousands) 2017 2016 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 Receivables from investments maturities Principal, interest and escrow servicing advances Guaranteed mortgage loan claims receivable Others Total other assets $1,035,110 215,349 168,852 84,771 16,539 $1,243,668 218,062 172,550 90,320 14,085 7,514 70,000 46,630 – 107,299 69,711 163,819 122,070 152,403 138,081 $1,991,323 $2,145,510 Note 17 - Investments in equity investees During the year ended December 31, 2017, the Corporation recorded earnings of $34.1 million, from its equity investments, compared to $31.3 million for the year ended December 31, 2016. The carrying value of the Corporation’s equity method investments was $215 million and $ 218 million at December 31, 2017 and 2016, respectively. following table presents information of aggregated summarized the Corporation’s equity method The financial investees: Years ended December 31, (In thousands) Operating results: Total revenues Total expenses Income tax expense Net income At December 31, (In thousands) Balance Sheet: Total assets Total liabilities 2017 2016 2015 $931,627 663,069 42,799 $852,160 634,173 47,434 $643,632 414,975 33,920 $225,759 $170,553 $194,737 2017 2016 $8,439,622 $6,009,911 $7,640,819 $5,778,619 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 18 - Goodwill and other intangible assets There were no changes in the carrying amount of goodwill for the year ended December 31, 2017. The changes in the carrying amount of goodwill for the year ended December 31, 2016, allocated by reportable segments, were as follows (refer to Note 41 for the definition of the Corporation’s reportable segments): (In thousands) Banco Popular de Puerto Rico Banco Popular North America Total Popular, Inc. 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 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. At December 31, 2017 and 2016, the Corporation had $ 6.1 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark. 142 POPULAR, INC. 2017 ANNUAL REPORT The following table reflects the components of other intangible assets subject to amortization: (In thousands) December 31, 2017 Core deposits Other customer relationships Total other intangible assets December 31, 2016 Core deposits Other customer relationships Total other intangible assets During the year ended December 31, 2016, core deposit intangibles with a gross amount of $26.3 million became fully amortized. During the year ended December 31, 2017, the Corporation recognized $ 9.4 million in amortization expense related to other intangible assets with definite useful lives (2016 - $ 12.1 million; 2015 - $11.0 million). The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods: (In thousands) Year 2018 Year 2019 Year 2020 Year 2021 Year 2022 Later years $9,286 9,042 4,967 2,157 1,281 2,776 Results of the Annual Goodwill Impairment Test The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. goodwill accounting impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying is considered not amount, goodwill of 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 for which the first step goodwill for each reporting unit the reporting unit standards, applicable Under Gross Carrying Amount $37,224 35,683 $72,907 $37,274 36,449 $73,723 Accumulated Amortization $22,347 21,051 $43,398 $18,624 16,162 $34,786 Net Carrying Value $14,877 14,632 $29,509 $18,650 20,287 $38,937 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 2017 using July 31, 2017 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 POPULAR, INC. 2017 ANNUAL REPORT 143 as well 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 Corporation generally uses combination of methods, a including market price multiples of comparable companies and transactions, as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: • a selection of comparable publicly traded companies, based on nature of business, location and size; • a selection of comparable acquisition and capital raising transactions; • the discount rate applied to future earnings, based on an estimate of the cost of equity; • the potential future earnings of the reporting unit; and • the market growth and new business assumptions. For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no is made to the comparable control premium adjustment companies market multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment. For purposes of the discounted cash flows financial projections presented to (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) the / Liability Management Committee Corporation’s Asset included in these (“ALCO”). The growth assumptions 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 144 POPULAR, INC. 2017 ANNUAL REPORT Ibbotson Build-Up Method and ranged from 11.58% to 14.49% for the 2017 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. BPPR passed Step 1 in the annual test as of July 31, 2017. The results indicated that the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPPR’s equity value by approximately $871 million or 26%. Accordingly, there was no indication of impairment on the goodwill recorded in BPPR at July 31, 2017 and there was no need for a Step 2 analysis. As indicated in Note 2, during the month of September Hurricanes Irma and Maria made landfall and subsequently caused extensive destruction in the U.S. and British Virgin Islands and Puerto Rico, disrupting the markets in which BPPR does business. The hurricanes have and may continue to impact the Corporation’s financial results, as detailed in Note 2, which may have an effect on BPPR’s estimated fair value. However, given the excess of BPPR’s fair the Corporation has value over determined, based on the information currently available, that impairment of goodwill. The there is no indication of Corporation will continue monitoring the impact of the hurricanes as new information becomes available. amount, carrying its BPNA passed Step 1 in the annual test as of July 31, 2017. The results indicated that the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPNA’s equity value by approximately $183 million or 11%. Accordingly, there was no indication of impairment on the goodwill recorded in BPNA at July 31, 2017 and there was no need for a Step 2 analysis. 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, 2017 valuation date. the as part of Furthermore, analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of Popular, the fair value results determined for the reporting units in the July 31, 2017 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, 2017 Balance at January 1, 2017 (gross amounts) $280,221 515,285 $795,506 Accumulated impairment losses $ 3,801 164,411 $168,212 Balance at January 1, 2017 (net amounts) Balance at December 31, 2017 (gross amounts) $276,420 350,874 $627,294 $280,221 515,285 $795,506 Accumulated impairment losses $ 3,801 164,411 $168,212 Balance at December 31, 2017 (net amounts) $276,420 350,874 $627,294 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 Note 19 - Deposits Total interest bearing deposits as of the end of the periods presented consisted of: At December 31, 2017, the Corporation had brokered deposits amounting to $ 0.5 billion (December 31, 2016 - $ 0.6 billion). The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $4 million at December 31, 2017 (December 31, 2016 - $6 million). Note 20 - Borrowings The following table presents the balances of assets sold under at December 31, 2017 and agreements December 31, 2016. to repurchase December 31, 2017 December 31, 2016 $ 8,561,718 $ 7,793,533 10,885,967 8,012,706 19,447,685 15,806,239 (In thousands) December 31, 2017 December 31, 2016 Assets sold under agreements to 3,446,575 4,068,303 7,514,878 3,570,956 4,138,586 7,709,542 repurchase $390,921 $479,425 Total assets sold under agreements to repurchase $390,921 $479,425 (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 Total interest bearing deposits $26,962,563 $23,515,781 A summary of December 31, 2017 follows: certificates of deposit by maturity at (In thousands) 2018 2019 2020 2021 2022 2023 and thereafter Total certificates of deposit $3,941,152 1,150,663 1,083,152 710,484 581,771 47,656 $7,514,878 POPULAR, INC. 2017 ANNUAL REPORT 145 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 30 to 90 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 Total collateralized mortgage obligations Total December 31, 2017 December 31, 2016 Repurchase liability Repurchase liability weighted average interest rate Repurchase liability Repurchase liability weighted average interest rate $148,516 87,357 43,500 279,373 30,656 19,463 15,937 66,056 31,383 – – 31,383 14,109 14,109 $390,921 1.70% 1.70 2.00 1.75 1.77 1.48 1.60 1.64 1.51 – – 1.51 0.28 0.28 1.66% $ 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% 146 POPULAR, INC. 2017 ANNUAL REPORT Repurchase agreements in this portfolio are generally short- term, often overnight. 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 Assets sold under agreements to repurchase: (Dollars in thousands) 2017 2016 Maximum aggregate balance outstanding at any month-end $471,083 $954,253 Average monthly aggregate balance outstanding Weighted average interest rate: For the year At December 31 $399,422 $757,230 1.22% 1.50% 1.01% 1.12% The following table presents information related to the Corporation’s other short-term borrowings for the periods ended December 31, 2017 and December 31, 2016. Other short-term borrowings: (Dollars in thousands) 2017 2016 Advances with the FHLB paying interest at maturity raging from 1.43% to 1.66% Others $ 95,000 $ – 1,208 1,200 Balance outstanding at the end of the period $ 96,208 $ 1,200 Maximum aggregate balance outstanding at any month-end $240,598 $31,200 Average monthly aggregate balance outstanding Weighted average interest rate: For the year At December 31 $ 52,784 $ 6,266 1.61% 1.55% 2.15% 9.00% The following table presents the composition of notes payable at December 31, 2017 and December 31, 2016. (In thousands) Advances with the FHLB with maturities ranging from 2018 through 2029 paying interest at monthly fixed rates ranging from 0.84% to 4.19 % (2016 -0.81% to 4.19%) Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest monthly at a floating rate ranging from 0.22% to 0.34% over the 1 month LIBOR (2016 - 0.22% to 0.34%) Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest quarterly at a floating rate from 0.09% to 0.24% over the 3 month LIBOR (2016 - (0.01)% to 0.24%) Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $3,127 (2016 - $5,212) 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 $449 (2016 - $476) Others December 31, 2017 December 31, 2016 $ 572,307 $ 608,193 34,164 34,164 25,019 30,313 446,873 444,788 439,351 18,642 439,323 18,071 Total notes payable $1,536,356 $1,574,852 POPULAR, INC. 2017 ANNUAL REPORT 147 A breakdown of borrowings by contractual maturities at December 31, 2017 is included in the table below. Assets sold under agreements to repurchase Short-term borrowings Notes payable $390,921 – – – – – – $390,921 $96,200 – – – – – 8 $96,208 $ 255,088 609,015 112,144 21,840 5,143 533,126 – Total $ 742,209 609,015 112,144 21,840 5,143 533,126 8 $1,536,356 $2,023,485 collateralized with loans held-in-portfolio, and do not have restrictive covenants or callable features. Also, at December 31, 2017, the Corporation has a borrowing facility at the Federal Reserve Bank of New York amounting to $1.1 billion (2016 - $1.2 billion), which remained unused at December 31, 2017 and 2016. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions. the discount window of (In thousands) 2018 2019 2020 2021 2022 Later years No stated maturity Total borrowings At December 31, 2017 and 2016, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.9 billion and $3.8 billion, respectively, of which $726 million and $673 million, respectively, were used. In addition, at December 31, 2017 and 2016, the Corporation had placed $260 million and $200 million, respectively, of the available FHLB credit facility as collateral for a municipal letter of credit to secure deposits. The FHLB borrowing facilities are 148 POPULAR, INC. 2017 ANNUAL REPORT Note 21 - 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, 2017 and December 31, 2016. Gross Amounts Not Offset in the Statement of Financial Position As of December 31, 2017 Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets Presented in the Statement of Financial Position (In thousands) Derivatives Total Gross Amount of Recognized Assets $16,719 $16,719 $– $– $16,719 $16,719 $121 $121 $– $– $– $– Financial Instruments Securities Collateral Received Cash Collateral Received Net Amount $16,598 $16,598 As of December 31, 2017 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 $– – $– $ 14,431 390,921 $405,352 Gross Amount of Recognized Liabilities $ 14,431 390,921 $405,352 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 Gross Amount of Recognized Assets $ 14,094 23,637 $ 37,731 Financial Instruments $121 – $121 Securities Collateral Pledged $ 8 390,921 $390,929 Cash Collateral Pledged $– – $– Net Amount $14,302 – $14,302 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 (In thousands) Derivatives Repurchase agreements Total (In thousands) Derivatives Reverse repurchase agreements Total POPULAR, INC. 2017 ANNUAL REPORT 149 As of December 31, 2016 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 $– – $– $ 12,842 479,425 $492,267 Gross Amount of Recognized Liabilities $ 12,842 479,425 $492,267 Financial Instruments $551 – $551 Securities Collateral Pledged $ 747 479,425 $480,172 Cash Collateral Pledged Net Amount $– – $– $11,544 – $11,544 (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 22 - Trust preferred securities At December 31, 2017 and 2016, 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, 2017 and 2016. BanPonce Trust I Popular Capital Trust I Popular North America Capital Trust I Popular Capital Trust Il $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] 150 POPULAR, INC. 2017 ANNUAL REPORT At December 31, 2017 and 2016, the Corporation had $427 million in trust preferred securities outstanding which do not qualify for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment. Note 23 – 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, 2017 and 2016 consisted of: • 6.375% non-cumulative monthly income preferred stock, 2003 Series A, no par value, liquidation preference value of $25 per share. Holders on record of the 2003 Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 6.375% of their liquidation preference value, or $0.1328125 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the option of the Corporation with the consent of the Board of Governors of the Federal Reserve System. The redemption price per share is $25.00. The shares of 2003 Series A Preferred Stock have no voting rights, except for certain rights in instances when the Corporation does not pay dividends for a defined period. These shares are not subject to any sinking fund requirement. Cash dividends declared and paid on the 2003 Series A Preferred Stock amounted to $ 1.4 million for the year ended December 31, 2017, 2016 and 2015. Outstanding shares of 2003 Series A Preferred Stock amounted to 885,726 at December 31, 2017, 2016 and 2015. • 8.25% non-cumulative monthly income preferred stock, 2008 Series B, no par value, liquidation preference value of $25 per share. The shares of 2008 Series B Preferred Stock were issued in May 2008. Holders of record of the 2008 Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof, out of funds legally available, non-cumulative cash dividends at the annual rate per share of 8.25% of their liquidation preferences, or $0.171875 per share per month. These shares of preferred stock are perpetual, nonconvertible, have no preferential rights to purchase any securities of the Corporation and are redeemable solely at the option of the Board of the Corporation with the consent of Governors of the Federal Reserve System beginning on May 28, 2013. The redemption price per share is $25.00. Cash dividends declared and paid on the 2008 Series B Preferred Stock amounted to $ 2.3 million for the year ended December 31, 2017, 2016 and 2015. Outstanding shares of 2008 Series B Preferred Stock amounted to 1,120,665 at December 31, 2017, 2016 and 2015. The Corporation’s common stock trades on the NASDAQ Stock Market LLC (the “NASDAQ”) under the symbol BPOP. The 2003 Series A and 2008 Series B Preferred Stock is not listed on NASDAQ. The Corporation’s common stock ranks junior to all series of preferred stock as to dividend rights and / or as to rights on liquidation, dissolution or winding up of the Corporation. Dividends on each series of preferred stocks are payable if declared. The Corporation’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the Corporation fails to pay or set aside full dividends on the preferred stock for the latest dividend period. The ability of the Corporation to pay dividends in the future is limited by regulatory requirements, 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. On the Corporation’s Board of Directors January 23, 2017, approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. During the year 2017, cash dividends of $ 1.00 (2016 - $ 0.60; 2015 - $0.30) per common share outstanding amounting to $ 102.1 million (2016 - $62.2 million; 2015 - $31.1 million) of which $ 25.5 million were payable to shareholders of common stock at December 31, 2017 (2016 - $15.6 million; 2015 - $15.5 million). The quarterly dividend declared to shareholders of record as of the close of business on December 5, 2017, which amounted to $25.5 million, was paid on January 2, 2018. During the first quarter of 2017, the Corporation completed a $75 million privately negotiated accelerated share repurchase the transaction, transaction (“ASR”). As part of Corporation received 1,847,372 and recognized $79.5 million in treasury stock, based on the stock’s spot price, offset by a $4.5 million adjustment to capital surplus, resulting from the decline in the Corporation’s stock price during the term of the ASR. this shares 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 POPULAR, INC. 2017 ANNUAL REPORT 151 Capital adequacy minimum requirement (including conservation capital buffer) Actual (Dollars in thousands) Amount Ratio Amount Ratio 2017 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 $4,985,265 19.22% $2,399,052 1,778,498 3,793,268 19.73 587,809 1,083,171 17.05 9.250% 9.250 9.250 $4,226,519 16.30% $1,491,303 1,105,553 3,546,121 18.44 365,395 1,010,232 15.90 5.750% 5.750 5.750 $4,226,519 16.30% $1,880,338 1,393,958 3,546,121 18.44 460,715 1,010,232 15.90 7.250% 7.250 7.250 $4,226,519 10.02% $1,687,432 1,328,818 3,546,121 10.67 345,681 1,010,232 11.69 4% 4 4 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 $4,121,208 16.48% $1,656,338 1,247,979 3,436,615 18.24 384,883 997,094 17.16 $4,121,208 10.91% $1,511,403 1,191,783 3,436,615 11.53 306,375 997,094 13.02 5.125% 5.125 5.125 6.625% 6.625 6.625 4% 4 4 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 $ 540 million at December 31, 2017 (2016 - $ 513 million; 2015 - $ 495 million). During 2017, $ 27 million was transferred to the statutory reserve account (2016 - $ 18 million, 2015 - $ 26 million). BPPR was in compliance with the statutory reserve requirement in 2017, 2016 and 2015. Failure agencies. Note 24 - Regulatory capital requirements The Corporation and its banking subsidiaries are subject to various regulatory capital requirements imposed by the federal banking to meet minimum capital requirements can lead to certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. On January 1, 2015, the Corporation, capital BPPR and BPNA became 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, 2017 and 2016, the Corporation exceeded all capital adequacy requirements to which it is subject. At December 31, 2017 and 2016, 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, 2017 and 2016 under the Basel III regulatory guidance. 152 POPULAR, INC. 2017 ANNUAL REPORT The final Basel III capital rules require the phase out of trust non-qualifying Tier 1 capital preferred securities. At December 31, 2017 the Corporation had $427 million in trust preferred securities outstanding which does not qualify for Tier 1 capital instead qualified for Tier 2 capital treatment. treatment, but instruments such as The Basel III final rules also introduced 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 2017 2016 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 $1,922,700 635,469 10% $1,883,741 580,956 10 10% 10 $1,249,755 413,055 6.5% $1,224,432 377,621 6.5 6.5% 6.5 $1,538,160 508,375 8% $1,506,993 464,765 8 $1,661,023 432,102 5% $1,489,729 382,968 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 2017 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 5.750% 7.250 9.250 N/A 2018 6.375% 7.875 9.875 N/A 2019 2020 7.000% 8.500 10.500 N/A 7.000% 8.500 10.500 N/A Minimum Capital Plus Capital Conservation Buffer POPULAR, INC. 2017 ANNUAL REPORT 153 Note 25 - Other comprehensive loss The following table presents changes in accumulated other comprehensive loss by component for the years ended December 31, 2017, 2016 and 2015. Changes in Accumulated Other Comprehensive Loss by Component [1] (In thousands) Foreign currency translation Beginning Balance 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 losses on investments Beginning Balance Other comprehensive loss 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 accumulated other comprehensive loss Net change Ending balance Total [1] All amounts presented are net of tax. Years ended December 31, 2015 2016 2017 $ (39,956) $ (35,930) $ (32,832) (3,078) (3,078) (4,026) (4,026) (3,098) (3,098) $ (43,034) $ (39,956) $ (35,930) $(211,610) $(211,276) $(205,187) (5,164) (11,402) (16,032) 13,684 13,386 12,261 (2,318) (2,318) 6,202 (334) (2,318) (6,089) $(205,408) $(211,610) $(211,276) $ (68,318) $ (9,560) $ 8,465 (40,325) (58,585) (29,871) 6,740 167 11,959 (267) (340) (113) (33,852) (58,758) (18,025) $(102,170) $ (68,318) $ (9,560) $ (402) $ (120) $ (318) (790) (2,203) (2,669) 1,152 362 1,921 (282) 2,867 198 $ (40) $ (402) $ (120) $(350,652) $(320,286) $(256,886) 154 POPULAR, INC. 2017 ANNUAL REPORT The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2017, 2016, and 2015. (In thousands) Adjustment of pension and postretirement benefit plans Amortization of net losses Amortization of prior service credit Unrealized holding losses on investments Realized gain 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, 2015 2016 2017 Personnel costs Personnel costs Total before tax Income tax benefit Total net of tax 3,800 (18,628) 7,262 $(22,428) $(21,948) $(20,100) 3,800 3,800 (18,148) (16,300) 6,357 7,080 $(11,366) $(11,068) $ (9,943) Net gain 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 $ 334 $ 379 $ 141 (8,299) (7,965) 1,492 $ (6,473) $ (209) 170 3 173 (14,445) (14,304) 2,458 $(11,846) Mortgage banking activities Total before tax Income tax benefit Total net of tax Total reclassification adjustments, net of tax (1,888) 736 $ (1,888) $ (3,149) $ (4,702) (4,702) (3,149) 1,835 1,228 $ (1,152) $ (1,921) $ (2,867) $(18,991) $(12,816) $(24,656) Note 26 - Guarantees The Corporation has obligations upon the occurrence of certain events under guarantees provided in certain contractual agreements as summarized below. financial If institutions, The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by other financial in each case to guarantee the the performance of various customers to third parties. 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, 2017, the Corporation recorded a liability of $0.3 million (December 31, 2016 - $0.3 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. In accordance with the provisions of ASC Topic 460, the Corporation recognizes at fair value the obligation at inception of the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contracts amount in standby letters of credit outstanding at December 31, 2017 and 2016, shown in Note 27, represent the maximum potential future payments that the Corporation could be amount of required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customers as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash, marketable securities, real estate, receivables, and others. Management does not anticipate any material losses related to these instruments. Also, 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 the credit recourse since 2009. Also, Corporation may sell, in bulk sale transactions, residential 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 POPULAR, INC. 2017 ANNUAL REPORT 155 the recourse arrangements At December 31, 2017, the Corporation serviced $1.5 billion (December 31, 2016 - $1.7 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2017, the Corporation repurchased approximately $ 29 million of unpaid to the credit principal balance in mortgage loans subject recourse provisions (2016—$ 44 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, 2017, the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 59 million (December 31, 2016—$ 54 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, 2017 and 2016. the Corporation’s liability established to cover (In thousands) Balance as of beginning of period Provision for recourse liability Net charge-offs Balance as of end of period Years ended December 31, 2016 2017 $ 54,489 20,446 (16,115) $ 58,663 14,548 (18,722) $ 58,820 $ 54,489 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. relevant in the sold” 156 POPULAR, INC. 2017 ANNUAL REPORT severity. The probability of default 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. 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 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 $0.1 million in repurchases under BPPR’s representation and warranty ended December 31, 2017 and no repurchases during the year ended these loans December 31, 2016. A substantial amount of reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. in the Corporation’s liability for estimated losses associated with the indemnifications and representations and warranties related to loans sold by BPPR during the years ended December 31, 2017 and 2016. arrangements following presents changes during table year The the the (In thousands) Balance as of beginning of period Provision for representation and warranties Net charge-offs Balance as of end of period 2017 2016 $10,936 874 (68) $ 8,087 3,140 (291) $11,742 $10,936 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, 2017, the Corporation serviced $16.1 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2016 - $18.0 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation in the meantime, proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At December 31, 2017, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $107 million (December 31, 2016 - $70 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows: (In thousands) December 31, 2017 December 31, 2016 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 $4,303,256 $4,562,981 3,011,673 2,966,656 250,029 2,116 33,633 261,856 1,490 34,644 15,297 25,622 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, 2017 and December 31, 2016. In addition, at December 31, 2017 and December 31, 2016, PIHC fully and unconditionally guaranteed on a subordinated basis $ 427 million, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 22 to the consolidated financial statements for further information on the trust preferred securities. the financial needs of Note 27 - 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 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. the At December 31, 2017 and December 31, 2016, Corporation maintained a reserve of approximately $10 million and $9 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit. the and, residential Business concentration Since the Corporation’s business activities are concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto and in particular, Rico economy 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 41 to the Consolidated Financial Statements. Puerto Rico is in the midst of a profound fiscal and economic crisis, was recently significantly impacted by two major hurricanes, and has commenced several proceedings under the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) to restructure its outstanding obligations and those of certain of its instrumentalities. In September 2017, Puerto Rico was impacted by Hurricanes Irma and Maria. Most relevant, Hurricane Maria made landfall on September 20, 2017, causing severe wind and flood damage to infrastructure, homes and businesses throughout Puerto Rico. Following the passage of Hurricane Maria, all Puerto Rico was left without electrical power, other basic utility and infrastructure curtailed and the government imposed a mandatory curfew. As of the date of this report, a number of businesses and homes remained without power and some businesses are operating partially or remain services were severely POPULAR, INC. 2017 ANNUAL REPORT 157 by March 30, 2018. Both the certified fiscal plans and the most recent public versions of the proposed fiscal plans indicate that the applicable government entities are unable to pay their outstanding thus recognizing a need for a significant debt restructuring and/or write downs. obligations scheduled, currently as On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court for the District of Puerto Rico to restructure the Commonwealth’s liabilities under Title III of PROMESA. The Oversight Board has subsequently filed analogous petitions with respect to COFINA, the Employees Retirement System, the Puerto Rico Highways and Transportation Authority and the Puerto Rico Electric Power Authority. The Oversight Board has also authorized GDB to pursue a restructuring of its financial indebtedness under Title VI of PROMESA. Although as of the date hereof, these entities are the only entities for which the Oversight Board has sought restructuring authority provided by PROMESA, the Oversight Board may use the restructuring authority of Title III or Title VI of PROMESA for other Commonwealth instrumentalities, including its municipalities, in the future. to use the this At December 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 484 million, which is fully outstanding at year-end (compared to a direct exposure of approximately $584 million, of which $ 529 million was outstanding amount, at December 31, 2016). Of $435 million consists of loans and $ 49 million are securities ($459 million and $ 70 million at December 31, 2016). All of the amount outstanding at December 31, 2017 were obligations from various Puerto Rico municipalities. In most cases, these are “general obligations” of a municipality, to which the applicable municipality has pledged its good faith, credit and unlimited taxing power, or a municipality, to which the applicable municipality has pledged other the revenues. At December 31, 2017, 74% of Corporation’s exposure to municipal loans and securities was concentrated in the municipalities of San Juan, Guaynabo, Carolina and Bayamón. “special obligations” of During the third quarter of 2017, the Corporation sold all of its COFINA bonds at a gain of approximately $0.1 million. The Corporation had recorded an other-than-temporary impairment charge of $8.3 million in respect of those bonds during the second quarter of 2017 as a result of the filing of the Title III proceeding in respect of COFINA and the non-payment of interest on the COFINA bonds in June 2017, pursuant to a court order issued in such proceeding. closed, while others have permanently closed. The damages caused by the hurricanes are substantial and have had a material adverse impact on economic activity in Puerto Rico. It is still, however, too early to fully assess and quantify the extent of the damage caused by the hurricanes, as well as their long- term impact on economic activity. For a discussion of the impact of the hurricanes on the Corporation’s operations and financial results during 2017, refer to Note 2 - Hurricanes impact. The U.S. Congress enacted PROMESA on June 30, 2016 in response to the Commonwealth’s ongoing fiscal and economic crisis. PROMESA, among other things, (i) established a seven- member oversight board (the “Oversight Board”) with broad powers over the finances of the Commonwealth and its instrumentalities, (ii) requires the Commonwealth (and any instrumentality thereof designated as a “covered entity” under PROMESA) to submit its budgets, and if the Oversight Board so requests, a fiscal plan for certification by the Oversight Board, and (iii) established two separate processes for the restructuring of its instrumentalities and municipalities: (a) Title VI, a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debts, and (b) Title III, a court-supervised process for a comprehensive restructuring similar to Chapter 9 of the U.S. Bankruptcy Code. the outstanding liabilities of the Commonwealth, entities” including PROMESA, The Oversight Board has designated a number of entities as the “covered under its instrumentalities. While the Commonwealth and all of Oversight Board has the power to designate any of the Commonwealth’s municipalities as covered entities under it has not done so as of the date hereof. The PROMESA, Oversight Board has approved fiscal plans for certain of these “covered entities,” including the Commonwealth, Government Development Bank for Puerto Rico (“GDB”) and several other public corporations. The Commonwealth’s fiscal plan covers the central government and several of the Commonwealth’s instrumentalities. The fiscal plans were prepared and certified prior to the impact of Hurricanes Irma and Maria and are thus based on pre-hurricane assumptions of government revenues, economic activity and outmigration. On October 31, 2017, the Oversight Board requested revised fiscal plans the Commonwealth and various public corporations to take into the impact of Hurricanes Irma and Maria. The account Commonwealth, the Puerto Rico Electric Power Authority (“PREPA”), and the Puerto Rico Aqueduct and Sewer Authority (“PRASA”) submitted revised fiscal plans to the Oversight Board on January 24, 2018. The Oversight Board requested revisions to such fiscal plans and, on February 12, 2018, the government submitted further revised fiscal plans to the Oversight Board. The Oversight Board is in the process of reviewing such fiscal plans and has stated that it expects to certify fiscal plans for the Commonwealth, PREPA and PRASA for 158 POPULAR, INC. 2017 ANNUAL REPORT The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities: (In thousands) Central Government 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) 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 Investment Portfolio Loans Total Outstanding Total Exposure $ 2 7 27 36 2 2 4 4 $ – – – – – – – – $ 2 7 27 36 2 2 4 4 $ 2 7 27 36 2 2 4 4 3,295 15,485 29,240 1,025 49,045 13,183 192,904 106,368 122,038 434,493 16,478 208,389 135,608 123,063 483,538 16,478 208,389 135,608 123,063 483,538 $49,087 $434,493 $483,580 $483,580 in collateral In addition, at December 31, 2017, the Corporation had $386 million in indirect exposure to loans or securities issued or guaranteed by Puerto Rico governmental entities but whose principal source of repayment are non-governmental entities. In such obligations, the Puerto Rico government entity guarantees any shortfall in the event of borrower default ($406 million at December 31, 2016). These included $310 million in residential mortgage loans guaranteed by the Puerto Rico Housing Finance Authority (“HFA”), an entity that has been designated as a covered entity under PROMESA (December 31, 2016 - $326 million). These mortgage loans are secured by the underlying properties and the HFA guarantee serve to cover shortfalls in collateral in the event of a borrower default. Although the Governor is currently authorized by local legislation to impose a temporary moratorium on the financial obligations of the HFA, he has not exercised this power as of the date hereof. Also, the Corporation had $44 million in Puerto Rico housing bonds issued by HFA, which are secured by second mortgage loans on Puerto Rico residential properties, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $25 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($43 million, $6 million and $31 million at December 31, 2016, respectively). BPPR’s commercial loan portfolio also includes loans to private borrowers who are service providers, lessors, suppliers or have other relationships with the government. These borrowers could be negatively affected by the fiscal measures to be implemented to address the Commonwealth’s fiscal crisis and the ongoing Title III proceedings under PROMESA described above. Similarly, BPPR’s mortgage and consumer loan portfolios include loans to government employees which could also be negatively affected by fiscal measures such as employee layoffs or furloughs. The Corporation has operations in the United States Virgin Islands (the “USVI”) and has approximately $82 million in direct exposure to USVI government entities. The USVI has been experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities their outstanding debt obligations. In addition, in September 2017, the USVI was also severely impacted by Hurricanes Irma and Maria, which will pose additional challenges to the USVI government and could further materially adversely affect the USVI economy. to service Other contingencies As indicated in Note 11 to the Consolidated Financial Statements, as part of the loss sharing agreements related to the the Corporation Westernbank FDIC-assisted transaction, 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 POPULAR, INC. 2017 ANNUAL REPORT 159 true-up payment obligation was estimated at $ 165 million at December 31, 2017 (December 31, 2016 - $ 153 million). For additional information refer to Note 11. material to the Corporation’s consolidated financial position in a particular period. Set forth below is a description of the Corporation’s 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 (“Legal Proceedings”). When the Corporation determines that it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where in management’s judgment, it is in the best interest of both the Corporation and its shareholders to do so. defenses) when, has meritorious it On at least a quarterly basis, Popular assesses its liabilities and contingencies relating to outstanding Legal Proceedings utilizing the latest information available. For matters where it is probable that the Corporation will incur a material loss and the the Corporation amount establishes an accrual for the 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. reasonably estimated, can be 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 $27.8 million as of December 31, 2017. reasonably For certain other cases, management cannot estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the Legal Proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current Legal Proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the Legal Proceedings, and the inherent uncertainty of the various potential outcomes of such Legal Proceedings. Accordingly, management’s from time-to-time, and actual losses may be more or less than the current estimate. estimate will change and available While the 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 in matters in which a loss amount can be reasonably estimated will not have a material adverse effect on the Corporation’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be 160 POPULAR, INC. 2017 ANNUAL REPORT significant legal proceedings. (the BANCO POPULAR DE PUERTO RICO Hazard Insurance Commission-Related Litigation Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have been named defendants in a putative class action complaint captioned Perez Díaz v. Popular, Inc., et al, Instance, Arecibo Part. The filed before the Court of First 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 and “Defendant MAPFRE-PRAICO Insurance Company Insurance Companies”). Plaintiffs essentially allege that the Popular 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 million plus legal interest, for the “good experience” commissions allegedly paid by the Defendant Insurance Companies during the relevant time 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, which the Defendant Insurance Companies filed shortly before hearing, was denied with a right to replead following limited targeted discovery. On March 24, 2017, the Popular Defendants filed a certiorari petition with the Puerto Rico Court of Appeals seeking a review of the lower court’s denial of the motion to dismiss. The Court of Appeals denied the Popular Defendant’s request, and the Popular Defendants appealed this determination to the Puerto Rico Supreme Court, which declined review. Separately, a class certification hearing was held in June and the Court requested post-hearing briefs on this issue. On October 26, 2017, the Court entered an order whereby it broadly certified the class. At a hearing held on November 2, 2017, the Court encouraged the parties to reach agreement on discovery and class notification procedures. The Court further allowed defendants until January 4, 2018 to answer the complaint. A follow-up hearing was set for March 6, 2018. On December 21, 2017, the Popular Defendants filed a certiorari petition before the Puerto Rico Court of Appeals, which plaintiffs opposed on January 9, 2018. The Court of Appeals has not yet ruled on whether it will entertain this petition. The proceedings at the Court of First Instance have not been stayed, and discovery is in progress. financial insurance in violation of institutions with insurance deductible 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, filed before the Puerto Rico Court of First Instance, San Juan Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the same Popular Defendants, as well brokerage other subsidiaries in Puerto Rico. Plaintiffs essentially contend that in November 2015, Antilles Insurance Company obtained approval from the Puerto Rico Insurance Commissioner to market an endorsement that allowed its customers to obtain reimbursement on their for good experience, but that defendants failed to offer this product or disclose its existence to their customers, favoring other their duties as insurance products instead, brokers. Plaintiffs seek a determination that defendants unlawfully failed to comply with their duty to disclose the existence of this new insurance product, as well as double or to a determination that treble damages (the latter subject defendants engaged in anti-monopolistic practices in failing to offer this product). Between late March and early April, co-defendants filed motions to dismiss the complaint and for preliminary injunctive relief. A opposed the request co-defendant filed a third-party Complaint against Antilles Insurance Company. A preliminary injunction and class certification hearing originally scheduled for April 6th was subsequently postponed, pending resolution of the motions to dismiss. On July 31, 2017, the Court dismissed the complaint with prejudice. In August 2017, plaintiffs appealed this judgment. Because of the passing of Hurricane Maria, the Court temporarily stayed all legal proceedings, including any filing the Popular deadlines. Defendants filed their opposition brief on November 29, 2017, ahead of is now ripe for adjudication by the Court of Appeals. In accordance with such directive, the filing deadline. The appeal A third putative class action also tangentially related to hazard insurance policies and captioned Morales v. Banco Popular de Puerto Rico, et al., was filed in May 2017. Plaintiffs aver that BPPR forced-placed hazard insurance on their mortgaged properties in violation of Puerto Rico’s implied covenant of good faith, BPPR’s alleged fiduciary duties as the escrow account manager of their mortgage loans, the Truth in Influenced and Lending Act (“TILA”) and the Racketeer seek class Corrupt Organizations Act certification, an order enjoining BPPR and other unnamed fraudulent defendants practices insurance, unspecified compensatory damages, costs and attorneys’ fees. On July 19, 2017, BPPR filed a motion for summary judgment, which the Court granted on December 29, 2017. Given that plaintiffs did not appeal this determination, such decision is now final and unappealable. from maintaining concerning their forced-placed allegedly hazard (RICO). Plaintiffs Mortgage-Related Litigation and Claims BPPR has been named a defendant in a putative class action captioned Lilliam González Camacho, et al. v. Banco Popular de Puerto Rico, et al., filed before the United States District Court for the District of Puerto Rico on behalf of mortgage-holders who have allegedly been subjected to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs essentially contend that when they sought to reduce their loan payments, defendants failed to provide them with reduced loan payments, instead subjecting them to lengthy loss mitigation them in processes while filing foreclosure claims against parallel. Plaintiffs assert that such actions violate HAMP, HARP and other loan modification programs, as well as the Puerto Rico Mortgage Debtor Assistance Act and TILA. For the alleged violations stated above, Plaintiffs request that all Defendants (over 20 separate defendants have been named, including all local banks), jointly and severally, respond in an amount of no less than $400 million. BPPR waived service of process in June and filed a motion to dismiss in August which is pending resolution. Plaintiffs unsuccessfully sought to amend the leave, and subsequently appealed the complaint without District Court’s decision to strike the complaint from the record. Such appeal is also pending resolution. BPPR has also been named a defendant in two separate putative class actions captioned Costa Dorada Apartment Corp., et al. v. Banco Popular de Puerto Rico, et al., and Yiries Josef Saad Maura v. Banco Popular, et al., filed by the same counsel who filed the González Camacho action referenced above, on behalf of commercial and residential customers of the defendant banks who have allegedly been subject to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs essentially contend that when they sought to reduce their loan payments, defendants failed to provide them with reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure claims against them in parallel (dual tracking), all in violation of TILA, the Real Estate Settlement Procedures Act the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”) and other consumer-protection laws and regulations. They demand approximately $1 billion (in Costa Dorada) and unspecified damages (in Saad Maura). Banco Popular has not yet been served with summons in relation to the Costa Dorada Matter. On January 3, 2018, plaintiffs in the Saad Maura case requested that Banco Popular waive service of process, which it agreed to do on February 1, 2018. A response is not yet due. in a complaint for damages and breach of contract captioned Héctor Robles Rodriguez et al. v. Municipio de Ceiba, et al. Plaintiffs are residents of a development called Hacienda Las Lomas. Through the Doral Bank-FDIC assisted transaction, BPPR acquired a significant number of mortgage loans within in this development and is currently the primary creditor in the BPPR has been named a defendant (“RESPA”), POPULAR, INC. 2017 ANNUAL REPORT 161 against the relevant claim damages the developer, project. Plaintiffs insurance companies, and most contractor, recently, their mortgage lenders, because of a landslide that occurred in October 2015, affecting various streets and houses within the development. Plaintiffs specifically allege that the mortgage lenders, including BPPR, should be deemed liable for their alleged failure to properly inspect the subject properties. Plaintiffs demand in excess of $30 million in damages and the annulment of their mortgage deeds. BPPR extended plaintiffs three consecutive six-month payment forbearances, the last of which is still in effect, and has recently engaged in preliminary settlement discussions with plaintiffs. In November 2017, the FDIC notified BPPR that it had agreed to indemnify the Bank in connection with its Doral-related exposure, pursuant to the terms of the relevant Purchase and Assumption Agreement. 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, 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 and concerning and construction loans in Puerto Rico. The Corporation is cooperating with these requests and is in discussions with the relevant U.S. government departments regarding the resolution of such matters. There can be no assurances as to the outcome of those discussions. residential appraisals estate real Separately, it has come to the attention of management that certain letters generated by the Corporation to comply with Consumer Financial Protection Bureau (“CFPB”) rules requiring written notification to borrowers who have submitted a loss mitigation application were not mailed to borrowers over a period of up to approximately three-years due to a systems interface error. Loss mitigation is a process whereby creditors work with mortgage loan borrowers who are having difficulties making their loan payments on their debt. The loss mitigation process applies both to mortgage loans held by the Corporation and to mortgage loans serviced by the Corporation for third parties. The Corporation has corrected the systems interface error that caused the letters not to be sent. The Corporation has notified applicable regulators and is conducting a review of its mortgage files to assess the scope of impact. Based on currently available potential customer information, we believe that although the mailing error extended to approximately 20,000 residential mortgage loans (approximately 50% of which are serviced by the Corporation for third parties), the number of borrowers actually affected by the mailing error was substantially lower due to, among other 162 POPULAR, INC. 2017 ANNUAL REPORT things, the fact that more than half of all borrowers potentially subject to such error closed on a permanent loss mitigation alternative and the fact that the Corporation regularly uses means other than the mail to communicate with borrowers, including email and hand delivery of written notices at our mortgage servicing centers or bank branches. During the fourth quarter of 2017, the Corporation began outreach to potentially affected borrowers with outstanding loans that had not already closed on a permanent loss mitigation alternative to encourage them to continue or restart their loss mitigation process. While the Corporation has made a preliminary determination regarding the impact the systems interface error may have had on borrowers who proceeded through the foreclosure process, such determination is still subject to further review. The Corporation expects to complete this assessment and reach out to applicable regulators before the end of the first quarter of 2018 to share the results thereof, as well as any related remediation plans. At this point, we are not able to estimate the financial impact of the failure to mail the loss mitigation notices. that debtors involuntary subsequently (the “Lenders”) proceeding Other Significant Proceedings In June 2017, a syndicate comprised of BPPR and other local filed an involuntary Chapter 11 banks bankruptcy and against Betteroads Asphalt Betterecycling Corporation (the “Involuntary Debtors”). This filing followed attempts by the Lenders to restructure and resolve the Involuntary Debtors’ obligations and outstanding defaults under a certain credit agreement, first through good faith negotiations and subsequently, through the filing of a collection action against the Involuntary Debtors in local court. counterclaimed, The asserting damages in excess of $900 million. The Lenders ultimately joined in the commencement of these involuntary bankruptcy proceedings against to preserve and recover the Involuntary Debtors’ assets, having confirmed that the Involuntary Debtors were transferring assets out of their estate for little or no consideration. The Involuntary Debtors subsequently filed a motion to dismiss the proceedings and for damages against the syndicate, arguing both that this petition was filed in bad faith and that there was a bona fide dispute as to the petitioners’ claims, as set forth in the counterclaim filed by the Involuntary Debtors in local court. The court allowed limited discovery to take place prior to an evidentiary hearing (still unscheduled and to be held after the discovery cut-off date) to determine the merits of debtors’ motion to dismiss. At a hearing held in November 2017, the Court determined that it was inclined to rule against the dismissal of the complaint but requested that the parties submit supplemental briefs on the subject, which the parties did. Discovery is ongoing. the Debtors in order one claimed damages arbitration with POPULAR SECURITIES 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 Puerto Rico, including Popular Securities. Popular Securities has received customer complaints and is named as a respondent (among other broker-dealers) in 111 arbitration proceedings with aggregate claimed amounts of approximately $228 million, including of approximately $78 million in which another Puerto Rico broker-dealer is a co-defendant. While Popular Securities believes it has meritorious defenses to the claims asserted in these proceedings, it has often determined that it is in its best interest to settle such claims rather than expend the money and resources required to see such cases to completion. The Government’s defaults and non-payment of its various debt obligations, the Commonwealth government’s and the Financial Oversight Management pursue Board’s restructurings under Title III and Title VI of PROMESA have increased and may continue to increase the number of customer filed against Popular complaints Securities concerning Puerto Rico bonds, including bonds issued by COFINA and 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. (and claimed damages) decision to Subpoenas for Production of Documents in relation to PROMESA Title III Proceedings Popular Securities has, together with Popular, Inc. and BPPR (collectively, the “Popular Companies”) filed an appearance in connection with the Commonwealth of Puerto Rico’s pending Title III bankruptcy proceeding. Its appearance was prompted by a request by the Commonwealth’s Unsecured Creditors’ Committee (“UCC”) to allow a broad discovery program under Rule 2004 to investigate, among other things, the causes of the Puerto Rico financial crisis. The Rule 2004 request sought broad discovery not only from the Popular Companies, but also from Banco Santander de Puerto Rico (“Santander”) and others, spanning in excess of eleven (11) years. In their respective objections, both the Popular Companies and Santander argued that these requests go substantially beyond the permissible scope of Rule 2004 discovery programs and should either be denied outright or substantially modified. A hearing before Magistrate Judge Gail Dein was held on August 9, 2017. At the hearing, the Court requested that the UCC and the PROMESA Oversight Board, who opposed the UCC’s request, submit further briefing on this subject. The parties argued their the omnibus hearing held on respective positions at November 15, 2017. Upon listening to arguments on this matter, Magistrate Dein denied the UCC’s request without prejudice, to allow the law firm of Kobre & Kim to carry out its own independent investigation on behalf of the PROMESA Oversight Board. from the UCC and COFINA Agents Since the August 2017 hearing, the Popular Companies have been served with additional requests for the preservation and voluntary production of certain COFINA-related documents and witnesses in connection with the COFINA-Commonwealth adversary complaint, as well as from the Oversight Board’s Independent Investigator, Kobre & Kim. The Popular Companies are cooperating with all such requests but have asked that such requests be submitted in the form of a subpoena to address privacy and confidentiality considerations pertaining to some of the documents involved in the production. POPULAR COMMUNITY BANK 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. 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 reordering, certain 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, Plaintiffs filed a second amended item processing claims based on POPULAR, INC. 2017 ANNUAL REPORT 163 trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt. Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization including GNMA and FNMA. These special transactions, purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA 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 31 to the consolidated financial statements for additional information on the debt securities outstanding at December 31, 2017 and 2016, 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 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. On January 3, 2017, PCB filed a brief with the Appellate Division in support of its appeal of the lower Court’s prior order that granted in part and denied in part PCB’s motion to dismiss plaintiffs’ second amended complaint. Oral argument was held on April 4, 2017. On April 25, 2017, the Court issued an order denying PCB’s appeal from the partial denial of our motion to the parties reached an dismiss. On November 13, 2017, agreement in principle. Under this agreement, subject to certain customary conditions including court approval of a final settlement agreement in consideration for the full settlement and release of defendant, an amount up to $5.2 million will be paid to qualified plaintiffs. Eugene Duncan v. Popular North America Popular North America has been named a defendant in a putative class action complaint captioned Duncan v. Popular North America, filed on January 29, 2018 in the United States for the Eastern District of New York. The District Court complaint generally asserts that Popular North America (“PNA”) failed to design, construct, maintain and operate its website to be fully accessible to and independently usable by plaintiff and other blind or visually-impaired people, and that PNA’s denial of full and equal access to its website, and therefore to its products and services, violates the Americans with Disabilities Act. Plaintiff seeks a permanent injunction to cause a change in defendant’s allegedly unlawful corporate policies, practices and procedures so that its website becomes to blind and visually impaired and remains customers. On February 15, 2018, Popular North America requested an extension of time to answer the complaint or otherwise plead. A response is not yet due. accessible Note 28 - 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 164 POPULAR, INC. 2017 ANNUAL REPORT to loss as a result of the Corporation’s involvement as servicer of GNMA and FNMA loans at December 31, 2017 and 2016. (In thousands) Assets Servicing assets: Mortgage servicing rights Total servicing assets Other assets: Servicing advances Total other assets Total assets Maximum exposure to loss 2017 2016 $132,692 $158,562 $132,692 $158,562 $ 47,742 $ 20,787 $ 47,742 $ 20,787 $180,434 $179,349 $180,434 $179,349 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 $11.7 billion at December 31, 2017 (December 31, 2016 - $12.3 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, 2017 and 2016 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, 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. 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, these operating expenses of the joint venture. As part of the acquiring entity’s assets. commitments unfunded cover to 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. 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, 2017 and 2016. (In thousands) Assets Loans held-in-portfolio: Advances under the working capital line $ Advances under the advance facility Total loans held-in-portfolio $ Accrued interest receivable $ Other assets: PRLP 2011 Holdings, LLC PR Asset Portfolio 2013-1 International, LLC 2017 2016 2017 2016 – – – – $ – $ – – $ – $ $ $ – – – – $ 1,391 2,475 $ 3,866 $ 19 Equity investment Total assets Liabilities Deposits Total liabilities Total net assets $7,199 $7,199 $ 9,167 $ 12,874 $22,378 $ 9,167 $ 12,874 $26,263 $ (20) $ (20) $7,179 $(1,127) $(10,501) $ (9,692) $(1,127) $(10,501) $ (9,692) $ 8,040 $ 2,373 $16,571 Maximum exposure to loss $7,179 $ 8,040 $ 2,373 $16,571 POPULAR, INC. 2017 ANNUAL REPORT 165 as to the risk The credit attributed required by the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, fair value measurements guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2017, inclusion of the credit risk in the fair value of the derivatives resulted in a gain of $0.2 million (2016 –loss of $ 0.9 million; 2015 –loss of $ 0.8 million) from the Corporation’s credit standing adjustment and a loss of $0.1 million (2016 – gain of $ 0.4 million; 2015 – gain of $0.3 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, 2017, the amount recognized for the right to reclaim cash collateral under master netting agreements was $94 thousand and no amount was recognized for the obligation to return cash collateral (December 31, 2016 - $ 4 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 thousand (December 31, 2016 - $0.8 million). Based on the contractual obligations established on these derivative instruments, the Corporation has fully collateralized these positions by pledging collateral of $94 thousand at December 31, 2017 (December 31, 2016 - $ 4 million). at December 2017 was $10 31, The Corporation determined that the maximum exposure to loss under a worst case scenario at December 31, 2017 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, 2017. Note 29 - Derivative instruments and hedging activities The use of derivatives the incorporated as part of is Corporation’s overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest income is not materially affected by movements in interest rates. The Corporation uses derivatives in its trading activities to facilitate customer transactions, and as a means of risk management. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. the fair value of By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the derivative asset. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes risk for the the Corporation, Corporation. To manage the risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. On the other hand, when the fair value of a derivative contract the Corporation owes the counterparty and, therefore, the fair value of derivatives liabilities incorporates nonperformance risk or the risk that the obligation will not be fulfilled. thus creating a repayment is negative, level of credit 166 POPULAR, INC. 2017 ANNUAL REPORT Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2017 and 2016 were as follows: $ 98,850 $105,290 Other assets hedging instruments $ 98,850 $105,290 Notional amount Derivative assets Derivative liabilities At December 31, 2016 2017 Statement of condition classification Fair value at December 31, 2016 2017 Statement of condition classification Fair value at December 31, 2016 2017 $ $ $ $ $ $ 76 76 180 10 Other liabilities 34 34 9 759 Other liabilities Other liabilities $ 70,850 2,252 $ 709 112,554 Trading account securities Other assets – 185,596 70,306 2,637 191,738 73,470 Other assets Other assets Other assets – 97 16,356 36 388 12,868 66,077 69,957 – – – Other liabilities Other liabilities – Interest bearing deposits $ $ $ $ $ $ 132 132 19 10 – 87 – 715 715 – 810 22 331 – 14,183 10,964 (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 $395,081 $451,065 $16,643 $14,060 $14,299 $12,127 Total derivative assets and liabilities $493,931 $556,355 $16,719 $14,094 $14,431 $12,842 POPULAR, INC. 2017 ANNUAL REPORT 167 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 79 days at December 31, 2017. 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. Year ended December 31, 2017 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(1,295) $(1,295) (In thousands) Forward contracts Total Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) 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) $(1,920) $(1,920) $32 $32 Year ended December 31, 2016 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(3,612) $(3,612) (In thousands) Forward contracts Total Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) 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) $(3,148) $(3,148) $ (1) $ (1) Year ended December 31, 2015 Amount of net gain (loss) recognized in OCI on derivatives (effective portion) $(4,376) $(4,376) (In thousands) Forward contracts Total Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion and ineffective portion) 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) $(4,719) $(4,719) $17 $17 Fair Value Hedges At December 31, 2017 and 2016, there were no derivatives designated as fair value hedges. 168 POPULAR, INC. 2017 ANNUAL REPORT Non-Hedging Activities For the year ended December 31, 2017, the Corporation recognized a loss of $ 0.9 million (2016 – loss of $ 0.1 million; 2015 – loss of $ 0.3 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, 2017 Year ended December 31, 2016 Year ended December 31, 2015 Mortgage banking activities Other operating income Other operating income Interest expense Other operating income Interest expense Interest expense $(1,484) 51 67 (14) (48) 5,934 (5,429) $ (923) $ (160) 333 27 12 57 1,981 (2,374) $ (124) $(389) 300 49 (4) – (334) 73 $(305) Forward Contracts The Corporation has forward contracts to sell mortgage-backed securities, which are accounted for as trading derivatives. Changes in their fair value are recognized in mortgage banking activities. Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments In addition to using derivative instruments as part of its interest rate risk management strategy, the Corporation also utilizes derivatives, such as interest rate swaps and foreign exchange forward contracts, in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in earnings in the period of change. and conditions with credit approvals limit Interest Rate Caps The Corporation enters an intermediary on behalf of its customers and simultaneously takes offsetting positions under the same terms and conditions, thus minimizing its market and credit risks. 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 over the counter market. Accordingly, the embedded options and the related indexed options are marked-to-market through earnings. Note 30 - 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, 2015 New loans Payments Other changes Balance at December 31, 2016 New loans Payments Other changes, including existing loans to new related parties Balance at December 31, 2017 $165,238 2,639 (30,639) (687) $136,551 17,608 (22,796) 51,626 $182,989 New loans and payments include 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. During 2017, the borrower defaulted on his payment obligations under the restructured loan and as of December 31, 2017 the loan was 306 days past due. The balance due on the loan at December 31, 2017 was approximately $0.9 million. POPULAR, INC. 2017 ANNUAL REPORT 169 In June 2017, one of our directors acquired new family relationships by way of marriage. The following loans were obtained prior to the director’s marriage: In November 2003, an entity owned by two brothers-in-law of a director of the Corporation obtained a commercial loan in the aggregate amount of $0.7 million from Westernbank. The loan was acquired by BPPR as part of a FDIC assisted transaction in 2010. The loan is a fully amortizing 30-year loan with a variable interest rate and it is secured by real estate and guaranteed by the two brothers-in-law and their wives. The outstanding principal balance on the loan as of December 31, 2017 was $0.4 million. In 2010, as part of foreclosure in June 2017. As a result of In May 2001, brother-in-law of a director of the Corporation obtained a $0.3 million mortgage loan from Doral Bank, secured by a residential property. The loan was a fully amortizing 30-year loan with a fixed annual rate of 7.250%. The borrower became delinquent on his payments commencing in October 2011. After the FDIC placed Doral Bank in receivership in 2015, BPPR began to act as servicer of the loan for the benefit of a third-party investor. After exhausting various collection and loss mitigation efforts, BPPR, acting as servicer, and the borrower, negotiated and entered into a deed that in lieu of transaction, the third-party investor acquired the residential property that secured the mortgage loan and recorded a loss of $0.2 million. At the time of closing of the deed in lieu of foreclosure transactions, the outstanding principal balance of the loan was $0.3 million and the loan payoff amount, including principal, interest and other accrued fees was $0.4 million. The deed in lieu of foreclosure was approved and ratified by the Audit Committee under the Related Party Policy. the Westernbank FDIC assisted transaction, BPPR acquired (i) four commercial loans made to entities that were wholly owned by one brother-in-law of a director of the Corporation and (ii) one commercial loan made to an entity that was owned by the same brother-in-law together with this director’s father-in-law and another brother- in-law. The loans were secured by real estate and personally guaranteed by the owners of each entity. The loans were originated by Westerbank between 2001 and 2005 and had an aggregate outstanding principal balance of approximately $33.5 million when they were acquired by BPPR in 2010. Between 2011 and 2014, the loans were restructured to consist of (i) five notes with an aggregate outstanding principal balance of $19.8 million with a 6% annual interest rate (“Notes A”) and (ii) five notes with an aggregate outstanding balance of $13.5 million with a 1% annual interest rate, to be paid upon maturity (“Notes B”). The restructured notes had a maturity of September 30, 2016 and, thereafter, various interim renewals were approved, with the last two renewals occurring in June 2017 and October 2017, with the renewed loans maturing in January 31, 2018. The June renewals included a six-month principal moratorium for four of the Notes A commencing on 170 POPULAR, INC. 2017 ANNUAL REPORT March 2017 and a change in the interest from 6% to 4.25% in one of the Notes A. The October renewals included a 60-day moratorium of principal and interest on all of the Notes A and a subsequent 60-day principal moratorium on four of the Notes A. The aggregate outstanding balance on the loans as of December 31, 2017 was approximately $32.1 million. Although the loans were not paid by the borrowers upon their expiration on January 31, 2018, borrowers have continued to make payments of principal and interest for all Notes A, except one in which they are only making interest payments. The June and October renewals and moratoriums were ratified by the Audit Committee under the Related Party Policy. In April 2010, in connection with the acquisition of the Westernbank assets from the FDIC, as receiver, BPPR acquired a term loan to a corporate borrower partially owned by an investment corporation in which the Corporation’s Executive Chairman, at that time the Chief Executive Officer, as well as certain of his family members, are the owners. In addition, the officer’s sister and brother-in-law are owners of an entity that holds an ownership interest in the borrower. At the time the loan was acquired by BPPR, it had an unpaid principal balance of $40.2 million. In May 2017, this loan was sold by BPPR to Popular, Inc., holding company (“PIHC”). At the time of sale, the loan had an unpaid principal balance of $37.9 million. PIHC paid $37.9 million to BPPR for the loan, of which $6.0 million was recognized by BPPR as a capital contribution representing the difference between the fair value and the book value of the loan at the time of transfer. Immediately upon being acquired by BHC, the loan’s maturity was extended by 90 days (under the same terms as originally contracted) to provide the BHC additional time to evaluate a refinancing or long-term extension of the loan. In August 2017, the credit facility was refinanced with a stated maturity in February 2019. The facility was subject to the loan payment moratorium offered as part of the hurricane relief efforts. As interest payments amounting to approximately $0.5 million were deferred and capitalized as part of the loan balance. As of December 31, 2017, the unpaid principal balance amounted to $38.2 million. The renewal, acquisition and refinancing described above were approved by the Audit Committee under the Related Party Policy. such, On February 2018, BPPR entered into a definitive asset purchase agreement for the acquisition of the Reliable Financial Services and Reliable Financial Holding Company auto finance business in Puerto Rico. Refer to Note 42 for additional information on this transaction. As part of the acquisition transaction, BPPR agreed to enter in an agreement with Reliable Financial Services to sublease the space necessary for BPPR to continue the acquired operations. Reliable Financial Services’ lease agreement is with the entity in which the Corporation’s Executive Chairman and his family members hold an ownership interest, described in the preceeding paragraph as having a loan with the Corporation. The estimated total rental amount to be paid during a 12-month period by BPPR to Reliable Financial Services under the sublease is approximately $2 million. BPPR’s agreement to enter into a sublease with Reliable Financial Services in connection with the acquisition transaction was ratified by the Audit Committee under the Related Party Policy. 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. 31, 2017, the Corporation’s banking subsidiaries held deposits from related parties, excluding Inc. (“EVERTEC”) amounting to $431 million EVERTEC, (2016 - $328 million). At December 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. During 2017 the Corporation engaged, in the ordinary course of business, the legal services of a law firm of which the father-in-law of an officer of the Corporation, is a partner. The fees paid to this firm for the fiscal year 2017 amounted to approximately the aforementioned law firm was approved and ratified by the Audit Committee under the Related Party Policy. $0.2 million. The engagement of For the year ended December 31, 2017, the Corporation made contributions of approximately $1.0 million to Banco Popular Foundations, which are not-for-profit corporations dedicated to philanthropic work (2016 - $1.5 million). In contributed addition, the Corporation during 2017, (In thousands) Equity investment in EVERTEC approximately $1.2 million to the Embracing Puerto Rico campaign which supports Hurricane Maria relief initiatives, and $0.3 million to the Employee Emergency Fund, both of which are sponsored by the BPPR Foundation. The Corporation also provided human and operational resources to support the activities of the Puerto Rico Foundation which in 2017 amounted to approximately $1.2 million. in EVERTEC, various processing Related party transactions with EVERTEC, as an affiliate The Corporation has an investment Inc. and (“EVERTEC”), which provides 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, 2017, the Corporation’s stake in EVERTEC was 16.10%.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 for the 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 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. years The Corporation received $3.5 million in dividend distributions during the year ended December 31, 2017 from its investments in EVERTEC’s holding company (December 31, 2016 - $4.7 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of financial “other assets” in the consolidated statement of condition. December 31, 2017 December 31, 2016 $47,532 $38,904 The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2017 and December 31, 2016. 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, 2017 December 31, 2016 $ 6,830 (22,284) (2,040) $(17,494) $ 6,394 (14,899) (20,372) $(28,877) POPULAR, INC. 2017 ANNUAL REPORT 171 The Corporation’s proportionate share of income 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, 2017, 2016 and 2015. (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, 2015 2016 2017 $ 8,924 2,659 $11,796 (573) $11,593 1,636 $11,583 $11,223 $13,229 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, 2017, 2016 and 2015. Items that represent expenses to the Corporation are presented with parenthesis. (In thousands) Years ended December 31, 2016 2015 2017 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 $ (44) $ (64) $ 28,136 6,855 (176,971) 1,236 29,739 6,995 (178,524) 1,052 (58) 27,816 6,898 (164,809) Interest expense Other service fees Net occupancy Professional fees 1,311 Other operating expenses Total $(140,788) $(140,802) $(128,842) PRLP 2011 Holdings, LLC As indicated in Note 28 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, 2017 December 31, 2016 $7,199 $9,167 The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at December 31, 2017 and December 31, 2016. (In thousands) Deposits (non-interest bearing) December 31, 2017 December 31, 2016 $(20) $(1,127) 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, 2017, 2016 and 2015. (In thousands) Years ended December 31, 2016 2015 2017 Share of loss from the equity investment in PRLP 2011 Holdings, LLC $(972) $(502) $(4,021) During the years ended December 31, 2017, the Corporation received $ 1.0 million in capital distributions from its investment in PRLP 2011 Holdings, LLC (December 31, 2016 - $ 3.4 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, 2017, 2016 and 2015. (In thousands) For the years ended December 31, 2016 2017 2015 Category Interest income on loan to PRLP 2011 Holdings, LLC $– $11 $189 Interest income 172 POPULAR, INC. 2017 ANNUAL REPORT PR Asset Portfolio 2013-1 International, LLC indicated in Note 28 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. Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation’s results of operations for the years ended December 31, 2017, 2016 and 2015. (In thousands) Interest income on loan to PR Asset Portfolio 2013-1 International, LLC Interest expense on Years ended December 31, 2016 2017 2015 Category $ 9 $1,011 $2,805 Interest income deposits (31) (4) (4) Interest expense (In thousands) December 31, 2017 December 31, 2016 Total $(22) $1,007 2,801 Equity investment in PR Asset Portfolio 2013-1 International, LLC $12,874 $22,378 The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at December 31, 2017 and December 31, 2016. (In thousands) Loans Accrued interest receivable Deposits Net total December 31, 2017 December 31, 2016 $ – – (10,501) $(10,501) $ 3,866 19 (9,692) $(5,807) 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 loss from PR Asset Portfolio 2013-1 International, LLC for years ended December 31, 2017, 2016 and 2015. (In thousands) Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC Years ended December 31, 2015 2016 2017 $(2,444) $(2,057) $(6,280) During the year ended December 31, 2017, the Corporation received $ 7.1 million in capital distribution from its investment in PR Asset Portfolio 2013-1 International, LLC. No received during the year ended capital distribution was December 31, 2016. The Corporation received $0.7 million in dividend distributions during the year ended December 31, 2017, which were declared by PR Asset Portfolio 2013-1 International, LLC during the year ended December 31, 2016. transactions between the The table presents following Centro Financiero BHD León At December 31, 2017, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the year ended December 31, 2017, the Corporation recorded $ 24.8 million in earnings from its investment in BHD Leon (2016 - $ 24.1 million), which had a carrying amount of $ 135.0 million at December 31, 2017 (December 31, 2016 - $ 125.5 million). As of December 31, 2016 BPPR had extended a credit facility of $ 50 million to BHD León, with an outstanding balance of $ 25 million. This credit facility expired during March 2017. On December 2017, BPPR extended a credit facility of $ 40 million to BHD León, with an outstanding balance of $ 40 million at year end. The Corporation received $ 11.8 million in dividend distributions during the year ended December 31, 2017 from its investment in BHD Leon (December 31, 2016 - $ 12.1 million). On June 30, 2017, BPPR extended an $8 million credit facility to Grupo Financiero Leon, S.A. Panamá (“GFL”), a shareholder of BHD Leon. The sources of repayment for this loan are the dividends to be received by GFL from its investment in BHD Leon. BPPR’s credit facility ranks pari passu with another $8 million credit facility extended to GFL by BHD International Panama, an affiliate of BHD Leon. Puerto Rico Investment Companies 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, 2017 administrative fees charged to these investment companies amounted to $ 7.7 million (2016- $ 8.6 million) and waived fees amounted to for a net fee of $ $ 2.2 million (2016 - $ 2.8 million), 5.5 million (2016 - $ 5.8 million). POPULAR, INC. 2017 ANNUAL REPORT 173 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. • 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 • 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 including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts the counterparty Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently. quality, reflect credit that The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. 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, 2017, the available lines of credit facilities amounted to $356 million (December 31 2016 - $357 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. in connection with the acquisition of Other Related Party Transactions In April 2010, the Westernbank assets from the FDIC, as receiver, BPPR acquired a term loan to a corporate borrower partially owned by an investment corporation in which the Corporation’s Executive Chairman, at that time the Chief Executive Officer, as well as certain of his family members, hold an ownership interest. At the time the loan was acquired by BPPR, it had an unpaid principal balance of $40.2 million. In May 2017, this loan was sold by BPPR to Popular, Inc., holding company (“PIHC”). At the time of sale, the loan had an unpaid principal balance of $37.9 million. PIHC paid $37.9 million to BPPR for the loan, of which $6.0 million was recognized by BPPR as a capital contribution representing the difference between the fair value and the book value of the loan at the time of transfer. Immediately upon being acquired by BHC, the loan’s maturity was extended by 90 days (under the same terms as originally contracted) to provide the BHC additional time to evaluate a refinancing or long-term extension of the loan. In August 2017, the credit facility was refinanced with a stated maturity in February 2019. As of December 31, 2017, the unpaid principal balance amounted to $38.2 million. 820-10 “Fair Value Measurements Note 31 - Fair value measurement and ASC Subtopic 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 • 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 174 POPULAR, INC. 2017 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, 2017 and 2016 and on a nonrecurring basis in periods subsequent to initial recognition for the years ended December 31, 2017, 2016, and 2015: At December 31, 2017 (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 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 $503,385 – – – – – – $503,385 $3,424,779 608,933 6,609 943,753 4,687,374 1,815 802 $9,674,065 $ $ – – – – 1,288 – – 1,288 $ 3,928,164 608,933 6,609 943,753 4,688,662 1,815 802 $10,178,738 $ – – – 261 261 – – $503,646 $ $ $ $ – – – $ 159 – 29,237 12,249 41,645 – 16,719 $9,732,429 $ $ $ – 529 43 529 $ 1,101 $ 168,031 – $ 170,420 $ 159 529 29,280 13,039 43,007 168,031 16,719 $10,406,495 $ $ $ (14,431) $ (14,431) – (164,858) (164,858) $ (14,431) $(164,858) $ (179,289) – $ 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. 2017 ANNUAL REPORT 175 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, 2017, 2016 and 2015 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, 2017 Assets Loans [1] Other real estate owned [2] [3] Other foreclosed assets [2] Total assets measured at fair value on a nonrecurring basis Write-downs $– – – $– $– – – $– $ 64,041 89,743 2,176 $ 64,041 89,743 2,176 $ $155,960 $155,960 $ (16,807) (19,085) (890) (36,782) [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. [3] Write-downs include $2.7 million related to estimated damages caused by Hurricanes Irma and Maria based on the sample of properties examined. (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 $ (26,272) (10,260) (12) $123,935 $123,935 $ (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. (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. 176 POPULAR, INC. 2017 ANNUAL REPORT The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2017, 2016, and 2015. (In thousands) Balance at January 1, 2017 Gains (losses) included in earnings Gains (losses) included in OCI Additions Sales Settlements Transfers out of Level 3 Balance at December 31, 2017 Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2017 (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 Year ended December 31, 2017 MBS classified as investment securities available- for-sale $1,392 – 9 – – (25) (88) $1,288 CMOs classified as trading account securities $1,321 – – 44 (365) (195) (276) $ 529 Other securities classified as trading account securities $602 (73) – – – – – $529 MBS classified as trading account securities $ 4,755 (124) – 332 (156) (876) (3,888) 43 $ Mortgage servicing rights Total assets (36,519) – 7,661 – – – $ 196,889 $ 204,959 (36,716) 9 8,037 (521) (1,096) (4,252) $ 168,031 $ 170,420 Contingent consideration $(153,158) (11,700) – – – – – $(164,858) Total liabilities $(153,158) (11,700) – – – – – $(164,858) $ – $ – $ (3) $ 42 $(18,986) $(18,947) $ (11,700) $ (11,700) 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 Other securities classified as trading account securities $687 (85) – – – – $602 MBS classified as trading account securities $ 6,454 (86) – 1,128 (1,852) (889) $ 4,755 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 Other securities classified as trading account securities $1,563 94 – – – (970) – $ 687 MBS classified as trading account securities $6,229 (42) – 1,126 (187) (672) – $6,454 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 POPULAR, INC. 2017 ANNUAL REPORT 177 During the year ended December 31, 2017, certain MBS and CMO’s amounting to $4.3 million, were transferred from Level 3 to Level 2 due to a change in valuation technique from an internally-prepared pricing matrix and discounted cash flow models, respectively, to a bond’s theoretical value. 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 and 2015. Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2017, 2016, and 2015 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: 2017 2016 2015 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) $ – (11,700) (36,519) (197) – (11,700) (18,986) 39 – (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 (In thousands) Interest income FDIC loss share (expense) income Mortgage banking activities Trading account (loss) profit Other operating income Total $(48,416) $(30,647) $(58,292) $(37,566) $ (1,009) $18,398 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. Fair value at December 31, 2017 Valuation technique Unobservable inputs Weighted average (range) (In thousands) CMO’s - trading Other - trading $ $ 529 Discounted cash flow model 529 Discounted cash flow model Mortgage servicing rights $ 168,031 Discounted cash flow model Contingent consideration $(164,858) Discounted cash flow model Loans held-in-portfolio $ 63,765 [1] External appraisal Other real estate owned $ 77,839 [2] External appraisal Weighted average life Yield Prepayment speed Weighted average life Yield Prepayment speed Prepayment speed Weighted average life Discount rate Credit loss rate on covered loans Risk premium component of discount rate Haircut applied on external appraisals Haircut applied on external appraisals 2.2 years (1.6 - 2.3 years) 3.9% (3.7% - 4.2%) 19.3% (17.8% - 21.5%) 5.3 years 12.6% 10.8% 5.4% (0.2% - 23.1%) 6.8 years (0.1 - 16.0 years) 11.2% (9.5% - 15.0%) 3.6% (0.0% - 100.0%) 3.5% 24.7% (19.0% - 35.0%) 22.2% (20.0% - 30.0%) [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. 178 POPULAR, INC. 2017 ANNUAL REPORT 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 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 • U.S. Treasury securities: The fair value of U.S. Treasury notes is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2. U.S. Treasury bills are classified as Level 1 given the high volume of trades and pricing based on those trades. • Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. • Obligations and States of Puerto Rico, political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2. • Mortgage-backed securities: Certain agency mortgage- backed securities (“MBS”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally- prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3. sector. Their POPULAR, INC. 2017 ANNUAL REPORT 179 • Collateralized mortgage obligations: Agency collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as broker quotes, executed trades, credit information and cash flows. • Equity securities: Equity securities that do not trade in highly liquid markets are classified as Level 2. • 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” important variables • Mutual funds, other equity securities, corporate securities, U.S. Treasury bills, and interest-only strips (included as “other” in the “trading account securities” category): For corporate securities and mutual funds, quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are in classified as Level 2. The 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 the dividend aforementioned variables. In addition, demand and supply also affect the price. Other equity securities that do not trade in highly liquid markets are classified as Level 2. U.S. Treasury bills are classified as Level 1 given the high volume of trades and pricing based on those trades. Given that the fair value was estimated based on a discounted cash flow model using unobservable inputs, interest-only strips are classified as Level 3. consideration taking yield into incorporates assumptions Mortgage servicing rights Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The discounted cash flow model that market participants would use in estimating future net servicing income, characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3. including portfolio 180 POPULAR, INC. 2017 ANNUAL REPORT Derivatives Interest rate swaps, interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally- developed data related to current spreads that denote their probability of default. Contingent consideration liability The fair value of the true-up payment obligation (contingent consideration) to the FDIC as it relates to the Westernbank FDIC-assisted transaction was estimated using projected cash flows related to the loss sharing agreements at the true-up measurement date. It took into consideration the intrinsic loss estimate, asset premium/discount, cumulative shared loss payments, and the cumulative servicing amount related to the loan portfolio. Refer to Note 11 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 volume weighted average spread of the Corporation’s outstanding senior unsecured debt over the equivalent T Note. 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. 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, or an internal valuation. These foreclosed assets are classified as Level 3 since they are subject to internal adjustments. Note 32 - 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 prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. Many of these estimates vary significantly from amounts that could be realized in actual transactions. judgment with respect assumptions and may various involve The fair values reflected herein have been determined based on the prevailing rate environment at December 31, 2017 and December 31, 2016, as applicable. In different interest rate fair value estimates can differ significantly, environments, In especially for certain fixed rate financial addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, they do not represent the Corporation’s value as a going concern. instruments. that is, POPULAR, INC. 2017 ANNUAL REPORT 181 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 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, 2017 Carrying amount Level 1 Level 2 Level 3 Fair value $ 402,857 5,255,119 43,007 10,178,738 $ 402,857 5,245,346 261 503,385 $ $ $ $ $ $ – 9,773 41,645 9,674,065 – – 750 750 57,819 94,308 13,198 6 165,331 – – – – – 16,719 $ $ $ $ $ $ – – 1,101 1,288 $ 402,857 5,255,119 43,007 10,178,738 83,239 71 243 83,553 – – – 5,208 5,208 134,839 21,883,003 465,893 33,323 168,031 – $ $ $ $ $ 83,239 71 993 84,303 57,819 94,308 13,198 5,214 170,539 134,839 21,883,003 465,893 33,323 168,031 16,719 – – – – – – – – – – – – – – – December 31, 2017 Level 1 Level 2 Level 3 Fair value – – – – – – – – – – – – $27,938,630 7,381,232 $35,319,862 $ $ $ 390,752 96,208 628,839 463,554 406,883 – $ 1,499,276 $ $ 14,431 – $ $ $ $ $ $ $ $ – – – – – – – – 18,642 $27,938,630 7,381,232 $35,319,862 $ $ $ 390,752 96,208 628,839 463,554 406,883 18,642 18,642 $ 1,517,918 – 164,858 $ $ 14,431 164,858 $ $ $ $ $ 92,754 67 1,000 93,821 57,819 94,308 13,198 1,900 167,225 132,395 23,702,612 484,030 45,192 168,031 16,719 Carrying amount $27,938,630 7,514,878 $35,453,508 $ $ $ 390,921 96,208 631,490 446,873 439,351 18,642 $ 1,536,356 $ $ 14,431 164,858 $ $ $ $ $ $ $ $ $ $ $ $ $ [1] Refer to Note 31 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level. [2] Refer to Note 20 to the Consolidated Financial Statements for the composition of other short-term borrowings. 182 POPULAR, INC. 2017 ANNUAL REPORT (In thousands) Financial Assets: Cash and due from banks Money market investments Trading account securities, excluding derivatives [1] Investment securities available-for-sale [1] Investment securities held-to-maturity: Obligations of Puerto Rico, States and political subdivisions Collateralized mortgage obligation-federal agency Other Total investment securities held-to-maturity Other investment securities: FHLB stock FRB stock Trust preferred securities Other investments Total other investment securities Loans held-for-sale Loans not covered under loss sharing agreement with the FDIC Loans covered under loss sharing agreements with the FDIC FDIC loss share asset Mortgage servicing rights Derivatives $ $ $ $ $ $ (In thousands) Financial Liabilities: Deposits: Demand deposits Time deposits Total deposits Assets sold under agreements to repurchase 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, 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 – – $ $ $ $ $ $ $ $ $ $ $ $ – 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 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 $ $ $ $ $ $ $ $ $ $ $ $ $ [1] Refer to Note 31 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level. [2] Refer to Note 20 to the Consolidated Financial Statements for the composition of other short-term borrowings. POPULAR, INC. 2017 ANNUAL REPORT 183 The notional amount of commitments to extend credit at December 31, 2017 and December 31, 2016 is $ 7.6 billion and $ 7.8 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at December 31, 2017 and December 31, 2016 is $ 36 million 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 • 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 yield curve of US Virgin Islands Revenue Bonds. US Virgin Islands Revenue Bonds are rated speculative grade, currently in their payments and fall public municipalities debt. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was internal based speed assumptions, these municipal bonds are classified as Level 3. PROMESA like prepayment Puerto under yield Rico and on 184 POPULAR, INC. 2017 ANNUAL REPORT • Agency collateralized mortgage obligation: The fair value of the agency collateralized mortgage obligation (“CMO”), which is guaranteed by GNMA, was based on internal yield and prepayment speed assumptions. This agency CMO is classified as Level 3. • Other: Other securities include foreign 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 • Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2. • Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2. • Trust preferred securities: These securities represent the equity-method investment in the common stock of these trusts. Book value is the same as fair value for these securities since the fair value of the junior subordinated debentures is the same amount as the fair value of the trust preferred securities issued to the public. The equity- method investment in the common stock of these trusts is classified as Level 2. values, • 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 private litigation is resolved. Thus, these stocks are classified as Level 3. Common stock traded only in a foreign market with a readily determinable fair value are classified as Level 2. 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 to sell. Loans internal adjustments and estimated costs 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. commercial, Loans were 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 the U.S. projected net Government agency curve. The loss share asset is classified as Level 3. losses were discounted using Deposits • 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. • Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these an early cancellation estimate based on historical experience. Time deposits are classified as Level 2. certificates of deposit incorporate Assets sold under agreements to repurchase • Securities 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 to sold considered. repurchase are classified as Level 2. agreements Securities under Other short-term borrowings amount carrying 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 • FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows over the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2. In determining contractual term. their • 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. • Junior interest subordinated debentures deferrable (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2. POPULAR, INC. 2017 ANNUAL REPORT 185 providing benefits to participants. A well defined internal structure has been established to develop and implement a risk- controlled investment strategy that is targeted to produce a total return that, when combined with the bank’s contributions to the fund, will maintain the fund’s ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income. Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee periodically reviews the investments and assets performance of 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 2017 and 2016, by asset category, is summarized in the table below. Minimum allotment Maximum allotment 0% 0% 0% 0% 70% 100% 5% 100% • Others: The other category includes lease obligations. Generally accepted accounting principles do not require a fair valuation of capital lease obligations, therefore; it is included at its carrying amount. Capital lease obligations are classified as Level 3. capital Note 33 - 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 is 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 Puerto Rico 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 Puerto Rico Internal Revenue Code limits and a compensation definition that excludes nonqualified arrangements. The freeze applied to the restoration plan as well. pursuant amounts deferred to funding policy is The Corporation’s to make annual contributions to the plans, when necessary, in amounts which fully provide for all benefits as they become due under the plans. The Corporation’s pension fund investment strategy is to in a prudent manner for the exclusive purpose of invest Equity Debt securities Popular related securities Cash and cash equivalents 186 POPULAR, INC. 2017 ANNUAL REPORT 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, 2017 and 2016. 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 2017 2016 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 $ – $130,721 $ 283,947 – – 123,052 49,779 54,110 – – 4,510 – 4,539 – – – – 22,686 – – – – – – – – – 182 – 4,576 $ 7,566 $138,287 $ 7,858 – – 74,013 – – – – – 291,805 123,052 103,889 74,013 4,510 4,539 182 22,686 4,576 – $108,572 $ 171,632 – – 134,015 75,801 62,524 – – 13,910 – 4,786 – – – – 38,158 – – – – – – – – – 336 – 3,219 $ 6,731 $115,303 178,488 134,015 138,325 70,589 13,910 4,786 336 38,158 3,219 6,856 – – 70,589 – – – – – Total assets $199,848 $473,496 $4,758 $89,437 $767,539 $234,697 $374,701 $3,555 $84,176 $697,129 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 • 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: • 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. • 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. • Equity securities - common stocks - Equity securities with quoted market prices obtained from an active exchange market and high liquidity are classified as Level 1. • 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. • Foreign commingled trust fund - Collective investment funds are valued at the NAV of shares held by the plan at year end. regularly instruments • 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. • 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. • 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. • 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 these are reported as instrument Level 3. specific attributes, The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or POPULAR, INC. 2017 ANNUAL REPORT 187 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 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, 2017 and 2016. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2017 and 2016. Information on the shares of common stock held by the pension and restoration plans is provided in the table that follows. measured at fair value. (In thousands) Balance at beginning of year Actual return on plan assets: Change in unrealized (loss) gain relating to instruments still held at the reporting date Purchases, sales, issuance, settlements, paydowns and maturities (net) Balance at end of year 1,203 1,462 $4,758 $3,555 2017 2016 $3,555 $2,093 (In thousands, except number of shares information) Shares of Popular, Inc. common stock Fair value of shares of Popular, Inc. common – – stock 2017 2016 149,127 145,637 $ 5,293 $ 6,382 Dividends paid on shares of Popular, Inc. common stock held by the plan $ 132 $ 22 The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2017 and 2016. (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 188 POPULAR, INC. 2017 ANNUAL REPORT Pension plan Benefit restoration plans 2017 2016 2017 2016 $ 736,082 24,479 49,731 (37,612) $ 736,140 25,166 12,219 (37,443) $ 42,576 1,410 2,394 (2,072) $ 40,773 1,392 2,533 (2,122) $ 772,680 $ 736,082 $ 44,308 $ 42,576 $ 665,235 89,008 16,000 (37,612) $ 612,283 30,395 60,000 (37,443) $ 31,894 4,849 237 (2,072) $ 32,131 1,480 405 (2,122) $ 732,631 $ 665,235 $ 34,908 $ 31,894 $ 276,839 $ 295,589 $ 13,488 $ 15,577 $ 276,839 $ 295,589 $ 13,488 $ 15,577 $ (70,847) $(123,857) $(10,682) $ (8,642) 13,699 294,792 295,589 15,577 224,742 (3,952) 16,000 170,935 (6,193) 60,000 4,895 (1,044) 237 5,057 (567) 405 236,790 (276,839) 224,742 (295,589) 4,088 (13,488) 4,895 (15,577) $ (40,049) $ (70,847) $ (9,400) $(10,682) The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2017 and 2016. (In thousands) Current liabilities Non-current liabilities Pension plan 2017 2016 $ – 40,049 $ – 70,847 Benefit restoration plans 2017 $ 232 9,168 2016 $ 234 10,448 The following table presents the funded status of the plans at December 31, 2017 and 2016. (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 2017 2016 2017 2016 $(772,680) $(736,082) 665,235 732,631 $(44,308) 34,908 $(42,576) 31,894 $ (40,049) $ (70,847) $ (9,400) $(10,682) The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2017 and 2016. (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 2017 2016 2017 2016 $295,589 $294,792 $15,577 $13,699 (20,215) (19,521) (1,644) (1,328) 1,465 20,318 (18,750) 797 (445) (2,089) 3,206 1,878 $276,839 $295,589 $13,488 $15,577 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 2018. (In thousands) Net actuarial loss Pension plan Benefit restoration plans $18,863 $1,398 The following table presents information for plans with a projected benefit obligation in excess of plan assets for the years ended December 31, 2017 and 2016. (In thousands) Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Pension plan Benefit restoration plans 2017 2016 $772,680 772,680 732,631 $736,082 736,082 665,235 2017 $44,308 44,308 34,908 2016 $42,576 42,576 31,894 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, 2017 and 2016. POPULAR, INC. 2017 ANNUAL REPORT 189 The following table presents weighted - average actuarial assumptions used to determine the benefit obligations at December 31, 2017 and 2016: Pension plan Tax qualified restoration plans Benefit restoration plans 2017 2017 2016 2016 2016 2017 Discount rate 3.56% 4.02% 3.54% 3.98% 3.55% 3.99% The following table presents the actuarial assumptions used to determine the components of net periodic benefit cost for the years ended December 31, 2017, 2016 and 2015. Pension plan 2016 2017 2015 Benefit restoration plans 2017 2016 2015 Discount rate for benefit obligation Discount rate for interest cost Expected return on plan assets 4.02% 4.27% 3.90% 3.98% / 3.99% 4.23% / 4.20% 3.90% 3.42% 3.52% 3.90% 3.40% / 3.35% 3.51% / 3.39% 3.90% 6.88% 7.00% 6.50% 6.88% 7.00% 6.50% The following table presents the components of net periodic benefit cost for the years ended December 31, 2017 and 2016. (In thousands) Interest cost Expected return on plan assets Recognized net actuarial loss Net periodic benefit (credit) cost Pension plan 2016 2017 2015 Benefit restoration plans 2015 2016 2017 $ 24,479 (40,742) 20,215 $ 25,166 (38,493) 19,521 $ 29,613 (44,225) 17,860 $ 1,410 (2,010) 1,644 $ 1,392 (2,153) 1,328 $ 1,630 (2,359) 1,244 $ 3,952 $ 6,194 $ 3,248 $ 1,044 $ 567 $ 515 The Corporation expects to pay the following contributions to the benefit plans during the year ended December 31, 2018. (In thousands) Pension plan Benefit restoration plans 2018 $ – $235 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. 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) 2018 2019 2020 2021 2022 2023 - 2027 Pension plan Benefit restoration plans $ 39,537 40,130 40,691 41,198 41,614 211,287 $ 2,198 2,283 2,354 2,417 2,453 12,967 190 POPULAR, INC. 2017 ANNUAL REPORT 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, 2017 and 2016. The following table presents the changes in accumulated the (income), pre-tax, loss for comprehensive other postretirement health care benefit plan. (In thousands) 2017 2016 (In thousands) 2017 2016 Accumulated other comprehensive (income) Change in benefit obligation: Benefit obligation at beginning of the year Service cost Interest cost Benefits paid Actuarial (gain) loss loss at beginning of year $13,865 $15,466 $ 162,365 1,026 5,703 (5,357) 6,983 $ 165,999 1,156 6,021 (6,509) (4,302) $ Increase (decrease) in accumulated other comprehensive loss : Recognized during the year: Prior service credit Amortization of actuarial losses 3,800 (569) 3,800 (1,099) Benefit obligation end of year $ 170,720 162,365 Occurring during the year: Amounts recognized in accumulated other comprehensive loss: Net prior service cost Net loss $ (3,470) $ 27,549 (7,270) 21,135 Net actuarial (gains) losses 6,983 (4,302) Total increase (decrease) in accumulated other comprehensive loss 10,214 (1,601) Accumulated other comprehensive (income) Accumulated other comprehensive loss $ 24,079 $ 13,865 loss at end of year $24,079 $13,865 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 $(162,365) $(165,999) 13,865 15,466 (148,500) (3,498) 5,357 (150,533) (4,476) 6,509 comprehensive loss Net liability at end of year (24,079) (13,865) $(170,720) $(162,365) 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, 2018. (146,641) (148,500) Net prior service credit (In thousands) Net actuarial loss 2018 $(3,470) $ 1,283 The table below presents a breakdown of the liability (In thousands) associated with the postretirement health care benefit plan. (In thousands) Current liabilities Non-current liabilities 2017 2016 $ 6,202 164,518 $ 6,328 156,037 The following table presents the funded status of postretirement health care December 31, 2017 and 2016. 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 2017 2016 $(170,720) $(162,365) – – $(170,720) $(162,365) The following table presents the components of net periodic postretirement health care benefit cost. Service cost Interest cost Amortization of prior service credit Recognized net actuarial loss (gain) 2017 2016 2015 $ 1,026 5,703 (3,800) 569 $ 1,156 6,021 (3,800) 1,099 $ 1,470 6,356 (3,800) 996 Net periodic benefit cost $ 3,498 $ 4,476 $ 5,022 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, 2017 and 2016. POPULAR, INC. 2017 ANNUAL REPORT 191 The Corporation expects to contribute $6.3 million to the postretirement benefit plan in 2018 to fund current benefit payment requirements. payments the postretirement health care benefit plan during the next ten years are presented in the following table. be made projected Benefit on to (In thousands) 2018 2019 2020 2021 2022 2023 - 2027 $ 6,259 6,524 6,763 7,024 7,263 39,915 Savings plans The Corporation also provides defined contribution savings plans pursuant the Puerto Rico to Section 1081.01(d) of Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant- directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in the year ended December 31, 2017 was $10 million (2016 - $8.8 million, 2015 - $6.4 million). The plans held 1,644,706 (2016 – 1,797,267) shares of common stock of the Corporation with a market value of approximately $58.4 million at December 31, 2017 (2016 - $78.8 million). 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 Weighted average assumptions used to determine benefit obligation at years 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 2017 2016 3.62% 4.10% 5.50% 6.00% 5.00% 5.00% 2019 2019 Weighted average assumptions used to determine net periodic benefit cost for the years 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 2017 2016 2015 4.10% 4.37% 4.00% 4.30% 4.63% 4.00% 3.58% 3.70% 4.00% 6.00% 6.50% 7.00% 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, 2017 1-percentage point increase 1-percentage point decrease $ 191 $ (254) $5,328 $(7,571) 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 2017 2016 $170,720 170,720 – $162,365 162,365 – 192 POPULAR, INC. 2017 ANNUAL REPORT Note 34 - Net income per common share The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the years ended December 31, 2017, 2016 and 2015: (In thousands, except per share information) Net income from continuing operations Net income from discontinued operations Preferred stock dividends Net income applicable to common stock Average common shares outstanding Average potential dilutive common shares Average common shares outstanding - assuming dilution Basic EPS from continuing operations Basic EPS from discontinued operations Total Basic EPS Diluted EPS from continuing operations Diluted EPS from discontinued operations Total Diluted EPS As disclosed in Note 23, during the quarter ended March 31, the Corporation completed a $75 million privately 2017, negotiated accelerated share repurchase transaction (“ASR”). As part of this transaction, the Corporation entered into a forward contract in which the final number of shares delivered at settlement was based on the average daily volume weighted average price (“VWAP”) of its common stock, net of a discount, during the term of the ASR. Based on the discounted VWAP of $40.60, its outstanding common stock. the Corporation received 1,847,372 shares of 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 2017 2016 2015 $ 107,681 – (3,723) $ 215,556 1,135 (3,723) 893,997 1,347 (3,723) 103,958 $ 212,968 $ 891,621 101,966,429 78,907 103,275,264 102,019 102,967,186 157,123 102,045,336 103,377,283 103,124,309 1.02 – 1.02 1.02 – 1.02 $ $ $ $ $ $ 2.05 0.01 2.06 2.05 0.01 2.06 $ $ $ $ $ $ 8.65 0.01 8.66 8.64 0.01 8.65 $ $ $ $ $ $ $ $ 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, 2017, 2016 and 2015, there were no stock options outstanding. Note 35 - Rental expense and commitments At December 31, 2017, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals as follows: Year 2018 2019 2020 2021 2022 Later years Minimum payments [1] $ (In thousands) 31,886 29,845 28,160 26,005 23,077 107,986 $ 246,959 [1] Minimum payments have not been reduced by minimum non-cancelable sublease rentals due in the future of $ 0.3 million at December 31, 2017. POPULAR, INC. 2017 ANNUAL REPORT 193 Note 38 - Stock-based compensation Incentive Plan In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the Incentive Plan”). The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan. Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting is vested ratably over five years schedule. The first part commencing at the date of grant (the “graduated vesting portion”) and the second part is vested at termination of employment after attaining 55 years of age and 10 years of service (the “retirement vesting portion”). The graduated vesting portion 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 or after 2014 was modified as follows: the first part is vested ratably over four years commencing at the date of the grant (the “graduated vesting portion”) and the second part is vested 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 “retirement vesting portion”). The graduated vesting portion 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. 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, 2017 was $ 32.1 million (2016 - $ 32.4 million; 2015 - $ 35.9 million), which is included in net occupancy, equipment and communication expenses, according to their nature. Note 36 - Other service fees The following table presents the major categories of other service fees for the years ended December 31, 2017, 2016 and 2015. (In thousands) Debit card fees Insurance fees Credit card fees Sale and administration of investment products Trust fees Other fees 2017 2016 2015 $ 42,721 50,948 67,584 $ 46,241 63,482 70,526 $ 46,176 63,976 68,166 21,958 19,972 14,084 21,450 18,811 14,260 23,846 18,866 15,060 Total other service fees $217,267 $234,770 $236,090 Note 37 - 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 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 Years ended December 31, 2016 2015 2017 $ (469) $ (10,201) $(66,238) 3,136 2,454 (239) 15,658 8,433 73,205 2,405 (31,338) (13,836) (11,700) – (5,892) (33,413) (136,197) (4,824) 9,559 – 1,714 $(10,066) $(207,779) $ 20,062 [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. 194 POPULAR, INC. 2017 ANNUAL REPORT The following table summarizes the restricted stock and performance shares activity under the Incentive Plan for members of management. (Not in thousands) Non-vested at January 1, 2015 Granted Vested Forfeited Non-vested at December 31, 2015 Granted Performance Shares Quantity Adjustment Vested Forfeited Non-vested at December 31, 2016 Granted Performance Shares Quantity Adjustment Vested Shares 628,009 323,814 (430,646) (25,446) 495,731 344,488 39,566 (487,784) (8,019) 383,982 212,200 (232,989) (67,853) Non-vested at December 31, 2017 295,340 Weighted-average grant date fair value $27.13 33.37 30.45 28.65 $28.25 25.86 24.37 27.72 29.13 $26.35 42.57 29.10 48.54 $30.75 During the year ended December 31, 2017, 138,516 shares of restricted stock (2016 - 279,890; 2015 - 231,830) were awarded to management under the Incentive Plan. 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 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. During the year ended December 31, 2017, 73,684 performance shares (2016 - 64,598; 2015 - 91,984) were granted under this plan. incentive awards, with a During the year ended December 31, 2017, the Corporation recognized $ 5.6 million of restricted stock expense related to management tax benefit of $1.1 million (2016 - $7.3 million, with a tax benefit of $1.4 million; 2015 - $10.7 million, with a tax benefit of $1.6 million). During the year ended December 31, 2017, the fair market value of the restricted stock vested was $4.4 million at grant date and $6.4 million at vesting date. This triggers a windfall of $0.8 million that was recorded as a reduction on income tax expense. During the year ended December 31, 2017 the Corporation recognized $1.2 million of performance shares expense, with a tax benefit of $ 0.1 million (2016 - $1.5 million, 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, 2017 was $ 8.0 million and is expected to be recognized over a weighted- average period of 2.3 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, 2015 Granted Vested Forfeited Non-vested at December 31, 2015 Granted Vested Forfeited Non-vested at December 31, 2016 Granted Vested Forfeited – 22,119 (22,119) – – 40,517 (40,517) – – 25,771 (25,771) – Non-vested at December 31, 2017 – – $32.29 32.29 – – $29.77 29.77 – – $38.42 38.42 – – During the year ended December 31, 2017, the Corporation granted 25,771 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (2016 - 40,517; 2015 – 22,119). During this period, the Corporation recognized $1.3 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $0.1 million (2016 - $1.1 million, with a tax benefit of $ 0.1 million; 2015 - $0.5 million, with a tax benefit of $0.1 million). The fair value at vesting date of the restricted stock vested during the year ended December 31, 2017 for directors was $ 1.0 million. POPULAR, INC. 2017 ANNUAL REPORT 195 Note 39 - Income taxes The components of income tax expense (benefit) for the years ended December 31, are summarized in the following table. (In thousands) Current income tax expense: Puerto Rico Federal and States Subtotal Deferred income tax expense (benefit): Puerto Rico Federal and States Adjustment for enacted changes in income tax laws Subtotal Total income tax expense (benefit) 2017 2016 2015 $ 17,356 6,046 $11,031 7,059 $ 16,675 7,281 23,402 18,090 23,956 31,132 7,938 168,358 207,428 36,423 24,271 – 60,694 63,808 (582,936) – (519,128) $230,830 $78,784 $(495,172) 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 Deferred tax asset valuation allowance Difference in tax rates due to multiple jurisdictions Adjustment in net deferred tax due to change in tax law Unrecognized tax benefits State and local taxes Others Income tax expense (benefit) Amount $132,020 (76,815) (13,104) 20,882 (2,217) 168,358 (1,185) 4,123 (1,232) $230,830 2017 % of pre-tax income 39% (23) (4) 6 (1) 50 – 1 – 68% 2016 % of pre-tax income 39% (22) 4 6 (1) – (2) 3 – 27% Amount $114,792 (63,053) 11,155 16,585 (4,092) – (4,442) 9,081 (1,242) $ 78,784 2015 Amount $ 155,542 (60,049) (10,010) (586,159) (3,008) – – 4,543 3,969 $(495,172) % of pre-tax income 39% (15) (3) (147) (1) – – 1 1 (125)% 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 explained below. During the third quarter of 2017, a reversal of $1.2 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 compared to $4.4 million in the same quarter of 2016. On December 22, 2017, the President of the United States signed into law the “Tax Cuts and Job Acts” (the “Act”), which resulted in a reduction in the U.S. operations net deferred tax asset with a corresponding charge to income tax expense of $168.4 million primarily for a reduction in the marginal significant corporate income tax rate. Among the most provisions of the 2017 Federal Tax Reform was the reduction of the U.S. federal income tax rate from a maximum rate of 35% to a single tax rate of 21%. The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. At December 31, 2017, the Corporation had a deferred tax asset amounting to $1.0 billion, net of a valuation allowance of $448 million. The DTA related to the U.S. operations was $348 million, net of a valuation allowance of $381 million. 196 POPULAR, INC. 2017 ANNUAL REPORT Deferred income taxes reflect the net 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: (In thousands) Deferred tax assets: Tax credits available for carryforward Net operating loss and other carryforward available Postretirement and pension benefits Deferred loan origination fees Allowance for loan losses Deferred gains Accelerated depreciation Intercompany deferred (loss) gains Difference in outside basis from pass-through entities Other temporary differences Total gross deferred tax assets 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 (In thousands) Deferred tax assets: Tax credits available for carryforward Net operating loss and other carryforward available Postretirement and pension benefits Deferred loan origination fees Allowance for loan losses Deferred gains Accelerated depreciation Intercompany deferred (loss) gains Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations Other temporary differences Total gross deferred tax assets 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 December 31, 2017 US Total PR $ 16,069 115,512 85,488 3,669 603,462 – 1,300 224 30,424 25,084 $ 7,979 708,158 – 958 20,708 2,670 7,083 – – 6,901 $ 24,048 823,670 85,488 4,627 624,170 2,670 8,383 224 30,424 31,985 881,232 754,457 1,635,689 60,402 31,973 26,364 9,876 128,615 – 33,009 (7,961) 386 25,434 67,263 380,561 60,402 64,982 18,403 10,262 154,049 447,824 $685,354 $348,462 $1,033,816 December 31, 2016 US Total PR $ 16,552 112,929 94,741 4,335 628,127 – 605 2,496 $ 1,958 1,125,293 – 2,287 20,980 4,884 9,223 – $ 18,510 1,238,222 94,741 6,622 649,107 4,884 9,828 2,496 13,160 16,417 – 14,710 13,160 31,127 889,362 1,179,335 2,068,697 58,363 28,412 30,334 7,892 125,001 46,951 – 45,562 (8,999) 585 37,148 617,336 58,363 73,974 21,335 8,477 162,149 664,287 $717,410 $ 524,851 $1,242,261 POPULAR, INC. 2017 ANNUAL REPORT 197 The net deferred tax asset shown in the table above at December 31, 2017 is reflected in the consolidated statements of financial condition as $1.0 billion in net deferred tax assets (in the “other assets” caption) (2016 - $1.2 billion in deferred tax asset in the “other assets” caption) and $1.3 million in deferred tax liabilities (in the “other liabilities” caption) (2016 - $1.4 million 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 $17.4 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 realized through a single member limited liability company with partnership election. Additionally, the deferred tax asset related to the NOLs outstanding at December 31, 2017 expires as follows: (In thousands) 2018 2019 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2037 $ 446 648 46 1,166 901 10,736 14,057 11,608 48,044 291,773 101,969 105,219 86,474 16,053 464 66,268 6,165 $762,037 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, 198 POPULAR, INC. 2017 ANNUAL REPORT including the future reversal of existing taxable temporary reversing future taxable income exclusive of differences, temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies. At December 31, 2017 the net deferred tax asset of the U.S. operations amounted to $729 million with a valuation allowance of approximately $381 million, for a net deferred tax asset after valuation allowance of approximately $348 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 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, taking into account 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. the Corporation operations will be realized. Accordingly, recorded a partial reversal of the valuation allowance on the from the U.S. operations amounting to deferred tax asset approximately ended December 31, 2015. As of December 31, 2017, 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 evidence, management concluded that it is more likely than not that a portion of the deferred tax asset from the U.S. operation, amounting to approximately $348 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arise. available positive $589 million, and negative during year the all At December 31, 2017, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $685 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, 2017. 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, 2017. 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 all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, the Corporation has maintained a full valuation allowance on the deferred tax asset of $67 million as of December 2017. 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. However, certain subsidiaries that are organized as limited liability companies with a partnership election are treated as pass-through entities for Puerto Rico tax purposes. 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 income tax return. The intercompany consolidated federal 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, 2016 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 Additions for tax positions related to 2017 Reduction as a result of lapse of statute of limitations Reduction as a result of settlements Balance at December 31, 2017 $ 9.0 1.1 0.3 (3.0) $ 7.4 1.1 (0.9) (0.3) $ 7.3 of in the financial statement the total amount of At December 31, 2017, interest condition recognized approximated $2.7 million (2016 - $2.9 million). The total interest expense recognized during 2017 was $598 thousand net of the reduction of $505 thousand due to settlement and $353 thousand due to the expiration of the statute of limitations (2016 - $1.2 million). Management determined that, as of December 31, 2017 and 2016, there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating of operations. consolidated statements expenses in the 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, 2017 (2016 - $9.0 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, 2017, the following years remain subject to examination in the U.S. Federal jurisdiction – 2014 and thereafter and in the Puerto Rico jurisdiction – 2013 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.6 million. POPULAR, INC. 2017 ANNUAL REPORT 199 Note 40 - 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, 2017, 2016 and 2015 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 Receivables from investments securities Recognition of mortgage servicing rights on securitizations or asset transfers Interest capitalized on loans subject to the temporary payment moratorium Loans booked under the GNMA buy-back option [1] Includes loans securitized into trading securities and subsequently sold before year end. 2017 $ 2,433 221,432 2016 $ 3,763 212,353 2015 $ 7,152 193,503 82,035 27,407 109,442 11,237 8,435 19,672 2,472 1,705 – 462,033 7,514 2 70,000 7,661 46,944 790,942 117,334 28,614 145,948 15,452 17,351 32,803 7,249 5,947 – 775,612 46,630 102 – 10,884 – 91,255 136,368 36,106 172,474 24,104 22,745 46,849 65,063 17,065 63,645 1,088,121 78,759 6,150 – 13,460 – 58,568 the Corporation’s Puerto Rico On February 27, 2015, 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. It includes aspects of targeted mainly to corporate, small and middle size the lending and businesses. depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR. Note 41 - Segment reporting The Corporation’s two reportable segments – Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc. consists of corporate structure Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments. 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, 2017, additional disclosures are provided for the business areas included in this reportable segment, as described below: • Commercial the Corporation’s banking operations conducted at BPPR, which are represents banking 200 POPULAR, INC. 2017 ANNUAL REPORT • 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 • 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, Inc., 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, Inc. supported BPNA’s deposit gathering through its online platform until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. During the third quarter of 2015, BPNA and E-LOAN, Inc. completed an asset purchase and sale transaction in which E-LOAN, Inc. sold to BPNA all of its outstanding loan portfolio, including residential mortgage loans and home equity lines of credit, which had a carrying value of approximately $213 million. Prior to this transaction, the Corporation provided additional disclosures for the BPNA reportable segment related to E- LOAN, Inc. After the close of the above mentioned asset purchase and sale transaction, additional disclosures with respect to E-LOAN, Inc. are no longer considered relevant to the financial statements and accordingly are not presented. During 2017, the E-LOAN brand was transferred to BPPR and is being used to offer personal loans through an online platform. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, Leon. The Corporate group also includes the expenses of certain corporate areas that are identified as critical to the organization including: Finance, Risk Management and Legal. are accounting policies of The the segments 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 Depreciation expense Other operating expenses Income tax expense Net income Segment assets December 31, 2017 Banco Popular de Puerto Rico Banco Popular North America Intersegment Eliminations $ $ 1,279,844 253,032 364,164 8,713 39,162 957,924 72,741 $ 280,946 77,944 20,430 665 8,553 170,042 191,749 $ 312,436 $ (147,577) $ (217) – (572) – – (551) (93) (145) $34,843,668 $9,168,256 $(16,992) December 31, 2017 Reportable Segments Corporate Eliminations Total Popular, Inc. (In thousands) Net interest income (expense) Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense $ 1,560,573 $ (58,609) $ 330,976 384,022 9,378 47,715 1,127,415 403 37,949 – 649 74,731 (benefit) 264,397 (35,835) Net income (loss) $ 164,714 $ (60,608) $ – (5,955) (2,804) – – (2,692) $ 1,501,964 325,424 419,167 9,378 48,364 1,199,454 2,268 3,575 230,830 $ 107,681 Segment assets $43,994,932 $5,046,153 $(4,763,748) $44,277,337 (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 $ 258,416 15,266 21,651 665 – 6,715 174,585 36,712 $ (474) – (119) – – – (779) 92 $ 230,060 $ 46,124 $ 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) 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 Banco Popular North America Intersegment Eliminations $ $ 1,231,585 240,817 464,786 10,465 40,440 970,201 116,058 $ 239,379 626 22,667 554 6,272 188,102 (580,738) $ 318,390 $ 647,230 $ – – 125 – – – – 125 $27,907,350 $7,780,002 $(129,038) POPULAR, INC. 2017 ANNUAL REPORT 201 Net interest income $ Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax expense (In thousands) Net interest income (expense) Provision for loan losses Non-interest income Amortization of intangibles Depreciation expense Other operating expenses Income tax benefit December 31, 2015 Reportable Segments Corporate Eliminations Total Popular, Inc. $ 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 Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows: 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 December 31,2017 Banco Popular de Puerto Rico Geographic Information (In thousands) Commercial Banking Consumer and Retail Banking Other Financial Services Eliminations Total Banco Popular de Puerto Rico 518,404 $ 753,922 $ 7,499 $ 19 $ 1,279,844 8,911 244,121 – – 253,032 (In thousands) Revenues: [1] Puerto Rico United States Other 2017 2016 2015 $1,527,758 318,093 75,280 $1,361,663 283,349 74,979 $1,598,066 255,714 74,744 79,630 194,741 90,222 (429) 364,164 Total consolidated revenues $1,921,131 $1,719,991 $1,928,524 211 4,274 4,228 17,338 21,120 704 – – 8,713 39,162 239,369 93,378 656,998 (31,404) 62,030 10,767 (473) – 957,924 72,741 [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. Net income $ 238,827 $ 53,554 $ 19,992 $ 63 $ 312,436 Segment assets $21,735,909 $20,180,173 $520,717 $(7,593,131) $34,843,668 Selected Balance Sheet Information 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 (In thousands) Puerto Rico Total assets Loans Deposits United States Total assets Loans Deposits Other Total assets Loans Deposits [1] 2017 2016 2015 $33,705,624 17,591,078 27,575,292 $28,813,289 16,880,868 23,185,551 $26,764,689 17,477,070 20,893,232 $9,648,865 6,608,056 6,635,153 $8,928,475 5,799,562 6,266,473 $922,848 743,329 1,243,063 $919,845 755,017 1,044,200 $7,858,712 4,873,504 5,288,886 $1,138,332 778,656 1,027,605 [1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. 202 POPULAR, INC. 2017 ANNUAL REPORT Note 42 - Subsequent events On February 14, 2018, Banco Popular de Puerto Rico, entered into an agreement to acquire and assume from Reliable Financial Services, Inc. and Reliable Finance Holding Company, subsidiaries of Wells Fargo & Company (“Wells Fargo”), certain assets and liabilities related to Wells Fargo’s auto finance business in Puerto Rico (“Reliable”). As part of the transaction, Banco Popular will acquire approximately $1.5 billion in retail auto loans and $340 million in commercial loans. The acquired auto loan portfolio has credit characteristics that are similar to Banco Popular’s existing self-originated portfolio. Banco Popular will also acquire certain other assets and assume certain liabilities of Reliable. The purchase price for the all-cash transaction is expected to be approximately $1.7 billion, reflecting an aggregate discount of 4.5% on the assets to be acquired. Banco Popular will fund the purchase price with existing liquidity. The transaction is to the receipt by the parties of any further not subject to satisfaction of customary regulatory approvals. Subject closing conditions, Popular anticipates the transaction to close during the second quarter of 2018. On or after closing, Reliable employees will become employees of Banco Popular. Reliable will continue operating independently as a division of Banco Popular for a period of time after closing, before integrating Reliable’s operations with Popular Auto’s. The Corporation will account for this transaction as a business combination under U.S. GAAP, in accordance with ASC 805. 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, 2017 and 2016, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2017. POPULAR, INC. 2017 ANNUAL REPORT 203 Condensed Statements of Condition (In thousands) ASSETS Cash and due from banks (includes $47,663 due from bank subsidiary (2016 – $47,614)) Money market investments Trading account securities Other investment securities, at lower of cost or realizable value (includes $8,725 in common securities from statutory trusts (2016 – $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 $1,096 due from subsidiaries and affiliate (2016 – $936)) Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Notes payable Other liabilities (includes $2,033 due to subsidiaries and affiliate (2016 – $2,574)) Stockholders’ equity Total liabilities and stockholders’ equity [1] Refer to Note 22 to the consolidated financial statements for information on the statutory trusts. December 31, 2017 2016 $ 47,663 246,457 3,985 $ 47,783 252,347 2,640 9,850 3,727,383 1,534,640 232,387 33,221 266 3,365 49,777 18,025 9,850 3,658,451 1,707,167 243,993 1,142 2 3,067 51,259 11,257 $5,906,487 $5,988,954 $ 737,685 64,813 5,103,989 $ 735,600 55,309 5,198,045 $5,906,487 $5,988,954 204 POPULAR, INC. 2017 ANNUAL REPORT Condensed Statements of Operations (In thousands) Income: Dividends from subsidiaries Interest income (includes $3,183 due from subsidiaries and affiliates (2016 – $1,965; 2015 – $1,188)) Earnings from investments in equity method investees Other operating income 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 $8,225 (2016 – $8,160 ; 2015 – $7,309)), net of reimbursement by subsidiaries for services provided by parent of $76,720 (2016 – $74,573 ; 2015 – $74,799) Total expenses Income before income taxes and equity in undistributed earnings of subsidiaries Income tax expense (benefit) Income before equity in undistributed earnings of subsidiaries Equity in undistributed (losses) earnings of subsidiaries Income from continuing operations Equity in undistributed earnings of discontinued operations Net income Comprehensive income, net of tax Years ended December 31, 2015 2016 2017 $211,500 4,238 11,761 86 – 266 $102,300 2,141 12,352 – 1,767 90 $ 41,350 1,332 13,710 – – (187) 227,851 118,650 56,205 52,470 403 52,470 (35) 52,470 35 (1,773) (4,208) (1,293) 51,100 176,751 – 176,751 (69,070) 107,681 – 48,227 70,423 19 70,404 145,152 215,556 1,135 51,212 4,993 (186) 5,179 888,818 893,997 1,347 $107,681 $216,691 $895,344 $ 77,315 $153,291 $868,330 POPULAR, INC. 2017 ANNUAL REPORT 205 Condensed Statements 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, net of dividends or distributions 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 (benefit) expense Gain on: Sale and valuation adjustments of investment securities Net (increase) decrease in: Trading securities Other assets Net increase (decrease) in: 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 sale of investment securities: Available-for-sale Other Capital contribution to subsidiaries Net decrease in advances to subsidiaries and affiliates Net repayments on other loans Return of capital from equity method investments Return of capital from wholly owned subsidiaries Acquisition of loans portfolio Acquisition of trademark 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: Proceeds from issuance of common stock Dividends paid Net payments for repurchase of common stock Payments related to tax withholding for share-based compensation Net cash used in financing activities Net (decrease) 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, 2016 2015 2017 $ 107,681 $ 216,691 $ 895,344 69,070 403 2,086 (11,761) – (146,287) (35) 2,087 (12,352) 19 (890,165) 35 2 (13,710) (186) – (1,767) – (1,345) 12,191 (620) 4,473 (380) 8,781 3,230 (3,854) (5,622) 73,874 (158,336) (901,245) 181,555 58,355 (5,901) 5,890 9,857 (242,457) – – (5,955) – 181 500 22,400 (31,909) (5,560) (965) 23 38 278 1,583 – – 35 433 14,000 – – (953) 56 434 – – – 53,769 24 11,500 203,000 – – (1,079) 9 – (15,357) 25,723 24,766 7,016 (95,910) (75,668) (1,756) 7,437 (65,932) (475) (1,623) 6,226 (19,257) (1,021) (963) (166,318) (60,593) (15,015) (120) 47,783 23,485 24,298 3,850 20,448 $ 47,663 $ 47,783 $ 24,298 Popular, Inc. (parent company only) received dividend distributions from its direct equity method investees amounting to $3.5 million for the year ended December 31, 2017 (2016 - $4.7 million). 206 POPULAR, INC. 2017 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 22 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, 2017: 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, 2017 and 2016, and the results of operations and cash flows for the periods ended December 31, 2017, 2016 and 2015. Year 2018 2019 2020 2021 2022 Later years No stated maturity Total (In thousands) $ – 446,873 – – – 290,812 – $737,685 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. 2017 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 with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings (accumulated deficit) Treasury stock, at cost Accumulated other comprehensive loss, net of tax Total stockholders’ equity At December 31, 2017 All other subsidiaries and eliminations PNA Holding Co. Elimination entries Popular, Inc. Consolidated $ 462 2,807 – – – $ 402,910 5,254,662 39,303 10,178,738 93,821 $ (48,178) (248,807) (101) – – $ 402,857 5,255,119 43,187 10,178,738 93,821 4,492 1,646,287 – 152,883 – 132,395 – (7,140,697) – 167,225 – 132,395 – – – – – – – – – 112 – 34,312 – – 24,384,251 5,955 24,423,427 517,274 130,633 623,160 – – – 517,274 130,633 623,426 24,147,732 5,955 24,186,642 45,192 543,777 169,260 19,595 213,574 168,031 1,912,727 627,294 29,558 – – – – (211) – (17,035) – – 45,192 547,142 169,260 19,595 213,844 168,031 1,991,323 627,294 35,672 Popular Inc. Holding Co. $ 47,663 246,457 3,985 – – 9,850 5,494,410 – 33,221 – – 266 32,955 – 3,365 – – 369 – 61,319 – 6,114 $5,906,487 $ 1,688,472 $44,131,452 $ (7,449,074) $44,277,337 $ $ – – – – – 737,685 64,813 802,498 50,160 1,042 4,289,976 1,203,521 (90,058) (350,652) 5,103,989 – – – – – 148,539 5,276 153,815 – 2 4,100,848 (2,536,707) – (29,486) 1,534,657 $ 8,539,123 27,211,370 35,750,493 390,921 96,208 650,132 1,641,383 $ (48,178) (248,807) $ 8,490,945 26,962,563 (296,985) 35,453,508 – – – (15,033) 390,921 96,208 1,536,356 1,696,439 38,529,137 (312,018) 39,173,432 – 56,307 5,728,978 165,878 – (348,848) 5,602,315 – (56,309) (9,821,299) 2,362,302 (84) 378,334 50,160 1,042 4,298,503 1,194,994 (90,142) (350,652) (7,137,056) 5,103,905 Total liabilities and stockholders’ equity $5,906,487 $ 1,688,472 $44,131,452 $(7,449,074) $44,277,337 208 POPULAR, INC. 2017 ANNUAL REPORT Condensed Consolidating Statement of Financial Condition (In thousands) Assets: Cash and due from banks Money market investments Trading account securities, at fair value Investment securities available-for-sale, at fair value Investment securities held-to-maturity, at amortized cost Other investment securities, at lower of cost or realizable value Investment in subsidiaries Loans held-for-sale, at lower of cost or fair value Loans held-in-portfolio: Loans not covered under loss-sharing agreements with the FDIC Loans covered under loss-sharing agreements with the FDIC Less - Unearned income Allowance for loan losses Total loans held-in-portfolio, net FDIC loss-share asset Premises and equipment, net Other real estate not covered under loss-sharing agreements with the FDIC Other real estate covered under loss-sharing agreements with the FDIC Accrued income receivable Mortgage servicing assets, at fair value Other assets Goodwill Other intangible assets Total assets Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities Total liabilities Stockholders’ equity: Preferred stock Common stock Surplus Retained earnings (accumulated deficit) Treasury stock, at cost Accumulated other comprehensive loss, net of tax Total stockholders’ equity 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 – – – – – – – – – 138 – 25,146 – – 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 – – – – – – – – – (90) – (14,968) – – 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 Popular, Inc. Holding Co. $ 47,783 252,347 2,640 – – 9,850 5,609,611 – 1,142 – – 2 1,140 – 3,067 81 – 112 – 61,770 – 553 $5,988,954 $ 1,861,757 $38,568,970 $ (7,758,072) $38,661,609 $ $ – – – – – – $ 7,028,524 23,782,844 30,811,368 $ (48,081) (267,063) $ 6,980,443 23,515,781 (315,144) 30,496,224 – – 735,600 55,309 790,909 50,160 1,040 4,246,495 1,228,834 (8,198) (320,286) 5,198,045 – – 148,512 6,034 154,546 – 2 4,111,207 (2,382,049) – (21,949) 1,707,211 479,425 1,200 690,740 865,861 – – – (15,253) 479,425 1,200 1,574,852 911,951 32,848,594 (330,397) 33,463,652 – 56,307 5,717,066 264,944 – (317,941) 5,720,376 – (56,309) (9,819,746) 2,108,578 (88) 339,890 50,160 1,040 4,255,022 1,220,307 (8,286) (320,286) (7,427,675) 5,197,957 Total liabilities and stockholders’ equity $5,988,954 $ 1,861,757 $38,568,970 $(7,758,072) $38,661,609 POPULAR, INC. 2017 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 for loan losses- non-covered loans Provision 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 loss on sale of loans, including valuation adjustments on loans held-for-sale Adjustments (expense) to indemnity reserves on loans sold FDIC loss-share expense Other operating income Total non-interest income Operating expenses: Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion FDIC deposit insurance Other real estate owned (OREO) expenses Other operating expenses Amortization of intangibles Total operating expenses Income (loss) before income tax and equity in earnings of subsidiaries Income tax (benefit) expense Income (loss) before equity in earnings of subsidiaries Equity in undistributed earnings of subsidiaries Net income (loss) Comprehensive income (loss), net of tax 210 POPULAR, INC. 2017 ANNUAL REPORT Popular, Inc. Holding Co. $211,500 1,056 2,616 566 – 215,738 – – 52,470 52,470 163,268 403 – 162,865 – – – – – 266 – – – 11,847 12,113 47,561 3,876 2,925 217 11,766 549 2,014 – 42 (70,723) – (1,773) 176,751 – 176,751 (69,070) $107,681 $ 77,315 Year ended December 31, 2017 All other subsidiaries and eliminations PNA Holding Co. Elimination entries Popular, Inc. Consolidated $ – – 54 322 – 376 – – 10,767 10,767 (10,391) – – (10,391) – – – – – – – – – 921 921 – – 2 – (427) – – – – 51 – (374) (9,096) (8,382) (714) (153,944) $ – 1,477,713 51,495 190,309 4,487 1,724,004 144,534 5,728 13,155 163,417 1,560,587 325,234 5,742 1,229,611 153,709 220,073 25,496 334 (8,299) (1,110) (420) (22,377) (10,066) 51,598 408,938 436,669 85,318 62,215 43,165 281,585 21,917 56,431 26,392 48,498 190,467 9,378 1,262,035 376,514 236,944 139,570 – $(211,500) (4) (2,670) – – (214,174) $ – 1,478,765 51,495 191,197 4,487 1,725,944 (2,670) (4) – (2,674) (211,500) (5,955) – (205,545) – (2,806) – – – 27 – – – (26) (2,805) – – – – (436) – – – – (2,256) – (2,692) (205,658) 2,268 (207,926) 223,014 141,864 5,724 76,392 223,980 1,501,964 319,682 5,742 1,176,540 153,709 217,267 25,496 334 (8,299) (817) (420) (22,377) (10,066) 64,340 419,167 484,230 89,194 65,142 43,382 292,488 22,466 58,445 26,392 48,540 117,539 9,378 1,257,196 338,511 230,830 107,681 – $(154,658) $ 139,570 $ 15,088 $ 107,681 $(162,195) $ 108,663 $ 53,532 $ 77,315 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 POPULAR, INC. 2017 ANNUAL REPORT 211 Condensed Consolidating Statement of Operations (In thousands) Interest and dividend income: Dividend income from subsidiaries Loans Money market investments Investment securities Trading account securities Total interest and dividend income Interest Expense: Deposits Short-term borrowings Long-term debt Total interest expense Net interest (expense) income Provision for loan losses- non-covered loans Provision for loan losses- covered loans Net interest (expense) income after provision for loan losses Service charges on deposit accounts Other service fees Mortgage banking activities Net gain and valuation adjustments on investment securities 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) $ 868,330 212 POPULAR, INC. 2017 ANNUAL REPORT Condensed Consolidating Statement of Cash Flows (In thousands) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in earnings of subsidiaries, net of dividends or distributions 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 Impairment losses on long-lived assets Other-than-temporary impairment on investment securities Fair value adjustments on mortgage servicing rights FDIC loss-share expense Adjustments to indemnity reserves on loans sold Earnings from investments under the equity method Deferred income tax (benefit) expense (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 Proceeds from sale of investment securities: Available for sale Other Net repayments (disbursements) on loans Proceeds from sale of loans Acquisition of loan portfolios Acquisition of trademark Net payments from FDIC under loss-sharing agreements Return of capital from equity method investments Capital contribution to subsidiary 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 (used in) provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid to parent company Dividends paid Net payments for repurchase of common stock Return of capital to parent company Capital contribution from parent Payments related to tax withholding for share-based compensation Net cash (used in) provided by financing activities Net (decrease) 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 Popular, Inc. Holding Co. PNA Holding Co. Elimination entries Popular, Inc. Consolidated Year ended December 31, 2017 All other subsidiaries and eliminations $ 107,681 $(154,658) $ 139,570 $ 15,088 $ 107,681 69,070 403 – 649 2,086 – – – – – (11,761) – (8) – – 42 – – – (1,345) (748) 12,256 – – 3,230 73,874 181,555 153,944 – – – 27 – – – – – (921) (8,382) – – – – – – – – 26 – – – (758) 143,936 (10,722) – 325,021 9,378 47,715 (24,423) 4,784 8,299 36,519 10,066 22,377 (21,401) 215,864 4,289 (334) (16,670) 21,673 (244,385) 69,464 (315,522) 502,994 (75,201) (64,886) 2,670 (13,100) 25,466 530,657 670,227 (223,014) – – – – – – – – – – (54) – – – – – – – (31) 121 2,122 (121) – 341 (220,636) (205,548) – 325,424 9,378 48,364 (22,310) 4,784 8,299 36,519 10,066 22,377 (34,083) 207,428 4,281 (334) (16,670) 21,715 (244,385) 69,464 (315,522) 501,618 (75,802) (50,508) 2,549 (13,100) 28,279 527,831 635,512 5,890 10,455 (2,362,992) (18,255) (2,364,902) – – – – – – 181 – (31,909) (5,560) – 500 (5,955) 22,400 (965) 23 38 (15,357) – – – – – – – – – – – 138 – 10,400 – – – 20,993 – – – – – 7,016 – (95,910) (75,668) – – (1,756) (166,318) (120) 47,783 $ 47,663 – – – – – – – – – (10,400) – – (10,400) (129) 591 462 $ (4,139,762) (29,672) 2,023,295 6,232 14,992 30,265 (398,857) 38,279 (541,489) 5,560 (7,679) 8,056 5,955 – (61,732) 9,730 96,502 (5,303,317) 4,935,948 (88,505) 95,008 (95,607) 55,000 – (211,500) – – (22,400) 5,955 – 4,673,899 40,809 362,101 402,910 $ – – – – (4,139,762) (29,672) 2,023,295 6,232 – – – (37,864) 37,864 – – – – (32,800) – – – (51,055) 18,157 – – – – – 211,500 – 4 32,800 (5,955) – 256,506 (97) (48,081) $ (48,178) 14,992 30,265 (398,676) 415 (535,534) – (7,679) 8,694 – – (62,697) 9,753 96,540 (5,348,736) 4,954,105 (88,505) 95,008 (95,607) 55,000 7,016 – (95,910) (75,664) – – (1,756) 4,753,687 40,463 362,394 402,857 $ During the year ended December 31, 2017 there have not been any cash flows associated with discontinued operations. POPULAR, INC. 2017 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 provided by (used in) operating activities: Equity in earnings of subsidiaries, net of dividends or distributions 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 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 Payments related to tax withholding for share-based compensation 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. Year ended December 31, 2016 All other subsidiaries and eliminations Elimination entries Popular, Inc. Consolidated $ 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) (475) – (1,623) (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) (563) – (1,623) 2,853,259 (1,280) 363,674 362,394 $ The Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2016 includes the cash flows from operating, investing and financing activities associated with discontinued operations. 214 POPULAR, INC. 2017 ANNUAL REPORT Condensed Consolidating Statement of Cash Flows (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings losses of subsidiaries, net of dividends or distributions 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 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 (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: Proceeds from calls, paydowns, maturities and redemptions 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 and other productive assets Foreclosed assets Net cash provided by investing activities Cash flows from financing activities: Net increase (decrease) in: Deposits Assets sold under agreements to repurchase Other short-term borrowings Payments of notes payable Proceeds from issuance of notes payable Proceeds from issuance of common stock Dividends paid to parent company Dividends paid Net payments for repurchase of common stock Return of capital to parent company Payments related to tax withholding for share-based compensation 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, 2015 All other subsidiaries and eliminations $ 895,344 $ 627,224 $ 943,818 $(1,571,042) $ 895,344 (890,165) 35 – 761 2 – – – – (13,710) (186) (639,688) – – – – – – – – 244 – (2) – – – – – – – – – – – – – (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) – – – – – – – – 53,793 – – – – – – – 11,500 203,000 – (1,079) 9 – 24,766 – – – – – 6,226 – (19,257) (1,021) – (963) (15,015) 3,850 20,448 $ 24,298 – – – – – – (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 – – 350 – (350) – – – – – 1,829 200,000 – – – – 178,255 – – – (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) (1,021) – (963) (925,895) (17,421) 381,095 363,674 $ $ The Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations. POPULAR, INC. 2017 ANNUAL REPORT 215 [THIS PAGE INTENTIONALLY LEFT BLANK] P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708