Exhibit 13.1

CONTENTS ÍNDICE Year in Review 1 25-Year Historical Financial Summary 4 Management & Board of Directors 6 Resumen del Año 7 Resumen Financiero Histórico - 25 Años 10 Gerencia y Junta de Directores 12 Popular, Inc. (NASDAQ:BPOP) is a full-service financial provider Popular, Inc. (NASDAQ:BPOP) es un proveedor de servicios based in Puerto Rico, with operations in Puerto Rico, the Virgin financieros con sede en Puerto Rico y operaciones en Puerto Rico, Islands and the United States. In Puerto Rico, Popular is the leading Islas Vĺrgenes y Estados Unidos. En Puerto Rico es la institución banking institution, by both assets and deposits, and ranks among bancaria lĺder, tanto en activos como en depósitos, y se encuentra the largest 50 banks in the U.S. by assets. entre los 50 bancos más grandes de Estados Unidos por total de activos. CORPORATE INFORMATION Independent Registered Public Accounting Firm: INFORMACIÓN CORPORATIVA PricewaterhouseCoopers LLP Firma registrada de Contabilidad Pública Independiente: PricewaterhouseCoopers LLP The company’s Form 10-K, proxy statement and any other financial information is available on http://www.popular.com/en/investor- El Formulario 10-K, el proxy y otra información financiera están relations/annual-reports/ disponibles en http://www.popular.com/accionistas/informe-anual/ ANNUAL MEETING REUNIÓN ANUAL The 2017 Annual Stockholders’ Meeting of Popular, Inc. will be La Reunión Anual de Accionistas 2017 de Popular, Inc., se llevará held on Wednesday, April 26, at 9:00 a.m. at the penthouse of the a cabo el miércoles, 26 de abril, a las 9:00 a.m. en el piso PH de Popular Center Building, San Juan, Puerto Rico. Popular Center, San Juan, Puerto Rico.

POPULAR, INC. YEAR IN REVIEW Our achievements in 2016 reflect the actions we have taken in recent years to strengthen our balance sheet, improve our risk profile, drive business growth and manage our capital. I am pleased to report that we produced solid core financial results, improved credit quality and delivered strong business performance, which positions us for more active capital management in 2017. We continued to strengthen our capital position, closing the year with a Common Equity Tier 1 ratio of 16.5%. As a result of this strength and of the consistent progress we have made in recent years, in January of 2017 our Board of Directors approved an increase in the quarterly common stock dividend from $0.15 to $0.25 and a $75 million common stock repurchase program. While fully aware of the challenging environment in Puerto Rico, we will pursue additional opportunities to actively manage our capital and return capital to our shareholders as appropriate. Richard L. Carrión Chairman of the Board and Chief Executive Officer, Popular, Inc. We reported net income of $217 million for the year, compared with $895 million in 2015. Net income in 2015 included the benefit of the partial recapture of our deferred tax asset related to our operations in the United States. The figure for 2016 includes, among other significant “I am honored items, the effects of two adverse arbitration awards related to claims made by us under the commercial loss-share agreement with the by our clients’ FDIC, as receiver for Westernbank, which resulted in an expense of $131 million, net of tax. trust and support. Although we were clearly disappointed with the result of these We will continue arbitrations, we believe today, as we did when we decided to pursue these claims, that asserting our rights under the commercial loss-share working to earn agreement with the FDIC was in the best interest of our shareholders. Despite these recent setbacks, the 2010 Westernbank transaction, in their business which we acquired approximately $9 billion in assets, has proven to every day, in be of great financial and strategic importance to Popular. After adjusting for the impact of the adverse decisions, among other each interaction.” items, adjusted net income for 2016 totaled $358 million, compared to an adjusted net income of $375 million in the previous year, as our business in the United States did not benefit from the low income tax rate and credit recoveries experienced in 2015. Credit quality improved significantly during 2016. We reduced non-performing assets from $843 million or 2.4% of assets in 2015 to $774 million or 2.0% of assets in 2016. Net charge-offs were 22 basis points lower than in the previous year, for a ratio of 0.76% of loans in 2016, and inflows into non-performing loans declined by 23%. While credit metrics in our U.S. business continued to be strong, the year over year improvement was led by our Puerto Rico business, despite 1

POPULAR, INC. YEAR IN REVIEW challenging economic and fiscal conditions on the Island. These positive results are the product of strong risk management efforts including, among others, resolutions, restructurings, sales of non-performing assets and improved credit underwriting standards over the last several years. Our stock price closed 2016 at $43.82, 55% higher than 2015. This performance compares favorably against the KBW NASDAQ Bank Index and our peer banks in the United States, which increased 26% and 39% in 2015, respectively. In addition to reflecting our positive financial results, the price of BPOP shares appeared to be positively impacted by the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), a law to address Puerto Rico’s fiscal and economic situation. The price also benefitted from a broad increase in the price of bank stocks following the November U.S. presidential elections, due to expectations of a reduction in corporate taxes, a roll back of regulations affecting the sector and higher spending in infrastructure, among others. During 2016, we continued to solidify our leading market position in Puerto Rico. Total deposits increased by 10%, driven in part by an increase in government deposits. Loans remained fairly flat when compared to 2015. Despite a contracting credit market on the Island, our lending businesses remained active throughout the year, and production roughly offset normal portfolio runoff. The strength of our franchise in Puerto Rico lies in our customer base, which in 2016 reached close to 1.7 million clients or 65% of the banked population on the Island. This, combined with the variety and quality of the products and services we offer our retail and commercial customers, has driven our performance in recent years and presents substantial opportunities to continue growing our business in Puerto Rico. While we always seek to attract new clients, we are keenly focused on retaining and deepening our relationship with current customers. We are enhancing our analytical capabilities to gain a deeper understanding of our customers’ needs, behaviors and preferences to serve our diverse client base in a more individualized manner. We are also leveraging technology to enhance customer experience. Approximately 700,000 of our retail clients actively use our online platform, and 75% of these use mobile devices. In December 2016, close to 40% of deposit transactions in Puerto Rico were processed through ATMs and mobile devices. Our bank in the mainland United States, Popular Community Bank, had another strong year, achieving an increase of 17% in its loan portfolio. We also continued the transformation of our retail network in the United States. We opened two branches and relocated six additional ones to expand or improve our footprint. As a result of these efforts, branch deposits grew by 12%. We also made headway in the migration of transactions to digital channels, increasing digital deposits to 35% in 2016. We continued to invest in those areas we deem critical for our present and future performance, mainly risk management, technology and our people. We have a solid risk management infrastructure. However, complex and ever-evolving regulatory requirements demand significant investment. We made progress in the implementation of our technology strategy, including the streamlining and modernization of core banking systems and the development of digital channels. We also enhanced our cybersecurity program to protect Popular’s information assets and our customers’ information. To this end, we implemented additional controls and established a continuous monitoring process. Despite the progress we have made on this front, the constant evolution of cyber risks will undoubtedly continue to require considerable attention and resources in the future. We intensified our efforts to attract, develop and retain talent, revamping the recruitment processes, renovating trainings, and supporting internal mobility. We promoted employee wellness initiatives, including those designed to promote the health and financial well-being of our people, and emphasized the Corporation’s Diversity and Inclusion Program. Following our deeply ingrained tradition of community involvement, Fundación Banco Popular in Puerto Rico and the Popular Community Bank Foundation in the United States, together, donated over $3 million to more than 100 non-profit organizations, impacting over 20,000 individuals. Our employees are the backbone of our efforts, donating funds as well as their time to support groups backed by the Corporation. We also increased corporate donations and expanded programs in areas such as financial education and entrepreneurship. As we look ahead, Puerto Rico’s fiscal condition and economic environment remains our biggest challenge. The situation, which had become increasingly complicated in recent years, came to a head during 2016 when it became evident that the government would be unable to meet its debt obligations. This past 2

2016 HIGHLIGHTS ADJUSTED NET INCOME BPOP STOCK PRICE CHANGE VS. PEERS 2015-2016 $358 M 100% PR Peers 86% ORGANIC LOAN 80% GROWTH IN US 60% 17% BPOP 55% 40% US Peers 39% 20$ KBW Nasdaq REDUCTION IN Bank 26% NON-PERFORMING 0% ASSETS $69 M -20% -40% ROBUST CAPITAL METRICS -60% 16.5% 15 - - 16 16 - 16 - - 16 16 - - 16 16 - 16 - 16 - 16 - 16 - - 16 Dec Jan Feb Mar Apr Jun Jul Sep Oct Dec Common Equity Tier I May Aug Nov June, on the day before the local government defaulted on its general obligation debt, the federal government, through PROMESA, established the Fiscal Oversight and Management Board for Puerto Rico and a framework for an orderly debt restructuring. The Fiscal Oversight and Management Board, which is composed of seven members, was constituted in late August and is working with the new administration to develop a five-year fiscal plan for Puerto Rico. The Board has also extended a stay on litigation by Puerto Rico creditors through May 1st, 2017. The implementation of PROMESA will undoubtedly have important implications for Puerto Rico’s future. Since we are in uncharted territory, it is difficult to predict all of its ramifications. Given current budgetary imbalances, there will likely be a reduction of government spending which, in the short term, could negatively impact economic activity on the Island. However, we also see some near term opportunities to offset potential government cuts stemming from improved business and consumer confidence, energy infrastructure development and the payment of balances owed to suppliers by the Puerto Rico government. We are hopeful that, in time, Puerto Rico will benefit from a more manageable debt load, balanced government budgets and a revitalized economy. As the largest financial institution on the Island, we will continue to seek to be a source of information, support and advice, particularly on matters related to economic growth, which is the most critical element in the long run. Throughout Popular’s 123-year history, we have persevered through a number of challenges on the Island, and have always emerged stronger. This time will not be different. Our accomplishments in 2016 were made possible by the guidance of our Board of Directors, the leadership of our senior management team and the hard work of our 7,800 colleagues. Their dedication is a constant source of pride and inspiration. I would like to thank Ileana González, who retired in January of 2017 after 21 years of service. Ileana held several key positions at Popular, including Corporate Comptroller from 2004 until she became Executive Vice President of the Commercial Credit Administration Group in 2012. We are grateful for her valuable contributions and wish her the very best. I am honored by our clients’ trust and support. We will continue working to earn their business every day, in each interaction. Finally, I am grateful for our shareholders’ confidence in our organization. We look forward to building on these achievements to deliver another year of solid performance. Richard L. Carrión Chairman of the Board and Chief Executive Officer, Popular, Inc. 3

25 YEAR HISTORICAL FINANCIAL SUMMARY (Dollars in millions, except per share data) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Selected Financial Information Net Income (Loss) $ 85.1 $ 109.4 $ 124.7 $ 146.4 $ 185.2 $ 209.6 $ 232.3 $ 257.6 $ 276.1 $ 304.5 $ 351.9 Assets 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 Gross Loans 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 Deposits 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 Stockholders’ Equity 752.1 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 Market Capitalization $ 987.8 $ 1,014.7 $ 923.7 $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,611.7 $ 3,790.2 $ 3,578.1 $ 3,965.4 $ 4,476.4 Return on Average Assets (ROAA) 0.89% 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% Return on Average Common Equity (ROACE) 12.72% 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% Per Common Share1 Net Income (Loss) - Basic $ 3.49 $ 4.18 $ 4.59 $ 5.24 $ 6.69 $ 7.51 $ 8.26 $ 9.19 $ 9.85 $ 10.87 $ 13.05 Net Income (Loss) - Diluted 3.49 4.18 4.59 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 Dividends (Declared) 1.00 1.20 1.25 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 Book Value 28.79 31.86 34.35 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 Market Price 37.81 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 Assets by Geographical Area Puerto Rico 87% 79% 76% 75% 74% 74% 71% 71% 72% 68% 66% United States 10% 16% 20% 21% 22% 23% 25% 25% 26% 30% 32% Caribbean and Latin America 3% 5% 4% 4% 4% 3% 4% 4% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Traditional Delivery System Banking Branches Puerto Rico 162 165 166 166 178 201 198 199 199 196 195 Virgin Islands 3 8 8 8 8 8 8 8 8 8 8 United States 30 32 34 40 44 63 89 91 95 96 96 Subtotal 195 205 208 214 230 272 295 298 302 300 299 Non-Banking Offices Popular Financial Holdings 41 58 73 91 102 117 128 137 136 149 153 Popular Cash Express 51 102 132 154 195 Popular Finance 26 26 28 31 39 44 48 47 61 55 36 Popular Auto 9 8 10 9 8 10 10 12 12 20 18 Popular Leasing, U.S.A. 7 8 10 11 13 13 Popular Mortgage 3 3 3 11 13 21 25 29 Popular Securities 1 2 2 2 3 4 7 Popular One Popular Insurance 2 2 2 Popular Insurance Agency, U.S.A. 1 1 Popular Insurance, V.I. 1 E-LOAN EVERTEC 4 4 4 5 Subtotal 76 92 111 134 153 183 258 327 382 427 460 Total 271 297 319 348 383 455 553 625 684 727 759 Electronic Delivery System ATMs Owned Puerto Rico 211 234 262 281 327 391 421 442 478 524 539 Virgin Islands 3 8 8 8 9 17 59 68 37 39 53 United States 6 11 26 38 53 71 94 99 109 118 131 Total 220 253 296 327 389 479 574 609 624 681 723 Transactions (in millions) Electronic Transactions2 28.6 33.2 43.0 56.6 78.0 111.2 130.5 159.4 199.5 206.0 236.6 Items Processed3 170.4 171.8 174.5 175.0 173.7 171.9 170.9 171.0 160.2 149.9 145.3 Employees (full-time equivalent) 7,024 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 470.9 $ 489.9 $ 540.7 $ 357.7 $ (64.5) $ (1,243.9) $ (573.9) $ 137.4 $ 151.3 $ 245.3 $ 599.3 $ (313.5) $ 895.3 $ 216.7 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 $ 5,960.2 $ 7,685.6 $ 5,836.5 $ 5,003.4 $ 2,968.3 $ 1,455.1 $ 1,445.4 $ 3,211.4 $ 1,426.0 $ 2,144.9 $ 2,970.6 $ 3,523.4 $ 2,936.6 $ 4,548.1 1.36% 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% 19.30% 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% $ 17.36 $ 17.95 $ 19.78 $ 12.41 $ (2.73) $ (45.51) $ 2.39 $ (0.62) $ 1.44 $ 2.36 $ 5.80 $ (3.08) $ 8.66 $ 2.06 17.36 17.92 19.74 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 5.05 6.20 6.40 6.40 6.40 4.80 0.20 — — — — — 0.30 0.60 96.60 109.45 118.22 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 224.25 288.30 211.50 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 62% 55% 53% 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 36% 43% 45% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 2% 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 193 192 194 191 196 179 173 185 183 175 171 168 173 171 8 8 8 8 8 8 8 8 9 9 9 9 9 9 97 128 136 142 147 139 101 96 94 92 90 47 50 51 298 328 338 341 351 326 282 289 286 276 270 224 232 231 181 183 212 158 134 2 129 114 4 43 43 49 52 51 9 18 18 17 15 12 12 10 10 10 10 9 9 9 9 11 15 14 11 24 22 32 30 33 32 32 32 33 36 37 37 38 25 24 17 8 9 12 12 13 7 6 6 4 4 3 3 3 2 4 5 6 6 6 5 2 2 2 2 2 1 1 1 1 1 1 1 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 5 5 5 7 9 9 9 431 421 351 292 280 97 61 55 58 59 59 46 46 37 729 749 689 633 631 423 343 344 344 335 329 270 278 268 557 568 583 605 615 605 571 624 613 597 599 602 622 635 57 59 61 65 69 74 77 17 20 20 22 21 21 20 129 163 181 192 187 176 136 138 135 134 132 83 87 101 743 790 825 862 871 855 784 779 768 751 753 706 730 756 255.7 568.5 625.9 690.2 772.7 849.4 804.1 381.6 410.4 420.4 425.4 438.4 465.0 523.5 138.5 133.9 140.3 150.0 175.2 202.2 191.7 11,474 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 1 Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2 From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago Popular, Internet Banking and ATH Network transactions in Puerto Rico. From 2004 to 2009, these numbers were adjusted to include ATH Network transactions in the Dominican Republic, Costa Rica, El Salvador and United States, health care transactions, wire transfers, and other electronic payment transactions in addition to those previously stated. After 2010, the summary only includes electronic transactions made by Popular, Inc.’s clients and excludes electronic transactions processed by EVERTEC for other clients. 3 After the sale in 2010 of EVERTEC, Popular’s information technology subsidiary, the Corporation does not process electronic items. 5

POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS SENIOR MANAGEMENT TEAM RICHARD L. CARRIÓN IGNACIO ALVAREZ CAMILLE BURCKHART Chairman of the Board President & Chief Operating Officer Executive Vice President & Chief Executive Officer Popular, Inc. and Banco Popular & Chief Information Popular, Inc. de Puerto Rico and Digital Officer President Innovation, Technology Popular Community Bank & Operations Group Popular, Inc. MANUEL A. CHINEA JAVIER D. FERRER JUAN O. GUERRERO Executive Vice President Executive Vice President, Executive Vice President Popular, Inc. Chief Legal Officer & Financial and Insurance Chief Operating Officer Corporate Secretary Services Group Popular Community Bank General Counsel & Banco Popular de Puerto Rico Corporate Matters Group Popular, Inc. GILBERTO MONZÓN EDUARDO J. NEGRÓN NÉSTOR O. RIVERA Executive Vice President Executive Vice President Executive Vice President Individual Credit Group Administration Group Retail Banking Group Banco Popular de Puerto Rico Popular, Inc. Banco Popular de Puerto Rico ELI S. SEPÚLVEDA LIDIO V. SORIANO CARLOS J. VÁZQUEZ Executive Vice President Executive Vice President Executive Vice President Commercial Credit Group & Chief Risk Officer & Chief Financial Officer Banco Popular de Puerto Rico Corporate Risk Popular, Inc. Management Group Popular, Inc. BOARD OF DIRECTORS RICHARD L. CARRIÓN JOAQUÍN E. BACARDÍ, III ALEJANDRO M. BALLESTER Chairman of the Board Private Investor President & Chief Executive Officer Ballester Hermanos, Inc. Popular, Inc. JOHN W. DIERCKSEN MARÍA LUISA FERRÉ DAVID E. GOEL Principal President & Chief Managing General Partner Greycrest, LLC Executive Officer Matrix Capital Management Grupo Ferré Rangel Company, LP C. KIM GOODWIN WILLIAM J. TEUBER JR. CARLOS A. UNANUE Private Investor Private Investor President Goya de Puerto Rico 6

POPULAR, INC. RESUMEN DEL AÑO Richard L. Carrión Presidente de la Junta de Directores y Principal Oficial Ejecutivo, Popular, Inc. “Me siento honrado por la confianza y el apoyo de nuestros clientes. Continuaremos trabajando para ganarnos su negocio, dĺa tras dĺa, en cada interacción”. Nuestros logros en el 2016 reflejan las acciones tomadas en años recientes para fortalecer nuestra posición financiera, mejorar nuestro perfil de crédito, crecer el negocio y manejar nuestro capital. Me complace informar que generamos resultados financieros básicos sólidos, mejoramos la calidad de crédito y logramos un fuerte desempeño en nuestros negocios, lo que nos posiciona para un manejo más activo de nuestro capital en el 2017. Continuamos fortaleciendo nuestra posición de capital, terminando el año con una relación de capital básico (Common Equity Tier 1) de 16.5%. Como resultado de esta solidez y del progreso logrado en años recientes, en enero de 2017 nuestra Junta de Directores aprobó un aumento en el dividendo trimestral de $0.15 a $0.25 por acción común y un programa de recompra de acciones de $75 millones. Tomando en cuenta el ambiente desafiante en Puerto Rico, perseguiremos oportunidades adicionales para manejar activamente nuestro capital y devolver capital a nuestros accionistas según sea apropiado. Informamos un ingreso neto de $217 millones para el año, comparado con $895 millones en el 2015. El ingreso neto de 2015 incluyó el beneficio de un reverso parcial de la reserva de nuestro activo de contribuciones diferidas relacionado con nuestras operaciones de Estados Unidos. La cifra para el 2016 incluye, entre otras partidas significativas, el impacto de dos decisiones adversas relacionadas a reclamaciones hechas por nosotros al FDIC como sĺndico de Westernbank bajo el acuerdo de participación de pérdidas en préstamos comerciales, que resultaron en un gasto de $131 millones, neto de contribuciones. Aunque claramente decepcionados con el resultado de estos procesos de arbitraje, creemos hoy, al igual que cuando decidimos perseguir estas reclamaciones, que hacer valer nuestros derechos bajo el acuerdo de participación de pérdidas en préstamos comerciales con el FDIC era en el mejor interés de nuestros accionistas. A pesar de estos contratiempos recientes, la transacción de Westernbank en el 2010, en la cual adquirimos aproximadamente $9,000 millones en activos, ha probado ser de gran importancia financiera y estratégica para Popular. Luego de ajustar para excluir el impacto de estas decisiones adversas, entre otras partidas, el ingreso neto ajustado para el 2016 alcanzó $358 millones, comparado con un ingreso neto ajustado de $375 millones en el año anterior, debido a que nuestro negocio en los Estados Unidos no se benefició de una baja tasa contributiva y de recobros de préstamos que tuvo en el 2015. La calidad de crédito mejoró sustancialmente en el 2016. Los activos no acumulativos se redujeron de $843 millones o 2.4% de los activos a $774 millones o 2.0% de los activos en el 2016. Las pérdidas netas en préstamos estuvieron 22 puntos base por debajo del año anterior, para una proporción de 0.76% del total de préstamos, y la cantidad de préstamos que se convirtieron en no acumulativos se redujo en un 23%. Aunque las métricas de crédito en nuestro negocio en los Estados 7

POPULAR, INC. RESUMEN DEL AÑO Unidos se mantuvieron fuertes, la mejorĺa de un año al otro se debió a nuestro negocio en Puerto Rico, a pesar de las condiciones económicas y fiscales en la isla. Estos resultados positivos son el producto de esfuerzos de manejo de riesgo que incluyen, entre otras estrategias, resoluciones, reestructuraciones, ventas de activos no productivos y mejores criterios de suscripción de crédito durante los últimos años. El precio de nuestra acción cerró el 2016 en $43.82, un 55% más alto que en el 2015. Este desempeño compara favorablemente con el Índice Bancario KBW NASDAQ y con nuestro grupo de bancos pares en los Estados Unidos, que, en el 2016, aumentaron un 26% y un 39%, respectivamente. Además de reflejar nuestros resultados financieros positivos, el precio de las acciones de BPOP pareció impactarse positivamente de la promulgación de la Ley para la Supervisión, Administración y Estabilidad Económica de Puerto Rico (PROMESA, por sus siglas en inglés), una ley para atender la situación fiscal y económica de Puerto Rico. El precio se benefició, además, por un aumento en el precio de las acciones de muchos bancos tras las elecciones presidenciales de los Estados Unidos en noviembre, debido a expectativas de una disminución en la tasa contributiva de las corporaciones, una reducción de las regulaciones que afectan al sector y mayor inversión en infraestructura, entre otras. Durante el 2016, continuamos fortaleciendo nuestra posición de liderazgo en Puerto Rico. Los depósitos totales aumentaron 10%, impulsados en gran parte por los depósitos del gobierno. Los préstamos permanecieron prácticamente al mismo nivel del año anterior. A pesar de un mercado de crédito en contracción, nuestros negocios de préstamos se mantuvieron activos durante el año, y la originación de nuevos préstamos prácticamente contrarrestó los repagos normales de la cartera. La fortaleza de nuestra franquicia en Puerto Rico reside en nuestra base de clientes, que en el 2016 alcanzó 1.7 millones, o un 65% de la población de la isla que utiliza servicios bancarios. Esto, combinado con la variedad y calidad de los productos y servicios que ofrecemos a individuos y a negocios, ha impulsado nuestro desempeño en años recientes y presenta oportunidades considerables para continuar creciendo nuestro negocio en Puerto Rico. Aunque siempre buscamos atraer nuevos clientes, estamos enfocados en retener y profundizar nuestra relación con clientes existentes. Estamos robusteciendo nuestras capacidades analĺticas para obtener un mejor entendimiento de las necesidades, comportamientos y preferencias de nuestros clientes para poder servirlos de una forma más individualizada. Además, estamos aprovechando la tecnologĺa para mejorar la experiencia de los clientes. Aproximadamente 700 mil de nuestros clientes de banca personal utilizan activamente nuestra plataforma en lĺnea, y un 75% de estos utiliza dispositivos móviles. En diciembre de 2016, aproximadamente 40% de las transacciones de depósito en Puerto Rico se procesaron a través de cajeros automáticos y dispositivos móviles. Nuestro banco en los Estados Unidos continentales, Popular Community Bank, tuvo otro año fuerte, alcanzando un crecimiento de 17% en su cartera de préstamos. También continuamos la transformación de nuestra red de distribución, abriendo dos sucursales nuevas y relocalizando otras seis para expandir nuestro alcance. Como resultado de estos esfuerzos, los depósitos en sucursales aumentaron un 12%. También avanzamos en la migración de transacciones a canales digitales, aumentando la proporción de depósitos digitales a 35% en el 2016. Continuamos invirtiendo en aquellas áreas que consideramos crĺticas para nuestro desempeño actual y futuro, principalmente manejo de riesgo, tecnologĺa y nuestra gente. Contamos con una sólida infraestructura de manejo de riesgo. Sin embargo, requisitos reglamentarios complejos y en constante evolución exigen una inversión significativa. Adelantamos la ejecución de nuestra estrategia de tecnologĺa, incluyendo la simplificación y modernización de nuestros sistemas bancarios principales y el desarrollo de canales digitales. También, robustecimos nuestro programa de seguridad cibernética para proteger los activos de información de Popular y la información financiera de nuestros clientes. A estos fines, implantamos controles adicionales y establecimos un proceso de monitoreo continuo. A pesar de lo logrado en este frente, la evolución constante de los riesgos cibernéticos sin duda continuará requiriendo atención y recursos considerables en el futuro. Intensificamos nuestros esfuerzos para atraer, desarrollar y retener talento, mejorando nuestros procesos de reclutamiento, renovando nuestros adiestramientos y apoyando la movilidad interna. Promovimos iniciativas de bienestar para nuestros empleados, incluyendo aquellas que promueven la salud fĺsica y financiera de nuestra gente, y enfatizamos el Programa de Diversidad e Inclusión de la Corporación. Siguiendo nuestra larga y profunda tradición de participación en la comunidad, Fundación Banco Popular en Puerto Rico y Popular Community Bank Foundation en los Estados Unidos, juntas, donaron sobre $3 millones a más de 100 organizaciones sin fines de lucro, impactando a más de 20,000 personas. Nuestros empleados son los pilares de estos esfuerzos, donando dinero, asĺ como su tiempo, a los grupos a los cuales la Corporación apoya. Además, aumentamos los donativos corporativos y nuestros programas en áreas como educación financiera y la promoción del espĺritu empresarial. 8

PUNTOS PRINCIPALES DEL 2016 INGRESO NETO AJUSTADO CAMBIO DEL PRECIO DE LA ACCIÓN DE POPULAR COMPARADO CON LOS PARES 2015-2016 $358 M 100% Pares PR 86% CRECIMIENTO ORGÁNICO 80% DE LA CARTERA DE 60% PRÉSTAMOS EN EE.UU. BPOP 55% 17% 40% Pares EE.UU. 39% 20$ Índice KBW 26% DISMINUCIÓN DE LOS ACTIVOS 0% NO ACUMULATIVOS $69 M -20% -40% NIVEL DE CAPITAL ROBUSTO -60% 16.5% - 15 - 16 - 16 16 - - 16 16 - 16 - - 16 - 16 16 - 16 - 16 - 16 -Common Equity Tier I dic ene feb mar abr may jun jul ago sep oct nov dic Mirando hacia el futuro, la condición fiscal y económica de Puerto Rico continúa siendo nuestro desafĺo principal. La situación, la cual se complicó en años recientes, llegó a un punto crĺtico en el 2016 cuando fue evidente que el gobierno no podrĺa cumplir con sus obligaciones de deuda. En junio del año pasado, un dĺa antes de que el gobierno local incumpliera con el pago de la deuda de sus obligaciones generales, el gobierno federal, a través de PROMESA, estableció la Junta de Supervisión Fiscal para Puerto Rico y un marco para una reestructuración ordenada de la deuda. La Junta de Supervisión Fiscal, compuesta de siete miembros, se constituyó en agosto y está trabajando junto a la nueva administración para desarrollar un plan fiscal de cinco años para Puerto Rico. La Junta además extendió la posposición de litigios de los acreedores de Puerto Rico hasta el 1ro de mayo de 2017. La implantación de PROMESA indudablemente tendrá implicaciones importantes para el futuro de Puerto Rico. Dado que nos encontramos en territorio desconocido, es difĺcil predecir todas sus ramificaciones. Tomando en cuenta el desequilibrio fiscal actual, probablemente habrá una reducción del gasto gubernamental que, en el corto plazo, podrĺa afectar negativamente la actividad económica en la isla. Sin embargo, también vemos algunas oportunidades que pudiesen contrarrestar posibles recortes del gobierno, como una mejorĺa en la confianza de los individuos y empresas, el desarrollo de la infraestructura de energĺa y el pago de balances que el gobierno de Puerto Rico le adeuda a suplidores. Estamos esperanzados que, con el tiempo, Puerto Rico se beneficie de una carga de deuda más manejable, un presupuesto gubernamental balanceado y una economĺa revitalizada. Como la principal institución financiera en la isla, continuaremos buscando ser fuente de información, apoyo y consejo, particularmente en temas relacionados al crecimiento económico, que es el elemento más crĺtico a largo plazo. En los 123 años de Popular, hemos atravesado un sinnúmero de desafĺos en la isla, y siempre emergemos más fuertes. Esta vez no será diferente. Nuestros logros en el 2016 fueron posibles gracias al consejo de nuestra Junta de Directores, al liderazgo de nuestro equipo gerencial y al trabajo de nuestros 7,800 compañeros. Su dedicación es una fuente constante de orgullo e inspiración. Quisiera agradecer a Ileana González, quien se acogió al retiro en enero de 2017 luego de 21 años de servicio. Ileana ocupó varias posiciones importantes en Popular, incluyendo Contralor Corporativo desde el 2004, hasta que se convirtió en vicepresidenta ejecutiva del Grupo de Administración de Crédito Comercial en el 2012. Agradecemos sus valiosas aportaciones y le deseamos lo mejor. Me siento honrado por la confianza y el apoyo de nuestros clientes. Continuaremos trabajando para ganarnos su negocio, dĺa tras dĺa, en cada interacción. Finalmente, estoy agradecido por la confianza de los accionistas en nuestra organización. Estamos deseosos de construir sobre estos logros para alcanzar otro año de resultados sólidos. Richard L. Carrión Presidente de la Junta de Directores y Principal Oficial Ejecutivo, Popular, Inc. 9

25 AÑOS RESUMEN FINANCIERO HISTÓRICO (Dólares en millones, excepto información por acción) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Información Financiera Seleccionada Ingreso neto (Pérdida neta) $ 85.1 $ 109.4 $ 124.7 $ 146.4 $ 185.2 $ 209.6 $ 232.3 $ 257.6 $ 276.1 $ 304.5 $ 351.9 Activos 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 Préstamos brutos 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 Depósitos 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 Capital de accionistas 752.1 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 Valor agregado en el mercado $ 987.8 $ 1,014.7 $ 923.7 $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,611.7 $ 3,790.2 $ 3,578.1 $ 3,965.4 $ 4,476.4 Rendimiento de activos promedio (ROAA) 0.89% 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% Rendimiento de capital común promedio (ROACE) 12.72% 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% Por Acción Común1 Ingreso neto (Pérdida neta) - Básico $ 3.49 $ 4.18 $ 4.59 $ 5.24 $ 6.69 $ 7.51 $ 8.26 $ 9.19 $ 9.85 $ 10.87 $ 13.05 Ingreso neto (Pérdida neta) - Diluido 3.49 4.18 4.59 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 Dividendos (Declarados) 1.00 1.20 1.25 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 Valor en los libros 28.79 31.86 34.35 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 Precio en el mercado 37.81 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 Activos por Área Geográfica Puerto Rico 87% 79% 76% 75% 74% 74% 71% 71% 72% 68% 66% Estados Unidos 10% 16% 20% 21% 22% 23% 25% 25% 26% 30% 32% Caribe y Latinoamérica 3% 5% 4% 4% 4% 3% 4% 4% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Sistema de Distribución Tradicional Sucursales bancarias Puerto Rico 162 165 166 166 178 201 198 199 199 196 195 Islas Vĺrgenes 3 8 8 8 8 8 8 8 8 8 8 Estados Unidos 30 32 34 40 44 63 89 91 95 96 96 Subtotal 195 205 208 214 230 272 295 298 302 300 299 Oficinas no bancarias Popular Financial Holdings 41 58 73 91 102 117 128 137 136 149 153 Popular Cash Express 51 102 132 154 195 Popular Finance 26 26 28 31 39 44 48 47 61 55 36 Popular Auto 9 8 10 9 8 10 10 12 12 20 18 Popular Leasing, U.S.A. 7 8 10 11 13 13 Popular Mortgage 3 3 3 11 13 21 25 29 Popular Securities 1 2 2 2 3 4 7 Popular One Popular Insurance 2 2 2 Popular Insurance Agency, U.S.A. 1 1 Popular Insurance, V.I. 1 E-LOAN EVERTEC 4 4 4 5 Subtotal 76 92 111 134 153 183 258 327 382 427 460 Total 271 297 319 348 383 455 553 625 684 727 759 Sistema Electrónico de Distribución Cajeros automáticos propios y administrados Puerto Rico 211 234 262 281 327 391 421 442 478 524 539 Islas Vĺrgenes 3 8 8 8 9 17 59 68 37 39 53 Estados Unidos 6 11 26 38 53 71 94 99 109 118 131 Total 220 253 296 327 389 479 574 609 624 681 723 Transacciones (en millones) Transacciones electrónicas2 28.6 33.2 43.0 56.6 78.0 111.2 130.5 159.4 199.5 206.0 236.6 Efectos procesados3 170.4 171.8 174.5 175.0 173.7 171.9 170.9 171.0 160.2 149.9 145.3 Empleados (equivalente a tiempo completo) 7,024 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 470.9 $ 489.9 $ 540.7 $ 357.7 $ (64.5) $ (1,243.9) $ (573.9) $ 137.4 $ 151.3 $ 245.3 $ 599.3 $ (313.5) $ 895.3 $ 216.7 36,434.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 22,602.2 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 18,097.8 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 2,754.4 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 $ 5,960.2 $ 7,685.6 $ 5,836.5 $ 5,003.4 $ 2,968.3 $ 1,455.1 $ 1,445.4 $ 3,211.4 $ 1,426.0 $ 2,144.9 $ 2,970.6 $ 3,523.4 $ 2,936.6 $ 4,548.1 1.36% 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% 19.30% 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% $ 17.36 $ 17.95 $ 19.78 $ 12.41 $ (2.73) $ (45.51) $ 2.39 $ (0.62) $ 1.44 $ 2.36 $ 5.80 $ (3.08) $ 8.66 $ 2.06 17.36 17.92 19.74 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 5.05 6.20 6.40 6.40 6.40 4.80 0.20 — — — — — 0.30 0.60 96.60 109.45 118.22 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 224.25 288.30 211.50 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 62% 55% 53% 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 36% 43% 45% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 2% 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 193 192 194 191 196 179 173 185 183 175 171 168 173 171 8 8 8 8 8 8 8 8 9 9 9 9 9 9 97 128 136 142 147 139 101 96 94 92 90 47 50 51 298 328 338 341 351 326 282 289 286 276 270 224 232 231 181 183 212 158 134 2 129 114 4 43 43 49 52 51 9 18 18 17 15 12 12 10 10 10 10 9 9 9 9 11 15 14 11 24 22 32 30 33 32 32 32 33 36 37 37 38 25 24 17 8 9 12 12 13 7 6 6 4 4 3 3 3 2 4 5 6 6 6 5 2 2 2 2 2 1 1 1 1 1 1 1 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 5 5 5 7 9 9 9 431 421 351 292 280 97 61 55 58 59 59 46 46 37 729 749 689 633 631 423 343 344 344 335 329 270 278 268 557 568 583 605 615 605 571 624 613 597 599 602 622 635 57 59 61 65 69 74 77 17 20 20 22 21 21 20 129 163 181 192 187 176 136 138 135 134 132 83 87 101 743 790 825 862 871 855 784 779 768 751 753 706 730 756 255.7 568.5 625.9 690.2 772.7 849.4 804.1 381.6 410.4 420.4 425.4 438.4 465.0 523.5 138.5 133.9 140.3 150.0 175.2 202.2 191.7 11,474 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 1 Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la división de acciones a la inversa realizada en mayo 2012. 2 Desde el 1981 hasta el 2003, las transacciones electrónicas incluyen transacciones ACH, Pago Directo, TelePago Popular, Banca por Internet y transacciones por la Red ATH en Puerto Rico. Desde el 2004 hasta el 2009, estos números incluyen el total de transacciones por la Red ATH en República Dominicana, Costa Rica, El Salvador y Estados Unidos, transacciones de facturación médica, transferencias cablegráficas y otros pagos electrónicos además de lo previamente señalado. A partir del 2010, esta cifra incluye solamente las transacciones realizadas por los clientes de Popular, Inc. y excluye las transacciones procesadas por EVERTEC para otros clientes. 3 A partir del 2010, luego de la venta de EVERTEC, la subsidiaria de tecnologĺa de Popular, Inc., no se procesan efectos electrónicos. 11

POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES EQUIPO GERENCIAL EJECUTIVO RICHARD L. CARRIÓN IGNACIO ALVAREZ CAMILLE BURCKHART Presidente de la Presidente y Principal Oficial Vicepresidenta Ejecutiva y Junta de Directores y de Operaciones Popular, Inc. Principal Oficial de Informática Principal Oficial Ejecutivo y Banco Popular de Puerto Rico y Estrategia Digital Popular, Inc. Presidente Grupo de Innovación, Popular Community Bank Tecnologĺa y Operaciones Popular, Inc. MANUEL A. CHINEA JAVIER D. FERRER JUAN O. GUERRERO Vicepresidente Ejecutivo Vicepresidente Ejecutivo, Vicepresidente Ejecutivo Popular, Inc. Principal Oficial Legal y Grupo de Servicios Principal Oficial de Operaciones Secretario Corporativo Financieros y Seguros Popular Community Bank Grupo de Consejerĺa General Banco Popular de Puerto Rico y Asuntos Corporativos Popular, Inc. GILBERTO MONZÓN EDUARDO J. NEGRÓN NÉSTOR O. RIVERA Vicepresidente Ejecutivo Vicepresidente Ejecutivo Vicepresidente Ejecutivo Grupo de Crédito a Individuo Grupo de Administración Grupo de Banca Individual Banco Popular de Puerto Rico Popular, Inc. Banco Popular de Puerto Rico ELI S. SEPÚLVEDA LIDIO V. SORIANO CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo Vicepresidente Ejecutivo y Vicepresidente Ejecutivo y Grupo de Crédito Comercial Principal Oficial de Riesgo Principal Oficial Financiero Banco Popular de Puerto Rico Grupo Corporativo de Popular, Inc. Manejo de Riesgo Popular, Inc. JUNTA DE DIRECTORES RICHARD L. CARRIÓN JOAQUÍN E. BACARDÍ, III ALEJANDRO M. BALLESTER Presidente de la Inversionista Privado Presidente Junta de Directores y Ballester Hermanos, Inc. Principal Oficial Ejecutivo Popular, Inc. JOHN W. DIERCKSEN MARÍA LUISA FERRÉ DAVID E. GOEL Principal Presidenta y Principal Socio Gerente General Greycrest, LLC Oficial Ejecutiva Matrix Capital Management Grupo Ferré Rangel Company, LP C. KIM GOODWIN WILLIAM J. TEUBER JR. CARLOS A. UNANUE Inversionista Privada Inversionista Privado Presidente Goya de Puerto Rico 12

P.O. BOX 362708 | SAN JUAN, PUERTO RICO 00936-2708

Financial Review and

Supplementary Information

Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Statistical Summaries	82-86
Financial Statements
Report of Management on Internal Control Over Financial Reporting	87
Report of Independent Registered Public Accounting Firm	88
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015	90
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014	91
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014	92
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014	93
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014	94
Notes to Consolidated Financial Statements	95

1

Management’s Discussion and

Analysis of Financial Condition

and Results of Operations

Forward-Looking Statements	3
Overview	4
Critical Accounting Policies / Estimates	10
Statement of Operations Analysis	18
Net Interest Income	18
Provision for Loan Losses	23
Non-Interest Income	24
Operating Expenses	25
Income Taxes	26
Fourth Quarter Results	26
Reportable Segment Results	27
Statement of Financial Condition Analysis	31
Assets	31
Liabilities	34
Stockholders’ Equity	36
Regulatory Capital	36
Off-Balance Sheet Arrangements and Other Commitments	38
Contractual Obligations and Commercial Commitments	38
Risk Management	40
Risk Management Framework	40
Market / Interest Rate Risk	42
Liquidity	49
Credit Risk	55
Enterprise Risk and Operational Risk Management	78
Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards	78
Adjusted net income – Non-GAAP Financial Measure	79
Statistical Summaries
Statements of Financial Condition	82
Statements of Operations	83
Average Balance Sheet and Summary of Net Interest Income	84
Quarterly Financial Data	86

2

The following Management’s Discussion and Analysis (“MD&A”) provides information which management believes is necessary for understanding the financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, consolidated financial statements, and corresponding notes included in this “Financial Review and Supplementary Information - 2016 Annual Report” (“the report”) should be considered an integral part of this MD&A.

FORWARD-LOOKING STATEMENTS

The information included in this report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc’s (“Popular”, the “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 anticipated impacts of our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the Federal Deposit Insurance Corporation (“FDIC”) as receiver, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate”, “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.

Forward-looking statements are not guarantees of future performance are based on management’s current expectations and, by their nature, involve certain risks, 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 in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve; the impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board, on the economy, our customers and our business; the impact of the actions to be taken to address Puerto Rico’s fiscal crisis on the value of our portfolio of Puerto Rico government securities and loans to governmental entities, and the possibility that these actions may result in credit losses that are higher than currently expected; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) on the Corporation’s businesses, business practices and costs of operations; regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located; the performance of the stock and bond markets; competition in the financial services industry; additional FDIC assessments; and possible legislative, tax or regulatory changes; a failure in or breach of our operational or security systems or infrastructure, including that of EVERTEC, Inc. our provider of core financial transaction processing and information technology services, as a result of cyber attacks or otherwise; and risks related to the Doral transaction, including our ability to maintain customer relationships and risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; 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 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.

3

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, 2016 discusses additional information about the business of the Corporation and the material risk factors that, in addition to the other information in this report, readers should consider.

OVERVIEW

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. The BPNA franchise operates under the brand name of Popular Community Bank. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and Southern Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 42 to the consolidated financial statements presents information about the Corporation’s business segments.

The Corporation has several investments which it accounts for under the equity method. These include the 16.05% interest in EVERTEC, a 15.84% interest in Centro Financiero BHD Leon, S.A. (“BHD Leon”), a 24.9% interest in PR Asset Portfolio 2013-1 International, LLC and a 24.9% interest in PRLP 2011 Holdings LLP, among other investments in limited partnerships which mainly hold investment securities. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s systems infrastructure and transaction processing businesses. BHD León is a diversified financial services institution operating in the Dominican Republic. PR Asset Portfolio 2013-1 International, LLC is a joint venture to which the Corporation sold construction and commercial loans and commercial and residential real estate owned assets, most of which were non-performing, with a fair value of $306 million during the year 2013. PRLP 2011 Holdings LLP is a joint venture to which the Corporation sold construction and commercial loans, most of which were non-performing, with a fair value of $148 million during the year 2011. For the year ended December 31, 2016, the Corporation recorded approximately $31.3 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2016 were $218.1 million. Refer to Note 18 to the consolidated financial statements for additional information of the Corporation’s investments under the equity method.

Significant events

Completed sale of non-performing assets

During the year ended December 31, 2016, the Corporation completed the sale of commercial and construction loans with a carrying value of approximately $100 million and other real estate owned (“OREO”) with a carrying value of $9 million acquired in 2010 from the FDIC as receiver for Westernbank (“Westernbank” or “WB”). The sale resulted in a net benefit before taxes of approximately $8 million from the sale of the loans and a loss of $5.1 million from the sale of OREOs.

Review board decisions related to the arbitration with the FDIC

During the third and fourth quarters of 2016, the review board hearing several of the arbitration claims submitted by BPPR issued final arbitration decisions denying BPPR’s request for reimbursement for shared loss claims that were subject to the disputes between BPPR and the Federal Deposit Insurance Corporation (“FDIC”), as receiver, under the commercial loss share agreement entered into in connection with the WB FDIC-assisted transaction. As a result, the Corporation recorded a pre-tax charge of $171.8 million in connection with unreimbursed losses considered in the arbitration proceedings, the related adjustment to the true-up obligation owed to the FDIC at the end of the loss-share agreements in 2020 and recoveries previously incorporated in the net damages claimed in the arbitration.

Table 1 provides selected financial data for the past five years. For purposes of the discussions, assets subject to loss sharing agreements with the FDIC, including loans and other real estate owned, are referred to as “covered assets” or “covered loans” since the Corporation expects to be reimbursed for 80% of any future losses on those assets, subject to the terms of the FDIC loss sharing agreements.

4

Table 1 - Selected Financial Data
	Years ended December 31,
(Dollars in thousands, except per common share data)	2016			2015			2014			2013			2012
CONDENSED STATEMENTS OF OPERATIONS
Interest income	$	1,634,573		$	1,603,014		$	1,633,543		$	1,647,940		$	1,644,386
Interest expense		212,518			194,031			688,471			303,366			362,759
Net interest income		1,422,055			1,408,983			945,072			1,344,574			1,281,627
Provision for loan losses:
Non-covered loans		171,126			217,458			223,999			536,710			322,234
Covered loans		(1,110	)		24,020			46,135			69,396			74,839
Non-interest income		297,936			519,541			386,515			791,013			511,489
Operating expenses		1,255,635			1,288,221			1,193,684			1,221,990			1,214,989
Income tax (benefit) expense		78,784			(495,172	)		58,279			(251,327	)		(26,403	)
Income (loss) from continuing operations		215,556			893,997			(190,510	)		558,818			207,457
Income (loss) from discontinued operations, net of tax		1,135			1,347			(122,980	)		40,509			37,818
Net income (loss)	$	216,691		$	895,344		$	(313,490	)	$	599,327		$	245,275
Net income (loss) applicable to common stock	$	212,968		$	891,621		$	(317,213	)	$	595,604		$	241,552
PER COMMON SHARE DATA
Net income (loss):
Basic:
From continuing operations	$	2.05		$	8.65		$	(1.88	)	$	5.41		$	1.99
From discontinued operations		0.01			0.01			(1.20	)		0.39			0.37
Total	$	2.06		$	8.66		$	(3.08	)	$	5.80		$	2.36
Diluted:
From continuing operations	$	2.05		$	8.64		$	(1.88	)	$	5.39		$	1.98
From discontinued operations		0.01			0.01			(1.20	)		0.39			0.37
Total	$	2.06		$	8.65		$	(3.08	)	$	5.78		$	2.35
Dividends declared	$	0.60		$	0.30		$	—		$	—		$	—
Common equity per share		49.60			48.79			40.76			44.26			39.35
Market value per common share		43.82			28.34			34.05			28.73			20.79
Outstanding shares:
Average - basic		103,275,264			102,967,186			102,848,792			102,693,685			102,429,755
Average - assuming dilution		103,377,283			103,124,309			102,848,792			103,061,475			102,653,610
End of period		103,790,932			103,618,976			103,476,847			103,397,699			103,169,806
AVERAGE BALANCES
Net loans[1]	$	23,062,242		$	23,045,308		$	22,366,750		$	22,799,878		$	22,786,545
Earning assets		33,713,158			31,451,081			29,897,273			29,741,099			29,510,753
Total assets		37,613,742			35,186,305			35,181,857			36,266,993			36,264,031
Deposits		29,066,010			26,778,582			24,647,355			24,571,382			24,702,622
Borrowings		2,339,399			2,757,334			3,514,203			4,291,861			4,414,483
Total stockholders’ equity		5,278,477			4,704,862			4,555,752			4,176,349			3,843,652
PERIOD END BALANCE
Net loans[1]	$	23,435,446		$	23,129,230		$	22,053,217		$	24,706,719		$	25,093,632
Allowance for loan losses		540,651			537,111			601,792			640,555			730,607
Earning assets		34,861,193			31,717,124			29,594,365			31,521,963			31,906,198
Total assets		38,661,609			35,761,733			33,086,771			35,748,752			36,506,911
Deposits		30,496,224			27,209,723			24,807,535			26,711,145			27,000,613
Borrowings		2,055,477			2,425,853			2,994,761			3,644,665			4,430,049
Total stockholders’ equity		5,197,957			5,105,324			4,267,382			4,626,150			4,110,000
SELECTED RATIOS
Net interest margin (taxable equivalent basis)[2]		4.48	%		4.74	%		3.45	%		4.73	%		4.47	%
Return on average total assets		0.58			2.54			(0.89	)		1.65			0.68
Return on average common stockholders’ equity		4.07			19.16			(7.04	)		14.43			6.37
Tier I Capital to risk-adjusted assets		16.48			16.21			18.13			19.15			17.35
Total Capital to risk-adjusted assets		19.48			18.78			19.41			20.42			18.63

[1] Includes loans held-for-sale and covered loans.

[2] Net interest margin for the year ended December 31, 2014 includes the impact of the cost associated with the refinancing of structured repos at BPNA and the accelerated amortization of the discount related to the TARP funds amounting to $39.2 million and $414.1 million, respectively. Refer additional information on the Net Interest Income section of this MD&A and to the reconciliation in Table 6.

5

Adjusted results of operations – Non-GAAP financial measure

Adjusted net income

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors Adjusted net income of the Corporation and excludes the impact of certain transactions on the results of its operations. Management believes that Adjusted net income provides meaningful information about the underlying performance of the Corporation’s ongoing operations. Adjusted net income is a non-GAAP financial measure. Refer to tables 46 to 48 for a reconciliation of net income to Adjusted net income for the years ended December 31, 2016, 2015 and 2014.

Net interest income on a taxable equivalent basis

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables 5 and 6 for the years ended December 31, 2016 as compared with the same periods in 2015 and 2014, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies and assets held by the Corporation’s international banking entities. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each period. The taxable equivalent computation considers the interest expense and other related expense disallowances required by the Puerto Rico tax law. Under this law, the exempt interest can be deducted up to the amount of taxable income. Net interest income on a taxable equivalent basis is a non-GAAP financial measure. Management believes that this presentation provides meaningful information since it facilitates the comparison of revenues arising from taxable and exempt sources.

Non-GAAP financial measures used by the Corporation may not be comparable to similarly named Non-GAAP financial measures used by other companies.

Financial highlights for the year ended December 31, 2016

The Corporation’s net income for the year ended December 31, 2016 amounted to $216.7 million, compared to a net income of $895.3 million and a net loss of $313.5 million, for 2015 and 2014, respectively. For the year 2016, the Corporation’s results include the impact of two unfavorable arbitration review board decisions in disputes with the FDIC, which resulted in a pre-tax charge of $171.8 million related to unreimbursed losses considered in the arbitrations, the related adjustment to the true-up obligation owed to the FDIC at the end of the loss-share agreements in 2020 and recoveries previously incorporated in the net damages claimed in the arbitration.

Net income from continuing operations for the year ended December 31, 2015 include $18.4 million in restructuring charges related to the U.S. operations; the impact of $17.9 million of net expenses associated with the acquisition in 2015, of certain assets and assumption of non-brokered deposits of Doral Bank from the FDIC, as receiver (the “Doral Bank Transaction”); an other-than-temporary impairment charge of $14.4 million on the portfolio of Puerto Rico government investment 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 from its U.S. operations for approximately $589.0 million.

Net loss from continuing operations for the year ended December 31, 2014 was $190.5 million. The continuing operations for the year 2014 reflect a $414.1 million expense related to the amortization of the discount associated with the TARP funds which were

6

repaid during 2014; a positive adjustment of $12.5 million in the amortization of the FDIC indemnification asset to reverse the impact of accelerated amortization expense recorded in prior periods; and the impact of the BPNA reorganization which included losses on bulk sales of non-performing assets totalling $11.1 million, a $39.8 million expense related to the refinancing of structured repos and restructuring charges of $26.7 million. In addition, during 2014 the Corporation recorded an income tax expense of $20.0 million related to the change in the capital gains tax rate in Puerto Rico from 15% to 20% and a $8.0 million charge to record a valuation allowance on the deferred tax asset at the holding company, offset by an income tax benefit of $23.4 million resulting from the Closing Agreement with the PR Treasury Department related to the treatment of certain charge-offs for the loans acquired from Westernbank.

For the year 2014, the Corporation’s results reflected a net loss from discontinued operations of $123.0 million, which include a goodwill impairment charge of $186.5 million and the net gain on the sale of the U.S. regional operations amounting to $33.8 million.

Excluding the impact of the above mentioned transactions, detailed in Tables 46 and 47, the Adjusted net income from continuing operations for the year ended December 31, 2016 was $358.1 million, compared to $374.8 million for 2015 and $300.7 million for 2014. Refer to Tables 46 through 48 for the reconciliation to the Adjusted net income.

On April 30, 2010, BPPR acquired certain assets and assumed certain liabilities of Westernbank from the FDIC in an assisted transaction. Table 2 provides a summary of the gross revenues derived from the assets acquired in the FDIC-assisted transaction during 2016, 2015 and 2014.

Table 2 - Financial Information - Westernbank FDIC-Assisted Transaction

	Years ended December 31,
(In thousands)	2016			2015			2014
Interest income on WB loans	$	175,207		$	208,779		$	293,610
FDIC loss share (expense) income :
Amortization of loss share indemnification asset		(10,201	)		(66,238	)		(189,959	)
Reversal of accelerated amortization in prior periods		—			—			12,492
80% mirror accounting on credit impairment losses[1]		(239	)		15,658			32,038
80% mirror accounting on reimbursable expenses		8,433			73,205			58,117
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		(31,338	)		(13,836	)		(13,124	)
Change in true-up payment obligation		(33,413	)		9,559			(1,791	)
Arbitration decision charge		(136,197	)		—			—
Other		(4,824	)		1,714			(797	)
Total FDIC loss share (expense) income		(207,779	)		20,062			(103,024	)
Total (expenses) revenues		(32,572	)		228,841			190,586
Provision (reversal) for loan losses		(3,318	)		54,113			46,135
Total (expenses) revenues less provision (reversal) for loan losses	$	(29,254	)	$	174,728		$	144,451

[1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

Average balances

	Years ended December 31,
(In millions)	2016		2015		2014
Loans	$	1,949	$	2,333	$	2,771
FDIC loss share asset		191		362		748

Interest income on Westernbank loans for the year 2016 amounted to $ 175 million versus $ 209 million in 2015, reflecting a yield of 8.99% versus 8.95%, 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 $ 208 million for 2016, compared to an income of $ 20 million for 2015. During 2016, the Corporation recorded a $136 million write-down to the indemnification asset related to the arbitration decision. Refer to the Non-Interest Income section of this MD&A for additional information on the FDIC loss share (expense) income.

7

Although an increase in cash flows increases the accretable yield to be recognized over the life of the loans, it also has the effect of lowering the realizable value of the loss share asset since the Corporation would receive lower FDIC payments under the loss share agreements. This is reflected in the amortization of the loss share asset.

The discussion that follows provides highlights of the Corporation’s results of operations for the year ended December 31, 2016 compared to the results of operations of 2015. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 3 presents a five-year summary of the components of net income (loss) as a percentage of average total assets.

Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets
	2016			2015			2014			2013			2012
Net interest income		3.78	%		4.00	%		2.69	%		3.71	%		3.54	%
Provision for loan losses		(0.45	)		(0.69	)		(0.77	)		(1.67	)		(1.10	)
Mortgage banking activities		0.15			0.23			0.09			0.21			0.23
Net gain and valuation adjustments on investment securities		—			—			—			0.02			—
Other-than-temporary impairment losses on investment securities		—			(0.04	)		—			—			—
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		0.02			—			0.12			(0.15	)		(0.08	)
Adjustments (expense) to indemnity reserves		(0.05	)		(0.05	)		(0.12	)		(0.10	)		(0.06	)
Trading account (loss) profit		—			(0.01	)		0.01			(0.04	)		0.01
FDIC loss share (expense) income		(0.55	)		0.06			(0.29	)		(0.23	)		(0.15	)
Other non-interest income		1.22			1.29			1.29			2.47			1.46
Total net interest income and non-interest income, net of provision for loan losses		4.12			4.79			3.02			4.22			3.85
Operating expenses		(3.34	)		(3.66	)		(3.39	)		(3.37	)		(3.34	)
Income (loss) from continuing operations before income tax		0.78			1.13			(0.37	)		0.85			0.51
Income tax expense (benefit)		0.20			(1.41	)		0.17			(0.69	)		(0.07	)
Income (loss) from continuing operations		0.58			2.54			(0.54	)		1.54			0.58
(Loss) income from discontinued operations, net of tax		—			—			(0.35	)		0.11			0.10
Net income (loss)		0.58	%		2.54	%		(0.89	)%		1.65	%		0.68	%

Net interest income from the continuing business for the year ended December 31, 2016 was $1.4 billion, an increase of $13.1 million when compared to 2015. On a taxable equivalent basis, net interest income increased by $17.4 million. Net interest margin decreased by 26 basis points to 4.22% in 2016, compared to 4.48% in 2015 mainly due to the mix in the assets composition. On a taxable equivalent basis, net interest margin was 4.48% in 2016, compared to 4.74% in 2015. Refer to the Net Interest Income section of this MD&A for additional information.

The Corporation’s total provision for loan losses (including covered and non-covered loans) totaled $170.0 million for the year ended December 31, 2016, compared with $241.5 million for 2015 and $270.1 million for 2014. The decrease in the provision was due to lower net charge-offs in Puerto Rico and lower provision for the Westernbank portfolio, partially offset by a higher provision in the U.S. due to portfolio growth and higher net charge-offs. The provision for loan losses for the non-covered loan portfolio totaled $171.1 million for the year ended December 31, 2016, compared to $217.5 million for the year ended December 31, 2015, a decrease of $46.4 million, driven by the reclassification of certain loans from covered to non-covered on July 1, 2015.

Non-performing assets, excluding covered loans and OREO, at December 31, 2016 were $738 million, a decrease of $64 million when compared with December 31, 2015. The decrease was mainly in the non-performing loans (“NPLs”) held-for-sale by $45 million, mostly related to the sale of the Puerto Rico Electric Power Authority (“PREPA”) loan transferred to held-for-sale in the second quarter of 2015. Non-performing loans held-in-portfolio at December 31, 2016 decreased by $44 million when compared against December 31, 2015, mostly driven by lower mortgage and commercial NPLs of $22 million and $18 million, respectively. These reductions were offset in part by higher OREOs of $25 million at December 31, 2016 versus December 31, 2015.

8

Refer to the Provision for Loan Losses and Credit Risk sections of this MD&A for information on the allowance for loan losses, non-performing assets, troubled debt restructurings, net charge-offs and credit quality metrics.

Non-interest income for the year ended December 31, 2016 amounted to $297.9 million, a decrease of $221.6 million, when compared with 2015. The decline reflects the impact of the $136.2 million write-down to the FDIC indemnification asset related to the FDIC arbitration decisions and an unfavorable change in the related true-up payment obligation to the FDIC, which reflects the impact of the arbitration decision as well as other commercial loss share agreement adjustments. Mortgage banking activities declined by $25.3 million during 2016, while other-than-temporary impairment losses declined by $14.2 million for 2016 mainly due to the $14.4 million charge related to P.R. Government securities portfolios recorded in 2015.

Refer to the Non-Interest Income section of this MD&A for additional information on the major variances of the different categories of non-interest income.

Total operating expenses for the year 2016 amounted to $1.3 billion, a decrease of $32.6 million. The decline was principally due to lower OREO expenses of $38.4 million, due to a $22.0 million loss on the bulk sale completed in 2015 and lower BPNA restructuring charges by $18.4 million, partially offset by higher personnel costs and professional fees. Refer to the Operating Expenses section of this MD&A for additional information.

Income tax expense amounted to $78.8 million for the year ended December 31, 2016, compared with an income tax benefit of $495.2 million for the previous year. The unfavorable variance in income tax was primarily due to a tax benefit of $589.0 million recorded during the year 2015 as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from its U.S. operations. Refer to the Income Taxes section in this MD&A and Note 40 to the consolidated financial statements for additional information on income taxes.

At December 31, 2016, the Corporation’s total assets were $38.7 billion, compared with $35.8 billion at December 31, 2015, an increase of $2.9 billion, or 8%. The increase is mainly driven by an increase in the Corporation’s money market investments of $0.7 billion and investment securities available-for-sale by $2.1 billion driven by the increase in liquidity resulting from higher deposits balances. The total loan portfolio increased by $0.3 billion due mainly to growth at BPNA, partially offset by lower mortgage loans originations at BPPR and the run-off of the WB portfolio, including the bulk sale of WB loans with a carrying value of approximately $100 million. The balance of the FDIC indemnification asset declined by $0.2 billion driven by the $136.2 million write-down from the unfavorable FDIC arbitration decisions, as mentioned above.

Deposits amounted to $30.5 billion at December 31, 2016, compared with $27.2 billion at December 31, 2015. Table 15 presents a breakdown of deposits by major categories. The increase in deposits was mainly from the Puerto Rico public sector and commercial deposits. The Corporation’s borrowings amounted to $2.1 billion at December 31, 2016, compared with $2.4 billion at December 31, 2015. The decrease in borrowings was mainly due to a net decrease in repurchase agreements, principally at BPPR.

Refer to Table 14 in the Statement of Financial Condition Analysis section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets.

Stockholders’ equity totaled $5.2 billion at December 31, 2016, compared with $5.1 billion at December 31, 2015. The Corporation continues to be well-capitalized at December 31, 2016. The Common Equity Tier 1 Capital ratio at December 31, 2016 was 16.49%, compared to 16.21% at December 31, 2015.

In summary, during 2016, the Corporation improved credit quality, delivered strong business performance in Puerto Rico, improved the results of its operations in the United States, and further solidified its capital position. The Corporation also continued to benefit from its stake in EVERTEC and BHD León, the second largest bank in the Dominican Republic.

Moving forward, the Corporation will continue to execute initiatives along its strategic focus areas: asset acquisition and business growth, technology and innovation, and organizational excellence. We will pursue opportunities to grow selected businesses organically or through acquisitions, leverage our technology to drive efficiencies and enhance our customers’ experience and further strengthen our organization to ensure strong, sustainable results in the future.

For further discussion of operating results, financial condition and business risks refer to the narrative and tables included herein.

9

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.

Table 4 - Common Stock Performance

	Market Price				Cash Dividends Declared per Share		Book Value Per Share		Dividend Yield [1]			Price/ Earnings Ratio			Market/Book Ratio
	High		Low
2016							$	49.60		1.87	%		21.27	x		88.35	%
4th quarter	$	44.70	$	35.41	$	0.15
3rd quarter		39.74		28.00		0.15
2nd quarter		31.34		26.66		0.15
1st quarter		28.80		22.62		0.15
2015								48.79		0.97			3.27			58.09
4th quarter	$	32.39	$	26.96	$	0.15
3rd quarter		31.49		27.19		0.15
2nd quarter		35.45		28.86		—
1st quarter		35.58		30.52		—
2014								40.76		N.M.			(11.06	)		83.54
4th quarter	$	34.14	$	27.34	$	—
3rd quarter		34.64		29.44		—
2nd quarter		34.18		28.93		—
1st quarter		31.50		25.50		—
2013								44.26		N.M.			4.95			64.91
4th quarter	$	29.17	$	24.07	$	—
3rd quarter		34.20		26.25		—
2nd quarter		30.60		26.88		—
1st quarter		28.92		21.70		—
2012								39.35		N.M.			8.85			52.83
4th quarter	$	20.90	$	17.42	$	—
3rd quarter		18.74		13.55		—
2nd quarter		21.20		13.58		—
1st quarter		23.00		14.30		—

[1] Based on the average high and low market price for the four quarters.

Note: All per share data has been adjusted to retroactively reflect the 1-for-10 reverse stock split effected on May 29, 2012.

N.M. – Not meaningful.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform with generally accepted accounting principles in the United States of America (“GAAP”) and general practices within the financial services industry. The Corporation’s significant accounting policies are described in detail in Note 2 to the consolidated financial statements and should be read in conjunction with this section.

Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The following MD&A section is a summary of what management considers the Corporation’s critical accounting policies and estimates.

Fair Value Measurement of Financial Instruments

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral 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.

10

The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.

The Corporation requires the use of observable inputs when available, in order to minimize the use of unobservable inputs to determine fair value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The amount of judgment involved in estimating the fair value of a financial instrument depends upon the availability of quoted market prices or observable market parameters. In addition, it may be affected by other factors such as the type of instrument, the liquidity of the market for the instrument, transparency around the inputs to the valuation, as well as the contractual characteristics of the instrument.

If listed prices or quotes are not available, the Corporation employs valuation models that primarily use market-based inputs including yield curves, interest rate curves, volatilities, credit curves, and discount, prepayment and delinquency rates, among other considerations. When market observable data is not available, the valuation of financial instruments becomes more subjective and involves substantial judgment. The need to use unobservable inputs generally results from diminished observability of both actual trades and assumptions resulting from the lack of market liquidity for those types of loans or securities. When fair values are estimated based on modeling techniques such as discounted cash flow models, the Corporation uses assumptions such as interest rates, prepayment speeds, default rates, 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.

Management believes that fair values are reasonable and consistent with the fair value measurement guidance based on the Corporation’s internal validation procedure and consistency of the processes followed, which include obtaining market quotes when possible or using valuation techniques that incorporate market-based inputs.

Refer to Note 32 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At December 31, 2016, approximately $ 8.3 billion, or 98%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation methodology and, therefore, were classified as Level 2. Level 2 classified instruments, consisted primarily of U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments.

Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. Financial assets that were fair valued using broker quotes amounted to $ 16 million at December 31, 2016, of which $ 6 million were Level 3 assets and $ 10 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3.

There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2016, 2015, and 2014. The Corporation’s policy is to recognize transfers as of the end of the reporting period.

Trading Account Securities and Investment Securities Available-for-Sale

The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year ended December 31, 2016, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers.

Inputs are evaluated to ascertain that they consider current market conditions, including the relative liquidity of 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,

11

spreads to established benchmarks and transactions on similar securities, to draw correlations based on the characteristics of the evaluated instrument. If for any reason the pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument. During the year ended December 31, 2016, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.

Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include, for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees.

Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions.

Refer to Note 32 to the consolidated financial statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value.

Loans and Allowance for Loan Losses

Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding.

Non-accrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income and the loan is accounted for either on a cash-basis method or on the cost-recovery method. Loans designated as non-accruing are returned to accrual status when the Corporation expects repayment of the remaining contractual principal and interest. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment.

Refer to the MD&A section titled Credit Risk, particularly the Non-performing assets sub-section, for a detailed description of the Corporation’s non-accruing and charge-off policies by major loan categories.

One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan losses. The provision for loan losses charged to current operations is based on this determination. The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.

For a detailed description of the principal factors used to determine the general reserves of the allowance for loan losses and for the principal enhancements Management made to its methodology, refer to Note 11.

According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual terms of 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 upon the proceeds received from the liquidation of the collateral property. For commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash flow to use the discounted cash flow valuation method. 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 from time to time based on management’s estimates.

For additional information on the Corporation’s policy of its impaired loans, refer to Note 2. In addition, refer to the Credit Risk section of this MD&A for detailed information on the Corporation’s collateral value estimation for other real estate.

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 risks in the loan portfolio. In developing its assessment of the adequacy of

12

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 or markets. Other factors that 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 accounting standards and loan 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.

A restructuring constitutes a TDR when the Corporation separately concludes that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. For information on the Corporation’s TDR policy, refer to Note 2.

Acquisition Accounting for Covered Loans and Related Indemnification Asset

The Corporation accounted for the Westernbank FDIC-assisted transaction under the accounting guidance of ASC Topic 805, Business Combinations, which requires the use of the purchase method of accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporated assumptions regarding credit risk. Loans acquired were recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. These fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Because the FDIC has agreed to reimburse the Corporation for losses related to the acquired loans in the Westernbank FDIC-assisted transaction, subject to certain provisions specified in the agreements, an indemnification asset was recorded at fair value at the acquisition date. The indemnification asset was recognized at the same time as the indemnified loans, and is measured on the same basis, subject to collectability or contractual limitations. The loss share indemnification asset on the acquisition date reflected the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflected counterparty credit risk and other uncertainties.

The initial valuation of these loans and related 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.

Given the significant discount related to credit in the valuation of the Westernbank acquired portfolio, 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.

13

Pursuant to an AICPA letter dated December 18, 2009, the AICPA summarized the SEC Staff’s view regarding the accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase. Regarding the accounting for such loan receivables, in the absence of further standard setting, the AICPA understands that the SEC Staff would not object to an accounting policy based on contractual cash flows (Option 1 - ASC Subtopic 310-20 approach) or an accounting policy based on expected cash flows (Option 2 – ASC Subtopic 310-30 approach). As such, 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 to receive. Therefore, the Corporation does not believe this is an appropriate method to apply.

• Option 2 – The Corporation believes analogizing to ASC Subtopic 310-30 is the more appropriate option to follow in accounting for the credit portion of the fair value discount. By doing so, the loan is only being accreted up to the value that the acquirer expected to receive at acquisition of the loan.

Based on the above, the Corporation elected Option 2 – the ASC Subtopic 310-30 approach to the outstanding balance for all the acquired loans in the Westernbank FDIC-assisted transaction with the exception of revolving lines of credit with active privileges as of the acquisition date, which are explicitly scoped out by the ASC Subtopic 310-30 accounting guidance. New advances / draws after the acquisition date under existing credit lines that did not have revolving privileges as of the acquisition date, particularly for construction loans, will effectively be treated as a “new” loan for accounting purposes and accounted for under the provisions of ASC Subtopic 310-20, resulting in a hybrid accounting for the overall construction loan balance.

Management used judgment in evaluating factors impacting expected cash flows and probable loss assumptions, including the quality of the loan portfolio, portfolio concentrations, distressed economic conditions in Puerto Rico, quality of underwriting standards of the acquired institution, reductions in collateral real estate values, and material weaknesses disclosed by the acquired institution, including matters related to credit quality review and appraisal report review.

At April 30, 2010, the acquired loans accounted for pursuant to ASC Subtopic 310-30 by the Corporation totaled $4.9 billion which represented undiscounted unpaid contractually-required principal and interest balances of $9.9 billion reduced by a discount of $5.0 billion resulting from acquisition date fair value adjustments. The non-accretable discount on loans accounted for under ASC Subtopic 310-30 amounted to $3.4 billion or approximately 68% of the total discount, thus indicating a significant amount of expected credit losses on the acquired portfolios.

Pursuant to ASC Section 310-20-15-5, the Corporation aggregated loans acquired in the FDIC-assisted transaction into pools with common risk characteristics for purposes of applying the recognition, measurement and disclosure provisions of this subtopic. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Characteristics considered in pooling loans in the Westernbank FDIC-assisted transaction included loan type, interest rate type, accruing status, amortization type, rate index and source type. Once the pools are defined, the Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset.

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 the pool is reasonably estimable. The 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 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.

The FDIC loss share indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold.

14

The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to loss share protection, except that the amortization / accretion terms differ for each asset. For covered loans accounted for pursuant to ASC Subtopic 310-30, decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers are recognized in non-interest income prospectively over the life of the FDIC loss sharing agreements. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date was accreted into income, a reduction of the related indemnification asset was recorded as a reduction in non-interest income. Increases in expected reimbursements from the FDIC are recognized in non-interest income in the same period that the allowance for credit losses for the related loans is recognized.

Over the life of the acquired loans that are accounted under ASC Subtopic 310-30, the Corporation continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Corporation evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased based on revised estimated cash flows and if so, recognizes a provision for loan loss in its consolidated statement of operations and an allowance for loan losses in its consolidated statement of financial condition. For any increases in cash flows expected to be collected from borrowers, the Corporation adjusts the amount of accretable yield recognized on the loans on a prospective basis over the pool’s remaining life.

The evaluation of estimated cash flows expected to be collected subsequent to acquisition on loans accounted pursuant to ASC Subtopic 310-30 and inherent losses on loans accounted pursuant to ASC Subtopic 310-20 require the continued usage of key assumptions and estimates. Given the current economic environment, the Corporation must apply judgment to develop its estimates of cash flows considering the impact of home price and property value changes, changing loss severities and prepayment speeds. Decreases 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. 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.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future 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 reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies.

15

Management evaluates the realization of the deferred tax asset by taxing jurisdiction, the US mainland operations are evaluated as a whole since a consolidated income tax return is filed; on the other hand, the deferred tax asset related to the Puerto Rico operations is evaluated on an entity by entity basis, since no consolidation is allowed in the income tax filing. Accordingly, this evaluation is composed of three major components: US mainland operations, Puerto Rico banking operations and Holding Company.

For the evaluation of the realization of the deferred tax asset by taxing jurisdiction, refer to Note 40.

Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

Changes in the Corporation’s estimates can occur due to changes in tax rates, new business strategies, newly enacted guidance, and resolution of issues with taxing authorities regarding previously taken tax positions. Such changes could affect the amount of accrued taxes. The Corporation has made tax payments in accordance with estimated tax payments rules. Any remaining payment will not have any significant impact on liquidity and capital resources.

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 profitability. The accounting for deferred 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.

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 tax law, the Corporation believes it may not succeed in realizing the tax benefit of certain positions if challenged. In evaluating a tax position, 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 position. The Corporation’s estimate of the ultimate tax liability contains assumptions based on past experiences, and judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Corporation evaluates these uncertain tax positions each quarter and adjusts the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or the expiration of a statute of limitations. The Corporation believes the estimates and assumptions used to support its evaluation of uncertain tax positions are reasonable.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $9.0 million at December 31, 2016 ($11.2 million at December 31, 2015). Refer to Note 40 to the consolidated financial statements for further information on this subject matter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.8 million.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. From time to time, the Corporation is audited by various federal, state and local authorities regarding income tax matters. Although management believes its approach in determining the appropriate tax treatment is supportable and in accordance with the accounting standards, it is possible that the final tax authority will take a tax position that is different than the tax position reflected in the Corporation’s income tax provision and other tax reserves. As each audit is conducted, adjustments, if any, are 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.

16

Goodwill

The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment. Intangibles with indefinite lives are evaluated for impairment at least annually, and on a more frequent basis, if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of 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 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 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 December 31, 2016, goodwill amounted to $627 million. Note 19 to the consolidated financial statements provides the assignment of goodwill by reportable segment.

For a detailed description of the annual goodwill impairment evaluation performed by the Corporation during the third quarter of 2016, refer to Note 19.

Pension and Postretirement Benefit Obligations

The Corporation provides pension and restoration benefit plans for certain employees of various subsidiaries. The Corporation also provides certain health care benefits for retired employees of BPPR. The non-contributory defined pension and benefit restoration plans (“the Plans”) are frozen with regards to all future benefit accruals.

The estimated benefit costs and obligations of the pension and postretirement benefit plans are impacted by the use of subjective assumptions, which can materially affect recorded amounts, including expected returns on plan assets, discount rates, termination rates, retirement rates and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against current industry practice and the actual experience of the Corporation. The Corporation uses an independent actuarial firm for assistance in the determination of the pension and postretirement benefit costs and obligations. Detailed information on the Plans and related valuation assumptions are included in Note 34 to the consolidated financial statements.

The Corporation periodically reviews its assumption for the long-term expected return on pension plan assets. The Plans’ assets fair value at December 31, 2016 was $697.1 million. The expected return on plan assets is determined by considering various factors, including a total fund return estimate based on a weighted-average of estimated returns for each asset class in the plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of return, inflation, credit spreads, equity risk premiums and excess return expectations.

As part of the review, the Corporation’s independent consulting actuaries performed an analysis of expected returns based on the plan’s asset expected allocation for the year 2017 using the Willis Towers Watson US Expected Return Estimator. This analysis is

17

reviewed by the Corporation and used as a tool to develop expected rates of return, together with other data. This forecast reflects the actuarial firm’s view of expected long-term rates of return for each significant asset class or economic indicator; for example, 8.5% for large cap stocks, 8.8% for small cap stocks, 9.0% for international stocks, 3.9% for aggregate fixed-income securities and 4.4% for long government/credit at January 1, 2017. A range of expected investment returns is developed, and this range relies both on forecasts and on broad-market historical benchmarks for expected returns, correlations, and volatilities for each asset class.

As a consequence of recent reviews, the Corporation decreased its expected return on plan assets for year 2017 to 6.5%. The expected rate of returns of 6.88% and 7.00% had been used for 2016 and 2015, respectively. Since the expected return assumption is on a long-term basis, it is not materially impacted by the yearly fluctuations (either positive or negative) in the actual return on assets.

Pension expense for the Plans amounted to $6.8 million in 2016. The total pension expense included a benefit of $40.6 million for the expected return on assets.

Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2017 from 6.5 % to 6.25% would increase the projected 2017 expense for the Banco Popular de Puerto Rico Retirement Plan, the Corporation’s largest plan, by approximately $1.6 million.

If the projected benefit obligation exceeds the fair value of plan assets, the Corporation shall recognize a liability equal to the unfunded projected benefit obligation and vice versa, if the fair value of plan assets exceeds the projected benefit obligation, the Corporation recognizes an asset equal to the overfunded projected benefit obligation. This asset or liability may result in a taxable or deductible temporary difference and its tax effect shall be recognized as an income tax expense or benefit which shall be allocated to various components of the financial statements, including other comprehensive income. The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s consolidated statement of financial condition. Management believes that the fair value estimates of the pension plan assets are reasonable given the valuation methodologies used to measure the investments at fair value as described in Note 32. Also, the compositions of the plan assets are primarily in equity and debt securities, which have readily determinable quoted market prices. The Corporation had recorded a liability for the underfunded pension benefit obligation of $81.5 million at December 31, 2016.

The Corporation uses the spot rate yield curve from the Willis Towers Watson RATE: Link (10/90) Model to discount the expected projected cash flows of the plans. The Corporation used an equivalent single weighted average discount rate of 4.02% for the Banco Popular de Puerto Rico Retirement Plan, 3.98% for the Tax Qualified Retirement Restoration Plan, 3.99% for the Benefit Restoration Plan and 4.10% for the Retiree Health Care Benefit Plan to determine the benefit obligations at December 31, 2016.

A 50 basis point decrease to each of the rates in the December 31, 2016 in the Willis Towers Watson RATE: Link (10/90) Model as of the beginning of 2017 would increase the projected 2017 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2 million. The change would not affect the minimum required contribution to the Plan.

The postretirement health care benefit plan was unfunded (no assets were held by the plan) at December 31, 2016. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $162.4 million at December 31, 2016 using an equivalent single discount rate of 4.10%. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. Note 34 to the consolidated financial statements provides information on the assumed rates considered by the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have on specified cost components and the postretirement benefit obligation of the Corporation.

STATEMENT OF OPERATIONS ANALYSIS

Net Interest Income

Net interest income is the difference between the revenue generated from earning assets less the interest cost of funding those assets. Several risk factors might influence net interest income including the economic environment in which we operate, market driven events, changes in volumes, repricing characteristics and the mix of assets and liabilities, as well as strategic decisions made by the Corporation’s management. Net interest income from the continuing business for the year ended December 31, 2016 was $1,422 million compared to $1,409 million in 2015. Net interest income from the continuing business, on a taxable equivalent basis, for the year ended December 31, 2016 was $1,510 million compared to $1,492 million in 2015.

18

The average key index rates for the years 2014 through 2016 were as follows:

	2016			2015			2014
Prime rate		3.51	%		3.26	%		3.25	%
Fed funds rate		0.39			0.13			0.08
3-month LIBOR		0.74			0.32			0.23
3-month Treasury Bill		0.31			0.04			0.05
10-year Treasury		1.84			2.13			2.53
FNMA 30-year		2.57			2.92			3.41

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the period ended December 31, 2016 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC Subtopic 310-30, of $18.3 million, related to those items, compared to a favorable impact of $16.7 million for the same period in 2015. The $1.6 million increase from 2015 to 2016 resulted mainly from the amortization of the discount from the Doral acquired loans.

Table 5 presents the different components of the 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 due to the mix in the assets composition. On a taxable equivalent basis, net interest margin was 4.48% in 2016, compared to 4.74% in 2015. The decline in the net interest margin was mainly attributed to a change in the asset composition, due to the maturity of higher yielding assets, such as WB and consumer loans in P.R., and investment in securities and commercial loans at lower rates. On the liability side higher funding costs related to both a higher volume of public sector deposits in Puerto Rico and retail deposits in the U.S. to finance the asset growth. Net interest income increased by $13.1 million year over year. On a taxable equivalent basis, net interest income increased by $17.4 million. The main reasons for these variances were as follows:

• Higher volume from money market, trading and investment securities by $2.2 billion due to a higher volume of deposits mainly in Puerto Rico. These assets carry a lower yield when compared to loans, therefore affecting the asset composition and lowering the yield on earning assets;

• 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 P.R. and accelerated 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.

Table 6 presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2015, as compared with the same period in 2014, segregated by major categories of interest earning assets and interest bearing liabilities. The acquisition of Doral assets and liabilities at the end of February 2015 was the most significant event impacting net interest income in 2015. Net interest margin was 4.48% in 2015, compared to 3.16% in 2014. On a taxable

19

equivalent basis, net interest margin 4.74% in 2015, compared to 3.45% in 2014. For the year ended December 31, 2014, the net interest income was impacted by $414.1 million in interest expense charges related to the repayment of TARP funds and $39.2 million interest expense related to the refinancing of structured repos in the U.S. The increases in net interest income and net interest margin were mainly due to:

• Lower volume by $438 million from WB loans which carried a yield of 8.95% and 10.60% for the year ended December 31, 2015 and 2014, respectively. This portfolio, due to its nature, will continue to decline as scheduled payments are received and workout arrangements are made; and

• Lower volume of trading account securities due to decreased securitization activity.

These negative variances were partially offset by:

• Higher volume of earning assets by $1.6 billion mostly related to the assets acquired in the Doral transaction, net of the related liabilities assumed in the transaction and increased volumes in Puerto Rico; and

• Lower cost of borrowings due to the repayment of TARP funds and the refinancing of U.S. structured repos during 2014, as described above. Also, lower cost of short term borrowings due to maturities that were not substituted due mainly to a higher volume of deposits, both interest and non-interest bearing. Partially offsetting this favorable variance is the issuance in 2014 of $450 million of senior notes at 7%, which were used to partially fund the repayment of TARP.

20

Table 5 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)

Years ended December 31,

																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2016		2015		Variance			2016			2015			Variance				2016		2015		Variance			Rate			Volume
(In millions)																	(In thousands)
$	3,104	$	2,382	$	722			0.53	%		0.30	%		0.23	%	Money market investments	$	16,428	$	7,243	$	9,185		$	7,205		$	1,980
	7,422		5,815		1,607			2.72			2.80			(0.08	)	Investment securities		201,955		162,620		39,335			(11,922	)		51,257
	125		209		(84	)		6.58			6.24			0.34		Trading securities		8,243		13,064		(4,821	)		677			(5,498	)
	10,651		8,406		2,245			2.13			2.18			(0.05	)	Total money market, investment and trading securities		226,626		182,927		43,699			(4,040	)		47,739
																Loans:
	9,203		8,705		498			5.08			5.10			(0.02	)	Commercial		467,208		444,307		22,901			(2,423	)		25,324
	726		616		110			5.38			6.00			(0.62	)	Construction		39,079		36,939		2,140			(4,040	)		6,180
	660		589		71			6.71			6.91			(0.20	)	Leasing		44,283		40,749		3,534			(1,211	)		4,745
	6,701		6,978		(277	)		5.54			5.39			0.15		Mortgage		371,451		376,308		(4,857	)		10,321			(15,178	)
	3,823		3,824		(1	)		10.42			10.37			0.05		Consumer		398,411		396,411		2,000			196			1,804
	21,113		20,712		401			6.25			6.25			—		Sub-total loans		1,320,432		1,294,714		25,718			2,843			22,875
	1,949		2,333		(384	)		8.99			8.95			0.04		WB loans		175,207		208,779		(33,572	)		12,088			(45,660	)
	23,062		23,045		17			6.49			6.52			(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
																Interest bearing deposits:
$	7,020	$	5,447	$	1,573			0.39	%		0.35	%		0.04	%	NOW and money market [1]	$	27,548	$	19,061	$	8,487		$	4,116		$	4,371
	7,528		7,027		501			0.24			0.23			0.01		Savings		18,002		16,211		1,791			354			1,437
	7,910		8,158		(248	)		1.04			0.89			0.15		Time deposits		82,027		72,261		9,766			10,234			(468	)
	22,458		20,632		1,826			0.57			0.52			0.05		Total deposits		127,577		107,533		20,044			14,704			5,340
	763		1,028		(265	)		1.02			0.73			0.29		Short-term borrowings		7,812		7,512		300			2,567			(2,267	)
	1,576		1,729		(153	)		4.89			4.57			0.32		Other medium and long-term debt		77,129		78,986		(1,857	)		3,036			(4,893	)
	24,797		23,389		1,408			0.86			0.83			0.03		Total interest bearing liabilities		212,518		194,031		18,487			20,307			(1,820	)
	6,608		6,147		461											Demand deposits
	2,308		1,915		393											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)		1,509,747		1,492,389		17,358		$	(9,416	)	$	26,774
								4.25	%		4.53	%		(0.28	)%	Net interest spread
																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.

21

Table 6 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)

Years ended December 31,

																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2015		2014		Variance			2015			2014			Variance				2015		2014		Variance			Rate			Volume
(In millions)																	(In thousands)
$	2,382	$	1,305	$	1,077			0.30	%		0.32	%		(0.02	)%	Money market investments	$	7,243	$	4,224	$	3,019		$	397		$	2,622
	5,815		5,886		(71	)		2.80			2.75			0.05		Investment securities		162,620		162,008		612			(3,358	)		3,970
	209		340		(131	)		6.24			6.16			0.08		Trading securities		13,064		20,914		(7,850	)		280			(8,130	)
	8,406		7,531		875			2.18			2.49			(0.31	)	Total money market, investment and trading securities		182,927		187,146		(4,219	)		(2,681	)		(1,538	)
																Loans:
	8,705		8,347		358			5.10			5.12			(0.02	)	Commercial		444,307		427,314		16,993			(1,290	)		18,283
	616		199		417			6.00			6.78			(0.78	)	Construction		36,939		13,482		23,457			(1,718	)		25,175
	589		547		42			6.91			7.33			(0.42	)	Leasing		40,749		40,135		614			(2,340	)		2,954
	6,978		6,641		337			5.39			5.40			(0.01	)	Mortgage		376,308		358,597		17,711			(472	)		18,183
	3,824		3,861		(37	)		10.37			10.36			0.01		Consumer		396,411		399,941		(3,530	)		419			(3,949	)
	20,712		19,595		1,117			6.25			6.33			(0.08	)	Sub-total loans		1,294,714		1,239,469		55,245			(5,401	)		60,646
	2,333		2,771		(438	)		8.95			10.60			(1.65	)	WB loans		208,779		293,610		(84,831	)		(36,727	)		(48,104	)
	23,045		22,366		679			6.52			6.85			(0.33	)	Total loans		1,503,493		1,533,079		(29,586	)		(42,128	)		12,542
$	31,451	$	29,897	$	1,554			5.36	%		5.75	%		(0.39	)%	Total earning assets	$	1,686,420	$	1,720,225	$	(33,805	)	$	(44,809	)	$	11,004
																Interest bearing deposits:
$	5,447	$	4,825	$	622			0.35	%		0.32	%		0.03	%	NOW and money market [1]	$	19,061	$	15,523	$	3,538		$	1,608		$	1,930
	7,027		6,733		294			0.23			0.22			0.01		Savings		16,211		14,664		1,547			856			691
	8,158		7,556		602			0.89			0.99			(0.10	)	Time deposits		72,261		74,900		(2,639	)		(7,065	)		4,426
	20,632		19,114		1,518			0.52			0.55			(0.03	)	Total deposits		107,533		105,087		2,446			(4,601	)		7,047
	1,028		1,887		(859	)		0.73			3.57			(2.84	)	Short-term borrowings		7,512		67,376		(59,864	)		(38,898	)		(20,966	)
	—		267		(267	)		—			170.91			(170.91	)	TARP funds		—		456,974		(456,974	)		—			(456,974	)
	1,729		1,360		369			4.57			4.34			0.23		Other medium and long-term debt		78,986		59,034		19,952			710			19,242
	23,389		22,628		761			0.83			3.04			(2.21	)	Total interest bearing liabilities		194,031		688,471		(494,440	)		(42,789	)		(451,651	)
	6,147		5,534		613											Non-interest bearing demand deposits
	1,915		1,735		180											Other sources of funds
$	31,451	$	29,897	$	1,554			0.62	%		2.30	%		(1.68	)%	Total source of funds		194,031		688,471		(494,440	)		(42,789	)		(451,651	)
								4.74	%		3.45	%		1.29	%	Net interest margin/income on a taxable equivalent basis (Non-GAAP)		1,492,389		1,031,754		460,635		$	(2,020	)	$	462,655
								4.53	%		2.71	%		1.82	%	Net interest spread
																Taxable equivalent adjustment		83,406		86,682		(3,276	)
								4.48	%		3.16	%		1.32	%	Net interest margin/ income non-taxable equivalent basis (GAAP)	$	1,408,983	$	945,072	$	463,911

Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

[1] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

22

Provision for Loan Losses

The Corporation’s total provision for loan losses totaled $170.0 million for the year ended December 31, 2016, compared with $241.5 million for 2015 and $270.1 million for 2014. The provision for loan losses for the non-covered loan portfolio totaled $171.1 million for the year ended December 31, 2016, compared to $217.5 million for the year ended December 31, 2015, a decrease of $46.4 million.

The provision for loan losses for the Puerto Rico 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.

The provision for loan losses for the U.S. operations amounted to $15.3 million for the year ended December 31, 2016, compared to $0.6 million for the year 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 consumer net charge-offs of $3.6 million. The effect of the 2016 annual recalibration was immaterial for BPNA, while the 2015 annual review resulted in a net increase of $0.7 million.

The covered portfolio reflected a reversal of provision of $1.1 million for the year ended December 31, 2016, compared to a provision of $24.0 million for same period of the previous year. The decrease of $25.1 million was mainly due to the reclassification to non-covered loans of the non-single family loans that were previously covered by the commercial loss agreement with the FDIC in the second quarter of 2015. The effect of the annual review of the components of the allowance for loan losses methodology was immaterial for the covered loans portfolio in 2016 and 2015.

The provision for loan losses for the non-covered loan portfolio totaled $217.5 million for the year ended December 31, 2015, compared with $224.0 million for 2014.

The provision for loan losses for the Puerto Rico non-covered portfolio amounted to $216.8 million for the year ended December 31, 2015, compared to $242.8 million for the year ended December 31, 2014. The decrease of $26.0 million was mainly related to the impacts of higher reserves for Puerto Rico’s government exposures, offset by a provision of $30.1 million for Westernbank loans, classified as covered until June 30, 2015, which includes a $15.2 million impairment on loans the Corporation had sold or intended to sell and were subject to the ongoing arbitration with the FDIC at that time. The provision for 2015 also included a $5.8 million impact related to commercial loans sold during the fourth quarter with book value of $34 million. Additionally, the review of the ALLL methodology resulted in a net decrease of $2.6 million for the BPPR segment, compared to a reserve release of $14.9 million in 2014. Net charge-offs increased by $30.7 million from the previous year mostly driven by $31.1 million in commercial charge-offs, most of which were specifically reserved in 2014.

The provision for loan losses for the U.S. operations amounted to $0.6 million for the year ended December 31, 2015 compared to a provision reversal of $18.9 million for the year ended December 31, 2014. Low provision levels were the result of strong credit quality, low levels of net charge-offs during 2015, and the de-risking of the U.S. loan portfolios. The annual review of the ALLL methodology resulted in a net increase of approximately $0.7 million during 2015, compared to a $3.8 million reserve release in 2014. The provision for 2014 included $12.8 million associated with bulk sales of loans.

The provision for the covered portfolio was $24.0 million for the year ended December 31, 2015, compared to $46.1 million for the previous year. The decrease of $22.1 million was mainly due to the reclassification to non-covered loans of the non-single family loans that were previously covered by the commercial loss agreement with the FDIC in the second quarter of 2015. The effect of the aforementioned enhancements to the allowance for loan losses methodology was immaterial for the covered loans portfolio in 2015 and 2014.

Refer to the Credit Risk section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.

23

Non-Interest Income

For the year ended December 31, 2016, non-interest income decreased by $221.6 million when compared with the previous year, principally due to:

• Unfavorable variance in FDIC loss-share (expense) income of $227.8 million, due to a $136.2 million write-down to the indemnification asset related to the arbitration decision, an unfavorable change in the true-up payment obligation which includes the impact of $17.8 million related to the arbitration decision as well as other commercial loss share agreement adjustments. In addition, there were lower mirror accounting on reimbursable expenses and credit impairment losses, partially offset by lower amortization of the indemnification asset. Refer to Table 2 for a breakdown of FDIC loss share (expense) income by major categories; and

• Lower income from mortgage banking activities by $25.3 million mainly due to an unfavorable variance in the valuation adjustment on mortgage servicing rights and lower gains on securitization transactions. Refer to Note 13 for additional details on mortgage banking activities;

These negative variances were partially offset by the following:

• Lower other-than-temporary impairment losses 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;

• Favorable variance in trading account (loss) profit of $3.9 million principally resulting from favorable fair value adjustments of P.R. municipal 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 the equity method, partially offset by an unfavorable variance in the fair value adjustments on a contingent consideration at the insurance agency business.

For the year ended December 31, 2015, non-interest income increased by $133.0 million when compared with the previous year, mainly due to:

• Favorable variance in FDIC loss share (expense) income of $123.1 million, principally due to lower amortization of the indemnification asset, higher mirror accounting on reimbursable expenses in part due to the impact of a $22.0 million loss related to the commercial OREO bulk sale completed during the second quarter of 2015 and a positive variance in the true-up payment obligation, partially offset by lower mirror accounting on credit impairment losses;

• Higher income from mortgage banking activities by $51.2 million due to higher servicing fees including those from the portfolio acquired as part of the Doral Bank Transaction during 2015, and a favorable variance in the fair value adjustments on mortgage servicing rights that includes a gain of $5.4 million related to the MSRs assumed during 2015 under a pre-existing backup servicing agreement, in addition to lower realized net losses on closed derivatives positions;

• Lower provision for indemnity reserves by $22.0 million due to lower reserves for loans sold with credit recourse at BPPR; and

• Higher other service fees by $10.8 million mainly due to higher insurance revenues, including fees from the portfolio acquired from the Doral insurance agency.

These favorable variances were partially offset by the following:

• Unfavorable variance in other-than-temporary impairment losses on investment securities of $14.4 million due to the charge recorded during the second quarter of 2015 on the portfolio of Puerto Rico government investment securities available-for-sale;

• Lower net gain on sale of loans by $40.0 million mainly due to gains from individual commercial NPL sales completed in 2014 at BPNA; and

• Lower other operating income by $13.0 million principally due to lower aggregated net earnings from investments under the equity method, partially offset by a favorable variance in the fair value adjustments on a contingent consideration at the insurance agency business.

24

Operating Expenses

Table 7 provides a breakdown of operating expenses by major categories.

Table 7 - Operating Expenses

	Years ended December 31,
(In thousands)	2016			2015			2014			2013			2012
Personnel costs:
Salaries	$	308,135		$	304,618		$	281,252		$	276,072		$	279,590
Commissions, incentives and other bonuses		73,684			79,305			59,138			57,060			51,320
Pension, postretirement and medical insurance		51,284			44,059			32,416			55,106			64,325
Other personnel costs, including payroll taxes		54,373			49,537			45,873			40,459			39,098
Total personnel costs		487,476			477,519			418,679			428,697			434,333
Net occupancy expenses		85,653			86,888			86,707			86,651			84,687
Equipment expenses		62,225			60,110			48,917			46,028			43,618
Other taxes		42,304			39,797			56,918			58,028			49,844
Professional fees:
Collections, appraisals and other credit related fees		14,607			23,098			26,257			32,727			41,029
Programming, processing and other technology services		205,466			191,895			173,814			174,921			169,927
Legal fees, excluding collections		42,393			26,122			28,305			15,557			12,821
Other professional fees		60,577			67,870			53,679			54,922			47,231
Total professional fees		323,043			308,985			282,055			278,127			271,008
Communications		23,897			25,146			25,684			25,385			25,687
Business promotion		53,014			52,076			54,016			59,453			60,784
FDIC deposit insurance		24,512			27,626			40,307			56,728			82,065
Loss on early extinguishment of debt		—			—			532			3,388			25,196
Other real estate owned (OREO) expenses		47,119			85,568			49,611			79,658			28,823
Other operating expenses:
Credit and debit card processing, volume, interchange and other expenses		20,796			22,854			21,588			19,901			18,789
Operational losses		35,995			20,663			18,543			17,954			23,681
All other		33,656			51,558			55,242			54,021			58,313
Total other operating expenses		90,447			95,075			95,373			91,876			100,783
Goodwill and trademark impairment losses		3,801			—			—			—			—
Amortization of intangibles		12,144			11,019			8,160			7,971			8,161
Restructuring costs		—			18,412			26,725			—			—
Total operating expenses	$	1,255,635		$	1,288,221		$	1,193,684		$	1,221,990		$	1,214,989
Personnel costs to average assets		1.30	%		1.36	%		1.19	%		1.18	%		1.20	%
Operating expenses to average assets		3.34			3.66			3.39			3.37			3.35
Employees (full-time equivalent)		7,828			7,810			7,752			8,059			8,072
Average assets per employee (in millions)	$	4.81		$	4.51		$	4.54		$	4.50		$	4.49

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.

25

These positive variances were partially offset by:

• Higher personnel cost by $10.0 million due to higher pension, postretirement and medical insurance by $7.2 million mainly driven by changes in actuarial assumptions;

• 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.

Operating expenses for the year ended December 31, 2015 increased by $94.5 million, or 8%, when compared with the previous year, driven primarily by:

• Higher personnel cost by $58.8 million, mainly due to higher salaries and incentive compensation associated with the Doral Bank Transaction, higher share-based compensation and higher pension expense related to adjustments to the mortality table and discount rate used for actuarial assumptions;

• Higher professional fees by $26.9 million, due to higher programming, application processing and hosting expenses including the impact of the business-to-business sales tax in Puerto Rico and higher professional fees directly associated with the Doral Bank Transaction;

• An increase in OREO expense by $36.0 million due to the loss on bulk sale of covered OREOs during 2015 mentioned above; and

• Higher equipment expense by $11.2 million mainly due to higher software maintenance expenses at BPPR.

These negative variances were partially offset by:

• Lower other taxes by $17.1 million mainly due to elimination of the Puerto Rico gross revenue tax and lower municipal license tax;

• A decrease in FDIC deposit insurance by $12.7 million, mainly due to improvements in the risk profile of the Corporation; and

• Lower restructuring cost by $8.3 million in connection with the reorganization of BPNA.

INCOME TAXES

Income tax expense amounted to $78.8 million for the year ended December 31, 2016, compared with an income tax benefit of $495.2 million for the previous year. The increase in income tax expense was mainly driven by the recognition during 2015 of a tax benefit of $589.0 million as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from the U.S. operations.

The effective income tax rate for the year ended December 31, 2016 was 27%. The effective tax rate is impacted by the composition and source of the taxable income.

Refer to Note 40 to the consolidated financial statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on income taxes.

Fourth Quarter Results

The Corporation recognized a net loss of $4.1 million for the quarter ended December 31, 2016, compared with a net income of $137.4 million for the same quarter of 2015. The results for the fourth quarter of 2016 include an after-tax charge amounting to $86.7 million, related to the unfavorable outcome from the FDIC arbitration review board. During the fourth quarter of 2015 the Corporation recorded a $44.1 million partial reversal of the valuation allowance of a portion of the deferred tax asset at the U.S. operations.

Net interest income for the fourth quarter of 2016 amounted to $355.4 million, compared with $352.5 million for the fourth quarter of 2015. The increase in net interest income was primarily due higher income from investment securities due to higher average balances as the Corporation benefited from increases in deposit balances, mainly in Puerto Rico, which were deployed for the purchase of investments. This was partially offset by higher cost of deposits, due to higher average balances as mentioned above.

26

The provision for loan losses amounted to $41.4 million for the quarter ended December 31, 2016, compared to $58.5 million for the fourth quarter of 2015. The decrease of $17.1 million is mainly at BPPR due to the impairment recorded in the fourth quarter of 2015 of $10.9 million for Westernbank loans which the Corporation sold or had the intent to sell and were subject to the arbitration with the FDIC, at that time.

Non-interest (expense) income amounted to $(0.2) million for the quarter ended December 31, 2016, compared with $132.4 million for the same quarter in 2015. The unfavorable variance was mainly on the FDIC loss share (expense) income due to the $116.8 million charge related to the arbitration decision denying BPPR’s claims under the loss sharing agreement and $9.9 million additional adjustments related to restructured commercial loans. Also, mortgage banking activities declined by $8.9 million due to lower gains on sales of loans and the fair value adjustment of mortgage servicing rights, partially offset by higher gains on closed derivative positions.

Operating expenses totaled $320.9 million for the quarter ended December 31, 2016, compared with $305.8 million for the same quarter in the previous year. The increase is due mainly to higher personnel costs by $3.2 million, mainly from pension and post retirement and other personnel costs, higher professional fees by $7.8 million, mainly from programming, processing and other technology fees and higher legal fees and higher OREO expenses by $3.7 million.

Income tax benefit amounted to $1.8 million for the quarter ended December 31, 2016, compared with income tax benefit of $16.8 million for the same quarter of 2015. The unfavorable variance was mainly due to the previously mentioned $44.1 million partial reversal of the valuation allowance of a portion of the deferred tax asset at the U.S. operations recorded in the fourth quarter of 2015, which was partially offset by lower taxable income at BPPR for 2016.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America. A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the reportable segments.

For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 42 to the consolidated financial statements.

The Corporate group reported a net loss of $60.6 million for the year ended December 31, 2016, compared with a net loss of $71.9 million for the year ended December 31, 2015.

Highlights on the earnings results for the reportable segments are discussed below:

Banco Popular de Puerto Rico

The Banco Popular de Puerto Rico reportable segment’s net 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 principal factors that contributed to the variance 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 income from investment 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;

• 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;

27

• Lower non-interest income by $221.4 million mainly due to:

• Unfavorable variance in FDIC loss share (expense) income by $227.8 million due to a $136.2 million write-down to the indemnification asset related to the arbitration decision, an unfavorable change in the true-up payment obligation, and lower mirror accounting on reimbursable expenses and credit impairment losses, partially offset by lower amortization of the indemnification asset; and

• 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 P.R. municipal bonds;

• 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 fees, partially offset by lower collections and appraisal fees;

• Lower income tax expense by $40.4 million mainly due to lower taxable income and the reversal of reserves for uncertain tax positions.

The Banco Popular de Puerto Rico reportable segment’s net income amounted to $318.4 million for the year ended December 31, 2015, compared with $274.3 million for the year ended December 31, 2014. The main factors that contributed to the favorable variance of $44.1 million in the financial results included the following:

• Lower net interest income by $57.3 million mainly impacted by lower interest income from loans from the WB portfolio due to run-off and loan resolutions, partially offset by higher income from mortgage loans driven by the mortgage loans portfolio acquired as part of the Doral Bank Transaction. The net interest margin in 2015 was 4.87% compared to 5.35% in the prior year;

• Lower provision for loan losses by $48.4 million due to a decrease in the provision on the non-covered loan portfolio by $26.3 million due to the impact in 2014 of higher reserves for Puerto Rico’s government exposures, partially offset by losses on proposed bulk sales of loans acquired from WB of $15.2 million and a loss of $5.9 million from a bulk sale of non-covered loans during 2015, and to a decrease in the covered loan portfolio by $22.1 million mainly due to the reclassification of non-single family loans to the non-covered category pursuant to the expiration of the commercial shared-loss arrangement with the FDIC in the second quarter of 2015;

28

• Higher non-interest income by $181.5 million mainly due to:

• Favorable variance in FDIC loss share (expense) income of $123.1 million, principally due to lower amortization of the indemnification asset, higher mirror accounting on reimbursable expenses in part due to the impact of a $22.0 million loss related to the commercial OREO bulk sale completed during the second quarter of 2015 and a positive variance in the true-up payment obligation, partially offset by lower mirror accounting on credit impairment losses;

• Higher income from mortgage banking activities by $51.1 million due to higher servicing fees including those from the portfolio acquired as part of the Doral Bank Transaction during 2015, and a favorable variance in the fair value adjustments on MSRs that includes the impact of the MSRs assumed during 2015 under a pre-existing backup servicing agreement of $5.4 million, in addition to lower realized net losses on closed derivatives positions;

• Favorable variance on adjustments to indemnity reserves by $24.1 million due to lower reserves for loans sold with credit recourse; and

• Higher other service fees by $11.0 million mainly due to higher insurance revenues, including fees from the portfolio acquired from the Doral insurance agency;

Partially offset by:

• Unfavorable variance in other-than-temporary impairment losses on investment securities of $14.4 million mainly due to the charge recorded during the second quarter of 2015 on the portfolio of Puerto Rico government investment securities available-for-sale; and

• Unfavorable variance in trading account (loss) profit of $9.0 million principally due to unfavorable fair value adjustments of P.R. municipal bonds and MBS.

• Higher operating expenses by $90.4 million mainly due to:

• Higher personnel costs by $52.7 million mainly due to higher salaries and incentive compensation associated with the Doral Bank Transaction, higher share based compensation and higher pension expense due to adjustments to the mortality table and discount rate used for actuarial assumptions;

• Higher professional fees by $25.6 million due to higher programming, application processing and hosting expenses in part due to the impact of the business-to-business sales tax in Puerto Rico and higher professional fees associated with the Doral Bank Transaction in 2015;

• An increase in OREO expense by $29.1 million due to the $22.0 million loss on the bulk sale of covered OREOs completed during 2015, higher write-downs on residential properties, and higher holding costs on residential properties; and

• Higher equipment expense by $12.5 million mainly due to higher software maintenance expenses;

Partially offset by:

• Lower other operating taxes by $15.0 million mainly due to the elimination of the Puerto Rico gross revenue tax and lower municipal license tax; and

• A decrease in FDIC deposit insurance by $12.1 million mainly due to improvements in its risk profile.

29

• Higher income tax expense by $38.1 million mainly due to higher taxable income, partially offset by the $20.0 million income tax expense recorded in 2014 for the increase in the income tax rate for capital gains from 15% to 20% associated with the WB portfolio.

Banco Popular North America

For the year ended December 31, 2016, the reportable segment of Banco Popular North America reported net income of $47.3 million, compared with $648.6 million for the year ended December 31, 2015. In addition to the recognition during 2015 of a tax benefit of $589.0 million as a result of the partial reversal of the valuation allowance of a portion of its deferred tax asset, the principal factors that contributed to the variance in the financial results included the following:

• 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;

• Unfavorable variance in the provision for loan losses by $14.6 million driven by portfolio growth and higher net charge-offs;

• Lower non-interest income by $1.0 million;

• 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.

For the year ended December 31, 2015, the reportable segment of Banco Popular North America reported net income of $648.6 million, compared with a net loss of $77.5 million for the year ended December 31, 2014. In addition to the recognition during 2015 of a tax benefit of $589.0 million as a result of the partial reversal of the valuation allowance of a portion of its deferred tax asset, the principal factors that contributed to the favorable variance of $726.1 million in the financial results included the following:

• Higher net interest income by $81.7 million mainly due to higher interest income from loans associated with the Doral Bank Transaction in 2015 and lower interest expense from short-term borrowings as a result of the aggregated impact of the $39.3 million interest expense associated with the refinancing of $638 million in long-term structured repos during 2014, partially offset by lower income from investment securities due to lower levels of MBS and CMOs. The BPNA reportable segment’s net interest margin was 3.90% for 2015 compared with 2.74% for the same period in 2014;

• Net increase in the provision for loan losses of $0.6 million during 2015, compared to a $18.9 million reserve release in 2014 which is net of the $12.8 million impact associated with bulk sales of loans;

• Lower non-interest income by $41.7 million mostly due to a decrease of $37.6 million in gains from sales of loans mainly due to individual commercial NPL sales completed in 2014, and an unfavorable variance in adjustments to indemnity reserves;

• Higher operating expenses by $2.6 million due to $6.9 million in costs directly related to the Doral Bank Transaction in 2015 and higher OREO expense by $6.8 million, mostly due to higher losses on sales of commercial OREO and write-downs on commercial properties. These unfavorable variances were partially offset by lower restructuring cost in connection with the reorganization of BPNA by $8.3 million; and

30

• Income taxes favorable variance of $583.8 million mainly driven by the recognition during 2015 of a tax benefit of $589.0 million, as discussed above.

STATEMENT OF FINANCIAL CONDITION ANALYSIS

Assets

At December 31, 2016, the Corporation’s total assets were $38.7 billion, compared with $35.8 billion at December 31, 2015 due to an increase in investments as a result of deposit growth. Refer to the consolidated financial statements included in this 2016 Annual Report for the Corporation’s consolidated statements of financial condition at December 31, 2016 and 2015. Also, refer to the Statistical Summary 2012-2016 in this MD&A for condensed statements of financial condition for the past five years.

Money market, trading and investment securities

Money market investments amounted to $2.9 billion at December 31, 2016 compared with $2.2 billion at the same date in 2015. The increase was mainly at BPPR due to an increase in cash balances from deposits, partially offset by the deployment of liquidity into investment securities and a decrease in repurchase agreements.

Trading account securities amounted to $60 million at December 31, 2016 compared with $72 million at December 31, 2015. The decrease was at the BPPR segment, mainly mortgage-backed securities and Puerto Rico government obligations. Refer to the Market / Interest Rate Risk section of this MD&A for a table that provides a breakdown of the trading portfolio by security type.

Investment securities available-for-sale and held-to-maturity amounted to $8.3 billion at December 31, 2016 compared with $6.2 billion at 2015. The increase of $2.1 billion was mainly due to purchases of MBS at both BPPR and BPNA and purchases of U.S. Treasury securities at BPPR.

Table 8 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis at December 31, 2016 and 2015. Also, Notes 8 and 9 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

Table 8 - Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity

(In thousands)	December 31, 2016		December 31, 2015
U.S. Treasury securities	$	2,136,620	$	1,183,328
Obligations of U.S. Government sponsored entities		711,850		939,641
Obligations of Puerto Rico, States and political subdivisions		118,798		121,176
Collateralized mortgage obligations		1,221,600		1,560,923
Mortgage-backed securities		4,105,332		2,344,196
Equity securities		2,122		2,398
Others		11,585		12,233
Total investment securities AFS and HTM	$	8,307,907	$	6,163,895

Loans

The Corporation’s total loan portfolio amounted to $23.4 billion at December 31, 2016, compared to $23.1 billion at December 31, 2015. Refer to Table 9 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Also, refer to Note 10 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

Loans covered under the FDIC loss sharing agreements are presented separately in Table 9. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. As of December 31, 2016, the Corporation’s covered loans portfolio amounted to $573 million, comprised mainly of residential mortgage loans.

31

Table 9 - Loans Ending Balances

	At December 31,
(in thousands)	2016		2015		2014		2013		2012
Loans not covered under FDIC loss sharing agreements:
Commercial	$	10,798,507	$	10,099,163	$	8,134,267	$	10,037,184	$	9,858,202
Construction		776,300		681,106		251,820		206,084		252,857
Legacy[1]		45,293		64,436		80,818		211,135		384,217
Lease financing		702,893		627,650		564,389		543,761		540,523
Mortgage		6,696,361		7,036,081		6,502,886		6,681,476		6,078,507
Consumer		3,754,393		3,837,679		3,870,271		3,932,226		3,868,886
Total non-covered loans held-in-portfolio		22,773,747		22,346,115		19,404,451		21,611,866		20,983,192
Loans covered under FDIC loss sharing agreements:
Commercial		—		—		1,614,781		1,812,804		2,244,647
Construction		—		—		70,336		190,127		361,396
Mortgage		556,570		627,102		822,986		934,373		1,076,730
Consumer		16,308		19,013		34,559		47,123		73,199
Loans covered under FDIC loss sharing agreements		572,878		646,115		2,542,662		2,984,427		3,755,972
Total loans held-in-portfolio		23,346,625		22,992,230		21,947,113		24,596,293		24,739,164
Loans held-for-sale:
Commercial		—		45,074		309		603		16,047
Construction		—		95		—		—		78,140
Legacy[1]		—		—		319		—		2,080
Mortgage		88,821		91,831		100,166		109,823		258,201
Consumer		—		—		5,310		—		—
Total loans held-for-sale		88,821		137,000		106,104		110,426		354,468
Total loans	$	23,435,446	$	23,129,230	$	22,053,217	$	24,706,719	$	25,093,632

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

Non-covered loans held-in-portfolio

Non-covered loans held-in-portfolio increased by $428 million from December 31, 2015 mainly at BPNA by $830 million, driven by growth in the commercial and construction loan portfolios, partially offset by a decrease of $402 million at BPPR due to lower originations of residential mortgages and the bulk sale of WB loans with a carrying value of approximately $100 million completed in the second quarter of 2016.

Covered loans

The covered loans portfolio amounted to $573 million at December 31, 2016, compared to $646 million at December 31, 2015. The decrease of $73 million is due to loan resolutions and the normal portfolio run-off. Refer to Table 9 for a breakdown of the covered loans by major loan type categories.

Tables 10 and 11 provide the activity in the carrying amount and outstanding discount on the Westernbank loans accounted for under ASC 310-30. The outstanding accretable discount is impacted by changes in cash flow expectations on the loan pool based on quarterly revisions of the portfolio. An increase in the accretable discount is recognized as interest income using the effective yield method over the estimated life of each applicable loan pool.

32

Table 10 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30

	Years ended
	December 31,
(In thousands)	2016			2015
Beginning balance	$	1,974,501		$	2,444,172
Accretion		169,748			202,966
Collections / loan sales / charge-offs[1]		(405,920	)		(672,637	)
Ending balance[2]	$	1,738,329		$	1,974,501
Allowance for loan losses (ALLL)		(68,877	)		(63,563	)
Ending balance, net of ALLL	$	1,669,452		$	1,910,938

^[1]  For the year ended December 31, 2016, includes the impact of the bulk sale of loans during the second quarter with a carrying value of approximately $99 million.

^[2]  The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $563 million as of December 31, 2016 (December 31, 2015 - $636 million).

Table 11 - Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30

	Years ended December 31,
(In thousands)	2016			2015
Beginning balance	$	1,112,458		$	1,271,337
Accretion[1]		(169,748	)		(202,966	)
Change in expected cash flows		67,377			44,087
Ending balance	$	1,010,087		$	1,112,458

[1] Positive to earnings, which is included in interest income.

Loans held-for-sale

Loans held-for-sale decreased by $48 million mainly due to the sale of a non-accrual public sector loan with a carrying amount of $40 million during the third quarter of 2016.

FDIC loss share asset

The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to the loss share protection from the FDIC, except that the amortization / accretion terms differ. Decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, as compared with the initial estimates, are recognized as a reduction to non-interest income prospectively over the life of the loss share agreements. This is because the indemnification asset balance is being reduced to the expected reimbursement amount from the FDIC.

The decrease of $241 million in the FDIC loss-share asset was mainly due to the $136.2 million write-down related to the review board’s denial of BPPR’s claims in connection with arbitration proceedings with the FDIC during the third and fourth quarter of 2016 and to $99 million in net payments received from the FDIC. Table 12 sets forth the activity in the FDIC loss share asset for the years ended December 31, 2016, 2015 and 2014. Also, refer to Note 12 to the consolidated financial statements for additional information on the FDIC loss share agreements.

Table 12 - Activity of Loss Share Asset

	Years ended December 31,
(In thousands)	2016			2015			2014
Balance at beginning of year	$	310,221		$	542,454		$	909,414
Amortization of loss share indemnification asset		(10,201	)		(66,238	)		(189,959	)
Reversal of accelerated amortization		—			—			12,492
Credit impairment losses to be covered under loss sharing agreements		(239	)		15,658			32,038
Reimbursable expenses		8,433			73,205			58,117
Recoveries reimbursable to the FDIC		(4,093	)		—			—
Net payments from FDIC under loss sharing agreements		(98,518	)		(247,976	)		(256,498	)
Arbitration decision charge		(136,197	)		—			—
Other adjustments attributable to FDIC loss sharing agreements		(72	)		(6,882	)		(23,150	)
Balance at end of period	$	69,334		$	310,221		$	542,454

33

Table 13 sets forth the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount).

Table 13 - Activity in the Remaining FDIC Loss Share Asset Discount

	Years ended December 31,
(In thousands)	2016			2015			2014
Balance at beginning of period[1]	$	26,100		$	53,095		$	103,691
Amortization of negative discount[2]		(10,201	)		(66,238	)		(189,959	)
Impact of changes in (higher) lower projected losses		(11,087	)		39,243			139,363
Balance at end of period	$	4,812		$	26,100		$	53,095

[1] Positive balance represents negative discount (debit to assets), while a negative balance represents a discount (credit to assets).

[2] Amortization results in a negative impact to non-interest income, while a positive balance results in a positive impact to non-interest income, particularly FDIC loss share (expense) income.

The Corporation revises its expected cash flows and estimated credit losses on a quarterly basis. The lowered loss estimates requires the Corporation to amortize the loss share asset to its currently lower expected collectible balance, thus resulting in negative accretion. Due to the shorter life of the indemnity asset compared with the expected life of the covered loans, this negative accretion temporarily offsets the benefit of higher cash flows accounted through the accretable yield on the loans.

Premises and equipment

Premises and equipment increased by $41 million from December 31, 2015 to December 31, 2016, mainly in buildings and construction in progress at BPPR and in leasehold improvements and equipment at BPNA.

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At December 31, 2016, OREO increased to $213 million from $192 million at December 31, 2015 mainly in residential properties at BPPR, partially offset by the bulk sale of WB commercial OREOs with a book value of $9 million during the second quarter of 2016. Refer to Note 16 to the consolidated financial statements for the activity in other real estate owned. The amounts included as “covered other real estate” are subject to the FDIC loss sharing agreement.

Other assets

Refer to Note 17 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the consolidated statements of financial condition at December 31, 2016 and 2015. Other assets decreased by $48 million from December 31, 2015 to December 31, 2016, due mostly to a decrease in the deferred tax asset and trades receivable, partially offset by an increase in guaranteed mortgage loan claims.

Goodwill

Goodwill increased by $1 million from December 31, 2015 to December 31, 2016, due to a goodwill adjustment of $5 million related to the Doral Bank Transaction recorded in the first quarter of 2016, partially offset by goodwill impairment of approximately $4 million related to Popular Securities during the third quarter of 2016. Refer to Note 19 to the consolidated financial statements for detailed information on the Corporation’s goodwill.

Liabilities

The Corporation’s total liabilities were $33.5 billion at December 31, 2016 compared to $30.7 billion at December 31, 2015. Refer to the Corporation’s consolidated statements of financial condition included in this Form 10-K.

34

Deposits and Borrowings

The composition of the Corporation’s financing to total assets at December 31, 2016 and 2015 is included in Table 14.

Table 14 - Financing to Total Assets

	December 31,		December 31,		% increase (decrease)			% of total assets
(In millions)	2016		2015		from 2015 to 2016			2016			2015
Non-interest bearing deposits	$	6,980	$	6,402		9.0	%		18.0	%		17.9	%
Interest-bearing core deposits		18,776		15,641		20.0			48.6			43.7
Other interest-bearing deposits		4,740		5,167		(8.3	)		12.3			14.4
Fed funds purchased and repurchase agreements		480		762		(37.0	)		1.2			2.1
Other short-term borrowings		1		1		—			—			—
Notes payable		1,575		1,663		(5.3	)		4.1			4.7
Other liabilities		912		1,019		(10.5	)		2.4			2.9
Liabilities from discontinued operations		—		2		(100.0	)		—			—
Stockholders’ equity		5,198		5,105		1.8			13.4			14.3

Deposits

At December 31, 2016, the Corporation’s total deposits amounted to $30.5 billion, compared to $27.2 billion at December 31, 2015. The deposits increase of $3.3 billion was driven primarily by increases at BPPR, whose deposits increased by $2.4 billion largely due to increases in deposits from the Puerto Rico public sector and commercial deposits. Deposits at BPNA also increased by approximately $0.8 billion in personal money market deposits and savings. During this period, brokered CDs declined, mainly at BPPR. Refer to Table 15 for a breakdown of the Corporation’s deposits at December 31, 2016 and 2015.

Table 15 - Deposits Ending Balances

(In thousands)	2016		2015		2014		2013		2012
Demand deposits [1]	$	9,053,897	$	7,221,238	$	6,606,060	$	6,590,963	$	6,442,739
Savings, NOW and money market deposits (non-brokered)		13,327,298		11,440,693		10,320,782		11,255,309		11,190,335
Savings, NOW and money market deposits (brokered)		405,487		382,424		406,248		553,521		456,830
Time deposits (non-brokered)		7,486,717		7,274,157		5,960,401		6,478,103		6,541,660
Time deposits (brokered CDs)		222,825		891,211		1,514,044		1,833,249		2,369,049
Total deposits	$	30,496,224	$	27,209,723	$	24,807,535	$	26,711,145	$	27,000,613

[1] Includes interest and non-interest bearing demand deposits.

Borrowings

The Corporation’s borrowings amounted to $2.1 billion at December 31, 2016, compared with $2.4 billion at December 31, 2015. The decrease in borrowings was mainly due to a net decrease in repurchase agreements principally at BPPR.

Refer to the Off-Balance Sheet Arrangements and Other Commitments section in this MD&A for additional information on the Corporation’s contractual obligations at December 31, 2016.

Other liabilities

The Corporation’s other liabilities amounted to $0.9 billion at December 31, 2016, a decrease of $0.1 billion when compared to December 31, 2015. The decrease in other liabilities was primarily due to a reduction in the liability for GNMA loans with a repurchase option due to higher repurchase activity during the fourth quarter of 2016.

Refer to Note 40 to the consolidated financial statements, which provides additional information with respect to the Corporation’s Income Taxes, and to Note 27, which provides additional information with respect to Guarantees, including the recourse liability.

35

Stockholders’ Equity

Stockholders’ equity totaled $5.2 billion at December 31, 2016, compared with $5.1 billion at December 31, 2015. The increase was principally due to net income of $217 million recorded for the year, partially offset by common and preferred dividends amounting to $62.3 million and $3.7 million, respectively, as well as an increase of $63 million in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss was due mainly to an increase of $59 million in unrealized losses in securities available-for-sale and unfavorable translation adjustments during the year amounting to $4 million mostly related to the investment in BHD León.

Refer to the consolidated statements of financial condition, comprehensive income and of changes in stockholders’ equity for information on the composition of stockholders’ equity. Also, refer to Note 26 for a detail of the accumulated other comprehensive loss, an integral component of stockholders’ equity.

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 2012 through 2016 under the regulatory guidance applicable during those years. Note 25 to the consolidated financial statements presents further information on the Corporation’s regulatory capital requirements, including the regulatory capital ratios of its depository institutions, BPPR and BPNA. The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations.

Table 16 - Capital Adequacy Data

	At December 31,
(Dollars in thousands)	2016			2015			2014			2013			2012
Risk-based capital:
Common Equity Tier 1 capital	$	4,121,208		$	4,049,576			(A	)		(A	)		(A	)
Tier 1 capital	$	4,121,208		$	4,049,576		$	3,849,891		$	4,464,742		$	4,058,242
Supplementary (Tier 2) capital		748,007			642,833			272,347			296,813			298,906
Total capital	$	4,869,215		$	4,692,409		$	4,122,238		$	4,761,555		$	4,357,148
Total risk-weighted assets	$	25,001,334		$	24,987,144		$	21,233,902		$	23,318,674		$	23,391,572
Adjusted average quarterly assets	$	37,785,070		$	34,253,625		$	32,250,173		$	34,746,137		$	35,226,183
Ratios:
Common Equity Tier 1 capital		16.48	%		16.21	%		(A	)		(A	)		(A	)
Tier 1 capital		16.48			16.21			18.13	%		19.15	%		17.35	%
Total capital		19.48			18.78			19.41			20.42			18.63
Leverage ratio		10.91			11.82			11.94			12.85			11.52
Average equity to assets		14.03			13.37			12.95			11.52			10.60
Average tangible equity to assets		12.45			11.95			11.45			9.78			8.82
Average equity to loans		22.89			20.42			19.17			16.88			15.47

(A) Common equity tier 1 capital measured was introduced by the Basel III Capital Rules which became effective on January 1, 2015. Common equity tier 1 capital is not applicable under the previous Basel 1 capital rules that were applicable in the previous years.

The increase in the CET1 capital ratio, Tier 1 capital ratio and total capital ratio on December 31, 2016 compared to December 31, 2015 was mostly due to the year’s earnings, partially offset by the complete phase out, effective on January 1, 2016, of the trust preferred securities under Basel III which at December 31, 2015 allowed approximately $107 million to be included in Tier 1 capital out of a total of $427 million outstanding. The phased out trust preferred securities qualified as Tier 2 capital and therefore continued to be included as part of the total capital ratio. The decrease in leverage ratio compared to 2015 was mainly due to the increase in average total assets driven by increases in investment balances.

36

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 2016, 2015 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 the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, Popular, BPPR and BPNA will be required to maintain such an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

Table 17 reconciles the Corporation’s total common stockholders’ equity to common equity Tier 1 capital.

Table 17 - Reconciliation Common Equity Tier 1 Capital

	At December 31,
(In thousands)	2016			2015
Common stockholders’ equity	$	5,147,797		$	5,055,164
AOCI related adjustments due to opt-out election		280,330			220,956
Goodwill, net of associated deferred tax liability (DTL)		(554,614	)		(564,323	)
Intangible assets, net of associated DTLs		(25,662	)		(22,222	)
Deferred tax assets and other deductions		(726,643	)		(639,999	)
Common equity tier 1 capital	$	4,121,208		$	4,049,576
Common equity tier 1 capital to risk-weighted assets		16.48	%		16.21	%

Non-GAAP financial measures

The tangible common equity ratio and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of 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 accounting principles in the United States of America (“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.

37

Table 18 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2016 and 2015.

Table 18 - Reconciliation Tangible Common Equity and Assets

	At December 31,
(In thousands, except share or per share information)	2016			2015
Total stockholders’ equity	$	5,197,957		$	5,105,324
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(627,294	)		(626,388	)
Less: Other intangibles		(45,050	)		(58,109	)
Total tangible common equity	$	4,475,453		$	4,370,667
Total assets	$	38,661,609		$	35,761,733
Less: Goodwill		(627,294	)		(626,388	)
Less: Other intangibles		(45,050	)		(58,109	)
Total tangible assets	$	37,989,265		$	35,077,236
Tangible common equity to tangible assets at end of period		11.78	%		12.46	%
Common shares outstanding at end of period		103,790,932			103,618,976
Tangible book value per common share	$	43.12		$	42.18

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its 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 27 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 services 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.

Purchase obligations include major legal and binding contractual obligations outstanding at the end of 2016, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions.

As previously indicated, the Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the consolidated statements of financial condition with the fair value 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.

38

At December 31, 2016, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, are presented in Table 19.

Table 19 - Contractual Obligations

	Payments Due by Period
(In millions)	Less than 1 year		1 to 3 years		3 to 5 years		After 5 years		Total
Certificates of deposits	$	3,947	$	2,001	$	1,711	$	51	$	7,710
Federal funds purchased and repurchase agreements		479		—		—		—		479
Other short-term borrowings		1		—		—		—		1
Long-term debt		154		746		131		526		1,557
Purchase obligations		112		58		7		—		177
Annual rental commitments under operating leases		34		59		52		126		271
Capital leases		1		3		3		11		18
Total contractual cash obligations	$	4,728	$	2,867	$	1,904	$	714	$	10,213

Under the Corporation’s repurchase agreements, Popular is required to deposit cash or qualifying securities to meet margin requirements. To the extent that 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.

At December 31, 2016, the Corporation’s liability on its pension, restoration and postretirement benefit plans amounted to approximately $244 million, compared with $299 million at December 31, 2015. The Corporation’s expected contributions to the pension and benefit restoration plans are minimal, while the expected contributions to the postretirement benefit plan to fund current benefit payment requirements are estimated at $6.4 million for 2017. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 34 to the consolidated financial statements for further information on these plans. Management believes that the effect of the pension and postretirement plans on liquidity is not significant to the Corporation’s overall financial condition. The BPPR’s non-contributory defined pension and benefit restoration plans are frozen with regards to all future benefit accruals.

At December 31, 2016, the liability for uncertain tax positions was $7.4 million, compared with $9.0 million as of the end of 2015. This liability represents an estimate of tax positions that the Corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty. Under the statute of limitations, the liability for uncertain tax positions expires as follows: 2017 - $1.1 million, 2018 - $1.1 million, 2019 - $1.1 million, 2020 - $1.5 million, and 2021 - $1.1 million. Additionally, $1.4 million is not subject to the statute of limitations. As a result of examinations, the Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.8 million, including interests.

The Corporation also utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments 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 the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

39

The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at December 31, 2016:

Table 20 - Off-Balance Sheet Lending and Other Activities

	Amount of commitment - Expiration Period
(In millions)	2017		Years 2018 - 2019		Years 2020 - 2021		Years 2022 - thereafter		Total
Commitments to extend credit	$	6,914	$	742	$	83	$	52	$	7,791
Commercial letters of credit		—		1		—		—		1
Standby letters of credit		6		26		3		—		35
Commitments to originate or fund mortgage loans		25		1		—		—		26
Total	$	6,945	$	770	$	86	$	52	$	7,853

RISK MANAGEMENT

Managing risk is an essential component of the Corporation’s business. Risk identification and monitoring are key elements in the overall risk management. Popular has a strong disciplined risk management culture where risk management is a share responsibility by all employees.

Risk Management Framework

Popular’s risk management framework seeks to ensure that there is an effective process in place to manage risk across the organization. Popular’s risk management framework 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); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest related options embedded in bank products (options risk).

• 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.

• 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.

• Compliance – Potential for loss resulting from violations of or non-conformance with laws, rules, regulations, prescribed practices.

40

• Regulatory and Legal Risk - Risk of negative impact to business activities, earnings or capital, regulatory 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.

• Strategic Risk – Potential for loss arising from adverse business decisions or improper implementation of business decisions. Also, it incorporates how management analyzes external factors that impact the strategic direction of the Corporation.

• Reputational Risk – Potential for loss arising from negative public opinion.

Risk Governance

The Corporation’s Board of Directors (the “Board”) has established a Risk Management Committee (“RMC”) to undertake the responsibilities of overseeing and approving the Corporation’s Risk Management Program, as well as the Corporation’s Capital Plan. The Capital Plan is a plan to maintain sufficient regulatory capital at the Corporation, BPPR and BPNA, which considers current and future regulatory capital requirements, expected future profitability and credit trends and, at least, two macroeconomic scenarios, including a base and stress scenario.

The RMC, as an oversight body, monitors and approves 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 Board and RMC have delegated to the Corporation’s management the implementation of 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, measure and monitor risks; implementing measurement mechanisms and infrastructure to achieve effective risk monitoring; developing and implementing the necessary management information and reporting mechanisms; and monitoring and testing the adequacy of the Corporation’s policies, strategies and guidelines.

The RMG is responsible for the overall coordination of risk management efforts throughout the Corporation and is composed of three reporting divisions: (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, and monitor credit risk. Through this committee, 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.

• ALCO (Asset / Liability Management Committee) – Oversees and approves the policies and processes designed to ensure sound market risk and balance sheet strategies, including the interest rate, liquidity, investment and trading policies. The ALCO monitors the capital position and plan for the Corporation and approves all capital management strategies, including capital market transactions and capital distributions. The ALCO also monitors forecasted results and their impact on capital, liquidity, and net interest margin of the Corporation.

• ORCO (Operational Risk Committee) – Monitors operational risk management activities to ensure the development and consistent application of operational risk policies, processes and procedures that measure, limit and manage the Corporation’s operational risks while maintaining the effectiveness and efficiency of the operating and businesses’ processes.

41

• Compliance Committees – Monitors regulatory compliance activities to ensure to compliance with legal and regulatory requirements and the Corporation’s policies.

• ERM (Enterprise Management Committee) – Monitors Market, Interest, Liquidity, Compliance, Regulatory, 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.

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 ALCO. In addition, the Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies to the Risk Management Committee, and enhancing and strengthening controls surrounding interest, liquidity and market risk. The ALCO generally meets on a weekly basis and reviews the Corporation’s current and forecasted asset and liability levels as well as desired pricing strategies and other relevant financial management and interest rate and risk topics. Also, on a monthly basis the ALCO reviews various interest rate risk sensitivity metrics, ratios and portfolio information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

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.

Most of the assets subject to market valuation risk are securities in the investment portfolio classified as available-for-sale. Refer to Notes 8 and 9 for further information on the investment portfolio. Investment securities classified as available-for-sale amounted to $8.2 billion as of December 31, 2016. Other assets subject to market risk include loans held-for-sale, which amounted to $89 million, mortgage servicing rights (“MSRs”) which amounted to $197 million and securities classified as “trading,” which amounted to $60 million, in each case as of December 31, 2016.

Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $ 153 million at December 31, 2016.

Management believes that market risk is currently not a material source of risk at the Corporation. A significant portion of the Corporation’s financial activities is concentrated in Puerto Rico, which has been going through a fiscal and economic crisis. Refer to the Geographic and Government Risk section of this MD&A for highlights on the current status of Puerto Rico’s fiscal and economic condition.

Interest Rate Risk (“IRR”)

The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield curve and option risks. In managing interest 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.

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 expectations and policy constraints.

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.

42

Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs.

Management assesses interest rate risk by comparing various net interest income simulations under different interest rate scenarios that differ in direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, the types of rate scenarios processed during the year included economic most likely scenarios, flat rates, yield curve twists, and parallel rate shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures.

The asset and liability management group performs validation procedures on various assumptions used as part of the sensitivity analysis as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage loans and mortgage-backed securities.

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, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at December 31, 2016 and 2015, assuming a static balance sheet and a one-year time horizon:

Table 21 - Net Interest Income Sensitivity (One Year Projection)

	December 31, 2016						December 31, 2015
(Dollars in thousands)	Amount Change			Percent Change			Amount Change			Percent Change
+400 basis points	$	236,945			16.52	%	$	186,126			13.41	%
+200 basis points		121,181			8.45			94,259			6.79
-200 basis points		(35,314	)		(2.46	)		(345	)		(0.02	)

Static gap analysis measures the volume of assets and liabilities maturing or repricing at a future point in time. Static gap reports stratify all of the Corporation’s assets, liabilities and off-balance sheet positions according to the instrument’s maturity, repricing characteristics and optionality, assuming no new business. The repricing volumes typically include adjustments for anticipated future asset prepayments and for differences in sensitivity to market rates. The volume of assets and liabilities repricing during future periods, particularly within one year, is used as one short-term indicator of IRR. Depending on the duration and repricing characteristics, changes in interest rates could either increase or decrease the level of net interest income. For any given period, the pricing structure of the assets and liabilities is generally matched when an equal amount of such assets and liabilities mature or reprice in that period. Any mismatch of interest earning assets and interest bearing liabilities is known as a gap position. A positive gap denotes asset sensitivity, which means that an increase in interest rates could have a positive effect on net interest income, while a decrease in interest rates could have a negative effect on net interest income. As shown in Table 22, at December 31, 2016, the Corporation’s one-year cumulative positive gap was $7.1 billion, or 20.4% of total earning assets. This compares with $4.3 billion and 13.6%, respectively, at December 31, 2015. The change in the one-year cumulative gap position was influenced by an increase in long duration core deposits invested in short-term money market investments. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures. They do not incorporate possible actions that could be taken to manage the Corporation’s IRR, nor do they capture the basis risks that might be included within the cumulative gap, given possible changes in the spreads between asset rates and the rates used to fund them.

43

Table 22 - Interest Rate Sensitivity

	At December 31, 2016
	By repricing dates
(Dollars in thousands)	0-30 days			Within 31 - 90 days			After three months but within six months			After six months but within nine months			After nine months but within one year			After one year but within two years			After two years			Non-interest bearing funds			Total
Assets:
Money market investments	$	2,889,217		$	—		$	1,000		$	—		$	—		$	—		$	—		$	—		$	2,890,217
Investment and trading securities		269,790			197,100			371,665			981,681			438,000			1,670,802			4,606,492			—			8,535,530
Loans		6,768,857			727,563			881,848			761,829			755,619			2,464,173			11,075,345			213			23,435,447
Other assets		—			—			—			—			—			—			—			3,800,415			3,800,415
Total		9,927,864			924,663			1,254,513			1,743,510			1,193,619			4,134,975			15,681,837			3,800,628			38,661,609
Liabilities and stockholders’ equity:
Savings, NOW and money market and other interest bearing demand deposits		1,388,083			381,708			483,629			465,393			447,245			1,606,653			11,033,527			—			15,806,238
Certificates of deposit		1,333,681			770,508			935,314			588,881			572,689			1,532,634			1,975,836			—			7,709,543
Federal funds purchased and assets sold under agreements to repurchase		171,898			207,769			99,759			—			—			—			—			—			479,426
Other short-term borrowings		1,200			—			—			—			—			—			—			—			1,200
Notes payable		3,815			13,302			17,381			29,018			32,561			210,463			1,268,311			—			1,574,851
Non-interest bearing deposits		—			—			—			—			—			—			—			6,980,443			6,980,443
Other non-interest bearing liabilities		—			—			—			—			—			—			—			911,951			911,951
Stockholders’ equity		—			—			—			—			—			—			—			5,197,957			5,197,957
Total	$	2,898,677		$	1,373,287		$	1,536,083		$	1,083,292		$	1,052,495		$	3,349,750		$	14,277,674		$	13,090,351		$	38,661,609
Interest rate sensitive gap		7,029,187			(448,624	)		(281,570	)		660,218			141,124			785,225			1,404,163			(9,289,723	)		—
Cumulative interest rate sensitive gap		7,029,187			6,580,563			6,298,993			6,959,211			7,100,335			7,885,560			9,289,723			—			—
Cumulative interest rate sensitive gap to earning assets		20.16	%		18.88	%		18.07	%		19.96	%		20.37	%		22.62	%		26.65	%		—			—

The Corporation estimates the sensitivity of economic value of equity to changes in interest rates. EVE is equal to the estimated present value of the Corporation’s assets minus the estimated present value of the liabilities. This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact of up or down rate changes in expected cash flows, including principal and interest, from all future periods.

EVE sensitivity calculated using interest rate shock scenarios is estimated on a quarterly basis. The shock scenarios consist of a +/- 200 and 400 basis points parallel shocks. Management has defined limits for the increases / decreases in EVE sensitivity resulting from the shock scenarios.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk 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 mortgage-backed securities and collateralized mortgage obligations, since prepayments could shorten (or lower prepayments could extend) the weighted average life of these portfolios. Table 23, which presents the maturity distribution of earning assets, takes into consideration prepayment assumptions.

44

Table 23 - Maturity Distribution of Earning Assets

	As of December 31, 2016
	Maturities
			After one year
			through five years				After five years
	One year		Fixed		Variable		Fixed interest		Variable interest
(In thousands)	or less		interest rates		interest rates		rates		rates		Total
Money market securities	$	2,890,217		—		—		—		—	$	2,890,217
Investment and trading securities		2,089,620	$	4,758,425	$	41,385	$	1,445,955	$	30,205		8,365,590
Loans:
Commercial		2,768,941		2,182,959		2,422,400		1,155,552		1,101,908		9,631,760
Construction		619,671		8,860		150,309		5,022		7,039		790,901
Lease financing		236,561		445,981		—		21,184		—		703,726
Consumer		2,036,703		1,399,733		155,767		57,554		94,412		3,744,169
Mortgage		718,324		1,474,351		155,290		4,203,490		152,329		6,703,784
Subtotal loans		6,380,200		5,511,884		2,883,766		5,442,802		1,355,688		21,574,340
Westernbank loans		702,937		575,468		255,807		245,619		81,275		1,861,106
Total earning assets	$	12,062,974	$	10,845,777	$	3,180,958	$	7,134,376	$	1,467,168	$	34,691,253

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.

Covered loans

The loans acquired in the Westernbank FDIC-assisted transaction were initially recorded at estimated fair values. As expressed in the Critical Accounting Policies / Estimates section of this MD&A, most of the covered loans have an accretable yield. The accretable yield includes the future interest expected to be collected over the remaining life of the acquired loans and the purchase premium or discount. The remaining life includes the effects of estimated prepayments and expected credit losses. For covered loans accounted for under ASC Subtopic 310-30, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued usage of key assumptions and estimates. Management must apply judgment to develop its estimates of cash flows for those covered loans given the impact of home price and property value changes, changes in interest rates and loss severities and prepayment speeds. Decreases in the expected cash flows by pool will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses, while increases in the expected cash flows of a pool will generally result in an increase in interest income over the remaining life of the loan, or pool of loans.

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be-announced) market transactions. The objective is to derive spread income from the portfolio and not to benefit from short-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.

45

At December 31, 2016, the Corporation held trading securities with a fair value of $60 million, representing approximately 0.2% of the Corporation’s total assets, compared with $72 million and 0.2%, respectively, at December 31, 2015. As shown in Table 24, the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at December 31, 2016 were investment grade securities. As of December 31, 2016, the trading portfolio also included $2.6 million in Puerto Rico government obligations and shares of closed-end funds that invest primarily in Puerto Rico government obligations ($6.0 million as of December 31, 2015). Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account loss of $0.8 million for the year ended December 31, 2016, compared to a loss of $4.7 million for 2015. Table 24 provides the composition of the trading portfolio at December 31, 2016 and December 31, 2015.

Table 24 - Trading Portfolio

	December 31, 2016					December 31, 2015
(Dollars in thousands)	Amount		Weighted Average Yield [1]			Amount		Weighted Average Yield [1]
Mortgage-backed securities	$	42,746		4.85	%	$	51,155		5.22	%
Collateralized mortgage obligations		1,321		5.27			2,054		5.06
Puerto Rico government obligations		1,164		5.51			4,590		5.41
Interest-only strips		602		12.35			687		12.10
Other (includes related trading derivatives)		13,972		3.03			13,173		3.31
Total	$	59,805		4.52	%	$	71,659		4.94	%

[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.

The Corporation’s trading portfolio had a 5-day VAR of approximately $0.4 million for the last week in December 31, 2016. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.

Derivatives

Derivatives may be used by the Corporation as part of its overall interest rate risk management strategy to minimize significant unexpected fluctuations in earnings and cash flows that are caused by fluctuations in interest rates. Derivative instruments that the Corporation may use include, among others, interest rate swaps, caps, floors, indexed options, and forward contracts. The Corporation does not use highly leveraged derivative instruments in its interest rate risk management strategy. The Corporation enters into interest rate swaps, interest rate caps and foreign exchange contracts for the benefit of commercial customers. Credit risk embedded in these transactions is reduced by requiring appropriate collateral from counterparties and entering into netting agreements whenever possible. All outstanding derivatives are recognized in the Corporation’s consolidated statement of condition at their fair value. Refer to Note 30 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities.

The Corporation’s derivative activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these hedges is monitored to ascertain that the Corporation is reducing market risk as expected. Derivative transactions are generally executed with instruments with a high correlation to the hedged asset or liability. The underlying index or instrument of the derivatives used by the Corporation is selected based on its similarity to the asset or liability

46

being hedged. As a result of interest rate fluctuations, fixed and variable interest rate hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Management will assess if circumstances warrant liquidating or replacing the derivatives position in the hypothetical event that high correlation is reduced. Based on the Corporation’s derivative instruments outstanding at December 31, 2016, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations.

Certain derivative contracts also present credit risk and liquidity risk because the counterparties may not comply with the terms of the contract, or the collateral obtained might be illiquid or become so. The Corporation controls credit risk through approvals, limits and monitoring procedures, and through master netting and collateral agreements whenever possible. Further, as applicable under the terms of the master agreements, the Corporation may obtain collateral, where appropriate, to reduce credit risk. The credit risk attributed to the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, as required by the fair 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, 2016, inclusion of the credit risk in the fair value of the derivatives resulted in a net loss of $0.5 million (2015 – net loss of $0.5 million; 2014 – net gain of $1.1 million), which consisted of a loss of $0.9 million (2015 – loss of $ 0.8 million; 2014 – loss of $ 0.1 million) resulting from the Corporation’s credit standing adjustment and a gain of $0.4 million (2015 – gain of $ 0.3 million; 2014 – gain of $1.2 million) from the assessment of the counterparties’ credit risk. At December 31, 2016, the Corporation had $4 million (2015 - $ 10 million) recognized for the right to reclaim cash collateral posted. On the other hand, the Corporation did not have any obligation to return cash collateral received at December 31, 2016 and 2015.

The Corporation performs appropriate due diligence and monitors the financial condition of counterparties that represent a significant volume of credit exposure. Additionally, the Corporation has exposure limits to prevent any undue funding exposure.

Cash Flow Hedges

The Corporation manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives designated as cash flow hedges and that are linked to specified hedged assets and liabilities. The cash flow hedges relate to forward contracts or TBA mortgage-backed securities that are sold and bought for future settlement to hedge mortgage-backed securities and loans prior to securitization. The seller agrees to deliver on a specified future date a specified instrument at a specified price or yield. These securities are hedging a forecasted transaction and are designated for cash flow hedge accounting. The notional amount of derivatives designated as cash flow hedges at December 31, 2016 amounted to $ 105 million (2015 - $ 110 million).

Refer to Note 30 to the consolidated financial statements for additional quantitative information on these derivative contracts.

Fair Value Hedges

The Corporation did not have any derivatives designated as fair value hedges during the years ended December 31, 2016 and 2015.

Trading and Non-Hedging Derivative Activities

The Corporation enters into derivative positions based on market expectations or to benefit from price differentials between financial instruments and markets mostly to economically hedge a related asset or liability. The Corporation also enters into various derivatives to provide these types of derivative products to customers. These free-standing derivatives are carried at fair value with changes in fair value recorded as part of the results of operations for the period.

Following is a description of the most significant of the Corporation’s derivative activities that are not designated for hedge accounting. Refer to Note 30 to the consolidated financial statements for additional quantitative and qualitative information on these derivative instruments.

At December 31, 2016, the Corporation had outstanding $ 113 million (2015- $ 189 million) in notional amount of interest rate swap agreements with a net negative fair value of $0.1 million (2015 – net negative fair value of $0.4 million), which were not designated as accounting hedges. These swaps were entered in the Corporation’s capacity as an intermediary on behalf of its customers and their offsetting swap position.

47

For the year ended December 31, 2016, the impact of the mark-to-market of interest rate swaps not designated as accounting hedges was a net increase in earnings of approximately $ 0.3 million, recorded in the other operating income category of the consolidated statement of operations, compared with an earnings increase of approximately $ 0.3 million and $ 1.2 million, in 2015 and in 2014 respectively.

At December 31, 2016, the Corporation had $0.7 million in notional amount of forward contracts outstanding not designated as accounting hedges with a positive fair value of $ 9 thousand while on December 31, 2015, the Corporation did not have any forward contracts outstanding not designated as accounting hedges. For the year ended December 31, 2016, the impact of the mark-to-market of the forward contracts not designated as accounting hedges was a reduction to non-interest income of $ 0.2 million (2015 - loss of $ 0.4 million; 2014 - loss of $ 10.9 million), which was included in the category of mortgage banking activities in the consolidated statement of operations.

Furthermore, the Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation offers certificates of deposit with returns linked to these indexes to its retail customers, principally in connection with individual retirement accounts (IRAs), and certificates of deposit. At December 31, 2016, these deposits amounted to $ 70 million (2015 - $ 86 million), or less than 1% (2015 – less than 1%) of the Corporation’s total deposits. In these certificates, the customer’s principal is guaranteed by the Corporation and insured by the FDIC to the maximum extent permitted by law. The instruments pay a return based on the increase of these indexes, as applicable, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested but allows the customer the potential to earn a return based on the performance of the indexes.

The risk of issuing certificates of deposit with returns tied to the applicable indexes is economically hedged by the Corporation. BPPR and BPNA purchase indexed options from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposit issued by these banking subsidiaries. By hedging the risk in this manner, the effective cost of these deposits is fixed. The contracts have a maturity and an index equal to the terms of the pool of retail deposits that they are economically hedging.

The purchased option contracts are initially accounted for at cost (i.e., amount of premium paid) and recorded as a derivative asset. The derivative asset is marked-to-market on a quarterly basis with changes in fair value charged to earnings. The deposits are hybrid instruments containing embedded options that must be bifurcated in accordance with the derivatives and hedging activities guidance. The initial value of the embedded option (component of the deposit contract that pays a return based on changes in the applicable indexes) is bifurcated from the related certificate of deposit and is initially recorded as a derivative liability and a corresponding discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and included as part of interest expense while the bifurcated option is marked-to-market with changes in fair value charged to earnings.

The purchased indexed options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify for hedge accounting, and therefore, cannot be designated as accounting hedges. At December 31, 2016, the notional amount of the indexed options on deposits approximated $ 73 million (2015 - $ 90 million) with a fair value of $ 13 million (asset) (2015 - $ 13 million) while the embedded options had a notional value of $ 70 million (2015 - $ 86 million) with a fair value of $ 11 million (liability) (2015 - $ 10 million).

Refer to Note 30 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2016 and 2015.

Foreign Exchange

The Corporation holds an interest in BHD León in the Dominican Republic, which is an investment accounted for under the equity method. The Corporation’s carrying value of the equity interest in BHD León approximated $126 million at December 31, 2016. This business is conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly-inflationary environments in which the effects would be included in the consolidated statements of operations. At December 31, 2016, the Corporation had approximately $40 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, compared with an unfavorable adjustment of $36 million at December 31, 2015 and $33 million at December 31, 2014.

48

Liquidity

The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board has delegated the monitoring of these risks to the RMC and the ALCO. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies.

An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding.

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s 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.

During the year ended December 31, 2016, the Corporation declared quarterly dividends on its common stock of $0.15 per share, for a total of $62.2 million. On January 23, 2017, the Corporation’s Board of Directors approved the following capital actions: increase the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share; and common stock repurchases of up to $75 million. The Company’s Board of Directors approved a quarterly cash dividend of $0.25 per share on its outstanding common stock. The dividend is payable on April 3, 2017 to shareholders of record as of March 17, 2017. Future quarterly dividends will be subject to the Board of Directors’ approval at the customary times those dividends are declared. Common stock repurchases will be made under a repurchase plan that has been authorized by the Company’s Board of Directors. Common stock repurchases may be executed in the open market or in privately negotiated transactions. The timing and exact amount of the share repurchases will be subject to various factors, including the Company’s capital position, financial performance and market conditions.

As discussed in Note 5 - Business Combinations, on February 27, 2015 the Corporation acquired certain assets and assumed all deposits (except brokered deposits) from Doral Bank. This included approximately $ 1.5 billion in loans, approximately $ 173 million in securities available for sale and $ 2.2 billion in deposits.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 79% of the Corporation’s total assets at December 31, 2016 and 76% at December 31, 2015. The ratio of total ending loans to deposits was 77% at December 31, 2016, compared to 85% at December 31, 2015. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At December 31, 2016, these borrowings consisted primarily of $ 479 million in assets sold under agreement to repurchase, $673 million in advances with the FHLB, $439 million in junior subordinated deferrable interest debentures (net of debt issuance cost) related to trust preferred securities and $445 million in term notes (net of debt issuance cost) issued to partially fund the repayment of TARP funds. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 21 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. A detailed description of the Corporation’s borrowings and available lines of credit, including its terms, is included in Note 21 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

49

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 maintains borrowing facilities with the FHLB and at the discount window of the Federal Reserve Board (the “Fed”), and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of 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.

During the year ended December 31, 2016, BPPR declared cash dividends of $78.8 million, a portion of which was used by Popular for the payments of the cash dividends on its outstanding common stock, as mentioned above.

Note 44 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the Fed 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.

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 recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings.

Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 15 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $25.8 billion, or 84% of total deposits, at December 31, 2016, compared with $22.0 billion, or 81% of total deposits, at December 31, 2015. Core deposits financed 76% of the Corporation’s earning assets at December 31, 2016, compared with 69% at December 31, 2015.

50

Certificates of deposit with denominations of $100,000 and over at December 31, 2016 totaled $ 4.1 billion, or 14% of total deposits (December 31, 2015 - $4.2 billion, or 15% of total deposits). Their distribution by maturity at December 31, 2016 is presented in the table that follows:

Table 25 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over

(In thousands)
3 months or less	$	1,524,204
3 to 6 months		411,954
6 to 12 months		549,248
Over 12 months		1,653,180
Total	$	4,138,586

Average deposits, including brokered deposits, for the year ended December 31, 2016 represented 86% of average earning assets, compared with 85% and 82% for the years ended December 31, 2015 and 2014, respectively. Table 26 summarizes average deposits for the past five years.

Table 26 - Average Total Deposits

	For the years ended December 31,
(In thousands)	2016		2015		2014		2013		2012
Non-interest bearing demand deposits	$	6,607,639	$	6,146,504	$	5,533,649	$	5,728,228	$	5,356,649
Savings accounts		7,528,057		7,027,238		6,733,195		6,792,137		6,571,133
NOW, money market and other interest bearing demand accounts		7,024,810		5,446,933		4,824,402		5,738,189		5,555,203
Certificates of deposit:
Under $100,000		2,525,448		3,537,307		3,708,622		4,817,831		5,276,389
$100,000 and over		4,240,008		3,755,412		3,107,735		2,995,175		3,375,846
Certificates of deposit		6,765,456		7,292,719		6,816,357		7,813,006		8,652,235
Other time deposits		1,140,048		865,189		739,752		700,815		768,713
Total interest bearing deposits		22,458,371		20,632,079		19,113,706		21,044,147		21,547,284
Total average deposits	$	29,066,010	$	26,778,583	$	24,647,355	$	26,772,375	$	26,903,933

At December 31, 2016 approximately 2% of the Corporation’s assets were financed by brokered deposits, as compared to 4% at December 31, 2015. The Corporation had $ 0.6 billion in brokered deposits at December 31, 2016 and $1.3 billion in December 31, 2015. In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts.

To the extent that the banking subsidiaries are unable to obtain sufficient liquidity through core deposits, the Corporation may meet its liquidity needs through short-term borrowings by pledging securities for borrowings under repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral.

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At December 31, 2016 and December 31, 2015, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.8 billion and $3.9 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $673 million at December 31, 2016 and $762 million at December 31, 2015. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At December 31, 2016 the credit facilities authorized with the FHLB were collateralized by $4.9 billion in loans held-in-portfolio, compared with $4.7 billion at December 31, 2015. Refer to Note 21 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.

At December 31, 2016 and December 31, 2015, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.2 billion and $1.3 billion, respectively, which remained unused as of both dates. The amount available under this borrowing facility is dependent upon the balance of performing loans, securities pledged as collateral and the haircuts assigned to such collateral. At December 31, 2016 and December 31, 2015, this credit facility with the Fed was collateralized by $2.3 billion and $2.5 billion, respectively, in loans held-in-portfolio.

51

At December 31, 2016, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances, no assurance can be given that they would be able to replace those funds in the future if the Corporation’s financial condition or general market conditions were to deteriorate. The Corporation’s financial flexibility will be severely constrained if its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future financing needs at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of market changes, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management 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.

Bank Holding Companies

The principal sources of funding for the bank holding companies (the “BHC’s”), which are Popular, Inc. (holding company only) (“PIHC”) and Popular North America, Inc. (“PNA”), include cash on hand, investment 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.

The principal use of these funds include the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities) and capitalizing its banking subsidiaries.

During the year ended December 31, 2016, PIHC received $78.8 million in dividends from BPPR and $4.7 million in dividends from EVERTEC’s parent company. PIHC also received $12.1 million in dividends from its investment in BHD León, and $37.5 million in dividends from its non-banking subsidiaries.

Another use of liquidity at the parent holding company is the payment of dividends on its outstanding stock. During the year ended December 31, 2016, the Corporation declared quarterly dividends on its outstanding common stock of $0.15 per share, for a total of $62.2 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $3.7 million for the year ended December 31, 2016. As mentioned above, on January 23, 2017, the Corporation’s Board of Directors approved the following capital actions: an increase in the Company’s quarterly common stock dividend to $0.25 per share for the second quarter of 2017; and common stock repurchases of up to $75 million. The dividend is payable on April 3, 2017 to shareholders of record as of March 17, 2017.

The 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 cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities.

Note 44 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the two BHC’s. The loans held-in-portfolio in such financial statements is principally associated with intercompany transactions.

The outstanding balance of notes payable at the BHC’s amounted to $884 million at December 31, 2016, compared with $890 million at December 31, 2015. The repayment of the BHC’s obligations represents a potential cash need which is expected to be met with a combination of internal liquidity resources stemming mainly from future dividend receipts and new borrowings.

The contractual maturities of the BHC’s notes payable at December 31, 2016 are presented in Table 27.

52

Table 27 - Distribution of BHC’s Notes Payable by Contractual Maturity

Year	(In thousands)
2017	$	—
2018		—
2019		444,788
2020		—
2021		—
Later years		439,324
Total	$	884,112

As indicated previously, the BHC did not issue new registered debt in the capital markets during the year ended December 31, 2016.

The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future.

Non-banking subsidiaries

The principal sources of funding for 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 funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings from their holding companies, BPPR or BPNA.

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 investment securities, sponsored U.S. agency securities, government sponsored mortgage-backed securities, and collateralized mortgage obligations that can be used to raise funds in the repo markets. At December 31, 2016, the investment and trading securities portfolios, as shown in Table 23, totaled $8.4 billion, of which $2.1 billion, or 25%, had maturities of one year or less. Mortgage-related investments in Table 23 are presented based on expected maturities, which may differ from contractual maturities, since they could be subject to prepayments. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity and risk appetite of the various counterparties. The Corporation’s unpledged investment and trading securities, excluding other investment securities, amounted to $ 3.7 billion at December 31, 2016 and $3.0 billion at December 31, 2015. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use. The maturity distribution of the total loan portfolio at December 31, 2016 is presented in Table 23. As of that date, $7.1 billion, or 30% of the loan portfolio was expected to mature within one year, compared with $7.1 billion, or 31% of the loan portfolio in the previous year. The contractual maturities of loans have been adjusted to include prepayments based on historical data and prepayment trends.

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, leverage ratios and other 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 requirements. As their fair value increases, the collateral requirements may increase, thereby reducing the balance of unpledged securities.

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic and fiscal conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. The Puerto Rico economy continues to face various challenges, including significant pressures in some sectors of the residential real estate market. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy and the ongoing fiscal crisis.

53

Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the Fed.

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 core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors.

The Corporation’s banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation’s overall credit ratings. At the BHCs, the volume of capital market borrowings has declined substantially, as the non-banking lending businesses that it had historically funded have been shut down and the need to raise unsecured senior debt has been substantially reduced.

Obligations Subject to Rating Triggers or Collateral Requirements

The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $14 million in deposits at December 31, 2016 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $0.8 million at December 31, 2016, with the Corporation providing collateral totaling $4 million to cover the net liability position with counterparties on these derivative instruments.

In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. In the event of a credit rating downgrade, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in Note 27 to the consolidated financial statements, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations amounted to approximately $62 million at December 31, 2016. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional 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.

54

Credit Risk

The effective management of credit risk requires 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, reviews and approves 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 subsidiaries, including the adherence to the Corporation’s risk appetite and credit risk tolerance limits.

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 on-balance sheet and off-balance sheet credit instruments. Credit risk management is based on analyzing the creditworthiness of the borrower or counterparty, the adequacy of underlying collateral given current events and conditions, and the existence and strength of any guarantor support.

Business activities that expose the Corporation to credit risk are managed within the Board’s established limits that consider factors, such as maintaining a prudent balance of risk-taking across diversified risk types and business units (compliance with regulatory guidance, considering factors such as concentrations and loan-to-value ratios), controlling the exposure to lower credit quality assets, and limiting growth in, and overall exposure to, any product or risk segment where the Corporation does not have sufficient experience and a proven ability to predict credit losses.

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 credit 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 centralized. When considered necessary, the Corporation requires collateral to support credit extensions and commitments, which is generally in the form of real estate and personal property, cash on deposit and other highly liquid instruments.

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, in the detail that 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, establishing credit exposure reporting standards, monitoring asset quality, and approving credit policies and amendments thereto for the subsidiaries and/or business lines, including special lending approval authorities when and if appropriate. The analysis of the allowance adequacy is presented to the Risk Management Committee of the Board of Directors for review, consideration and ratification on a quarterly basis.

The Corporation also has a Corporate Credit Risk Management Division (“CCRMD”). CCRMD is a centralized unit, independent of the lending function. The CCRMD’s functions include identifying, measuring and controlling credit risk independently from the business units, evaluating the credit risk rating system and reviewing the adequacy of the allowance for loan losses in accordance with GAAP and regulatory standards. CCRMD also ensures that the subsidiaries comply with the credit policies and applicable regulations, and monitors credit underwriting standards. Also, the CCRMD performs ongoing monitoring of the portfolio, including 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 to the credit risk management processes.

55

The Corporation’s Corporate Loan Review and Model Risk Monitoring (“CLR & MRM”) Division is an independent function from the CCRMD. Through the Commercial Loan Review Unit at the Corporate Loan Review Department (“CLRD”), CLR & MRM evaluates compliance with the Bank’s Commercial Credit Norms and Procedures and the precision of risk rating accuracy. The CLRD performs annual credit process reviews of several commercial portfolios, including small and middle market, construction, 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 loans, and the evaluation of credit and collateral documentation. The monitoring performed by CLRD contributes to assess compliance with credit policies and underwriting standards, to determine the current level of credit risk, to evaluate the effectiveness of the credit management process and to identify control deficiencies that may arise in the credit-origination and management processes. Based on its findings, CLRD develops recommendations 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.

The Corporation’s Commercial Credit Administration Group includes the Special Loans Division, the Commercial Credit Operations Division and the Loss-Sharing Agreement Administration Group. This unit focuses on maximizing the value of the Corporation’s special loans and other real estate owned of the commercial portfolio, as well as the FDIC covered loans portfolio.

At December 31, 2016, the Corporation’s credit exposure was centered in its $23.4 billion total loan portfolio, which represented 67% of its earning assets. The portfolio composition for the last five years is presented in Table 9.

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 associated with failure of the counterparty to perform in accordance with the terms and conditions of the contract and the decline in value of the underlying collateral. The credit risk associated with these financial instruments varies depending on the counterparty’s creditworthiness and the value of any collateral held. Refer to Note 28 to the consolidated financial statements and to the Contractual Obligations and Commercial Commitments section of this MD&A for the Corporation’s involvement in these credit-related activities.

At December 31, 2016, the Corporation maintained a reserve of approximately $9 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit (2015 - $10 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 30 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities, and the Derivatives sub-section included under Risk Management in this MD&A.

The Corporation may also encounter risk of default in relation to its investment securities portfolio. Refer to Notes 8 and 9 for the composition of the investment securities available-for-sale and held-to-maturity. The investment securities portfolio held by the Corporation at December 31, 2016 are mostly Obligations of U.S. Government sponsored entities, collateralized mortgage obligations, mortgage-backed securities and Obligations of Puerto Rico, States and political subdivisions.

The Corporation’s credit risk exposure is spread among individual consumers, small and medium businesses, as well as corporate borrowers engaged in a wide variety of industries. Of these commercial lending relationships, 295 have an aggregate exposure of $10 million or more. At December 31, 2016, highly leveraged transactions and credit facilities to finance real estate ventures or business acquisitions amounted to $195 million (2015 - $117 million), and there are no loans to less developed countries. The Corporation limits its exposure to concentrations of credit risk by the nature of its lending limits.

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 economic conditions 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.

56

Historically, the levels of real estate prices in Puerto Rico were more stable than in other U.S. markets. Nevertheless, the current economic environment has accelerated the devaluation of properties. In addition, demographic trends is also impacting the demand for housing and hence the devaluation of properties. Over the last few years, as the recession has 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, loan delinquencies, foreclosures and the cost of repossessing and disposing of real estate collateral.

Over the past several years, the Corporation has focused in de-risking its loan portfolios by reducing its exposure in asset classes with historically high loss content. In Puerto Rico, the construction portfolio has been reduced significantly standing at only $86 million in December 31, 2016. In the U.S., during the second half of 2014, the divesture of its regional operations in California, Illinois, and Central Florida, as well as the sale of certain non-performing and legacy assets were completed, as part of the U.S. operations reorganization. Furthermore, the Corporation has significantly curtailed the production of non-traditional mortgages as it ceased originating subprime consumer loans and non-conventional mortgage loans in its U.S. mainland operations. This shift in the risk profile of the credit portfolios has strengthened the Corporation and its better positioned to operate in Puerto Rico’s complex environment. The Corporation continues to analyze and monitor the higher risk segments of its portfolios, and although deemed appropriately sized and within the risk tolerance limits, remains attentive to changes in trends.

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 consumer lending group has 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.

Geographic and Government Risk

The Corporation is exposed to geographic and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 42 to the consolidated financial statements. A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth”), which is experiencing a severe economic and fiscal crisis resulting from continuing economic contraction, persistent and significant budget deficits, a high debt burden, unfunded legacy obligations and lack of access to the capital markets, among other factors.

The Commonwealth’s deficits were historically covered with bond financings, loans from the Government Development Bank for Puerto Rico (“GDB”) and other extraordinary one-time revenue measures, as well as deferring the cost of certain legacy obligations, such as pensions. The Commonwealth’s structural imbalance between revenue and expenditure and unfunded legacy obligations, coupled with the deterioration of GDB’s liquidity situation and Commonwealth’s recent inability to access the capital markets, have recently resulted in the government becoming unable to pay scheduled debt payments while continuing to provide government services.

In response to this crisis, in June 2016 the U.S. Federal Government enacted the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which, among other things, establishes a seven-member Federally-appointed oversight board (the “Oversight Board”) with broad powers over the finances of the Commonwealth and its instrumentalities.

Recent Economic Performance

Puerto Rico entered into recession in the fourth quarter of fiscal year 2006. Puerto Rico’s gross national product (GNP) has thereafter contracted in real terms in every year between fiscal year 2007 and fiscal year 2015 (inclusive), with the exception of growth of 0.5% in fiscal year 2012 (likely as a result of the large amount of governmental stimulus and deficit spending in that fiscal year). According to Puerto Rico Planning Board estimates released in October 2016, gross national product is projected to further

57

contract by 1.8% and 2.3% during fiscal years 2016 and 2017, respectively. The latest GDB Economic Activity Index, which is an indicator of general economic activity and not a direct measurement of GNP, reflected a 1.4% reduction in the average for fiscal year 2016, compared to the prior fiscal year. During the first six months of fiscal year 2017 (July to December 2016), the Economic Activity Index reflected a 1.9% average reduction compared to the corresponding figure for fiscal year 2016.

Fiscal and Liquidity Measures; Defaults in Debt Service Payments

The Commonwealth’s challenges have resulted in a severe fiscal and liquidity crisis, which has forced the government to implement extraordinary measures in order to continue to fund its operational expenses and provide essential services to its residents. Recent measures to tackle the government’s structural budgetary imbalance have included (a) reforms to the Commonwealth’s retirement systems, (b) the enactment of Act No. 66-2014, as amended (“Act 66”), a fiscal emergency law that, among other things, freezes formula appropriations, salaries and benefits under collective bargaining agreements and (c) certain revenue raising measures, including an increase in the sales and use tax (“SUT”) rate from 7% to 11.5% and the implementation of a Commonwealth SUT of 4% with respect to certain business-to-business services. The Administration of Governor Ricardo Rosselló Nevares, sworn in January 2017, has, among other measures, enacted legislation to extend (x) until fiscal year 2021 certain of the provisions of Act 66 and (y) for 10 years the temporary excise tax imposed by Act No. 154-2010.

Recent measures to address the Commonwealth’s liquidity crisis have included (i) requiring the two largest government retirement systems to pre-fund the payment of retirement benefits to participants and (ii) delaying the payment of third-party payables, income tax refunds and amounts due to public corporations. In addition, in April 2016 the Commonwealth enacted the Puerto Rico Emergency Moratorium and Rehabilitation Act (the “Moratorium Act”), pursuant to which the Commonwealth and certain of its instrumentalities suspended the payment of debt service on their respective debts and retained certain revenues assigned to particular public corporations, redirecting the same for the funding of operational expenses. The Moratorium Act also imposed significant constraints on the operation of GDB, including stringent restrictions on the withdrawal of deposits from GDB (including deposits of the Commonwealth’s municipalities).

Pursuant to Executive Orders issued under the Moratorium Act, the following entities have not made payment of principal and/or interest in full on certain of their respective bonds and notes as of the date hereof: the Commonwealth, GDB, the Puerto Rico Public Buildings Authority, the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the Puerto Rico Highways and Transportation Authority (“HTA”) (with respect to certain subordinated bonds). Certain other entities have not made scheduled deposits required under the governing bond documentation, including HTA, the Convention Center District Authority, PRIFA, the Employees Retirement System, and the University of Puerto Rico. Debt service on bonds issued by the Puerto Rico Public Finance Corporation has also not been appropriated since fiscal year 2016. Consistent with the provisions of the Moratorium Act and the executive orders issued thereunder, the approved budget for the Commonwealth for fiscal year 2017 does not allocate funds for the payment of debt service on the Commonwealth’s general obligation debt or any other debt payable from Commonwealth appropriations. The Governor has not taken action under the Moratorium Act with respect to the Puerto Rico Sales Tax Financing Corporation (“COFINA’”) and COFINA continues to make debt service payments when due.

On January 29, 2017, the Rosselló Administration enacted Act No. 5-2017 (“Act 5”), also known as the “Financial Emergency and Fiscal Responsibility Act”, to replace certain provisions of the Moratorium Act. Among other things, Act 5 extended the Governor’s power to suspend debt service obligations until May 1, 2017 (subject to an additional three-month extension by executive order) by prioritizing the payment of essential services over debt service. Act 5 grandfathers executive orders issued pursuant to the Moratorium Act and stipulates that the same shall continue in full force and effect until amended, rescinded or superseded.

The Government has stated that certain of these emergency liquidity measures are unsustainable and have significant negative economic effects. Also, the Commonwealth has indicated that it expects that these measures will not be sufficient to address the Commonwealth’s liquidity needs and that it will need to implement additional extraordinary measures to continue providing essential government services. Absent such additional liquidity measures, the Commonwealth has indicated it may experience significant bank cash shortfalls as soon as May 1, 2017, triggered by the expiration of the applicable moratorium period under Act 5 and the co-extensive stay of litigation imposed under PROMESA (described below).

58

Enactment of PROMESA

In general terms, PROMESA seeks to provide the Commonwealth with (i) fiscal and economic discipline through the creation of the Oversight Board, (ii) relief from creditor lawsuits through the enactment of a temporary stay on litigation to enforce rights or remedies related to outstanding liabilities of the Commonwealth and its instrumentalities and municipalities and (iii) two separate processes for the restructuring of the debt obligations of such entities. PROMESA also includes other miscellaneous provisions, including relief from certain wage and hour laws and regulations and provisions for identification and expedited permitting of critical infrastructure projects.

On August 31, 2016, President Obama appointed the seven voting members of the Oversight Board. Pursuant to PROMESA, the Oversight Board shall remain in place until market access is restored and balanced budgets, in accordance with modified accrual accounting, are produced for at least four consecutive years. During the first meeting of the Oversight Board, held on September 30, 2016, the Oversight Board announced the designation of a number of entities as covered entities under PROMESA, including the Commonwealth, all of its public corporations and retirement systems, and all affiliates and subsidiaries of the foregoing. While the Oversight Board has the power to designate any of the Commonwealth’s municipalities as covered entities under PROMESA, it has not done so as of the date hereof.

The designation of an entity as a covered entity has various implications under PROMESA. First, it means that the Governor will have to submit such entity’s annual budgets and, if the Oversight Board so requests, its fiscal plans, to the Oversight Board for its review and approval. Second, covered territorial instrumentalities may not issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to their debts without the prior approval of the Oversight Board. Third, pursuant to certain contracting guidelines approved by the Oversight Board, prior Oversight Board approval is required in connection with any transaction undertaken by a covered entity that (i) is outside the ordinary course of business or (ii) has a material financial impact. Finally, covered entities could also potentially be eligible to use the restructuring procedures provided by PROMESA. The first, Title VI, is a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debt. If a supermajority of creditors of a certain category agree, that agreement can bind all other creditors in such category. The second, Title III, draws on the federal bankruptcy code and provides a court-supervised process for a comprehensive restructuring led by the Oversight Board. Access to either of these procedures is dependent on compliance with certain requirements established in PROMESA, including the approval of the Oversight Board.

The initial stay of litigation imposed by PROMESA is effective from July 1, 2016 to February 15, 2017, subject to being extended under certain conditions. At the request of the Rosselló Administration, the Oversight Board, in its January 28, 2017 meeting, extended the stay for an additional 75 days to allow the new administration to submit its fiscal plan and complete a voluntary restructuring process under Title VI. The automatic stay imposed by PROMESA applies to covered actions against all government instrumentalities in Puerto Rico, even those that may not be immediately within the jurisdiction and purview of the Oversight Board, such as municipalities. Notwithstanding the stay on litigation provisions of PROMESA, there are various lawsuits filed by creditors in the U.S. District Court for the District of Puerto Rico challenging the Commonwealth’s actions under the Moratorium Act and requesting that the court lift the stay under PROMESA.

Commonwealth’s Fiscal Plan

PROMESA requires the Commonwealth to submit a fiscal plan to the Oversight Board that, among other things, (i) provides for estimates of revenues and expenditures in conformance with agreed accounting standards, (ii) ensures the funding of essential services, (iii) eliminates structural deficits, (iv) provides adequate funding for public pension systems and (v) provides for a debt burden that is sustainable. Furthermore, the fiscal plan must respect the relative lawful priorities or lawful liens under local law.

The Commonwealth submitted a fiscal plan for consideration of the Oversight Board on October 14, 2016 (the “October Fiscal Plan”). The October Fiscal Plan relied in part on the findings of the report prepared by a group of former International Monetary Fund economists and commissioned by the Commonwealth, commonly known as the “Krueger Report”, and the Fiscal and Economic Growth Plan prepared by the Commonwealth in 2015 in response to the crisis, which served as the base during fiscal year 2016 for unsuccessful debt restructuring negotiations.

The October Fiscal Plan projected that, under current policies, consolidated expenditures (including required pension payments and debt service on tax-supported debt) would, in the aggregate, exceed consolidated resources by approximately $58.7 billion from

59

fiscal year 2017 to fiscal year 2026. The October Fiscal Plan further estimated that, assuming the Commonwealth took the measures identified in the plan and that such measures produced the projected economic and financial results, in the absence of federal Affordable Care Act funding for the Government’s health programs there would still be a material cumulative financing gap during the ten-year period before the payment of any debt service. On the other hand, if the Commonwealth were to successfully implement the measures identified in the October Fiscal Plan and if federal healthcare funding is kept at the current level, the Commonwealth could have a cumulative primary surplus of approximately $18.8 billion during the next ten years (excluding payment of debt service of approximately $34.2 billion due during such period). The October Fiscal Plan stated that without a substantial debt restructuring resulting in a sustainable debt burden, Puerto Rico’s growth potential will continue to be hindered by the fear of future defaults, lower public and private investment and further outmigration.

The October Fiscal Plan did not contemplate a restructuring of the debt of Puerto Rico’s municipalities. The Fiscal Plan contemplated, however, as part of its expense reduction measures, the gradual elimination of budgetary subsidies provided to municipalities. Such subsidies constitute a material portion of the operating revenues of certain municipalities. The October Fiscal Plan is publicly available in the Oversight Board’s website.

In a meeting held on November 18, 2016, the Oversight Board rejected the October Fiscal Plan and established a set of guiding principles for the evaluation of the fiscal plan. Such guiding principles include that the fiscal plan must assume no additional federal support beyond that which is already established by law (including no extension of Affordable Care Act funding). The Oversight Board also established January 31, 2017 as the target date for the certification of a fiscal plan and requested the Administration to present a revised baseline financing gap forecast that, among other things, reflected revised macroeconomic assumptions, pay-as-you-go funding for pension benefits and the segregation of current employee contributions to the pension systems. On December 20, 2016, the Commonwealth issued revised baseline projections that, based on the revised assumptions, indicated a cumulative financing gap of approximately $67.5 billion over the ten-year projection period, an increase of approximately $8.8 billion when compared to the October Fiscal Plan.

Furthermore, on January 18, 2017 the Oversight Board published a series of additional targets and guidelines for certification of a fiscal plan and set fiscal year 2019 as the target for a structurally balanced budget. The initiatives identified by the Oversight Board, which included the elimination of budgetary subsidies to municipalities and an approximately 10% reduction in pension and/or pension-related benefits, would reduce the fiscal year 2019 primary balance before debt service from approximately negative $3.7 billion to a surplus before debt service of approximately $0.8 billion.

Upon assuming power in January 2017, the Rosselló Administration requested an extension of the deadline to submit a fiscal plan. On January 28, 2017 the Oversight Board granted the Administration until February 28, 2017 to submit a new fiscal plan and set March 15, 2017 as the new deadline for fiscal plan certification. On February 28, 2017, the Roselló administration submitted to their Oversight Board its draft fiscal plan which, among other initiatives, calls for significant reductions in operational expenses and subsides for municipalities and the University of Puerto Rico. The plan, which relies on significant change in economic assumptions vis a vis the baseline, projects a surplus before debt service of $11.6 billion in the aggregate during the ten year projection period (against $35.1 billion in contractual debt service).

Exposure of the Corporation

The credit quality of BPPR’s loan portfolio necessarily reflects, among other things, the general economic conditions in Puerto Rico and other adverse conditions affecting Puerto Rico consumers and businesses. The effects of the prolonged recession are reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on loans granted in Puerto Rico. In addition, the measures taken to address the fiscal crisis and those that may have to be taken in the near future will likely affect many of our individual customers and customers’ businesses, which could cause credit losses that adversely affect us and may negatively affect consumer confidence. Any reduction in consumer spending as a result of these issues may also adversely impact our interest and non-interest revenues. If global or local economic conditions worsen or the Government of Puerto Rico is unable to manage its fiscal crisis, including 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.

At December 31, 2016, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 584 million, of which approximately $ 529 million is outstanding ($669 million and $578 million, respectively, at December 31, 2015). Deterioration of the 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, $ 459 million consists of loans and $ 70 million are securities ($502 million and $76 million, respectively, at December 31, 2015). Of the amount outstanding, $ 17 million represents obligations from the Commonwealth or its public corporations, each of which has been designated as a covered entity under PROMESA. Obligations from various municipalities in

60

Puerto Rico constitute, however, the bulk of our direct exposure to Puerto Rico government obligations ($76 million at December 31, 2015). The remaining $ 512 million are in most cases “general obligations”, to which the applicable municipality has pledged its good faith , credit and unlimited taxing power, or “special obligations”, to which the applicable municipality has pledge other revenues ($502 million at December 31, 2015). The automatic stay on litigation imposed by PROMESA applies to all municipal obligations to which we are a party (other than to municipal obligations issued after the enactment of PROMESA). Furthermore, although the PROMESA Oversight Board has not designated any of the Commonwealth’s 78 municipalities as covered entities under PROMESA, it may decide to do so in the future. For a more detailed description of the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities, see note 28.

During the second quarter of 2016, the Corporation recognized an other-than-temporary impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2016 this security was rated Caa2 and CC by Moody’s and S&P, respectively. Puerto Rico’s fiscal and economic situation, together with the events described above, led management to conclude that the unrealized losses on this security were other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by this security was attributed to estimated credit losses. Accordingly, the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to this specific security.

In addition, at December 31, 2016, the Corporation had $406 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry the guarantee of a Puerto Rico governmental entity to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $326 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (“HFA”), an entity that has been designated as a covered entity under PROMESA (December 31, 2015 - $316 million). These mortgage loans are secured by the underlying properties and the “HFA” guarantee serves to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $49 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or second mortgages residential loans, and approximately $31 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($50 million and $28 million, respectively, at December 31, 2015).

As further detailed in Notes 8 and 9 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $849 million of residential mortgages and $99 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2016. The Corporation does not have any exposure to European sovereign debt.

Non-Performing Assets

Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 28.

On June 30, 2015, the shared-loss arrangement under the commercial loss share agreement with the FDIC related to the loans acquired from Westernbank as part of the FDIC assisted transaction in 2010 expired. Loans and OREO’s that remain covered under the terms of the single-family loss share agreement continue to be presented as covered assets in the accompanying tables and credit metrics as of December 31, 2016.

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 other portfolios that were not impacted by acquisition 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.

61

The Corporation continued to experience stable credit trends despite challenging economic conditions in Puerto Rico. The shift in the composition and the risk profile of the credit portfolios over the last few years has better positioned the Corporation to operate in the Island’s environment. The Corporation continues to closely monitor changes in credit quality trends and is focused on taking measures to minimize risks. The U.S. operation continued to reflect positive results with strong growth and favorable credit quality metrics.

Non-performing assets, excluding covered loans and OREO, decreased by $64 million when compared with December 31, 2015, mainly attributed to a reduction in the non-performing loans held-for-sale of $45 million, mostly related to the sale of the Puerto Rico Electric Power Authority (“PREPA”) loan transferred to held-for-sale in the second quarter of 2015. Non-performing loans held-in-portfolio decreased by $44 million from December 31, 2015, mostly driven by lower mortgage and commercial NPLs by $22 million and $18 million, respectively. These reductions were in part offset by higher OREOs by $25 million from December 31, 2015. Table 28 presents the information of non-performing assets.

At December 31, 2016, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $467 million in the Puerto Rico operations and $21 million in the U.S. operations. These figures compare to $504 million in the Puerto Rico operations and $22 million in the U.S. operations at December 31, 2015. In addition to the non-performing loans included in Table 28 at December 31, 2016, there were $169 million of non-covered performing 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 $160 million at December 31, 2015.

62

Table 28 - Non-Performing Assets

	December 31, 2016							December 31, 2015							December 31, 2014
(Dollars in thousands)	BPPR		BPNA		Popular, Inc.			BPPR		BPNA		Popular, Inc.			BPPR		BPNA		Popular, Inc.
Non-accrual loans:
Commercial	$	159,655	$	3,693	$	163,348		$	177,902	$	3,914	$	181,816		$	257,910	$	2,315	$	260,225
Construction		—		—		—			3,550		—		3,550			13,812		—		13,812
Legacy[1]		—		3,337		3,337			—		3,649		3,649			—		1,545		1,545
Leasing		3,062		—		3,062			3,009		—		3,009			3,102		—		3,102
Mortgage		318,194		11,713		329,907			337,933		13,538		351,471			295,629		9,284		304,913
Consumer		51,597		6,664		58,261			52,440		5,864		58,304			40,930		5,956		46,886
Total non-performing loans held-in-portfolio, excluding covered loans		532,508		25,407		557,915			574,834		26,965		601,799			611,383		19,100		630,483
Non-performing loans held-for-sale[2]		—		—		—			44,696		473		45,169			225		18,674		18,899
Other real estate owned (“OREO”), excluding covered OREO		177,412		3,033		180,445			151,439		3,792		155,231			119,144		16,356		135,500
Total non-performing assets, excluding covered assets	$	709,920	$	28,440	$	738,360		$	770,969	$	31,230	$	802,199		$	730,752	$	54,130	$	784,882
Covered loans and OREO[3]		36,044		—		36,044			40,571		—		40,571			148,099		—		148,099
Total non-performing assets	$	745,964	$	28,440	$	774,404		$	811,540	$	31,230	$	842,770		$	878,851	$	54,130	$	932,981
Accruing loans past-due 90 days or more[4] [5]	$	426,652	$	—	$	426,652		$	446,725	$	—	$	446,725		$	447,990	$	—	$	447,990
Excluding covered loans:[6]
Non-performing loans to loans held-in-portfolio						2.45	%						2.69	%						3.25	%
Including covered loans:
Non-performing loans to loans held-in-portfolio						2.41	%						2.63	%						2.95	%
Interest lost					$	29,385						$	27,644						$	23,413

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

[2] There were no non-performing loans held-for-sale as of December 31, 2016 (December 31, 2015 - $45 million in commercial loans and $95 thousand in construction loans; December 31, 2014 - $14.0 million in mortgage loans, $309 thousand in commercial loans and $4.5 million in consumer loans).

[3] The amount consists of $4 million in non-performing loans accounted for under ASC Subtopic 310-20 and $32 million in covered OREO at December 31, 2016 (December 31, 2015 - $4 million and $37 million, respectively; December 31, 2014 - $18 million and $130 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $282 million at December 31, 2016 (December 31, 2015 - $349 million; December 31, 2014 - $516 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

[5] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $181 million, $164 million and $125 million, respectively, of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2016, 2015 and 2014. Furthermore, the Corporation has approximately $68 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2015- $70 million; December 31, 2014- $66 million).

[6] These asset quality ratios have been adjusted to remove the impact of covered loans. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting.

63

Table 28 (continued) - Non-Performing Assets

	December 31, 2013							December 31, 2012
(Dollars in thousands)	BPPR		BPNA		Popular, Inc.			BPPR		BPNA		Popular, Inc.
Non-accrual loans:
Commercial	$	186,097	$	92,956	$	279,053		$	522,733	$	142,556	$	665,289
Construction		18,108		5,663		23,771			37,390		5,960		43,350
Legacy[1]		—		15,050		15,050			—		40,741		40,741
Leasing		3,495		—		3,495			4,865		—		4,865
Mortgage		206,389		26,292		232,681			596,106		34,024		630,130
Consumer		33,166		10,732		43,898			30,888		9,870		40,758
Total non-performing loans held-in-portfolio, excluding covered loans		447,255		150,693		597,948			1,191,982		233,151		1,425,133
Non-performing loans held-for-sale[2]		489		603		1,092			94,186		2,134		96,320
Other real estate owned (“OREO”), excluding covered OREO		105,206		30,295		135,501			215,872		50,972		266,844
Total non-performing assets, excluding covered assets	$	552,950	$	181,591	$	734,541		$	1,502,040	$	286,257	$	1,788,297
Covered loans and OREO[3]		197,388		—		197,388			213,483		—		213,483
Total non-performing assets	$	750,338	$	181,591	$	931,929		$	1,715,523	$	286,257	$	2,001,780
Accruing loans past-due 90 days or more[4] [5]	$	418,028	$	—	$	418,028		$	388,712	$	—	$	388,712
Excluding covered loans:[6]
Non-performing loans to loans held-in-portfolio						2.77	%						6.79	%
Including covered loans:
Non-performing loans to loans held-in-portfolio						2.55	%						6.06	%
Interest lost					$	29,766						$	86,442

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

[2] Non-performing loans held-for-sale consist of $603 thousand in commercial loans and $489 thousand in mortgage loans at December 31, 2013 (December 31, 2012 - $78 million in construction loans, $16 million in commercial loans, $2 million in legacy loans and $53 thousand in mortgage loans).

[3] The amount consists of $29 million in non-performing loans accounted for under ASC Subtopic 310-20 and $168 million in covered OREO at December 31, 2013 (December 31, 2012 - $74 million and $139 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[4] The carrying value of loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $751 million at December 31, 2013 (December 31, 2012 - $1 billion). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

[5] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $115 million and $86 million, respectively, of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2013 and December 31, 2012.

[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.

Accruing loans past due 90 days or more are composed primarily of credit cards, residential mortgage loans insured by FHA / VA, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option to purchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from other financial institutions that, although delinquent, the Corporation has received timely payment from the sellers / servicers, and, in some instances, have partial guarantees under recourse agreements.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $7.2 billion at December 31, 2016, of which $2.0 billion was secured with owner occupied properties, compared with $6.6 billion and $2.1 billion,

64

respectively, at December 31, 2015. CRE non-performing loans, excluding covered loans, amounted to $130 million at December 31, 2016, compared with $142 million at December 31, 2015. The CRE non-performing loans ratios for the BPPR and BPNA segments were 2.83% and 0.07%, respectively, at December 31, 2016, compared with 3.00% and 0.03%, respectively, at December 31, 2015.

Loan Delinquencies

Another key measure used to evaluate and monitor the Corporation’s asset quality is loan delinquencies. Loans delinquent 30 days or more and delinquencies, as a percentage of their related portfolio category at December 31, 2016 and 2015, are presented below.

Table 29 - Loan Delinquencies

(Dollars in millions)	2016			2015
Loans delinquent 30 days or more	$	2,013		$	2,360
Total delinquencies as a percentage of total loans:
Commercial		4.23	%		5.63	%
Construction		0.21			2.09
Legacy		9.97			8.49
Leasing		1.57			1.99
Mortgage		18.82			20.00
Consumer		4.47			4.46
Covered loans		19.26			20.76
Loans held-for-sale		0.52			33.64
Total		8.59	%		10.20	%

For the year ended December 31, 2016, total non-performing loan inflows, excluding consumer loans, decreased by $138 million, or 24%, when compared to the inflows for the same year in 2015. Inflows of non-performing loans held-in-portfolio at the BPPR segment decreased by $125 million, or 24%, compared to the inflows for the year ended 2015, mostly related to lower commercial and mortgage inflows by $76 million and $50 million, respectively. Inflows of non-performing loans held-in-portfolio at the BPNA segment decreased by $13 million, or 22%, from the same period in 2015, mostly driven by lower construction and mortgage inflows of $9 million and $6 million, respectively.

65

Table 30 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

	For the year ended December 31, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance	$	519,385		$	21,101		$	540,486
Plus:
New non-performing loans		401,143			47,433			448,576
Advances on existing non-performing loans		—			322			322
Reclassification from construction loans to commercial loans		2,436			—			2,436
Less:
Non-performing loans transferred to OREO		(50,940	)		(1,188	)		(52,128	)
Non-performing loans charged-off		(89,536	)		(3,260	)		(92,796	)
Loans returned to accrual status / loan collections		(302,203	)		(45,665	)		(347,868	)
Reclassification from construction loans to commercial loans		(2,436	)		—			(2,436	)
Ending balance NPLs	$	477,849		$	18,743		$	496,592

Table 31 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

	For the year ended December 31, 2015
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning balance	$	567,351		$	13,144		$	580,495
Plus:
New non-performing loans		526,084			60,488			586,572
Advances on existing non-performing loans		—			534			534
Reclassification from covered loans		8,075			—			8,075
Less:
Non-performing loans transferred to OREO		(36,794	)		(766	)		(37,560	)
Non-performing loans charged-off		(159,249	)		(3,991	)		(163,240	)
Loans returned to accrual status / loan collections		(319,741	)		(42,103	)		(361,844	)
Loans transferred to held-for-sale		(44,996	)		1,565			(43,431	)
Non-performing loans sold		(21,345	)		—			(21,345	)
Other transfers out of non-performing		—			(7,770	)		(7,770	)
Ending balance NPLs	$	519,385		$	21,101		$	540,486

66

Table 32 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2016
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	177,902		$	3,914		$	181,816
Plus:
New non-performing loans		77,615			20,542			98,157
Advances on existing non-performing loans		—			178			178
Reclassification from construction loans to commercial loans		2,436			—			2,436
Less:
Non-performing loans transferred to OREO		(6,700	)		—			(6,700	)
Non-performing loans charged-off		(41,011	)		(811	)		(41,822	)
Loans returned to accrual status / loan collections		(50,587	)		(20,130	)		(70,717	)
Ending balance - NPLs	$	159,655		$	3,693		$	163,348

Table 33 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2015
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	257,910		$	2,315		$	260,225
Plus:
New non-performing loans		153,682			14,880			168,562
Advances on existing non-performing loans		—			389			389
Reclassification from covered loans		7,395			—			7,395
Less:
Non-performing loans transferred to OREO		(6,342	)		—			(6,342	)
Non-performing loans charged-off		(118,601	)		(1,286	)		(119,887	)
Loans returned to accrual status / loan collections		(49,801	)		(4,141	)		(53,942	)
Loans transferred to held-for-sale		(44,996	)		(473	)		(45,469	)
Non-performing loans sold		(21,345	)		—			(21,345	)
Other transfers out of non-performing		—			(7,770	)		(7,770	)
Ending balance - NPLs	$	177,902		$	3,914		$	181,816

Table 34 - Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2016
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	3,550		$	—		$	3,550
Plus:
New non-performing loans		1,543			671			2,214
Less:
Non-performing loans transferred to OREO		(304	)		—			(304	)
Non-performing loans charged-off		(1,103	)		—			(1,103	)
Loans returned to accrual status / loan collections		(1,250	)		(671	)		(1,921	)
Reclassification from construction loans to commercial loans		(2,436	)		—			(2,436	)
Ending balance - NPLs	$	—		$	—		$	—

67

Table 35 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2015
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	13,812		$	—		$	13,812
Plus:
New non-performing loans		486			9,522			10,008
Reclassification from covered loans		112			—			112
Less:
Non-performing loans transferred to OREO		(2,194	)		—			(2,194	)
Non-performing loans charged-off		(138	)		—			(138	)
Loans returned to accrual status / loan collections		(8,528	)		(9,522	)		(18,050	)
Ending balance - NPLs	$	3,550		$	—		$	3,550

Table 36 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2016
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	337,933		$	13,538		$	351,471
Plus:
New non-performing loans		321,985			25,002			346,987
Less:
Non-performing loans transferred to OREO		(43,936	)		(1,144	)		(45,080	)
Non-performing loans charged-off		(47,422	)		(2,160	)		(49,582	)
Loans returned to accrual status / loan collections		(250,366	)		(23,523	)		(273,889	)
Ending balance - NPLs	$	318,194		$	11,713		$	329,907

Table 37 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

	For the year ended December 31, 2015
(In thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance - NPLs	$	295,629		$	9,284		$	304,913
Plus:
New non-performing loans		371,916			31,113			403,029
Reclassification from covered loans		568			—			568
Less:
Non-performing loans transferred to OREO		(28,258	)		(766	)		(29,024	)
Non-performing loans charged-off		(40,510	)		(1,259	)		(41,769	)
Loans returned to accrual status / loan collections		(261,412	)		(26,872	)		(288,284	)
Loans transferred to held-for-sale		—			2,038			2,038
Ending balance - NPLs	$	337,933		$	13,538		$	351,471

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 loan losses on a quarterly basis. In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors.

68

The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected. 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.

69

Table 38 - Allowance for Loan Losses and Selected Loan Losses Statistics

	2016							2015						2014
(Dollars in thousands)	Non-covered loans		Covered loans			Total		Non-covered loans		Covered loans		Total		Non-covered loans [4]			Covered loans			Total [4]
Balance at the beginning of year	$	502,935	$	34,176		$	537,111	$	519,719	$	82,073	$	601,792	$	538,463		$	102,092		$	640,555
Provision for loan losses (reversal of provision) - Continuing operations		171,126		(1,110	)		170,016		217,458		24,020		241,478		223,999			46,135			270,134
Provision for loan losses (reversal of provision) - Discontinued operations		—		—			—		—		—		—		(6,764	)		—			(6,764	)
		674,061		33,066			707,127		737,177		106,093		843,270		755,698			148,227			903,925
Charged-offs:
BPPR
Commercial		62,486		—			62,486		105,716		37,936		143,652		70,402			34,741			105,143
Construction		3,103		—			3,103		13,628		25,086		38,714		1,722			36,223			37,945
Leasing		6,151		—			6,151		5,561		—		5,561		6,028			—			6,028
Mortgage		68,075		3,524			71,599		53,296		6,158		59,454		45,389			9,156			54,545
Consumer		106,304		19			106,323		110,384		853		111,237		122,400			(2,589	)		119,811
Total BPPR charged-offs		246,119		3,543			249,662		288,585		70,033		358,618		245,941			77,531			323,472
BPNA
Commercial		1,115		—			1,115		1,452		—		1,452		16,628			—			16,628
Legacy [1]		535		—			535		2,019		—		2,019		8,071			—			8,071
Mortgage		2,506		—			2,506		1,670		—		1,670		3,517			—			3,517
Consumer		13,430		—			13,430		9,507		—		9,507		15,948			—			15,948
Discontinued operations		—		—			—		—		—		—		4,452			—			4,452
Total BPNA charged-offs		17,586		—			17,586		14,648		—		14,648		48,616			—			48,616
Popular, Inc.
Commercial		63,601		—			63,601		107,168		37,936		145,104		87,030			34,741			121,771
Construction		3,103		—			3,103		13,628		25,086		38,714		1,722			36,223			37,945
Leasing		6,151		—			6,151		5,561		—		5,561		6,028			—			6,028
Legacy [1]		535		—			535		2,019		—		2,019		8,071			—			8,071
Mortgage		70,581		3,524			74,105		54,966		6,158		61,124		48,906			9,156			58,062
Consumer		119,734		19			119,753		119,891		853		120,744		138,348			(2,589	)		135,759
Discontinued operations		—		—			—		—		—		—		4,452			—			4,452
Total charged-offs		263,705		3,543			267,248		303,233		70,033		373,266		294,557			77,531			372,088
Recoveries:
BPPR
Commercial		41,731		—			41,731		31,826		6,504		38,330		31,020			1,835			32,855
Construction		5,124		—			5,124		14,514		4,700		19,214		5,231			8,537			13,768
Leasing		2,263		—			2,263		2,258		—		2,258		2,067			—			2,067
Mortgage		3,759		808			4,567		2,305		930		3,235		1,389			714			2,103
Consumer		29,998		19			30,017		26,508		842		27,350		25,745			291			26,036
Total BPPR recoveries		82,875		827			83,702		77,411		12,976		90,387		65,452			11,377			76,829
BPNA
Commercial		4,428		—			4,428		5,294		—		5,294		15,523			—			15,523
Construction		—		—			—		—		—		—		237			—			237
Legacy [1]		2,448		—			2,448		4,779		—		4,779		17,141			—			17,141
Mortgage		573		—			573		391		—		391		2,321			—			2,321
Consumer		4,176		—			4,176		3,858		—		3,858		3,783			—			3,783
Discontinued operations		—		—			—		—		—		—		9,997			—			9,997
Total BPNA recoveries		11,625		—			11,625		14,322		—		14,322		49,002			—			49,002
Popular, Inc.
Commercial		46,159		—			46,159		37,120		6,504		43,624		46,543			1,835			48,378
Construction		5,124		—			5,124		14,514		4,700		19,214		5,468			8,537			14,005
Leasing		2,263		—			2,263		2,258		—		2,258		2,067			—			2,067
Legacy [1]		2,448		—			2,448		4,779		—		4,779		17,141			—			17,141
Mortgage		4,332		808			5,140		2,696		930		3,626		3,710			714			4,424
Consumer		34,174		19			34,193		30,366		842		31,208		29,528			291			29,819
Discontinued operations		—		—			—		—		—		—		9,997			—			9,997
Total recoveries		94,500		827			95,327		91,733		12,976		104,709		114,454			11,377			125,831

70

Net loans charged-offs (recoveries):
BPPR
Commercial		20,755			—		20,755			73,890			31,432			105,322			39,382			32,906			72,288
Construction		(2,021	)		—		(2,021	)		(886	)		20,386			19,500			(3,509	)		27,686			24,177
Leasing		3,888			—		3,888			3,303			—			3,303			3,961			—			3,961
Mortgage		64,316			2,716		67,032			50,991			5,228			56,219			44,000			8,442			52,442
Consumer		76,306			—		76,306			83,876			11			83,887			96,655			(2,880	)		93,775
Total BPPR net loans charged-offs		163,244			2,716		165,960			211,174			57,057			268,231			180,489			66,154			246,643
BPNA
Commercial		(3,313	)		—		(3,313	)		(3,842	)		—			(3,842	)		1,105			—			1,105
Construction		—			—		—			—			—			—			(237	)		—			(237	)
Legacy [1]		(1,913	)		—		(1,913	)		(2,760	)		—			(2,760	)		(9,070	)		—			(9,070	)
Mortgage		1,933			—		1,933			1,279			—			1,279			1,196			—			1,196
Consumer		9,254			—		9,254			5,649			—			5,649			12,165			—			12,165
Discontinued operations		—			—		—			—			—			—			(5,545	)		—			(5,545	)
Total BPNA net loans charged-offs (recoveries)		5,961			—		5,961			326			—			326			(386	)		—			(386	)
Popular, Inc.
Commercial		17,442			—		17,442			70,048			31,432			101,480			40,487			32,906			73,393
Construction		(2,021	)		—		(2,021	)		(886	)		20,386			19,500			(3,746	)		27,686			23,940
Leasing		3,888			—		3,888			3,303			—			3,303			3,961			—			3,961
Legacy [1]		(1,913	)		—		(1,913	)		(2,760	)		—			(2,760	)		(9,070	)		—			(9,070	)
Mortgage		66,249			2,716		68,965			52,270			5,228			57,498			45,196			8,442			53,638
Consumer		85,560			—		85,560			89,525			11			89,536			108,820			(2,880	)		105,940
Discontinued operations		—			—		—			—			—			—			(5,545	)		—			(5,545	)
Total net loans charged-offs		169,205			2,716		171,921			211,500			57,057			268,557			180,103			66,154			246,257
Net write-downs [2]		5,445			—		5,445			(35,779	)		(1,823	)		(37,602	)		(35,674	)		—			(35,674	)
Balance transferred from covered to non-covered loans		—			—		—			13,037			(13,037	)		—			—			—			—
Net write-downs related to loans transferred to discontinued operations		—			—		—			—			—			—			(20,202	)		—			(20,202	)
Balance at end of year	$	510,301		$	30,350	$	540,651		$	502,935		$	34,176		$	537,111		$	519,719		$	82,073		$	601,792
Specific ALLL	$	111,377		$	—	$	111,377		$	118,072		$	—		$	118,072		$	140,141		$	5		$	140,146
General ALLL	$	398,924		$	30,350	$	429,274		$	384,863		$	34,176		$	419,039		$	379,578		$	82,068		$	461,646
Loans held-in-portfolio:
Outstanding at year end	$	22,773,747				$	23,346,625		$	22,346,115					$	22,992,230		$	19,404,451					$	21,947,113
Average		22,373,143					22,980,546			21,497,403						22,925,237			19,990,182						22,760,961
Ratios:
Allowance for loan losses to loans held-in-portfolio		2.24	%				2.32	%		2.25	%					2.34	%		2.68	%					2.74	%
Recoveries to charge-offs		35.84					35.67			30.25						28.05			38.86						33.82
Net charge-offs to average loans held-in-portfolio		0.76					0.75			0.98						1.17			0.90						1.08
Allowance for loans losses to net charge-offs		3.02	x				3.14	x		2.38	x					2.00	x		2.89	x					2.44	x
Provision for loan losses to:
Net charge-offs [3]		1.01					0.99			1.03						0.90			1.17						1.04
Average loans held-in-portfolio		0.76	%				0.74	%		1.01	%					1.05	%		1.05	%					1.13	%
Allowance to non-performing loans held-in-portfolio		91.47					96.23			83.57						88.68			82.43						92.82

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

[2] Net write-downs are related to loans sold or transferred to held-for-sale.    

[3] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale.    

[4] Prior periods provision for loan losses and net charge-offs presented in this table has been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. Loans (ending and average) balances and credit quality ratios for prior periods included in this table has not been retrospectively adjusted for the impact of the discontinued operations.

71

Table 38 (continued) - Allowance for Loan Losses and Selected Loan Losses Statistics

	2013								2012
(Dollars in thousands)	Non-covered loans [4]			Covered loans		Total [4]			Non-covered loans [4]			Covered loans		Total [4]
Balance at the beginning of year	$	621,701		$	108,906	$	730,607		$	690,363		$	124,945	$	815,308
Provision for loan losses - Continuing operations		536,710			69,396		606,106			322,240			74,839		397,079
Provision for loan losses (reversal of provision) - Discontinued operations		(3,543	)		—		(3,543	)		11,862			—		11,862
		1,154,868			178,302		1,333,170			1,024,465			199,784		1,224,249
Charged-offs:
BPPR
Commercial		112,266			28,423		140,689			185,653			46,290		231,943
Construction		6,757			39,729		46,486			3,910			30,556		34,466
Leasing		6,034			—		6,034			4,680			—		4,680
Mortgage		49,418			10,679		60,097			59,286			5,909		65,195
Consumer		113,616			3,952		117,568			120,658			8,225		128,883
Total BPPR charged-offs		288,091			82,783		370,874			374,187			90,980		465,167
BPNA
Commercial		26,117			—		26,117			24,282			—		24,282
Construction		—			—		—			26			—		26
Legacy [1]		17,423			—		17,423			31,113			—		31,113
Mortgage		10,155			—		10,155			16,708			—		16,708
Consumer		21,622			—		21,622			36,036			—		36,036
Discontinued operations		38,957			—		38,957			57,140			—		57,140
Total BPNA charged-offs		114,274			—		114,274			165,305			—		165,305
Popular, Inc.
Commercial		138,383			28,423		166,806			209,935			46,290		256,225
Construction		6,757			39,729		46,486			3,936			30,556		34,492
Leasing		6,034			—		6,034			4,680			—		4,680
Legacy [1]		17,423			—		17,423			31,113			—		31,113
Mortgage		59,573			10,679		70,252			75,994			5,909		81,903
Consumer		135,238			3,952		139,190			156,694			8,225		164,919
Discontinued operations		38,957			—		38,957			57,140			—		57,140
Total charged-offs		402,365			82,783		485,148			539,492			90,980		630,472
Recoveries:
BPPR
Commercial		26,665			816		27,481			41,013			31		41,044
Construction		15,399			5,621		21,020			6,193			61		6,254
Leasing		2,528			—		2,528			3,737			—		3,737
Mortgage		1,682			65		1,747			2,509			—		2,509
Consumer		38,056			71		38,127			30,563			10		30,573
Total BPPR recoveries		84,330			6,573		90,903			84,015			102		84,117
BPNA
Commercial		16,933			—		16,933			10,272			—		10,272
Construction		—			—		—			1,218			—		1,218
Legacy [1]		21,320			—		21,320			16,260			—		16,260
Mortgage		2,352			—		2,352			1,545			—		1,545
Consumer		3,618			—		3,618			4,459			—		4,459
Discontinued operations		20,052			—		20,052			18,993			—		18,993
Total BPNA recoveries		64,275			—		64,275			52,747			—		52,747
Popular, Inc.
Recoveries:
Commercial		43,598			816		44,414			51,285			31		51,316
Construction		15,399			5,621		21,020			7,411			61		7,472
Leasing		2,528			—		2,528			3,737			—		3,737
Legacy [1]		21,320			—		21,320			16,260			—		16,260
Mortgage		4,034			65		4,099			4,054			—		4,054
Consumer		41,674			71		41,745			35,022			10		35,032
Discontinued operations		20,052			—		20,052			18,993			—		18,993
Total recoveries		148,605			6,573		155,178			136,762			102		136,864
Net loans charged-offs (recoveries):
BPPR
Commercial		85,601			27,607		113,208			144,640			46,259		190,899
Construction		(8,642	)		34,108		25,466			(2,283	)		30,495		28,212
Leasing		3,506			—		3,506			943			—		943
Mortgage		47,736			10,614		58,350			56,777			5,909		62,686
Consumer		75,560			3,881		79,441			90,095			8,215		98,310
Total BPPR net loans charged-offs (recoveries)		203,761			76,210		279,971			290,172			90,878		381,050

72

BPNA
Commercial		9,184			—		9,184			14,010			—		14,010
Construction		—			—		—			(1,192	)		—		(1,192	)
Legacy [1]		(3,897	)		—		(3,897	)		14,853			—		14,853
Mortgage		7,803			—		7,803			15,163			—		15,163
Consumer		18,004			—		18,004			31,577			—		31,577
Discontinued operations		18,905			—		18,905			38,147			—		38,147
Total BPNA net loans charged-offs (recoveries)		49,999			—		49,999			112,558			—		112,558
Popular, Inc.
Commercial		94,785			27,607		122,392			158,650			46,259		204,909
Construction		(8,642	)		34,108		25,466			(3,475	)		30,495		27,020
Leasing		3,506			—		3,506			943			—		943
Legacy [1]		(3,897	)		—		(3,897	)		14,853			—		14,853
Mortgage		55,539			10,614		66,153			71,940			5,909		77,849
Consumer		93,564			3,881		97,445			121,672			8,215		129,887
Discontinued operations		18,905			—		18,905			38,147			—		38,147
Total net loans charged-offs (recovered)		253,760			76,210		329,970			402,730			90,878		493,608
Net write-downs [2]		(362,645	)		—		(362,645	)		(34	)		—		(34	)
Balance at end of year	$	538,463		$	102,092	$	640,555		$	621,701		$	108,906	$	730,607
Specific ALLL	$	103,506		$	293	$	103,799		$	111,087		$	8,505	$	119,592
General ALLL	$	434,957		$	101,799	$	536,756		$	510,614		$	100,401	$	611,015
Loans held-in-portfolio:
Outstanding at year end	$	21,611,866				$	24,596,293		$	20,983,192				$	24,739,164
Average		21,354,143					24,581,862			20,477,264					24,527,602
Ratios:
Allowance for loan losses to loans held-in-portfolio		2.49	%				2.60	%		2.96	%				2.95	%
Recoveries to charge-offs		36.93					31.99			23.35					21.71
Net charge-offs to average loans held-in-portfolio		1.19					1.34			1.97					2.01
Allowance for loans losses to net charge-offs		2.12	x				1.94	x		1.54	x				1.48	x
Provision for loan losses to:
Net charge-offs [3]		0.85					0.86			0.83					0.83
Average loans held-in-portfolio		2.50	%				2.45	%		1.63	%				1.67	%
Allowance to non-performing loans held-in-portfolio		90.05					103.78			43.62					48.72

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

[2] Net write-downs are related to loans sold or transferred to held-for-sale.

[3] Excluding the provision for loans losses and net write-down related to loans sold or reclassified to held-for-sale.

[4] Prior periods provision for loan losses and net charge-offs presented in this table has been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. Loans (ending and average) balances and credit quality ratios for prior periods included in this table has not been retrospectively adjusted for the impact of the discontinued operations.

The following table presents net charge-offs to average loans held-in-portfolio (“HIP”) ratios by loan category for the years ended December 31, 2016, 2015 and 2014:

Table 39 - Net Charge-Offs (Recoveries) to Average Loans HIP (Non-covered loans)

	December 31, 2016									December 31, 2015									December 31, 2014
	BPPR			BPNA			Popular Inc.			BPPR			BPNA			Popular Inc.			BPPR			BPNA			Popular Inc.
Commercial		0.28	%		(0.11	)%		0.17	%		1.05			(0.16	)%		0.74	%		0.62	%		(0.20	)%		0.40	%
Construction		(1.98	)		—			(0.28	)		(0.76	)		—			(0.14	)		(2.42	)		(0.99	)		(2.22	)
Leasing		0.59			—			0.59			0.56			—			0.56			0.73			—			0.73
Legacy		—			(3.67	)		(3.67	)		—			(3.79	)		(3.79	)		—			(7.01	)		(7.01	)
Mortgage		1.09			0.23			0.98			0.85			0.13			0.75			0.82			0.10			0.69
Consumer		2.31			1.74			2.23			2.49			1.21			2.34			2.86			2.50			2.81
Total		0.95	%		0.12	%		0.76	%		1.24	%		0.01	%		0.98	%		1.14	%		(0.01	)%		0.90	%

Net charge-offs, excluding covered loans, for the year ended December 31, 2016, decreased by $42.3 million, when compared to the year ended December 31, 2015, and by $10.9 million, when compared to the year ended December 31, 2014. Decrease from 2015 was mainly driven by the BPPR segment with lower commercial net charge-offs of $53.1 million.

73

Table 40 - Composition of ALLL

	December 31, 2016
(Dollars in thousands)	Commercial			Construction			Legacy [2]			Leasing			Mortgage			Consumer			Total[3]
Specific ALLL	$	42,375		$	—		$	—		$	535		$	44,610		$	23,857		$	111,377
Impaired loans [1]	$	338,422		$	—		$	—		$	1,817		$	506,364		$	109,454		$	956,057
Specific ALLL to impaired loans [1]		12.52	%		—	%		—	%		29.44	%		8.81	%		21.80	%		11.65	%
General ALLL	$	160,279		$	9,525		$	1,343		$	7,127		$	103,324		$	117,326		$	398,924
Loans held-in-portfolio, excluding impaired 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]		1.53	%		1.23	%		2.97	%		1.02	%		1.67	%		3.22	%		1.83	%
Total ALLL	$	202,654		$	9,525		$	1,343		$	7,662		$	147,934		$	141,183		$	510,301
Total non-covered loans held-in-portfolio [1]	$	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 41 - Composition of ALLL

	December 31, 2015
(Dollars in thousands)	Commercial			Construction			Legacy[2]			Leasing			Mortgage			Consumer			Total[3]
Specific ALLL	$	49,243		$	264		$	—		$	573		$	44,029		$	23,963		$	118,072
Impaired loans [1]	$	337,133		$	2,481		$	—		$	2,404		$	471,932		$	111,836		$	925,786
Specific ALLL to impaired loans [1]		14.61	%		10.64	%		—	%		23.84	%		9.33	%		21.43	%		12.75	%
General ALLL	$	147,590		$	8,605		$	2,687		$	10,420		$	89,283		$	126,278		$	384,863
Loans held-in-portfolio, excluding impaired 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]		1.51	%		1.27	%		4.17	%		1.67	%		1.36	%		3.39	%		1.80	%
Total ALLL	$	196,833		$	8,869		$	2,687		$	10,993		$	133,312		$	150,241		$	502,935
Total non-covered loans held-in-portfolio [1]	$	10,099,163		$	681,106		$	64,436		$	627,650		$	7,036,081		$	3,837,679		$	22,346,115
ALLL to loans held-in-portfolio [1]		1.95	%		1.30	%		4.17	%		1.75	%		1.89	%		3.91	%		2.25	%

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.

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

[3] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2015, the general allowance on the covered loans amounted to $34.2 million.

74

Table 42 - Composition of ALLL

	December 31, 2014
(Dollars in thousands)	Commercial			Construction			Legacy[2]			Leasing			Mortgage			Consumer			Total[3]
Specific ALLL	$	64,736		$	363		$	—		$	770		$	46,111		$	28,161		$	140,141
Impaired loans [1]	$	357,161		$	13,268		$	—		$	3,023		$	435,824		$	117,732		$	927,008
Specific ALLL to impaired loans [1]		18.13	%		2.74	%		—	%		25.47	%		10.58	%		23.92	%		15.12	%
General ALLL	$	146,501		$	6,307		$	2,944		$	6,361		$	77,211		$	140,254		$	379,578
Loans held-in-portfolio, excluding impaired loans [1]	$	7,777,106		$	238,552		$	80,818		$	561,366		$	6,067,062		$	3,752,539		$	18,477,443
General ALLL to loans held-in-portfolio, excluding impaired loans [1]		1.88	%		2.64	%		3.64	%		1.13	%		1.27	%		3.74	%		2.05	%
Total ALLL	$	211,237		$	6,670		$	2,944		$	7,131		$	123,322		$	168,415		$	519,719
Total non-covered loans held-in-portfolio [1]	$	8,134,267		$	251,820		$	80,818		$	564,389		$	6,502,886		$	3,870,271		$	19,404,451
ALLL to loans held-in-portfolio [1]		2.60	%		2.65	%		3.64	%		1.26	%		1.90	%		4.35	%		2.68	%

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.

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

[3] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2014, the general allowance on the covered loans amounted to $82.1 million while the specific reserve amounted to $5 thousand.

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

	At December 31,
	2016					2015					2014					2013					2012
			% of loans					% of loans					% of loans					% of loans					% of loans
			in each					in each					in each					in each					in each
			category to					category to					category to					category to					category to
(Dollars in millions)	ALLL		total loans			ALLL		total loans			ALLL		total loans			ALLL		total loans			ALLL		total loans
Commercial	$	202.7		47.4	%	$	196.8		45.2	%	$	211.2		41.9	%	$	175.0		46.4	%	$	297.7		47.0	%
Construction		9.5		3.4			8.9		3.0			6.7		1.3			5.3		1.0			7.4		1.2
Legacy		1.3		0.2			2.7		0.3			3.0		0.4			13.7		1.0			33.1		1.8
Leasing		7.7		3.1			11.0		2.8			7.1		2.9			10.6		2.5			2.9		2.6
Mortgage		147.9		29.4			133.3		31.5			123.3		33.5			156.9		30.9			149.4		29.0
Consumer		141.2		16.5			150.2		17.2			168.4		20.0			176.9		18.2			131.2		18.4
Total[1]	$	510.3		100.0	%	$	502.9		100.0	%	$	519.7		100.0	%	$	538.4		100.0	%	$	621.7		100.0	%

[1] Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding covered loans and held-for-sale.

Non-covered loans portfolio

At December 31, 2016, the allowance for loan losses, increased by $7 million when compared with December 31, 2015, mostly driven by the $9 million reserve increase related to the annual recalibration of the environmental factors adjustment during the third quarter of 2016.

75

At December 31, 2016, the allowance for loan losses at the BPPR segment remained relatively flat at $468 million, or 2.73% of non-covered loans held-in-portfolio, compared with $470 million, or 2.67% of non-covered loans held-in-portfolio, at December 31, 2015. The allowance for loan losses was $489 million, or 3.07% of non-covered loans held-in-portfolio, at December 31, 2014. The ratio of the allowance to non-performing loans held-in-portfolio was 87.88% at December 31, 2016, compared with 81.75% at December 31, 2015 and 80.00% at December 31, 2014.

The allowance for loan losses at the BPNA segment increased to $42 million, or 0.75% of loans held-in-portfolio, compared with $33 million, or 0.69% of loans held-in-portfolio, at December 31, 2015, and $31 million, or 0.88% of loans held-in-portfolio, at December 31, 2014, mainly driven by portfolio growth. Credit trends for the BPNA segment continued strong with minimal non-performing loans and net charge-offs. The effect of the recalibration was immaterial for the BPNA segment. The ratio of the allowance to non-performing loans held-in-portfolio at the BPNA segment was 166.56% at December 31, 2016, compared with 123.43% at December 31, 2015 and 160.13% at December 31, 2014.

Covered loans portfolio

The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $30 million at December 31, 2016, compared to $34 million at December 31, 2015. This allowance covers the estimated credit loss exposure primarily related to acquired loans accounted for under ASC Subtopic 310-30.

Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of loan commitments assumed, the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for loans individually evaluated for impairment. Concurrently, the Corporation records an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements.

Troubled debt restructurings

The Corporation’s TDR loans, excluding covered loans, amounted to $1.2 billion at December 2016, increasing by $95 million, or 8%, from December 31, 2015. TDRs in accruing status increased by $106 million from December 31, 2015, due to sustained borrower performance, while non-accruing TDRs decreased by $11 million.

Refer to Note 11 to the consolidated financial statements for additional information on modifications considered troubled debt restructurings, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.

The tables that follow present the approximate amount and percentage of non-covered commercial impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at December 31, 2016 and December 31, 2015.

76

Table 44 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older

December 31, 2016
	Total Impaired Loans – Held-in-portfolio  (HIP)
(In thousands)	Count	Outstanding Principal Balance		Impaired Loans with Appraisals Over One- Year Old [1]
Commercial	118	$	283,782		8	%

[1] Based on outstanding balance of total impaired loans.

Table 45 - Non-Covered Impaired Loans With Appraisals Dated 1 Year Or Older

December 31, 2015
	Total Impaired Loans – Held-in-portfolio  (HIP)
(In thousands)	Count	Outstanding Principal Balance		Impaired Loans with Appraisals Over One- Year Old [1]
Commercial	118	$	281,478		29	%

[1] Based on outstanding balance of total impaired loans.

77

Enterprise Risk and Operational Risk Management

The Financial and Operational Risk Management Division (the “FORM Division”) is responsible for overseeing the implementation of the Enterprise Risk Management (ERM) framework, as well 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 new products and initiatives, the Corporate Compliance Division has put in place processes to ensure that an 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 itself in various ways, including errors, fraud, cyber attacks, business interruptions, inappropriate behavior of employees, and failure to perform in a timely manner, among others. These events can potentially result in financial losses and other damages to the Corporation, including reputational harm. The successful management of operational risk is particularly important to a diversified financial services company like Popular because of the nature, volume and complexity of its various businesses.

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 senior 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.

Operational risks fall into two major categories: business specific and corporate-wide affecting all business lines. The primary responsibility for the day-to-day management of business specific risks relies on business unit managers. Accordingly, business unit managers are responsible for ensuring that appropriate risk containment measures, including corporate-wide or business segment specific policies and procedures, controls and monitoring tools, are in place to minimize risk occurrence and loss exposures. Examples of these include personnel management practices, data reconciliation processes, transaction processing monitoring and analysis and contingency plans for systems interruptions. To manage corporate-wide risks, specialized functions, such as Legal, Information Security, Business Continuity and 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.

Operational risk management plays a different role in each category. For business specific risks, the FORM Division works with the segments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, business continuity and outsourcing risk management, legal and compliance, the risks are assessed and a consolidated corporate view is developed and communicated to the business level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. We continually monitor the system of internal controls, data processing systems, and corporate-wide processes and procedures to manage operational risk at appropriate, cost-effective levels. An additional level of review is applied to current and potential regulation and its impact on business processes, to ensure that appropriate controls are put in place to address regulation requirements. Today’s threats to customer information and information systems are complex, more wide spread, continually emerging, and increasing at a rapid pace. The Corporation continuously monitors these threats and, to date, we have not experienced any material losses as a result of cyber attacks.

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

Refer to Note 3, “New Accounting Pronouncements” to the consolidated financial statements.

78

Adjusted net income – Non-GAAP Financial Measure

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors Adjusted net income of the Corporation and excludes the impact of certain transactions on the results of its operations. Management believes that adjusted net income provides meaningful information about the underlying performance of the Corporation’s ongoing operations. Adjusted net income is a non-GAAP financial measure. Refer to the following tables for a reconciliation of net income to adjusted net income for the years ended December 31, 2016, 2015 and 2014.

Table 46 - Adjusted Net Income for the Year Ended December 31, 2016 (Non-GAAP)

(In thousands)	Pre-tax			Income tax effect			Impact on net income
U.S. GAAP Net income							$	216,691
Non-GAAP Adjustments:
Impact of EVERTEC restatement [1]		2,173			—			2,173
Bulk sale of WB loans and OREO [2]		(891	)		347	[4]		(544	)
FDIC arbitration award[3]		171,757			(41,108	)[4]		130,649
Goodwill impairment charge[5]		3,801			—			3,801
Other FDIC - LSA adjustments[6]		8,806			(2,380	)[4]		6,426
Income from discontinued operations[7]		(2,015	)		880			(1,135	)
Adjusted net income (Non-GAAP)							$	358,061

^[1]  Represents Popular Inc.‘s proportionate share of the cumulative impact of EVERTEC restatement and other corrective adjustments to its financial statements, as disclosed in EVERTEC’s 2015 Annual Report on Form 10K.Due to the preferential tax rate on the income from EVERTEC, the tax effect of this transaction was insignificant to the Corporation.

^[2]  Represents the impact of the bulk sale of Westernbank loans and OREO.

^[3]  Represents the arbitration decision denying BPPR’s request for reimbursement in certain shared loss claims.

^[4]  Gains and losses related to assets acquired from Westernbank as part of the FDIC assisted transaction are subject to the capital gains tax rate of 20%. Other items related to the FDIC loss-sharing agreements are subject to the statutory tax rate of 39%.

^[5]  Represents goodwill impairment charge in the Corporation’s securities subsidiary. The securities subsidiary is a limited liability company with a partnership election. Accordingly, its earnings flow through Popular, Inc., holding company, for income tax purposes. Since Popular, Inc. has a full valuation allowance on its deferred tax assets, this results in an effective tax rate of 0%.

^[6]  Additional adjustments, including prior period recoveries, related to restructured commercial loans to reduce the indemnification asset to its expected realizable value.

^[7]  Represents income from discontinued operations associated with the BPNA reorganization.

79

Table 47 - Adjusted Net Income for the Year Ended December 31, 2015 (Non-GAAP)

(In thousands)	Pre-tax			Income tax effect			Impact on net income
U.S. GAAP Net income							$	895,344
Non-GAAP Adjustments:
BPNA reorganization[1]		17,065			—			17,065
Doral Transaction[2]		25,576			(7,690	)		17,886
OTTI[3]		14,445			(2,486	)		11,959
Reversal DTA - PNA[4]		—			(589,030	)		(589,030	)
Loss on bulk sale of covered OREOs[5]		4,391			(1,712	)		2,679
Adjustment to FDIC indemnification asset[6]		10,887			(2,177	)		8,710
MSR’s acquired[7]		(4,378	)		1,707			(2,671	)
Impairment of loans under proposed portfolio sale[8]		15,190			(5,924	)		9,266
Bulk sale[9]		5,852			(2,282	)		3,570
Adjusted net income (Non-GAAP)							$	374,778

^[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.

^[2]  Includes approximately $0.8 million of fees charged for loan servicing cost to the FDIC, $2.1 million of fees charged for services provided to the alliance co-bidders, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $7.1 million, building rent expense of Doral Bank’s administrative offices for $4.1 million, professional fees and business promotion expenses directly associated with the Doral Bank Transaction and systems conversion for $16.0 million and other expenses, including equipment, business promotions and communications, of $1.3 million. Includes items corresponding to BPPR, which were taxed at 39% and items corresponding to BPNA, which had an effective tax rate of 0% due to the impact of the partial reversal of the valuation allowance, mentioned above.

^[3]  Represents an other than temporary impairment (“OTTI”) recorded on Puerto Rico government investment securities available- for- sale. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the government’s announcements regarding its ability to pay its debt, Popular determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other than temporary. The tax effect of this impairment is reflected at the capital gains rate of 20%, except for entities which had a full valuation allowance on its deferred tax asset.

^[4]  Represents the partial reversal of the valuation allowance of a portion of the deferred tax asset amounting to approximately $1.2 billion, at the U.S. operations.

^[5]  Represents the loss on a bulk sale of covered OREOs completed in the second quarter and the related mirror accounting of the 80% reimbursable from the FDIC.

^[6]  The negative amortization of the FDIC’s Indemnification Asset included a $10.9 million expense related to losses incurred by the corporation that were not claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations. Gains and losses related to assets acquired from Westernbank as part of the FDIC assisted transaction are subject to the capital gains tax rate of 20%.

^[7]  Represents the fair value of mortgage servicing rights acquired for a portfolio previously serviced by Doral Bank, for which Popular acted as a backup servicer, under a pre-existing contract.

^[8]  Represents impairment based on the estimated fair value of loans acquired from Westernbank, that Popular has the intent to sell and were subject to the ongoing arbitration with the FDIC.

^[9]  Represents the impact of a bulk sale of loans at the BPPR segment, which had a book value of approximately $34.4 million.

80

Table 48 - Adjusted Net Income for the Year Ended December 31, 2014 (Non-GAAP)

(In thousands)	Pre-tax			Income tax effect			Impact on net income
U.S. GAAP Net loss							$	(313,490	)
Non-GAAP Adjustments:
Closing Agreement with the PR Department of Treasury[1]		—			(23,427	)		(23,427	)
TARP repayment discount amortization[2]		414,068			8,034			422,102
BPNA reorganization[3]		200,635			—			200,635
Income tax adjustments[4]		20,048			—			20,048
Indemnification asset adjustments[5]		(12,492	)		2,498			(9,994	)
Other adjustments[6]		4,869			—			4,869
Adjusted net income (Non-GAAP)							$	300,743

^[1]  Represents a benefit related to a Closing Agreement with the PR Department of Treasury, completed during the second quarter of 2014.

^[2]  Represents the amortization of the discount and debt issue cost associated with the TARP funds repayment and the negative impact of the deferred tax asset valuation allowance recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the $450 million senior notes issued.

^[3]  Includes the aggregated impact of $39.8 million refinancing fees of structured repos, net loss of $11.1 million in bulk loan sales and $26.7 million in restructuring charges and a non-cash goodwill impairment charge of $186.5 million related to BPNA’s discontinued operations.

^[4]  On July 1, 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which , among other things, changed the income tax rate for capital gains for 15% to 20%. As a result, the Corporation recognized an income tax expense of $20.0 million, mainly related to the deferred tax liability associated with the portfolio acquired from Westernbank.

^[5]  The FDIC indemnity asset amortization included a positive adjustment of $12.5 million to reverse the impact of accelerated amortization expense recorded in prior periods.

^[6]  Represents the impact of the compensation package granted upon separation of an officer of the Corporation equal to approximately $3.0 million and represents the net loss on the early cancellation of a lease at BPNA $1.9 million.

81

Statistical Summary 2012-2016

Statements of Financial Condition

	At December 31,
(In thousands)	2016			2015			2014			2013			2012
Assets:
Cash and due from banks	$	362,394		$	363,674		$	381,095		$	423,211		$	439,363
Money market investments:
Federal funds sold and securities purchased under agreements to resell		23,637			96,338			151,134			181,020			246,977
Time deposits with other banks		2,866,580			2,083,754			1,671,252			677,433			838,603
Total money market investments		2,890,217			2,180,092			1,822,386			858,453			1,085,580
Trading account securities, at fair value		59,805			71,659			138,527			339,743			314,525
Investment securities available-for-sale, at fair value		8,209,806			6,062,992			5,315,159			5,294,800			5,084,201
Investment securities held-to-maturity, at amortized cost		98,101			100,903			103,170			140,496			142,817
Other investment securities, at lower of cost or realizable value		167,818			172,248			161,906			181,752			185,443
Loans held-for-sale, at lower of cost or fair value		88,821			137,000			106,104			110,426			354,468
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		22,895,172			22,453,813			19,498,286			21,704,010			21,080,005
Loans covered under loss-sharing agreements with the FDIC		572,878			646,115			2,542,662			2,984,427			3,755,972
Less – Unearned income		121,425			107,698			93,835			92,144			96,813
Allowance for loan losses		540,651			537,111			601,792			640,555			730,607
Total loans held-in-portfolio, net		22,805,974			22,455,119			21,345,321			23,955,738			24,008,557
FDIC loss-share asset		69,334			310,221			542,454			948,608			1,399,098
Premises and equipment, net		543,981			502,611			494,581			519,516			535,793
Other real estate not covered under loss-sharing agreements with the FDIC		180,445			155,231			135,500			135,501			266,844
Other real estate covered under loss-sharing agreements with the FDIC		32,128			36,685			130,266			168,007			139,058
Accrued income receivable		138,042			124,234			121,818			131,536			125,728
Mortgage servicing assets, at fair value		196,889			211,405			148,694			161,099			154,430
Other assets		2,145,510			2,193,162			1,636,519			1,686,977			1,568,954
Goodwill		627,294			626,388			465,676			647,757			647,757
Other intangible assets		45,050			58,109			37,595			45,132			54,295
Total assets	$	38,661,609		$	35,761,733		$	33,086,771		$	35,748,752		$	36,506,911
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	6,980,443		$	6,401,515		$	5,783,748		$	5,922,682		$	5,794,629
Interest bearing		23,515,781			20,808,208			19,023,787			20,788,463			21,205,984
Total deposits		30,496,224			27,209,723			24,807,535			26,711,145			27,000,613
Federal funds purchased and assets sold under agreements to repurchase		479,425			762,145			1,271,657			1,659,292			2,016,752
Other short-term borrowings		1,200			1,200			21,200			401,200			636,200
Notes payable		1,574,852			1,662,508			1,701,904			1,584,173			1,777,097
Other liabilities		911,951			1,019,018			1,012,029			766,792			966,249
Liabilities from discontinued operations		—			1,815			5,064			—			—
Total liabilities		33,463,652			30,656,409			28,819,389			31,122,602			32,396,911
Stockholders’ equity:
Preferred stock		50,160			50,160			50,160			50,160			50,160
Common stock		1,040			1,038			1,036			1,034			1,032
Surplus		4,255,022			4,229,156			4,196,458			4,170,152			4,150,294
Retained earnings		1,220,307			1,087,957			253,717			594,430			11,826
Treasury stock – at cost		(8,286	)		(6,101	)		(4,117	)		(881	)		(444	)
Accumulated other comprehensive loss, net of tax		(320,286	)		(256,886	)		(229,872	)		(188,745	)		(102,868	)
Total stockholders’ equity		5,197,957			5,105,324			4,267,382			4,626,150			4,110,000
Total liabilities and stockholders’ equity	$	38,661,609		$	35,761,733		$	33,086,771		$	35,748,752		$	36,506,911

82

Statistical Summary 2012-2016

Statements of Operations

	For the years ended December 31,
(In thousands)	2016			2015			2014			2013			2012
Interest income:
Loans	$	1,459,720		$	1,458,706		$	1,478,750		$	1,481,096		$	1,449,227
Money market investments		16,428			7,243			4,224			3,464			3,703
Investment securities		152,011			126,064			132,631			141,807			168,632
Trading account securities		6,414			11,001			17,938			21,573			22,824
Total interest income		1,634,573			1,603,014			1,633,543			1,647,940			1,644,386
Less - Interest expense		212,518			194,031			688,471			303,366			362,759
Net interest income		1,422,055			1,408,983			945,072			1,344,574			1,281,627
Provision for loan losses - non-covered loans		171,126			217,458			223,999			536,710			322,234
Provision (reversal) for loan losses - covered loans		(1,110	)		24,020			46,135			69,396			74,839
Net interest income after provision for loan losses		1,252,039			1,167,505			674,938			738,468			884,554
Mortgage banking activities		56,538			81,802			30,615			71,657			84,771
Net gain (loss) and valuation adjustments on investment securities		1,962			141			(870	)		7,966			(1,707	)
Other-than-temporary impairment losses on investment securities		(209	)		(14,445	)		—			—			—
Trading account (loss) profit		(785	)		(4,723	)		4,358			(13,483	)		4,478
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		8,245			542			40,591			(52,708	)		(29,414	)
Adjustments (expense) to indemnity reserves		(17,285	)		(18,628	)		(40,629	)		(37,054	)		(21,198	)
FDIC loss-share income (expense)		(207,779	)		20,062			(103,024	)		(82,051	)		(56,211	)
Other non-interest income		457,249			454,790			455,474			896,686			530,770
Total non-interest income		297,936			519,541			386,515			791,013			511,489
Operating expenses:
Personnel costs		487,476			477,519			418,679			428,697			434,333
All other operating expenses		768,159			810,702			775,005			793,293			780,656
Total operating expenses		1,255,635			1,288,221			1,193,684			1,221,990			1,214,989
Income (loss) from continuing operations, before income tax		294,340			398,825			(132,231	)		307,491			181,054
Income tax expense (benefit)		78,784			(495,172	)		58,279			(251,327	)		(26,403	)
Income (loss) from continuing operations	$	215,556		$	893,997		$	(190,510	)	$	558,818		$	207,457
Income (loss) from discontinued operations, net of income tax		1,135			1,347			(122,980	)		40,509			37,818
Net Income (Loss)	$	216,691		$	895,344		$	(313,490	)	$	599,327		$	245,275
Net Income (Loss) Applicable to Common Stock	$	212,968		$	891,621		$	(317,213	)	$	595,604		$	241,552

83

Statistical Summary 2012-2016

Average Balance Sheet and Summary of Net Interest Income

On a Taxable Equivalent Basis*

	2016							2015							2014
(Dollars in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
Assets
Interest earning assets:
Money market investments	$	3,103,390	$	16,428		0.53	%	$	2,382,045	$	7,243		0.30	%	$	1,305,326	$	4,224		0.32	%
U.S. Treasury securities		1,567,364		21,835		1.39			921,249		13,559		1.47			264,393		4,730		1.79
Obligations of U.S. Government sponsored entities		810,568		15,743		1.94			1,278,469		21,962		1.72			2,006,170		31,913		1.59
Obligations of Puerto Rico, States and political subdivisions		127,694		8,496		6.65			159,110		11,776		7.40			188,125		13,450		7.15
Collateralized mortgage obligations and mortgage-backed securities		4,735,418		147,097		3.11			3,275,702		105,562		3.22			3,231,806		101,650		3.15
Other		181,255		8,784		4.85			179,928		9,761		5.42			195,139		10,265		5.26
Total investment securities		7,422,299		201,955		2.72			5,814,458		162,620		2.80			5,885,633		162,008		2.75
Trading account securities		125,231		8,243		6.58			209,270		13,064		6.24			339,563		20,914		6.16
Loans		21,113,219		1,320,432		6.25			20,712,524		1,294,714		6.25			19,595,972		1,239,469		6.33
WB loans		1,949,023		175,207		8.99			2,332,784		208,779		8.95			2,770,779		293,610		10.60
Total loans (net of unearned income)		23,062,242		1,495,639		6.49			23,045,308		1,503,493		6.52			22,366,751		1,533,079		6.85
Total interest earning assets/Interest income	$	33,713,162	$	1,722,265		5.11	%	$	31,451,081	$	1,686,420		5.36	%	$	29,897,273	$	1,720,225		5.75	%
Total non-interest earning assets		3,900,580							3,735,224							3,758,897
Total assets from continuing operations	$	37,613,742						$	35,186,305						$	33,656,170
Total assets from discontinued operations		—		—		—			—		—		—			1,525,687		—		—
Total assets	$	37,613,742						$	35,186,305						$	35,181,857
Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other interest bearing demand accounts	$	14,548,307	$	45,550		0.31	%	$	12,474,170	$	35,272		0.28	%	$	11,557,597	$	30,187		0.26	%
Time deposits		7,910,063		82,027		1.04			8,157,908		72,261		0.89			7,556,109		74,900		0.99
Short-term borrowings		763,496		7,812		1.02			1,028,406		7,512		0.73			1,886,662		67,376		3.57
Notes payable		1,575,903		77,129		4.89			1,728,928		78,986		4.57			1,627,541		516,008		31.70
Total interest bearing liabilities/Interest expense		24,797,769		212,518		0.86			23,389,412		194,031		0.83			22,627,909		688,471		3.04
Total non-interest bearing liabilities		7,535,742							7,089,940							6,409,810
Total liabilities from continuing operations		32,333,511							30,479,352							29,037,719
Total liabilities from discontinued operations		1,754		—		—			2,091		—		—			1,588,386		—		—
Total liabilities		32,335,265							30,481,443							30,626,105
Stockholders’ equity		5,278,477							4,704,862							4,555,752
Total liabilities and stockholders’ equity	$	37,613,742						$	35,186,305						$	35,181,857
Net interest income on a taxable equivalent basis			$	1,509,747						$	1,492,389						$	1,031,754
Cost of funding earning assets						0.63	%						0.62	%						2.30	%
Net interest margin						4.48	%						4.74	%						3.45	%
Effect of the taxable equivalent adjustment				87,692							83,406							86,682
Net interest income per books			$	1,422,055						$	1,408,983						$	945,072

* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.

Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.

84

Statistical Summary 2012-2016

Average Balance Sheet and Summary of Net Interest Income

On a Taxable Equivalent Basis

	2013							2012
(Dollars in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
Assets
Interest earning assets:
Money market investments	$	1,036,495	$	3,464		0.33	%	$	1,051,373	$	3,704		0.35	%
U.S. Treasury securities		37,429		1,505		4.02			34,757		1,418		4.08
Obligations of U.S. Government sponsored entities		1,273,766		28,926		2.27			1,038,829		34,881		3.36
Obligations of Puerto Rico, States and political subdivisions		172,403		12,295		7.13			152,697		9,850		6.45
Collateralized mortgage obligations and mortgage- backed securities		3,758,610		106,377		2.83			3,752,954		121,494		3.24
Other		245,980		12,765		5.19			247,717		14,451		5.83
Total investment securities		5,488,188		161,868		2.95			5,226,954		182,094		3.48
Trading account securities		416,538		26,026		6.25			445,881		25,909		5.81
Loans		19,572,159		1,218,349		6.22			18,736,207		1,168,091		6.23
WB loans		3,227,719		300,745		9.32			4,050,338		301,441		7.44
Total loans (net of unearned income)		22,799,878		1,519,094		6.66			22,786,545		1,469,532		6.45
Total interest earning assets/Interest income	$	29,741,099	$	1,710,452		5.75	%	$	29,510,753	$	1,681,239		5.70	%
Total non-interest earning assets		4,362,183							4,486,835
Total assets from continuing operations	$	34,103,282						$	33,997,588
Total assets from discontinued operations		2,163,711		—		—			2,266,443		—		—
Total assets	$	36,266,993						$	36,264,031
Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other interest bearing demand accounts	$	11,243,095	$	31,080		0.28	%	$	10,834,812	$	40,069		0.37	%
Time deposits		7,956,922		93,777		1.18			8,835,308		127,696		1.45
Short-term borrowings		2,571,875		38,430		1.49			2,563,970		46,802		1.83
Notes payable		1,719,985		140,079		8.14			1,850,514		148,192		8.01
Total interest bearing liabilities/Interest expense		23,491,877		303,366		1.29			24,084,604		362,759		1.51
Total non-interest bearing liabilities		6,390,174							6,130,890
Total liabilities from continuing operations		29,882,051							30,215,494
Total liabilities from discontinued operations		2,208,593		—		—			2,204,885		—		—
Total liabilities		32,090,644							32,420,379
Stockholders’ equity		4,176,349							3,843,652
Total liabilities and stockholders’ equity	$	36,266,993						$	36,264,031
Net interest income on a taxable equivalent basis			$	1,407,086						$	1,318,480
Cost of funding earning assets						1.02	%						1.23	%
Net interest margin						4.73	%						4.47	%
Effect of the taxable equivalent adjustment				62,512							36,853
Net interest income per books			$	1,344,574						$	1,281,627

* Shows the effect of the tax exempt status of loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yield of the tax exempt and taxable assets on a taxable basis.

Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.

85

Statistical Summary 2015-2016

Quarterly Financial Data

	2016												2015
(In thousands, except per	Fourth			Third			Second			First			Fourth			Third			Second			First
common share information)	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
Summary of Operations
Interest income	$	411,044		$	407,299		$	412,210		$	404,020		$	401,357		$	401,282		$	410,301		$	390,074
Interest expense		55,639			53,612			51,659			51,608			48,857			50,547			47,748			46,879
Net interest income		355,405			353,687			360,551			352,412			352,500			350,735			362,553			343,195
Provision for loan losses - non-covered loans		40,924			42,594			39,668			47,940			57,711			69,568			60,468			29,711
Provision (reversal) for loan losses - covered loans		441			750			804			(3,105	)		820			(2,890	)		15,766			10,324
Mortgage banking activities		14,488			15,272			16,227			10,551			23,430			24,195			21,325			12,852
Net gain and valuation adjustments on investment securities		30			349			1,583			—			—			136			5			—
Other-than-temporary impairment losses on investment securities		—			—			(209	)		—			—			—			(14,445	)		—
Trading account (loss) profit		(1,627	)		(113	)		1,117			(162	)		(1,631	)		(398	)		(3,108	)		414
Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale		—			8,549			—			(304	)		(60	)		—			681			(79	)
Adjustments (expense) to indemnity reserves on loans sold		(3,051	)		(4,390	)		(5,746	)		(4,098	)		(8,647	)		(5,874	)		419			(4,526	)
FDIC loss-share (expense) income		(130,334	)		(61,723	)		(12,576	)		(3,146	)		(4,359	)		1,207			19,075			4,139
Other non-interest income		120,319			118,034			110,107			108,789			123,705			111,843			116,807			102,435
Operating expenses		320,871			323,672			309,149			301,943			305,808			306,897			363,174			312,342
(Loss) income from continuing operations before income tax		(7,006	)		62,649			121,433			117,264			120,599			108,269			63,904			106,053
Income tax (benefit) expense		(1,766	)		15,839			32,446			32,265			(16,827	)		22,620			(533,533	)		32,568
(Loss) income from continuing operations	$	(5,240	)	$	46,810		$	88,987		$	84,999		$	137,426		$	85,649		$	597,437		$	73,485
Income (loss) from discontinued operations, net of tax		1,135			—			—			—			—			(9	)		15			1,341
Net (loss) income	$	(4,105	)	$	46,810		$	88,987		$	84,999		$	137,426		$	85,640		$	597,452		$	74,826
Net (loss) income applicable to common stock	$	(5,036	)	$	45,880		$	88,056		$	84,068		$	136,495		$	84,709		$	596,521		$	73,896
Net (loss) income per common share - basic:	$	(0.05	)	$	0.44		$	0.85		$	0.81		$	1.32		$	0.82		$	5.80		$	0.72
Net (loss) income per common share - diluted:	$	(0.05	)	$	0.44		$	0.85		$	0.81		$	1.32		$	0.82		$	5.79		$	0.72
Dividends Declared per Common Share	$	0.15		$	0.15		$	0.15		$	0.15		$	0.15		$	0.15		$	—		$	—
Selected Average Balances
(In millions)
Total assets	$	39,086		$	38,091		$	37,371		$	35,892		$	35,576		$	35,840		$	35,577		$	33,806
Loans		23,077			23,042			23,144			22,986			23,131			23,148			23,390			22,505
Interest earning assets		35,262			34,201			33,431			31,937			31,733			31,815			31,965			30,272
Deposits		30,637			29,411			28,857			27,338			27,110			27,103			27,330			25,593
Interest-bearing liabilities		25,868			25,129			24,679			23,481			23,298			23,816			23,932			22,499
Selected Ratios
Return on assets		(0.04	)%		0.49	%		0.96	%		0.95	%		1.53	%		0.95	%		6.74	%		0.90	%
Return on equity		(0.38	)		3.46			6.80			6.58			10.77			6.79			54.93			7.02

Note: Because each reporting period stands on its own the sum of the net income (loss) per common share for the quarters may not equal to the net income (loss) per common share for the year.

86

Report of Management on Internal Control Over Financial Reporting

The management of Popular, Inc. (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2016 based on the criteria referred to above.

The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2016, as stated in their report dated March 1, 2017 which appears herein.

Richard L. Carrión Chairman of the Board and Chief Executive Officer	Carlos J. Vázquez Executive Vice President and Chief Financial Officer

87

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Popular, Inc.

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries (“the Corporation”) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.‘s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally

88

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, 2017

CERTIFIED PUBLIC ACCOUNTANTS

(OF PUERTO RICO)

License No. LLP-216 Expires Dec. 1, 2019

Stamp E257030 of the P.R. Society of

Certified Public Accountants has been

affixed to the file copy of this report

89

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,			December 31,
(In thousands, except share information)	2016			2015
Assets:
Cash and due from banks	$	362,394		$	363,674
Money market investments:
Securities purchased under agreements to resell		23,637			96,338
Time deposits with other banks		2,866,580			2,083,754
Total money market investments		2,890,217			2,180,092
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		11,486			19,506
Other trading securities		48,319			52,153
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		491,843			739,045
Other investment securities available-for-sale		7,717,963			5,323,947
Investment securities held-to-maturity, at amortized cost (fair value 2016 - $75,576; 2015 - $82,889)		98,101			100,903
Other investment securities, at lower of cost or realizable value (realizable value 2016 - $170,890; 2015 - $175,291)		167,818			172,248
Loans held-for-sale, at lower of cost or fair value		88,821			137,000
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		22,895,172			22,453,813
Loans covered under loss-sharing agreements with the FDIC		572,878			646,115
Less – Unearned income		121,425			107,698
Allowance for loan losses		540,651			537,111
Total loans held-in-portfolio, net		22,805,974			22,455,119
FDIC loss-share asset		69,334			310,221
Premises and equipment, net		543,981			502,611
Other real estate not covered under loss-sharing agreements with the FDIC		180,445			155,231
Other real estate covered under loss-sharing agreements with the FDIC		32,128			36,685
Accrued income receivable		138,042			124,234
Mortgage servicing assets, at fair value		196,889			211,405
Other assets		2,145,510			2,193,162
Goodwill		627,294			626,388
Other intangible assets		45,050			58,109
Total assets	$	38,661,609		$	35,761,733
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	6,980,443		$	6,401,515
Interest bearing		23,515,781			20,808,208
Total deposits		30,496,224			27,209,723
Federal funds purchased and assets sold under agreements to repurchase		479,425			762,145
Other short-term borrowings		1,200			1,200
Notes payable		1,574,852			1,662,508
Other liabilities		911,951			1,019,018
Liabilities from discontinued operations (Refer to Note 4)		—			1,815
Total liabilities		33,463,652			30,656,409
Commitments and contingencies (Refer to Note 28)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391shares issued and outstanding		50,160			50,160
Common stock, $0.01 par value; 170,000,000 shares authorized;
104,058,684 shares issued (2015 - 103,816,185) and 103,790,932 shares outstanding (2015 - 103,618,976)		1,040			1,038
Surplus		4,255,022			4,229,156
Retained earnings		1,220,307			1,087,957
Treasury stock - at cost, 267,752 shares (2015 - 197,209)		(8,286	)		(6,101	)
Accumulated other comprehensive loss, net of tax		(320,286	)		(256,886	)
Total stockholders’ equity		5,197,957			5,105,324
Total liabilities and stockholders’ equity	$	38,661,609		$	35,761,733

The accompanying notes are an integral part of these consolidated financial statements.

90

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years ended December 31,
(In thousands, except per share information)	2016			2015			2014
Interest income:
Loans	$	1,459,720		$	1,458,706		$	1,478,750
Money market investments		16,428			7,243			4,224
Investment securities		152,011			126,064			132,631
Trading account securities		6,414			11,001			17,938
Total interest income		1,634,573			1,603,014			1,633,543
Interest expense:
Deposits		127,577			107,533			105,087
Short-term borrowings		7,812			7,512			67,376
Long-term debt		77,129			78,986			516,008
Total interest expense		212,518			194,031			688,471
Net interest income		1,422,055			1,408,983			945,072
Provision for loan losses - non-covered loans		171,126			217,458			223,999
Provision (reversal) for loan losses - covered loans		(1,110	)		24,020			46,135
Net interest income after provision for loan losses		1,252,039			1,167,505			674,938
Service charges on deposit accounts		160,836			160,108			158,637
Other service fees (Refer to Note 37)		234,770			236,090			225,265
Mortgage banking activities (Refer to Note 13)		56,538			81,802			30,615
Net gain (loss) and valuation adjustments on investment securities		1,962			141			(870	)
Other-than-temporary impairment losses on investment securities		(209	)		(14,445	)		—
Trading account (loss) profit		(785	)		(4,723	)		4,358
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		8,245			542			40,591
Adjustments (expense) to indemnity reserves on loans sold		(17,285	)		(18,628	)		(40,629	)
FDIC loss-share (expense) income (Refer to Note 38)		(207,779	)		20,062			(103,024	)
Other operating income		61,643			58,592			71,572
Total non-interest income		297,936			519,541			386,515
Operating expenses:
Personnel costs		487,476			477,519			418,679
Net occupancy expenses		85,653			86,888			86,707
Equipment expenses		62,225			60,110			48,917
Other taxes		42,304			39,797			56,918
Professional fees		323,043			308,985			282,055
Communications		23,897			25,146			25,684
Business promotion		53,014			52,076			54,016
FDIC deposit insurance		24,512			27,626			40,307
Loss on early extinguishment of debt		—			—			532
Other real estate owned (OREO) expenses		47,119			85,568			49,611
Other operating expenses		90,447			95,075			95,373
Amortization of intangibles		12,144			11,019			8,160
Goodwill impairment charge		3,801			—			—
Restructuring costs (Refer to Note 4)		—			18,412			26,725
Total operating expenses		1,255,635			1,288,221			1,193,684
Income (loss) from continuing operations before income tax		294,340			398,825			(132,231	)
Income tax expense (benefit)		78,784			(495,172	)		58,279
Income (loss) from continuing operations		215,556			893,997			(190,510	)
Income (loss) from discontinued operations, net of tax (Refer to Note 4)		1,135			1,347			(122,980	)
Net Income (Loss)	$	216,691		$	895,344		$	(313,490	)
Net Income (Loss) Applicable to Common Stock	$	212,968		$	891,621		$	(317,213	)
Net Income (Loss) per Common Share – Basic
Net income (loss) from continuing operations		2.05			8.65			(1.88	)
Net income (loss) from discontinued operations		0.01			0.01			(1.20	)
Net Income (Loss) per Common Share – Basic	$	2.06		$	8.66		$	(3.08	)
Net Income (Loss) per Common Share – Diluted
Net income (loss) from continuing operations		2.05			8.64			(1.88	)
Net income (loss) from discontinued operations		0.01			0.01			(1.20	)
Net Income (Loss) per Common Share – Diluted	$	2.06		$	8.65		$	(3.08	)
Dividends Declared per Common Share	$	0.60		$	0.30		$	—

The accompanying notes are an integral part of these consolidated financial statements.

91

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Years ended December 31,
(In thousands)	2016			2015			2014
Net income (loss)	$	216,691		$	895,344		$	(313,490	)
Other comprehensive loss before tax:
Foreign currency translation adjustment		(4,026	)		(3,098	)		(4,451	)
Reclassification adjustment for losses included in net income		—			—			7,718
Adjustment of pension and postretirement benefit plans		(18,691	)		(26,283	)		(160,679	)
Amortization of net losses		21,948			20,100			(8,505	)
Amortization of prior service credit		(3,800	)		(3,800	)		3,800
Unrealized holding (losses) gains on investments arising during the period		(59,666	)		(32,440	)		57,401
Other-than-temporary impairment included in net income		209			14,445			—
Reclassification adjustment for (gains) losses included in net income		(379	)		(141	)		870
Unrealized net losses on cash flow hedges		(3,612	)		(4,376	)		(6,613	)
Reclassification adjustment for net losses included in net income		3,149			4,702			6,091
Other comprehensive loss before tax		(64,868	)		(30,891	)		(104,368	)
Income tax benefit		1,468			3,877			63,241
Total other comprehensive loss, net of tax		(63,400	)		(27,014	)		(41,127	)
Comprehensive income (loss) , net of tax	$	153,291		$	868,330		$	(354,617	)

Tax effect allocated to each component of other comprehensive loss:

	Years ended December 31,
(In thousands)	2016			2015			2014
Adjustment of pension and postretirement benefit plans	$	7,289		$	10,251		$	62,664
Amortization of net losses		(8,562	)		(7,839	)		3,317
Amortization of prior service credit		1,482			1,482			(1,482	)
Unrealized holding (losses) gains on investments arising during the period		1,081			2,569			(1,414	)
Other-than-temporary impairment included in net income		(42	)		(2,486	)		—
Reclassification adjustment for (gains) losses included in net income		39			28			(48	)
Unrealized net losses on cash flow hedges		1,409			1,707			2,579
Reclassification adjustment for net losses included in net income		(1,228	)		(1,835	)		(2,375	)
Income tax benefit	$	1,468		$	3,877		$	63,241

The accompanying notes are an integral part of these consolidated financial statements.

92

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)	Common stock		Preferred stock		Surplus			Retained earnings			Treasury stock			Accumulated other comprehensive loss			Total
Balance at December 31, 2013	$	1,034	$	50,160	$	4,170,152		$	594,430		$	(881	)	$	(188,745	)	$	4,626,150
Net loss									(313,490	)								(313,490	)
Issuance of stock		2				5,392												5,394
Tax windfall benefit on vesting of restricted stock						414												414
Repurchase of TARP-related warrants						(3,000	)											(3,000	)
Dividends declared:
Preferred stock									(3,723	)								(3,723	)
Common stock purchases												(3,272	)					(3,272	)
Common stock reissuance												36						36
Other comprehensive loss, net of tax															(41,127	)		(41,127	)
Transfer to statutory reserve						23,500			(23,500	)								—
Balance at December 31, 2014	$	1,036	$	50,160	$	4,196,458		$	253,717		$	(4,117	)	$	(229,872	)	$	4,267,382
Net income									895,344									895,344
Issuance of stock		2				6,224												6,226
Tax windfall benefit on vesting of restricted stock						169												169
Dividends declared:
Common stock									(31,076	)								(31,076	)
Preferred stock									(3,723	)								(3,723	)
Common stock purchases												(2,086	)					(2,086	)
Common stock reissuance												102						102
Other comprehensive loss, net of tax															(27,014	)		(27,014	)
Transfer to statutory reserve						26,305			(26,305	)								—
Balance at December 31, 2015	$	1,038	$	50,160	$	4,229,156		$	1,087,957		$	(6,101	)	$	(256,886	)	$	5,105,324
Net income									216,691									216,691
Issuance of stock		2				7,435												7,437
Tax windfall benefit on vesting of restricted stock						47												47
Dividends declared:
Common stock									(62,234	)								(62,234	)
Preferred stock									(3,723	)								(3,723	)
Common stock purchases												(2,202	)					(2,202	)
Common stock reissuance												17						17
Other comprehensive loss, net of tax															(63,400	)		(63,400	)
Transfer to statutory reserve						18,384			(18,384	)								—
Balance at December 31, 2016	$	1,040	$	50,160	$	4,255,022		$	1,220,307		$	(8,286	)	$	(320,286	)	$	5,197,957

	Years ended December 31,
Disclosure of changes in number of shares:	2016			2015			2014
Preferred Stock:
Balance at beginning and end of year		2,006,391			2,006,391			2,006,391
Common Stock:
Balance at beginning of year		103,816,185			103,614,553			103,435,967
Issuance of stock		242,499			201,632			178,586
Balance at end of year		104,058,684			103,816,185			103,614,553
Treasury stock		(267,752	)		(197,209	)		(137,706	)
Common Stock – Outstanding		103,790,932			103,618,976			103,476,847

The accompanying notes are an integral part of these consolidated financial statements.

93

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended December 31,
(In thousands)	2016			2015			2014
Cash flows from operating activities:
Net income (loss)	$	216,691		$	895,344		$	(313,490	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		170,016			241,478			263,369
Goodwill impairment losses		3,801			—			186,511
Amortization of intangibles		12,144			11,019			9,434
Depreciation and amortization of premises and equipment		46,874			47,474			47,137
Net accretion of discounts and amortization of premiums and deferred fees		(40,786	)		(73,496	)		278,576
Other-than-temporary impairment on investment securities		209			14,445			—
Fair value adjustments on mortgage servicing rights		25,336			7,904			24,683
FDIC loss-share expense (income)		207,779			(20,062	)		103,024
Adjustments (expense) to indemnity reserves on loans sold		17,285			18,628			40,629
Earnings from investments under the equity method		(31,288	)		(24,373	)		(39,578	)
Deferred income tax expense (benefit)		61,574			(519,128	)		43,512
(Gain) loss on:
Disposition of premises and equipment		4,094			(3,629	)		(1,716	)
Sale and valuation adjustments of investment securities		(1,962	)		(141	)		870
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(35,517	)		(35,013	)		(88,724	)
Sale of foreclosed assets, including write-downs		19,357			60,378			28,005
Disposal of discontinued business		—			—			(38,355	)
Acquisitions of loans held-for-sale		(310,217	)		(401,991	)		(308,600	)
Proceeds from sale of loans held-for-sale		89,887			124,111			123,375
Net originations on loans held-for-sale		(510,783	)		(792,821	)		(753,312	)
Net decrease (increase) in:
Trading securities		753,839			1,083,683			1,105,374
Accrued income receivable		(13,808	)		5,392			9,719
Other assets		(26,304	)		100,133			132,500
Net increase (decrease) in:
Interest payable		165			528			(707	)
Pension and other postretirement benefits obligation		(55,678	)		3,252			(10,171	)
Other liabilities		(13,241	)		(72,980	)		30,937
Total adjustments		372,776			(225,209	)		1,186,492
Net cash provided by operating activities		589,467			670,135			873,002
Cash flows from investing activities:
Net increase in money market investments		(710,125	)		(357,706	)		(963,933	)
Purchases of investment securities:
Available-for-sale		(3,407,779	)		(2,014,315	)		(2,001,940	)
Held-to-maturity		—			(750	)		(1,000	)
Other		(14,130	)		(40,847	)		(110,010	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,227,966			1,362,712			1,722,650
Held-to-maturity		4,588			4,856			39,962
Other		11,122			46,341			92,752
Proceeds from sale of investment securities:
Available-for-sale		5,259			96,760			310,210
Other		9,021			14,950			37,104
Net (disbursements) repayments on loans		(267,205	)		431,676			775,900
Proceeds from sale of loans		141,363			30,160			355,145
Acquisition of loan portfolios		(535,445	)		(338,447	)		(389,067	)
Acquisition of trademark		—			(50	)		—
Net payments from FDIC under loss sharing agreements		98,518			247,976			256,498
Net cash received and acquired from business combination		—			731,279			—
Acquisition of servicing advances		—			(61,304	)		—
Cash paid related to business acquisitions		—			(17,250	)		(6,330	)
Return of capital from equity method investments		907			13,329			—
Net cash disbursed from disposal of discontinued business		—			—			(205,895	)
Mortgage servicing rights purchased		—			(2,400	)		—
Acquisition of premises and equipment		(100,320	)		(62,656	)		(51,046	)
Proceeds from sale of:
Premises and equipment		8,897			12,880			14,337
Foreclosed assets		83,357			141,145			150,115
Net cash (used in) provided by investing activities		(3,444,006	)		238,339			25,452
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		3,286,428			207,338			109,015
Federal funds purchased and assets sold under agreements to repurchase		(282,719	)		(509,512	)		(387,635	)
Other short-term borrowings		—			(148,215	)		(380,000	)
Payments of notes payable		(254,816	)		(737,889	)		(1,059,290	)
Proceeds from issuance of notes payable		165,047			277,398			781,905
Proceeds from issuance of common stock		7,437			6,226			5,394
Dividends paid		(65,932	)		(19,257	)		(3,723	)
Repurchase of TARP - related warrants		—			—			(3,000	)
Net payments for repurchase of common stock		(2,186	)		(1,984	)		(3,236	)
Net cash provided by (used in) financing activities		2,853,259			(925,895	)		(940,570	)
Net decrease in cash and due from banks		(1,280	)		(17,421	)		(42,116	)
Cash and due from banks at beginning of period		363,674			381,095			423,211
Cash and due from banks at end of period	$	362,394		$	363,674		$	381,095
The accompanying notes are an integral part of these consolidated financial statements.

During the year ended December 31, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

94

Notes to Consolidated Financial

Statements

Note 1 - Nature of Operations and Basis of Presentation	96
Note 2 - Summary of Significant Accounting Policies	97
Note 3 - New Accounting Pronouncements	108
Note 4 - Discontinued Operations and Restructuring Plan	113
Note 5 - Business Combination	114
Note 6 - Restrictions on Cash and Due from Banks and Certain Securities	116
Note 7 - Securities Purchased under Agreements to Resell	117
Note 8 - Investment Securities Available-For-Sale	118
Note 9 - Investment Securities Held-to-Maturity	123
Note 10 - Loans	125
Note 11 - Allowance for Loan Losses	135
Note 12 - FDIC Loss Share Asset and True-Up Payment Obligation	151
Note 13 - Mortgage Banking Activities	153
Note 14 - Transfers of Financial Assets and Mortgage Servicing Assets	154
Note 15 - Premises and Equipment	158
Note 16 - Other Real Estate Owned	159
Note 17 - Other Assets	160
Note 18 - Investment in Equity Investees	161
Note 19 - Goodwill and Other Intangible Assets	162
Note 20 - Deposits	166
Note 21 - Borrowings	167
Note 22 - Offsetting of Financial Assets and Liabilities	170
Note 23 - Trust Preferred Securities	172
Note 24 - Stockholders’ Equity	173
Note 25 - Regulatory Capital Requirements	175
Note 26 - Other Comprehensive Loss	178
Note 27 - Guarantees	180
Note 28 - Commitments and Contingencies	182
Note 29 - Non-consolidated Variable Interest Entities	190
Note 30 - Derivative Instruments and Hedging Activities	193
Note 31 - Related Party Transactions	197
Note 32 - Fair Value Measurement	202
Note 33 - Fair Value of Financial Instruments	210
Note 34 - Employee Benefits	216
Note 35 - Net Income (Loss) per Common Share	226
Note 36 - Rental Expense and Commitments	227
Note 37 - Other Service Fees	228
Note 38 - FDIC Loss Share (Expense) Income	229
Note 39 - Stock-Based Compensation	230
Note 40 - Income Taxes	233
Note 41 - Supplemental Disclosure on the Consolidated Statements of Cash Flows	237
Note 42 - Segment Reporting	238
Note 43 - Popular, Inc. (Holding company only) Financial Information	243
Note 44 - Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities	247

95

Note 1 – Nature of operations and basis of presentation

Nature of Operations

Popular, Inc. (the “Corporation”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States and the Caribbean. In Puerto Rico, the Corporation provides retail, mortgage and commercial banking services, through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”). BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and South Florida under the name of Popular Community Bank. Refer to Note 4 for discussion of the sales of the California, Illinois and Central Florida regional operations during the year 2014. Note 42 to the consolidated financial statements presents information about the Corporation’s business segments.

On February 27, 2015, BPPR, in an alliance with other bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank (“Doral”) from the Federal Deposit Insurance Corporation (FDIC), as receiver (the “Doral Bank Transaction”). Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. Refer to Note 5 for further details on the Doral Bank Transaction.

Basis of Presentation

During the year ended December 31, 2014, the Corporation recorded an out-of-period adjustment to correct an error in the amortization expense of the FDIC indemnification asset recorded during the years 2012 and 2013. The FDIC indemnity asset amortization for the year ended December 31, 2014, included a benefit of approximately $12.5 million to reverse the impact of accelerated amortization expense recorded during prior periods. This amount was recognized as expense over the remaining portion of the Loss Sharing Agreement that expired in the quarter ending June 30, 2015. After evaluating the quantitative and qualitative aspects of the error and the out-of-period adjustment to the Corporation’s financial results, management has determined that the misstatement and the out-of-period adjustment are not material to the 2012, 2013 and 2014 financial statements, respectively.

96

Note 2 – Summary of significant accounting policies

The accounting and financial reporting policies of Popular, Inc. and its subsidiaries (the “Corporation”) conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry.

The following is a description of the most significant of these policies:

Principles of consolidation

The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. In accordance with the consolidation guidance for variable interest entities, the Corporation would also consolidate any variable interest entities (“VIEs”) for which it has a controlling financial interest; and therefore, it is the primary beneficiary. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of financial condition.

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 recorded in other operating 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 received. Limited partnerships are accounted for by the equity method unless the investor’s interest is so “minor” that the limited partner may have virtually no influence over partnership operating and financial policies.

Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements.

Discontinued Operations

Components of the Corporation that will be disposed of by sale, where the Corporation does not have a significant continuing involvement in the operations after the disposal, are accounted for as discontinued operations. The results of operations of the discontinued operations exclude allocations of corporate overhead. Refer to Note 4 - Discontinued Operations, for additional information on the discontinued operations.

Business combinations

Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date are measured at their fair values as of the acquisition date. The acquisition date is the date the acquirer obtains control. Also, assets or liabilities arising from noncontractual contingencies are measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability. Acquisition-related restructuring costs that do not meet certain criteria of exit or disposal activities are expensed as incurred. Transaction costs are expensed as incurred. Changes in income tax valuation allowances for acquired deferred tax assets are recognized in earnings subsequent to the measurement period as an adjustment to income tax expense. Contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value of the contingent consideration are recognized in earnings unless the arrangement is a hedging instrument for which changes are initially recognized in other comprehensive income.

The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Doral Bank Transaction, completed during the year ended December 31, 2015, constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Codification (“ASC”) Topic 805 “Business Combinations”.

During the fourth quarter of 2015, the Corporation early adopted ASU 2015-16 “Business Combination”. Accordingly, adjustments to the initial fair value estimates identified during the measurement period are being recognized in the reporting period in which the adjustment amounts are determined. Refer to Note 5 to the consolidated financial statements for the related disclosures in connection with the Doral Bank Transaction.

Use of estimates in the preparation of financial statements

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

97

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 identical assets or liabilities in 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.

The guidance in ASC Subtopic 820-10 also addresses measuring fair value in situations where markets are inactive and transactions are not orderly. Transactions or quoted prices for assets and liabilities may not be determinative of fair value when transactions are not orderly, and thus, may require adjustments to estimate fair value. Price quotes based on transactions that are not orderly should be given little, if any, weight in measuring fair value. Price quotes based on transactions that are orderly shall be considered in determining fair value, and the weight given is based on facts and circumstances. If sufficient information is not available to determine if price quotes are based on orderly transactions, less weight should be given to the price quote relative to other transactions that are known to be orderly.

Covered assets

Assets subject to loss sharing agreements with the FDIC, including certain loans and other real estate properties, are labeled “covered” on the consolidated statements of financial condition and throughout the notes to the consolidated financial statements. Loans acquired in the Westernbank FDIC-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 unusual event that could not have been reasonably anticipated has occurred. An investment in debt securities is considered impaired if the fair value of the investment is less than its amortized cost. For other-than-temporary impairments the Corporation assesses if it has both the intent and the ability to hold the security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. For other-than-temporary impairment not related to a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) for 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.

• Debt and equity securities (equity securities with readily available fair value) not classified as either securities held-to-maturity or trading securities, and which have a readily available fair value, are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income or loss. The specific identification method is used to determine realized gains and losses on securities available-for-sale, which are included in net gains or losses on sale and valuation adjustment of investment securities in the consolidated statements of operations. Declines in the value of debt and equity securities that are considered other-than-temporary reduce the value of the asset, and the estimated loss is recorded in non-interest income. For debt securities, the Corporation assesses whether (a) it has the intent to sell the debt security, or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an other-than-temporary impairment on the security is recognized. In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the impairment is separated into (a) the amount of the

98

total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in the statement of operations. The amount of the total impairment related to all other factors is recognized in other comprehensive loss. The other-than-temporary impairment analyses for both debt and equity securities are performed on a quarterly basis.

• 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 realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other-than-temporary, if any, on securities available-for-sale, held-to-maturity and other investment securities are determined using the specific identification method and are reported separately in the consolidated statements of operations. Purchases and sales of securities are recognized on a trade date basis.

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 same period(s) that the hedged transaction impacts 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.

Prior to entering a hedge transaction, the Corporation formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes 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 the hedged item. Hedge accounting is 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.

For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.

The fair value of derivative instruments considers the risk of non-performance by the counterparty or the Corporation, as applicable.

The Corporation obtains or pledges collateral in connection with its derivative activities when applicable under the agreement.

Loans

Loans are classified as loans held-in-portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable future is a management judgment which is determined based upon the type of loan, business strategies, current market conditions, balance sheet management and liquidity needs. Management’s view of the foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from held-in-portfolio into held-for-sale. Due to changing market conditions or other strategic initiatives, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held-for-sale may be reclassified into held-in-portfolio. Loans transferred between loans held-for-sale and held-in-portfolio classifications are recorded at the lower of cost or fair value at the date of transfer.

Purchased loans are accounted at fair 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.

99

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 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 interest income on commercial 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 recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due. The Corporation discontinues the recognition of interest on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 15-months delinquent as to principal or interest. The principal repayment on these loans is insured. Recognition of interest income on closed-end consumer loans and home equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Closed-end consumer loans and leases are charged-off when they are 120 days in arrears. Open-end (revolving credit) consumer loans are charged-off when 180 days in arrears. Commercial and consumer overdrafts are generally charged-off no later than 60 days past their due date.

Purchased impaired loans accounted for under ASC Subtopic 310-30 are not considered non-performing and continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 are recorded only to the extent that losses exceed the non-accretable difference established with purchase accounting.

A loan classified as a troubled debt restructuring (“TDR”) is typically in non-accrual status at the time of the modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.

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.

100

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 310-30 to all loans acquired in Westernbank FDIC-assisted transaction (including loans that do not meet scope of ASC Subtopic 310-30), except for credit cards and revolving lines of credit that were expressly scoped out from the application of this guidance since they continued to have revolving privileges after acquisition. Management used its judgment in evaluating factors impacting expected cash flows and probable loss assumptions, including the quality of the loan portfolio, portfolio concentrations, distressed economic conditions, quality of underwriting standards of the acquired institution, reductions in collateral real estate values, among other considerations that could also impact the expected cash inflows on the loans.

Loans accounted for under ASC Subtopic 310-30 represent loans showing evidence of credit deterioration and that it is probable, at the date of acquisition, that the Corporation would not collect all contractually required principal and interest payments. Generally, acquired loans that meet the definition for nonaccrual status fall within the Corporation’s definition of impaired loans under ASC Subtopic 310-30. Also, based on the fair value determined for the acquired portfolio, acquired loans that did not meet the definition of nonaccrual status also resulted in the recognition of a significant discount attributable to credit quality. Accordingly, an election was made by the Corporation to apply the accretable yield method (expected cash flow model of ASC Subtopic 310-30), as a loan with credit deterioration and impairment, instead of the standard loan discount accretion guidance of ASC Subtopic 310-20, for the loans acquired in the Westernbank FDIC-assisted transaction. These loans are disclosed as a loan that was acquired with credit deterioration and impairment.

Loans acquired as part of the Doral Bank FDIC-assisted transaction

Certain residential mortgage loans and commercial loans acquired as part of the Doral Bank Transaction were considered impaired. Accordingly, the Corporation applied the guidance of ASC Subtopic 310-30. Refer to Note 10 to the consolidated financial statements for additional information with respect to the loans acquired as part of the Doral Bank Transaction that were considered impaired.

Under ASC Subtopic 310-30, the loans acquired from the FDIC were aggregated into pools based on loans that had common risk characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Characteristics considered in pooling loans in the FDIC-assisted transaction included loan type, interest rate type, accruing status, amortization type, rate index and source type. Once the pools are defined, the Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset.

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 the pool is reasonably estimable. The 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. 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 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.

Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses 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.

101

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30 by analogy, by evaluating decreases in expected cash flows after the acquisition date.

For a detailed description of the principal factors used to determine the general reserves of the allowance for loan losses and for the principal enhancements Management made to its methodology, refer to Note 11.

According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual terms of 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 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 thus evaluated for impairment. Commercial and construction loans that originally met the Corporation’s threshold for impairment identification in a prior period, but due to charge-offs or payments are currently below the $1 million threshold and are still 90 days past due, except for TDRs, are accounted for under the Corporation’s general reserve methodology. Although the accounting codification guidance for specific impairment of a loan excludes large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (e.g. mortgage and consumer loans), it specifically requires that loan modifications considered troubled debt restructurings (“TDRs”) be analyzed under its provisions. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan is collateral dependent. The fair value of the collateral is generally based on appraisals. Appraisals may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the impairment measurement date. The Corporation requests updated appraisal reports from pre-approved appraisers for loans that are considered impaired following the Corporation’s reappraisals policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the borrower. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired.

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, including interest accrued at the original contract rate. If the payment of principal is dependent on the value of collateral, the current value of the collateral is taken into consideration in determining the amount of principal to be collected; therefore, all factors that changed are considered to determine if a concession was granted, including the change in the fair value of the underlying collateral that may be used to repay the loan. Classification of loan modifications as TDRs involves a degree of judgment. Indicators that the debtor is experiencing financial difficulties which are considered include: (i) the borrower is currently in default on any of its debt or it is probable that the borrower would be in payment default on any of its debt in the foreseeable future without the modification; (ii) the borrower has declared or is in the process of declaring bankruptcy; (iii) there is significant doubt as to whether the borrower will continue to be a going concern; (iv) the borrower has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; (v) based on estimates and projections that only encompass the borrower’s current business capabilities, it is forecasted that the entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through 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 reasonable period (at least twelve months of sustained performance) and the loan yields a market rate.

102

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 11 to the consolidated financial statements for additional qualitative information on TDRs and the Corporation’s determination of the allowance for loan losses.

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 share indemnification asset was initially recorded at fair value. Fair value was estimated using projected cash flows related to the loss sharing agreement.

The FDIC loss share indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold.

The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to loss share protection. 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, 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.

The amortization or accretion due to discounting of the loss share asset and changes in expected loss sharing reimbursements is included in non-interest income, particularly in the category of FDIC loss share (expense) income.

The true-up payment obligation associated with the loss share agreements is accounted for at fair value in accordance with ASC Section 805-30-25-6 as it is considered contingent consideration. The true-up payment obligation is included as part of other liabilities in the consolidated statements of financial condition. Any changes in the carrying value of the obligation are included in the category of FDIC loss share income (expense) in the consolidated statements of operations.

Refer to Note 12 for additional information on the FDIC loss share indemnification asset and true-up payment obligation.

Transfers and servicing of financial assets

The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the Corporation surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in ASC Topic 860 are met: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of these criteria, the 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 assets sold; recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale.

103

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 factors concerning the nature and extent of the 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 loan. Once the Corporation has 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.

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 loans originated by others. Whenever 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 the servicer 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.

All separately recognized servicing assets are initially recognized at fair value. For subsequent measurement of servicing rights, the Corporation has elected the fair value method for mortgage loans servicing rights (“MSRs”). Under the fair value measurement method, MSRs are recorded at fair value each reporting period, and changes in fair value are reported in mortgage banking activities in the consolidated statement of operations. Contractual servicing fees including ancillary income and late fees, as well as fair value adjustments, and impairment losses, if any, are reported in mortgage banking activities in the consolidated statement of operations. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

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.

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 interest cost incurred during the period required to substantially complete the asset. The interest rate for 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.

The Corporation has operating lease arrangements primarily associated with the rental of premises to support its branch network or for general office space. Certain of these arrangements are non-cancellable and provide for rent escalations and renewal options. Rent expense on non-cancellable operating leases with scheduled rent increases are recognized on a straight-line basis over the lease term.

104

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 loan losses. Subsequent to foreclosure, any losses in the carrying value arising from periodic re-evaluations of the 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 greater than $1 million is updated annually and if lower than $1 million it is updated every two years. For residential mortgage properties, the Corporation requests appraisals, every 12 to 18 months.

Appraisals may be adjusted due to age, collateral inspections, property profiles, or general market conditions. The adjustments applied are based upon internal information such as other appraisals for the type of properties and/or loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions.

Goodwill and other intangible assets

Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or circumstances indicate possible impairment using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, which include market price multiples of comparable companies and the discounted cash flow analysis. Goodwill impairment losses are recorded as part of operating expenses in the consolidated statement of operations.

Other intangible assets deemed to have an indefinite life are not amortized, but are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset. In determining that an intangible asset has an indefinite life, the Corporation considers expected cash inflows and legal, regulatory, contractual, competitive, economic and other factors, which could limit the intangible asset’s useful life.

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.

It is the Corporation’s policy to take possession of securities purchased under agreements to resell. However, the counterparties to such agreements maintain effective control over such securities, and accordingly 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.

105

The Corporation may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.

Software

Capitalized software is stated at cost, 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, is charged to operations over the estimated useful life of the software. Capitalized software is included in “Other assets” in the consolidated statement of financial condition.

Guarantees, including indirect guarantees of indebtedness of others

The Corporation, as a guarantor, recognizes at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Refer to Note 27 to the consolidated financial statements for further disclosures on guarantees.

Treasury stock

Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the consolidated statements of financial condition. At the date of retirement or subsequent reissue, the treasury stock account is reduced by the cost of such stock. At retirement, the excess of the cost of the treasury stock over its par value is recorded entirely to surplus. At reissuance, the difference between the consideration received upon issuance and the specific cost is charged or credited to surplus.

Income Recognition – Insurance agency business

Commissions and fees are recognized when related policies are effective. Additional premiums and rate adjustments are recorded as they occur. Contingent commissions are recorded on an accrual basis when the amount to be received is notified by the insurance company. Commission income from advance business is deferred. An allowance is created for expected adjustments to commissions earned relating to policy cancellations.

Income Recognition – Investment banking revenues and commissions

Investment banking revenue is recorded as follows: underwriting fees at the time the underwriting is completed and income is reasonably determinable; corporate finance advisory fees as earned, according to the terms of the specific contracts; and sales commissions on a trade-date basis. Commission income and expenses related to customers’ securities transactions are recorded on a trade-date basis.

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 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, except for highly inflationary environments in which the effects are included in other operating expenses.

The Corporation holds interests in Centro Financiero BHD León, S.A. (“BHD León”) in the Dominican Republic. The business of BHD León is mainly conducted in their country’s foreign currency. The resulting foreign currency translation adjustment from these operations is reported in accumulated other comprehensive loss. During 2014, BHD León entered into a merger agreement with Grupo Financiero León, as part of this transaction BHD León issued additional stock which had a dilutive effect of Popular’s equity participation. Therefore, a pro rata portion of the accumulated translation adjustment component of the equity attributable to this equity method investment was recognized as a loss through earnings.

Refer to the disclosure of accumulated other comprehensive loss included in Note 26.

Income taxes

The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities 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.

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

106

future reversal of existing temporary differences, the future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. In making such assessments, significant weight is given to evidence that can be objectively verified.

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.

Positions taken in the Corporation’s tax returns may be subject to challenge by the taxing authorities upon 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. Such tax positions are both initially 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.

The Corporation accounts for the taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues).

Income tax expense or benefit for the year is allocated among continuing operations, discontinued operations, and other comprehensive income, as applicable. The amount allocated to continuing operations is the tax effect of the pre-tax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of (a) changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years, (b) changes in tax laws or rates, (c) changes in tax status, and (d) tax-deductible dividends paid to shareholders, subject to certain exceptions.

Employees’ retirement and other postretirement benefit plans

Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses.

The funding policy is to contribute to the plan, as necessary, to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year.

The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service.

The guidance for compensation retirement benefits of ASC Topic 715 requires the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the statement of financial condition.

Stock-based compensation

The Corporation opted to use the fair value method of recording stock-based compensation as described in the guidance for employee share plans in ASC Subtopic 718-50.

Comprehensive income (loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The presentation of comprehensive income (loss) is included in separate consolidated statements of comprehensive income (loss).

Net income (loss) per common share

Basic income (loss) per common share is computed by dividing net income (loss) adjusted for preferred stock dividends, including undeclared or unpaid dividends if cumulative, and charges or credits related to the extinguishment of preferred stock or induced conversions of preferred stock, by the weighted average number of common shares outstanding during the year. Diluted income per common share take into consideration the weighted average common shares adjusted for the effect of stock options, restricted stock, performance shares and warrants, if any, using the treasury stock method.

Statement of cash flows

For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks.

107

Note 3 – New accounting pronouncements

Recently Issued Accounting Standards Updates

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

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

The 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 adoption of this guidance will have on its consolidated statements of financial condition and results of operations.

FASB Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment

The FASB issued ASU 2017-04 in January 2017, which simplifies the accounting for goodwill impairment by removing Step 2 of the two-step goodwill impairment test under the current guidance. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.

The amendments of this Update, which should be applied on a prospective basis, are effective for annual or any interim goodwill impairment 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.

The Corporation performs a goodwill impairment test at least on an annual basis. For the annual test as of July 31, 2016, BPNA failed Step 1, since its carrying amount exceeded its fair value. However, no impairment charge was recorded since BPNA passed Step 2 of the impairment test. Refer to additional information on Note 19. Upon adoption of this standard, if the carrying amount of any of the reporting units exceeds its fair value, the Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill.

FASB Accounting Standards Update (“ASU”) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments- Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)

The FASB issued ASU 2017-03 in January 2017, which incorporates into the Accounting Standards Codification recent SEC guidance about certain investments in qualified affordable housing and disclosing under SEC SAB Topic 11.M the effect on financial statements of adopting the revenue, leases and credit losses standards.

The Corporation has considered the guidance in this Update related to the disclosure on the effect on financial statements of adopting the revenue, leases and credit losses standards in the preparation of the consolidated financial statements for the year ended December 31, 2016.

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

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

108

The amendments of this Update, which should be applied on a prospective basis, are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted.

The Corporation will consider this guidance in any business combinations completed after the effective date.

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

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

The amendments of this Update, which should be applied using a retrospective transition method to each period presented, are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted.

The adoption of this standard will change the presentation in the consolidated statements of cash flows.

FASB Accounting Standards Update (“ASU”) 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control

The FASB issued ASU 2016-17 in October 2016, which changes how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control. Under the new guidance, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted, including adoption in an interim period.

Currently, the Corporation does not have indirect interests held through related parties that are under common control. The Corporation will continue to evaluate transactions as they arise in the future that may be impacted by this guidance.

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

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

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.

The Corporation is currently evaluating the impact that the adoption of this guidance will have on its consolidated statements of financial condition, results of operations, and presentation and disclosures.

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

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

109

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 reasonable and supportable forecasts that affect the collectability of financial assets. ASU 2016-13 also revises the approach to recognizing credit losses for available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, ASU 2016-13 provides that the initial allowance for credit losses on purchased credit impaired financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense.

ASU 2016-13 also expands disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as of January 1, 2019.

The Corporation is currently evaluating the impact that the adoption of this guidance will have on its consolidated statements of financial condition, results of operations, and presentation and disclosures. The Corporation expects an increase in its allowance for loan and lease losses due to the consideration of lifetime credit losses as part of the calculation.

FASB Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

The FASB issued ASU 2016-09 in March 2016 which simplifies multiple aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies as an income tax benefit or expense in the income statement and classification in the statement of cash flows as an operating activity, allowing entities to elect as an accounting policy to account for forfeitures when they occur, permitting entities to withhold up to the maximum individual statutory rate without classifying the awards as a liability, and requiring that the cash paid to satisfy the statutory income tax withholding obligation be classified as a financing activity.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition, results of operations, cash flows or presentation and disclosures.

FASB Accounting Standards Update (“ASU”) 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

The FASB issued ASU 2016-07 in March 2016, which eliminates the requirement to retroactively adopt the equity method of accounting. Therefore, as of the date the investment becomes qualified for equity method accounting, an entity should add the cost

110

of acquiring the additional interest in the investee to the current basis of its previously held interest. For available-for-sale securities, an entity should recognize through earnings the unrealized holding gains/losses in accumulated other comprehensive income/loss as of that date.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

The FASB issued ASU 2016-06 in March 2016, which clarifies that in assessing whether an embedded contingent put or call option is not clearly and closely related to the debt instrument, which is part of the assessment made to determine whether an embedded derivative must be bifurcated from the host contract, an entity is required to perform only the four step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable. It does not have to separately assess whether the event that triggers its ability to exercise the contingent option itself is indexed only to interest rates and credit risk.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

The FASB issued ASU 2016-05 in March 2016, which clarifies that a novation, or a change in the counterparty to the derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship, and therefore discontinuance of the application of hedge accounting, provided that all other hedge accounting criteria continue to be met.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

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

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

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

111

The ASU is expected to impact the Corporation’s consolidated financial statements since the Corporation has operating and land lease arrangements for which it is the lessee. 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, that is, the satisfaction of performance obligations, to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five step process is defined to achieve this core principle. The new guidance also requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The amendments of these Updates are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

The Corporation expects to elect the modified retrospective approach with the cumulative effect of initially adopting these Updates recognized in opening retained earnings at the date of adoption.

The Corporation’s main sources of revenues are related to financial instruments and are scoped out of the ASUs. The Corporation is evaluating the impact on fees and other non-interest revenues and does not expect the recognition of these to be significantly impacted by the adoption of these ASUs in light of the timing of when the performance obligations are fulfilled and the related revenues are currently being recognized. The Corporation does not expect the new revenue recognition provisions to have a material impact on its consolidated financial statements.

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

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

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.

Currently, the Corporation does not have any financial liabilities under the fair value option. In addition, the Corporation does not expect to be significantly impacted by the changes in the accounting for equity investments under the revised guidance.

112

Note 4 – Discontinued operations and restructuring plan

During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations and relocated certain back office operations to Puerto Rico and New York.

As defined in ASC 805-10-55, the regional operations sold constituted a business, and for financial reporting purposes, the results of the discontinued operations are presented as “Assets / Liabilities from discontinued operations” in the consolidated statement of condition and “Income (loss) from discontinued operations, net of tax” in the consolidated statement of operations.

As of December 31, 2016, there were no assets and liabilities held within the discontinued operations. The liabilities held at December 31, 2015 of $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale, were reversed during the quarter ended December 31, 2016, as a result of the expiration of the two-year period indemnification provision.

Net income from the discontinued operations amounted to $1.1 million for the year ended December 31, 2016 and $1.3 million for the year ended December 31, 2015.

Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which was completed by December 31, 2015, for which the Corporation incurred restructuring charges of $45.1 million, of which approximately $26.7 million were incurred in 2014 and $18.4 million in 2015. Restructuring charges were mostly comprised of personnel costs, which amounted to $17.5 million for 2014 and $12.9 million for 2015.

The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:

	Years ended December 31,
(In thousands)	2016			2015
Beginning balance	$	620		$	13,536
Charges expensed during the period		—			7,840
Payments made during the period		(492	)		(20,756	)
Ending balance	$	128		$	620

113

Note 5 – Business combination

On February 27, 2015, BPPR, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank from the FDIC, as receiver. Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. There is no loss-sharing arrangement with the FDIC on the acquired assets.

The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the Corporation as of February 27, 2015.

	Book value prior to
	purchase accounting		Fair value			Additional		As recorded by
(In thousands)	adjustments		adjustments			consideration[1]		Popular, Inc.
Assets:
Cash and due from banks	$	339,633	$	—		$	—	$	339,633
Investment in available-for-sale securities		172,706		—			—		172,706
Investments in FHLB stock		30,785		—			—		30,785
Loans		1,679,792		(165,925	)		—		1,513,867
Accrued income receivable		7,808		—			—		7,808
Receivable from the FDIC		—		—			480,137		480,137
Core deposit intangible		23,572		(10,762	)		—		12,810
Other assets		67,676		7,569			—		75,245
Total assets	$	2,321,972	$	(169,118	)	$	480,137	$	2,632,991
Liabilities:
Deposits	$	2,193,404	$	9,987		$	—	$	2,203,391
Advances from the Federal Home Loan Bank		542,000		5,187			—		547,187
Other liabilities		50,728		(511	)		—		50,217
Total liabilities	$	2,786,132	$	14,663		$	—	$	2,800,795
Excess of liabilities assumed over assets acquired	$	464,160
Aggregate fair value adjustments			$	(183,781	)
Additional consideration						$	480,137
Goodwill on acquisition								$	167,804

[1] The additional consideration represents the cash received from the FDIC for the difference between the net liabilities assumed and the net premium paid on the transaction.

In accordance with ASC Topic 805, the fair values assigned to the assets acquired and liabilities assumed are subject to refinement up to one year after the closing date of the acquisition as new information relative to closing date fair values become available, and thus the recognized goodwill may increase or decrease. During the second and third quarters of 2015, retrospective adjustments were made to the estimated fair values of certain assets acquired and liabilities assumed as part of the Doral Bank Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The retrospective adjustments resulted in a decrease of $2.1 million to the initial fair value estimate of the mortgage servicing rights, a decrease in other liabilities assumed of $0.5 million and, an increase of $2.6 million in the receivable from the FDIC related to the acquisition cost of deposits, all of which were adjusted against goodwill.

During the fourth quarter of 2015, the Corporation early adopted ASU 2015-16 “Business Combination”. Accordingly, adjustments to the initial fair value estimates identified during the measurement period were recognized in the reporting period in which the adjustment amounts were determined. Pursuant to ASU 2015-16, adjustments were made effective in the fourth quarter of 2015 to the estimated fair values of assets and liabilities assumed with the Doral Bank Transaction to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements.

114

During the quarter ended March 31, 2016, the Corporation recorded adjustments to its initial fair value estimates in connection with the Doral Bank Transaction. As a result, the discount on the loans increased by $4.7 million with a corresponding increase to goodwill.

The following table presents the principal changes in fair value and the revised amounts recorded during the measurement period.

(In thousands)	February 27, 2015 As recasted[a]		February 27, 2015 As previously reported[b]		Change
Assets:
Loans	$	1,513,867	$	1,665,756	$	(151,889	)
Goodwill		167,804		41,633		126,171
Core deposit intangible		12,810		23,572		(10,762	)
Receivable from the FDIC		480,137		441,721		38,416
Other assets		626,177		626,177		—
Total assets	$	2,800,795	$	2,798,859	$	1,936
Liabilities:
Deposits	$	2,203,391	$	2,201,455	$	1,936
Advances from the Federal Home Loan Bank		547,187		547,187		—
Other liabilities		50,217		50,217		—
Total liabilities	$	2,800,795	$	2,798,859	$	1,936

[a] Amounts reported include retrospective adjustments during the measurement period, in accordance with U.S. GAAP, related to the Doral Bank Transaction.

[b] Amounts are presented as previously reported as of September 30, 2015.

115

Note 6 - Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 1.2 billion at December 31, 2016 (December 31, 2015 - $ 1.1 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At December 31, 2016, the Corporation held $31 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2015 - $44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

116

Note 7 - Securities purchased under agreements to resell

The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. The Corporation is permitted by contract to repledge the securities, and has agreed to resell to the counterparties the same or substantially similar securities at the maturity of the agreements.

The fair value of the collateral securities held by the Corporation on these transactions at December 31, was as follows:

(In thousands)	2016		2015
Not repledged	$	27,388	$	111,545
Total	$	27,388	$	111,545

The repledged securities were used as underlying securities for repurchase agreement transactions.

117

Note 8 – Investment securities available-for-sale

The following table presents the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2016 and 2015.

	At December 31, 2016
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
U.S. Treasury securities
Within 1 year	$	844,002	$	1,254	$	28	$	845,228		1.00	%
After 1 to 5 years		1,300,729		214		9,551		1,291,392		1.11
Total U.S. Treasury securities		2,144,731		1,468		9,579		2,136,620		1.06
Obligations of U.S. Government sponsored entities
Within 1 year		100,050		102		—		100,152		0.98
After 1 to 5 years		613,293		710		2,505		611,498		1.38
After 5 to 10 years		200		—		—		200		5.64
Total obligations of U.S. Government sponsored entities		713,543		812		2,505		711,850		1.32
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,419		—		161		6,258		2.89
After 5 to 10 years		5,000		—		1,550		3,450		3.80
After 10 years		17,605		—		4,542		13,063		7.09
Total obligations of Puerto Rico, States and political subdivisions		29,024		—		6,253		22,771		5.60
Collateralized mortgage obligations - federal agencies
Within 1 year		13		—		—		13		1.23
After 1 to 5 years		18,524		429		28		18,925		2.89
After 5 to 10 years		39,178		428		61		39,545		2.68
After 10 years		1,180,686		6,313		23,956		1,163,043		1.99
Total collateralized mortgage obligations - federal agencies		1,238,401		7,170		24,045		1,221,526		2.02
Mortgage-backed securities
Within 1 year		55		1		—		56		4.76
After 1 to 5 years		19,960		537		43		20,454		3.86
After 5 to 10 years		317,185		3,701		1,721		319,165		2.29
After 10 years		3,805,675		28,772		68,790		3,765,657		2.47
Total mortgage-backed securities		4,142,875		33,011		70,554		4,105,332		2.46
Equity securities (without contractual maturity)		1,246		876		—		2,122		7.94
Other
Within 1 year		8,539		11		—		8,550		1.78
After 5 to 10 years		1,004		31		—		1,035		3.62
Total other		9,543		42		—		9,585		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.

118

	At December 31, 2015
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
U.S. Treasury securities
Within 1 year	$	24,861	$	335	$	—	$	25,196		4.31	%
After 1 to 5 years		1,149,807		365		1,999		1,148,173		1.03
After 5 to 10 years		9,937		22		—		9,959		1.99
Total U.S. Treasury securities		1,184,605		722		1,999		1,183,328		1.11
Obligations of U.S. Government sponsored entities
After 1 to 5 years		919,819		1,337		4,808		916,348		1.33
After 5 to 10 years		250		1		—		251		5.64
After 10 years		23,000		42		—		23,042		3.22
Total obligations of U.S. Government sponsored entities		943,069		1,380		4,808		939,641		1.38
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		7,227		—		199		7,028		3.94
After 5 to 10 years		5,925		—		2,200		3,725		4.02
After 10 years		18,585		—		6,979		11,606		6.99
Total obligations of Puerto Rico, States and political subdivisions		31,737		—		9,378		22,359		5.74
Collateralized mortgage obligations - federal agencies
After 1 to 5 years		21,446		594		37		22,003		2.81
After 5 to 10 years		44,585		733		—		45,318		2.85
After 10 years		1,518,662		8,137		33,283		1,493,516		1.99
Total collateralized mortgage obligations - federal agencies		1,584,693		9,464		33,320		1,560,837		2.02
Mortgage-backed securities
After 1 to 5 years		22,015		987		8		22,994		4.65
After 5 to 10 years		256,097		4,866		1,197		259,766		2.51
After 10 years		2,039,217		34,839		12,620		2,061,436		2.83
Total mortgage-backed securities		2,317,329		40,692		13,825		2,344,196		2.81
Equity securities (without contractual maturity)		1,350		1,053		5		2,398		7.92
Other
After 1 to 5 years		8,911		—		28		8,883		1.71
After 5 to 10 years		1,311		39		—		1,350		3.62
Total other		10,222		39		28		10,233		1.95
Total investment securities available-for-sale[1]	$	6,073,005	$	53,350	$	63,363	$	6,062,992		2.07	%

[1] Includes $2.4 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $1.5 billion serve as collateral for public funds.

The weighted average yield on investment securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

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.

119

The following table presents the aggregate amortized cost and fair value of investment securities available-for-sale at December 31, 2016 by contractual maturity.

(In thousands)	Amortized cost		Fair value
Within 1 year	$	952,659	$	953,999
After 1 to 5 years		1,958,925		1,948,527
After 5 to 10 years		362,567		363,395
After 10 years		5,003,966		4,941,763
Total		8,278,117		8,207,684
Equity securities		1,246		2,122
Total investment securities available-for-sale	$	8,279,363	$	8,209,806

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. During the year ended December 31, 2015, the Corporation sold U.S. agency securities and obligations from the Puerto Rico government and its political subdivisions. The proceeds from these sales were $ 96.8 million. Gross realized gains and losses on the sale of investment securities available-for-sale, for the years ended December 31, 2016, 2015 and 2014 were as follows:

	Years ended December 31,
(In thousands)	2016		2015			2014
Gross realized gains	$	378	$	226		$	4,461
Gross realized losses		—		(85	)		(5,331	)
Net realized gains (losses) on sale of investment securities available-for-sale	$	378	$	141		$	(870	)

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016, and 2015.

	At December 31, 2016
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. Treasury securities	$	1,162,110	$	9,579	$	—	$	—	$	1,162,110	$	9,579
Obligations of U.S. Government sponsored entities		430,273		2,426		3,126		79		433,399		2,505
Obligations of Puerto Rico, States and political subdivisions		6,258		161		16,512		6,092		22,770		6,253
Collateralized mortgage obligations - federal agencies		505,503		8,112		339,236		15,933		844,739		24,045
Mortgage-backed securities		3,537,606		70,173		15,113		381		3,552,719		70,554
Total investment securities available-for-sale in an unrealized loss position	$	5,641,750	$	90,451	$	373,987	$	22,485	$	6,015,737	$	112,936

120

	At December 31, 2015
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
U.S. Treasury securities	$	589,689	$	1,999	$	—	$	—	$	589,689	$	1,999
Obligations of U.S. Government sponsored entities		390,319		2,128		181,744		2,680		572,063		4,808
Obligations of Puerto Rico, States and political subdivisions		884		164		19,490		9,214		20,374		9,378
Collateralized mortgage obligations - federal agencies		331,501		4,446		814,195		28,874		1,145,696		33,320
Mortgage-backed securities		1,641,663		12,992		22,362		833		1,664,025		13,825
Equity securities		45		5		—		—		45		5
Other		8,883		28		—		—		8,883		28
Total investment securities available-for-sale in an unrealized loss position	$	2,962,984	$	21,762	$	1,037,791	$	41,601	$	4,000,775	$	63,363

As of December 31, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $113 million, driven by Mortgage backed securities and Collateralized mortgage obligations.

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

At December 31, 2016, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. During the quarter ended June 30, 2016 the Corporation recognized an other-than-temporary impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions, which at June 30, 2016 was rated Caa2 and CC by Moody’s and S&P, respectively. Puerto Rico’s fiscal and economic situation, together with, among other factors, the recent moratorium declared on the payment of principal and interest on obligations for certain Puerto Rico government securities, including those issued or guaranteed by the Commonwealth, led management to conclude that the unrealized losses on this security was other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by this security was attributed to estimated credit losses. Accordingly, during the quarter ended June 30, 2016 the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to this specific security. The security, for which an other-than-temporary impairment was recorded, was sold during the fourth quarter of 2016, resulting in a realized gain of $30 thousand. The proceeds from this sale were $882 thousand.

During the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015, these securities were rated Caa2 and CCC- by Moody’s and S&P, respectively. Notwithstanding the payment priorities established by the Puerto Rico Constitution for these securities, Puerto Rico’s fiscal and economic situation, together with the Government’s announcements regarding its ability to pay its debt and its intention to pursue a comprehensive debt restructuring, led management to conclude that the unrealized losses on these government securities was attributed to estimated credit losses. Accordingly, the other-than temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to these specific securities. These securities, for which an other-than-temporary impairment was recorded, were sold during the third quarter of 2015, resulting in a realized gain of $0.1 million. The proceeds from this sale were $26.8 million.

121

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This 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.

	2016				2015
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,255,844	$	3,211,443	$	2,649,860	$	2,633,899
Freddie Mac		1,381,197		1,361,933		1,088,691		1,079,956

122

Note 9 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2016 and 2015.

	At December 31, 2016
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,105	$	—	$	1,240	$	1,865		5.90	%
After 1 to 5 years		14,540		—		5,957		8,583		6.02
After 5 to 10 years		18,635		—		7,766		10,869		6.20
After 10 years		59,747		1,368		8,892		52,223		1.91
Total obligations of Puerto Rico, States and political subdivisions		96,027		1,368		23,855		73,540		3.49
Collateralized mortgage obligations - federal agencies
After 5 to 10 years		74		4		—		78		5.45
Total collateralized mortgage obligations - federal agencies		74		4		—		78		5.45
Other
Within 1 year		1,000		—		3		997		1.65
After 1 to 5 years		1,000		—		39		961		2.44
Total other		2,000		—		42		1,958		2.05
Total investment securities held-to-maturity[1]	$	98,101	$	1,372	$	23,897	$	75,576		3.46	%

[1] Includes $53.1 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

	At December 31, 2015
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	2,920	$	—	$	291	$	2,629		5.90	%
After 1 to 5 years		13,655		—		5,015		8,640		5.98
After 5 to 10 years		20,020		—		8,020		12,000		6.14
After 10 years		62,222		3,604		8,280		57,546		2.08
Total obligations of Puerto Rico, States and political subdivisions		98,817		3,604		21,606		80,815		3.55
Collateralized mortgage obligations - federal agencies
After 5 to 10 years		86		5		—		91		5.45
Total collateralized mortgage obligations - federal agencies		86		5		—		91		5.45
Other
After 1 to 5 years		2,000		—		17		1,983		1.81
Total other		2,000		—		17		1,983		1.81
Total investment securities held-to-maturity[1]	$	100,903	$	3,609	$	21,623	$	82,889		3.52	%

[1] Includes $57.2 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

123

The following table presents the aggregate amortized cost and fair value of investments securities held-to-maturity at December 31, 2016 by contractual maturity.

(In thousands)	Amortized cost		Fair value
Within 1 year	$	4,105	$	2,862
After 1 to 5 years		15,540		9,544
After 5 to 10 years		18,709		10,947
After 10 years		59,747		52,223
Total investment securities held-to-maturity	$	98,101	$	75,576

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016 and 2015:

	At December 31, 2016
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	31,294	$	1,702	$	30,947	$	22,153	$	62,241	$	23,855
Other		491		9		1,217		33		1,708		42
Total investment securities held-to-maturity in an unrealized loss position	$	31,785	$	1,711	$	32,164	$	22,186	$	63,949	$	23,897

	At December 31, 2015
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	33,334	$	21,606	$	33,334	$	21,606
Other		1,483		17		—		—		1,483		17
Total investment securities held-to-maturity in an unrealized loss position	$	1,483	$	17	$	33,334	$	21,606	$	34,817	$	21,623

As indicated in Note 8 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at December 31, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $53 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which a government insurance fund 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 was other-than-temporarily impaired at December 31, 2016. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

124

Note 10 – Loans

Loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential mortgage loans, as explained in Note 12.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to these consolidated financial statements.

During the year ended December 31, 2016, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $619 million, consumer loans of $164 million and commercial loans amounting to $51 million. Excluding the impact of the Doral Bank Transaction, during the year ended December 31, 2015, the Corporation recorded purchases of mortgage loans amounting to $588 million, consumer loans of $72 million and commercial loans of $55 million. Refer to Note 5 for information on loans acquired as part of the Doral Bank Transaction.

Excluding the bulk sale of Westernbank loans with a carrying value of approximately $100 million, the Corporation sold commercial and construction loans with a carrying value of approximately $47 million during the year ended December 31, 2016 (December 31, 2015 - $43 million). The Corporation performed whole-loan sales involving approximately $83 million of residential mortgage loans during the year ended December 31, 2016 (December 31, 2015 - $98 million). Also, during the year ended December 31, 2016, the Corporation securitized approximately $613 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $163 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $869 million and $219 million, respectively, during the year ended December 31, 2015.

Non-covered loans

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, by past due status at December 31, 2016 and 2015, including loans previously covered by the commercial FDIC loss sharing agreements.

125

December 31, 2016
Puerto Rico
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	232	$	—	$	664	$	896	$	173,644	$	174,540
Commercial real estate non-owner occupied		98,604		4,785		51,435		154,824		2,409,461		2,564,285
Commercial real estate owner occupied		12,967		5,014		112,997		130,978		1,660,497		1,791,475
Commercial and industrial		19,156		2,638		32,147		53,941		2,617,976		2,671,917
Construction		—		—		1,668		1,668		83,890		85,558
Mortgage		289,635		136,558		801,251		1,227,444		4,689,056		5,916,500
Leasing		6,619		1,356		3,062		11,037		691,856		702,893
Consumer:
Credit cards		11,646		8,752		18,725		39,123		1,061,484		1,100,607
Home equity lines of credit		—		65		185		250		8,101		8,351
Personal		12,148		7,918		20,686		40,752		1,109,425		1,150,177
Auto		32,441		7,217		12,320		51,978		774,614		826,592
Other		1,259		294		19,311		20,864		154,665		175,529
Total	$	484,707	$	174,597	$	1,074,451	$	1,733,755	$	15,434,669	$	17,168,424
December 31, 2016
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	5,952	$	—	$	206	$	6,158	$	1,058,138	$	1,064,296
Commercial real estate non-owner occupied		1,992		379		1,195		3,566		1,353,750		1,357,316
Commercial real estate owner occupied		2,116		540		472		3,128		240,617		243,745
Commercial and industrial		960		610		101,257		102,827		828,106		930,933
Construction		—		—		—		—		690,742		690,742
Mortgage		15,974		5,272		11,713		32,959		746,902		779,861
Legacy		833		346		3,337		4,516		40,777		45,293
Consumer:
Credit cards		8		28		30		66		92		158
Home equity lines of credit		2,908		1,055		4,762		8,725		243,450		252,175
Personal		2,547		1,675		1,864		6,086		234,521		240,607
Auto		—		—		—		—		9		9
Other		—		—		8		8		180		188
Total	$	33,290	$	9,905	$	124,844	$	168,039	$	5,437,284	$	5,605,323

126

December 31, 2016
Popular, Inc.
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.[1] [2]
Commercial multi-family	$	6,184	$	—	$	870	$	7,054	$	1,231,782	$	1,238,836
Commercial real estate non-owner occupied		100,596		5,164		52,630		158,390		3,763,211		3,921,601
Commercial real estate owner occupied		15,083		5,554		113,469		134,106		1,901,114		2,035,220
Commercial and industrial		20,116		3,248		133,404		156,768		3,446,082		3,602,850
Construction		—		—		1,668		1,668		774,632		776,300
Mortgage		305,609		141,830		812,964		1,260,403		5,435,958		6,696,361
Leasing		6,619		1,356		3,062		11,037		691,856		702,893
Legacy[3]		833		346		3,337		4,516		40,777		45,293
Consumer:
Credit cards		11,654		8,780		18,755		39,189		1,061,576		1,100,765
Home equity lines of credit		2,908		1,120		4,947		8,975		251,551		260,526
Personal		14,695		9,593		22,550		46,838		1,343,946		1,390,784
Auto		32,441		7,217		12,320		51,978		774,623		826,601
Other		1,259		294		19,319		20,872		154,845		175,717
Total	$	517,997	$	184,502	$	1,199,295	$	1,901,794	$	20,871,953	$	22,773,747

[1] Non-covered loans held-in-portfolio are net of $121 million in unearned income and exclude $89 million in loans held-for-sale.

[2] Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.5 billion were pledged at the FHLB as collateral for borrowings, $2.3 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.

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

December 31, 2015
Puerto Rico
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	459	$	217	$	1,316	$	1,992	$	130,154	$	132,146
Commercial real estate non-owner occupied		166,732		12,520		84,982		264,234		2,404,858		2,669,092
Commercial real estate owner occupied		14,245		5,624		138,778		158,647		1,750,597		1,909,244
Commercial and industrial		6,010		6,059		38,464		50,533		2,607,204		2,657,737
Construction		238		253		13,738		14,229		86,719		100,948
Mortgage		344,858		162,341		863,869		1,371,068		4,756,423		6,127,491
Leasing		7,844		1,630		3,009		12,483		615,167		627,650
Consumer:
Credit cards		11,078		9,414		19,098		39,590		1,088,755		1,128,345
Home equity lines of credit		186		292		394		872		9,816		10,688
Personal		13,756		7,889		22,625		44,270		1,158,565		1,202,835
Auto		33,554		7,500		11,640		52,694		763,256		815,950
Other		1,069		298		19,232		20,599		167,885		188,484
Total	$	600,029	$	214,037	$	1,217,145	$	2,031,211	$	15,539,399	$	17,570,610

127

December 31, 2015
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	33	$	253	$	—	$	286	$	693,647	$	693,933
Commercial real estate non-owner occupied		160		—		253		413		962,610		963,023
Commercial real estate owner occupied		1,490		429		221		2,140		200,204		202,344
Commercial and industrial		13,647		1,526		75,575		90,748		780,896		871,644
Construction		—		—		—		—		580,158		580,158
Mortgage		18,957		3,424		13,538		35,919		872,671		908,590
Legacy		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		327		134		437		898		13,037		13,935
Home equity lines of credit		3,149		1,114		4,176		8,439		296,045		304,484
Personal		1,836		690		1,240		3,766		168,860		172,626
Auto		—		—		6		6		22		28
Other		—		10		5		15		289		304
Total	$	40,759	$	8,242	$	99,100	$	148,101	$	4,627,404	$	4,775,505
December 31, 2015
Popular, Inc.
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.[1] [2]
Commercial multi-family	$	492	$	470	$	1,316	$	2,278	$	823,801	$	826,079
Commercial real estate non-owner occupied		166,892		12,520		85,235		264,647		3,367,468		3,632,115
Commercial real estate owner occupied		15,735		6,053		138,999		160,787		1,950,801		2,111,588
Commercial and industrial		19,657		7,585		114,039		141,281		3,388,100		3,529,381
Construction		238		253		13,738		14,229		666,877		681,106
Mortgage		363,815		165,765		877,407		1,406,987		5,629,094		7,036,081
Leasing		7,844		1,630		3,009		12,483		615,167		627,650
Legacy[3]		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		11,405		9,548		19,535		40,488		1,101,792		1,142,280
Home equity lines of credit		3,335		1,406		4,570		9,311		305,861		315,172
Personal		15,592		8,579		23,865		48,036		1,327,425		1,375,461
Auto		33,554		7,500		11,646		52,700		763,278		815,978
Other		1,069		308		19,237		20,614		168,174		188,788
Total	$	640,788	$	222,279	$	1,316,245	$	2,179,312	$	20,166,803	$	22,346,115

[1] Non-covered loans held-in-portfolio are net of $108 million in unearned income and exclude $137 million in loans held-for-sale.

[2] Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.3 billion were pledged at the FHLB as collateral for borrowings, $2.5 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.

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

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at December 31, 2016 and December 31, 2015. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

128

At December 31, 2016
	Puerto Rico				U.S. mainland				Popular, Inc.
			Accruing loans				Accruing loans				Accruing loans
	Non-accrual		past-due 90		Non-accrual		past-due 90		Non-accrual		past-due 90
(In thousands)	loans		days or more [1]		loans		days or more [1]		loans		days or more [1]
Commercial multi-family	$	664	$	—	$	206	$	—	$	870	$	—
Commercial real estate non-owner occupied		24,611		—		1,195		—		25,806		—
Commercial real estate owner occupied		102,771		—		472		—		103,243		—
Commercial and industrial		31,609		538		1,820		—		33,429		538
Mortgage[3]		318,194		406,583		11,713		—		329,907		406,583
Leasing		3,062		—		—		—		3,062		—
Legacy		—		—		3,337		—		3,337		—
Consumer:
Credit cards		—		18,725		30		—		30		18,725
Home equity lines of credit		—		185		4,762		—		4,762		185
Personal		20,553		34		1,864		—		22,417		34
Auto		12,320		—		—		—		12,320		—
Other		18,724		587		8		—		18,732		587
Total[2]	$	532,508	$	426,652	$	25,407	$	—	$	557,915	$	426,652

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

[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.

At December 31, 2015
	Puerto Rico				U.S. mainland				Popular, Inc.
			Accruing loans				Accruing loans				Accruing loans
	Non-accrual		past-due 90		Non-accrual		past-due 90		Non-accrual		past-due 90
(In thousands)	loans		days or more [1]		loans		days or more [1]		loans		days or more [1]
Commercial multi-family	$	1,062	$	—	$	—	$	—	$	1,062	$	—
Commercial real estate non-owner occupied		33,720		—		253		—		33,973		—
Commercial real estate owner occupied		106,449		—		221		—		106,670		—
Commercial and industrial		36,671		555		3,440		—		40,111		555
Construction		3,550		—		—		—		3,550		—
Mortgage[3]		337,933		426,094		13,538		—		351,471		426,094
Leasing		3,009		—		—		—		3,009		—
Legacy		—		—		3,649		—		3,649		—
Consumer:
Credit cards		—		19,098		437		—		437		19,098
Home equity lines of credit		—		394		4,176		—		4,176		394
Personal		22,102		523		1,240		—		23,342		523
Auto		11,640		—		6		—		11,646		—
Other		18,698		61		5		—		18,703		61
Total[2]	$	574,834	$	446,725	$	26,965	$	—	$	601,799	$	446,725

[1] Non-covered loans by $268 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.

[2] For purposes of this table non-performing loans exclude $ 45 million in non-performing loans held-for-sale.

[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $164 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2015. Furthermore, the Corporation has approximately $70 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.

129

The following table provides a breakdown of loans held-for-sale (“LHFS”) including loans in non-performing status at December 31, 2016 and 2015 by main categories.

	December 31, 2016						December 31, 2015
(In thousands)	Non-Performing		Performing		Total		Non-Performing		Performing		Total
Commercial	$	—	$	—	$	—	$	45,074	$	—	$	45,074
Construction		—		—		—		95		—		95
Mortgage		—		88,821		88,821		—		91,831		91,831
Total loans held-for-sale	$	—	$	88,821	$	88,821	$	45,169	$	91,831	$	137,000

The components of the net financing leases receivable at December 31, 2016 and 2015 were as follows:

(In thousands)	2016		2015
Total minimum lease payments	$	601,317	$	548,438
Estimated residual value of leased property		210,761		175,458
Deferred origination costs, net of fees		8,309		8,553
Less - Unearned financing income		117,296		103,433
Net minimum lease payments		703,091		629,016
Less - Allowance for loan losses		7,677		11,022
Net minimum lease payments, net of allowance for loan losses	$	695,414	$	617,994

At December 31, 2016, future minimum lease payments are expected to be received as follows:

(In thousands)
2017	$	136,657
2018		125,327
2019		102,100
2020		106,307
2021 and thereafter		130,926
Total	$	601,317

The following table presents loans acquired as part of the Doral Bank Transaction accounted for under ASC subtopic 310-20 as of the February 27, 2015 acquisition date:

(In thousands)
Fair value of loans accounted under ASC Subtopic 310-20	$	1,178,543
Gross contractual amounts receivable (principal and interest)	$	1,666,695
Estimate of contractual cash flows not expected to be collected	$	34,646

Covered loans

The following tables present the composition of loans by past due status at December 31, 2016 and 2015 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

December 31, 2016
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP [1]
Mortgage	$	25,506	$	12,904	$	69,856	$	108,266	$	448,304	$	556,570
Consumer		751		245		1,074		2,070		14,238		16,308
Total covered loans	$	26,257	$	13,149	$	70,930	$	110,336	$	462,542	$	572,878

[1] Includes $337 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

130

December 31, 2015
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP [1]
Mortgage	$	31,413	$	16,593	$	83,132	$	131,138	$	495,964	$	627,102
Consumer		1,246		444		1,283		2,973		16,040		19,013
Total covered loans	$	32,659	$	17,037	$	84,415	$	134,111	$	512,004	$	646,115

[1] Includes $386 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

The following table presents covered loans in nonperforming status and accruing loans past due 90 days or more by loan class at December 31, 2016 and 2015.

	December 31, 2016				December 31, 2015
	Non-accrual		Accruing loans past		Non-accrual		Accruing loans past
(In thousands)	loans		due 90 days or more		loans		due 90 days or more
Mortgage	$	3,794	$	—	$	3,790	$	—
Consumer		121		—		97		—
Total[1]	$	3,915	$	—	$	3,887	$	—

[1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $10 million at December 31, 2016 (December 31, 2015 - $10 million).

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.

Loans acquired from Westernbank as part of an FDIC-assisted transaction

The carrying amount of the Westernbank loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.

131

	December 31, 2016									December 31, 2015
	Carrying amount									Carrying amount
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Commercial real estate	$	985,181		$	14,440		$	999,621		$	1,114,368		$	35,393		$	1,149,761
Commercial and industrial		103,476			—			103,476			84,765			519			85,284
Construction		—			1,668			1,668			8,943			6,027			14,970
Mortgage		587,949			25,781			613,730			667,023			33,090			700,113
Consumer		18,775			1,059			19,834			23,047			1,326			24,373
Carrying amount [1]		1,695,381			42,948			1,738,329			1,898,146			76,355			1,974,501
Allowance for loan losses		(61,855	)		(7,022	)		(68,877	)		(59,753	)		(3,810	)		(63,563	)
Carrying amount, net of allowance	$	1,633,526		$	35,926		$	1,669,452		$	1,838,393		$	72,545		$	1,910,938

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $563 million as of December 31, 2016 and $636 million as of December 31, 2015.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.1 billion at December 31, 2016 (December 31, 2015 - $2.4 billion). At December 31, 2016, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing 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 Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the years ended December 31, 2016 and 2015, were as follows:

	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the years ended
	December 31, 2016									December 31, 2015
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	1,105,732		$	6,726		$	1,112,458		$	1,265,752		$	5,585		$	1,271,337
Accretion		(162,983	)		(6,765	)		(169,748	)		(192,826	)		(10,140	)		(202,966	)
Change in expected cash flows		59,159			8,218			67,377			32,806			11,281			44,087
Ending balance	$	1,001,908		$	8,179		$	1,010,087		$	1,105,732		$	6,726		$	1,112,458

132

	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the years ended
	December 31, 2016									December 31, 2015
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	1,898,146		$	76,355		$	1,974,501		$	2,272,142		$	172,030		$	2,444,172
Accretion		162,983			6,765			169,748			192,826			10,140			202,966
Collections / loan sales / charge-offs[1]		(365,748	)		(40,172	)		(405,920	)		(566,822	)		(105,815	)		(672,637	)
Ending balance[2]	$	1,695,381		$	42,948		$	1,738,329		$	1,898,146		$	76,355		$	1,974,501
Allowance for loan losses
ASC 310-30 Westernbank loans		(61,855	)		(7,022	)		(68,877	)		(59,753	)		(3,810	)		(63,563	)
Ending balance, net of ALLL	$	1,633,526		$	35,926		$	1,669,452		$	1,838,393		$	72,545		$	1,910,938

[1] For the year ended December 31, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.

[2] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $563 million as of December 31, 2016 (December 31, 2015- $636 million).

Other loans acquired with deteriorated credit quality

The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $700 million at December 31, 2016 (December 31, 2015 - $710 million). At December 31, 2016, none of the other acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the years ended December 31, 2016 and 2015 were as follows:

Activity in the accretable yield - Other acquired loans ASC 310-30
	For the years ended
(In thousands)	December 31, 2016			December 31, 2015
Beginning balance	$	221,128		$	116,304
Additions		17,635			132,273
Accretion		(35,030	)		(29,277	)
Change in expected cash flows		75,163			1,828
Ending balance	$	278,896		$	221,128

Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the years ended
(In thousands)	December 31, 2016			December 31, 2015
Beginning balance	$	564,050		$	212,763
Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)		(4,707	)		—
Additions		36,221			386,679
Accretion		35,030			29,277
Collections and charge-offs		(67,899	)		(64,669	)
Ending balance	$	562,695		$	564,050
Allowance for loan losses ASC 310-30 non-covered loans		(22,431	)		(19,276	)
Ending balance, net of allowance for loan losses	$	540,264		$	544,774

133

The following table presents loans acquired as part of the Doral Bank Transaction accounted for pursuant to ASC Subtopic 310-30 at the February 27, 2015 acquisition date.

(In thousands)
Contractually-required principal and interest	$	560,833
Non-accretable difference		112,153
Cash flows expected to be collected		448,680
Accretable yield		113,977
Fair value of loans accounted for under ASC Subtopic 310-30	$	334,703

134

Note 11 – Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date.

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

• Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.

• Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process.

For the period ended December 31, 2016, 38% (December 31, 2015 - 15%) of the ALLL for non-covered BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the leasing, auto, revolving and commercial and industrial loan portfolios for 2016 and in the commercial multi-family, commercial and industrial and mortgage loan portfolios for 2015.

For the period ended December 31, 2016, 0.11% (December 31, 2015 - 4 %) of our BPNA segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the commercial multifamily loan portfolio for 2016 and in the consumer loan portfolio for 2015.

• Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

During the third quarter of 2016, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These updates to the ALLL models, which are described in the paragraph below, were implemented as of September 30, 2016 and resulted in a net increase to the allowance for loan losses of $ 9.4 million for the non-covered portfolio. The effect of the aforementioned updates was immaterial for the covered loans portfolio.

Management made the following enhancements to the ALLL models during the third quarter of 2016:

• Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the third quarter of 2016, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends.

The effect of the recalibration to the environmental factors adjustment resulted in an increase to the allowance for loan losses of $9.4 million at September 30, 2016, related to the non-covered BPPR segment. The effect of the recalibration was immaterial for the BPNA segment.

135

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the years ended December 31, 2016 and 2015.

For the year ended December 31, 2016
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	186,925		$	4,957		$	128,327		$	10,993		$	138,721		$	469,923
Provision (reversal of provision)		19,147			(6,539	)		79,309			557			63,386			155,860
Charge-offs		(62,486	)		(3,103	)		(68,075	)		(6,151	)		(106,304	)		(246,119	)
Recoveries		41,731			5,124			3,759			2,263			29,998			82,875
Net recoveries		4,369			914			—			—			162			5,445
Ending balance	$	189,686		$	1,353		$	143,320		$	7,662		$	125,963		$	467,984
Specific ALLL	$	42,375		$	—		$	42,428		$	535		$	23,185		$	108,523
General ALLL	$	147,311		$	1,353		$	100,892		$	7,127		$	102,778		$	359,461
Loans held-in-portfolio:
Impaired non-covered loans	$	338,422		$	—		$	497,488		$	1,817		$	106,615		$	944,342
Non-covered loans held-in-portfolio excluding impaired loans		6,863,795			85,558			5,419,012			701,076			3,154,641			16,224,082
Total non-covered loans held-in-portfolio	$	7,202,217		$	85,558		$	5,916,500		$	702,893		$	3,261,256		$	17,168,424
For the year ended December 31, 2016
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	33,967		$	—		$	209		$	34,176
Provision (reversal of provision)		—			—			(1,092	)		—			(18	)		(1,110	)
Charge-offs		—			—			(3,524	)		—			(19	)		(3,543	)
Recoveries		—			—			808			—			19			827
Ending balance	$	—		$	—		$	30,159		$	—		$	191		$	30,350
Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—
General ALLL	$	—		$	—		$	30,159		$	—		$	191		$	30,350
Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			556,570			—			16,308			572,878
Total covered loans held-in-portfolio	$	—		$	—		$	556,570		$	—		$	16,308		$	572,878

136

For the year ended December 31, 2016
U.S. Mainland
(In thousands)	Commercial			Construction		Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	9,908		$	3,912	$	4,985		$	2,687		$	11,520		$	33,012
Provision (reversal of provision)		(253	)		4,260		1,562			(3,257	)		12,954			15,266
Charge-offs		(1,115	)		—		(2,506	)		(535	)		(13,430	)		(17,586	)
Recoveries		4,428			—		573			2,448			4,176			11,625
Ending balance	$	12,968		$	8,172	$	4,614		$	1,343		$	15,220		$	42,317
Specific ALLL	$	—		$	—	$	2,182		$	—		$	672		$	2,854
General ALLL	$	12,968		$	8,172	$	2,432		$	1,343		$	14,548		$	39,463
Loans held-in-portfolio:
Impaired loans	$	—		$	—	$	8,876		$	—		$	2,839		$	11,715
Loans held-in-portfolio excluding impaired loans		3,596,290			690,742		770,985			45,293			490,298			5,593,608
Total loans held-in-portfolio	$	3,596,290		$	690,742	$	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	$	196,833		$	8,869		$	167,279		$	2,687		$	10,993		$	150,450		$	537,111
Provision (reversal of provision)		18,894			(2,279	)		79,779			(3,257	)		557			76,322			170,016
Charge-offs		(63,601	)		(3,103	)		(74,105	)		(535	)		(6,151	)		(119,753	)		(267,248	)
Recoveries		46,159			5,124			5,140			2,448			2,263			34,193			95,327
Net recoveries		4,369			914			—			—			—			162			5,445
Ending balance	$	202,654		$	9,525		$	178,093		$	1,343		$	7,662		$	141,374		$	540,651
Specific ALLL	$	42,375		$	—		$	44,610		$	—		$	535		$	23,857		$	111,377
General ALLL	$	160,279		$	9,525		$	133,483		$	1,343		$	7,127		$	117,517		$	429,274
Loans held-in-portfolio:
Impaired loans	$	338,422		$	—		$	506,364		$	—		$	1,817		$	109,454		$	956,057
Loans held-in-portfolio excluding impaired 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

For the year ended December 31, 2015
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	201,589		$	5,483		$	120,860		$	7,131		$	154,072		$	489,135
Provision (reversal of provision)		88,680			(2,836	)		57,876			7,165			65,947			216,832
Charge-offs		(105,716	)		(13,628	)		(53,296	)		(5,561	)		(110,384	)		(288,585	)
Recoveries		31,826			14,514			2,305			2,258			26,508			77,411
Net write-downs related to transferred to held-for-sale		(37,907	)		—			—			—			—			(37,907	)
Allowance transferred from covered loans		8,453			1,424			582			—			2,578			13,037
Ending balance	$	186,925		$	4,957		$	128,327		$	10,993		$	138,721		$	469,923
Specific ALLL	$	49,243		$	264		$	42,965		$	573		$	23,478		$	116,523
General ALLL	$	137,682		$	4,693		$	85,362		$	10,420		$	115,243		$	353,400
Loans held-in-portfolio:
Impaired non-covered loans	$	337,133		$	2,481		$	465,117		$	2,404		$	109,660		$	916,795
Non-covered loans held-in-portfolio excluding impaired loans		7,031,086			98,467			5,662,374			625,246			3,236,642			16,653,815
Total non-covered loans held-in-portfolio	$	7,368,219		$	100,948		$	6,127,491		$	627,650		$	3,346,302		$	17,570,610

137

For the year ended December 31, 2015
Puerto Rico - Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	30,871		$	7,202		$	40,948		$	—		$	3,052		$	82,073
Provision (reversal of provision)		10,115			15,150			(1,011	)		—			(234	)		24,020
Charge-offs		(37,936	)		(25,086	)		(6,158	)		—			(853	)		(70,033	)
Recoveries		6,504			4,700			930			—			842			12,976
Net write-down related to loans transferred to held-for-sale		(1,101	)		(542	)		(160	)		—			(20	)		(1,823	)
Allowance transferred to non-covered loans		(8,453	)		(1,424	)		(582	)		—			(2,578	)		(13,037	)
Ending balance	$	—		$	—		$	33,967		$	—		$	209		$	34,176
Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—
General ALLL	$	—		$	—		$	33,967		$	—		$	209		$	34,176
Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			627,102			—			19,013			646,115
Total covered loans held-in-portfolio	$	—		$	—		$	627,102		$	—		$	19,013		$	646,115
For the year ended December 31, 2015
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	9,648		$	1,187		$	2,462		$	2,944		$	14,343		$	30,584
Provision (reversal of provision)		(3,582	)		2,725			(1,727	)		(3,017	)		6,227			626
Charge-offs		(1,452	)		—			(1,670	)		(2,019	)		(9,507	)		(14,648	)
Recoveries		5,294			—			391			4,779			3,858			14,322
Net (write-down) recovery related to loans transferred to held-for-sale		—			—			5,529			—			(3,401	)		2,128
Ending balance	$	9,908		$	3,912		$	4,985		$	2,687		$	11,520		$	33,012
Specific ALLL	$	—		$	—		$	1,064		$	—		$	485		$	1,549
General ALLL	$	9,908		$	3,912		$	3,921		$	2,687		$	11,035		$	31,463
Loans held-in-portfolio:
Impaired loans	$	—		$	—		$	6,815		$	—		$	2,176		$	8,991
Loans held-in-portfolio excluding impaired loans		2,730,944			580,158			901,775			64,436			489,201			4,766,514
Total loans held-in-portfolio	$	2,730,944		$	580,158		$	908,590		$	64,436		$	491,377		$	4,775,505

138

For the year ended December 31, 2015
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	242,108		$	13,872		$	164,270		$	2,944		$	7,131		$	171,467		$	601,792
Provision (reversal of provision)		95,213			15,039			55,138			(3,017	)		7,165			71,940			241,478
Charge-offs		(145,104	)		(38,714	)		(61,124	)		(2,019	)		(5,561	)		(120,744	)		(373,266	)
Recoveries		43,624			19,214			3,626			4,779			2,258			31,208			104,709
Net write-down related to loans transferred to held-for-sale		(39,008	)		(542	)		5,369			—			—			(3,421	)		(37,602	)
Ending balance	$	196,833		$	8,869		$	167,279		$	2,687		$	10,993		$	150,450		$	537,111
Specific ALLL	$	49,243		$	264		$	44,029		$	—		$	573		$	23,963		$	118,072
General ALLL	$	147,590		$	8,605		$	123,250		$	2,687		$	10,420		$	126,487		$	419,039
Loans held-in-portfolio:
Impaired loans	$	337,133		$	2,481		$	471,932		$	—		$	2,404		$	111,836		$	925,786
Loans held-in-portfolio excluding impaired loans		9,762,030			678,625			7,191,251			64,436			625,246			3,744,856			22,066,444
Total loans held-in-portfolio	$	10,099,163		$	681,106		$	7,663,183		$	64,436		$	627,650		$	3,856,692		$	22,992,230

The following table provides the activity in the allowance for loan losses related to Westernbank loans accounted for pursuant to ASC Subtopic 310-30.

	ASC 310-30 Westernbank loans
	For the years ended
(In thousands)	December 31, 2016		December 31, 2015
Balance at beginning of period	$	63,563	$	78,846
Provision for loan losses		1,342		46,643
Net recoveries (charge-offs)		3,972		(61,926	)
Balance at end of period	$	68,877	$	63,563

Impaired loans

The following tables present loans individually evaluated for impairment at December 31, 2016 and December 31, 2015.

December 31, 2016
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	82	$	82	$	34	$	—	$	—	$	82	$	82	$	34
Commercial real estate non-owner occupied		104,119		105,047		24,537		15,935		29,631		120,054		134,678		24,537
Commercial real estate owner occupied		131,634		169,013		13,007		31,962		50,094		163,596		219,107		13,007
Commercial and industrial		46,862		49,301		4,797		7,828		11,478		54,690		60,779		4,797
Mortgage		426,737		466,249		42,428		70,751		87,806		497,488		554,055		42,428
Leasing		1,817		1,817		535		—		—		1,817		1,817		535
Consumer:
Credit cards		37,464		37,464		5,588		—		—		37,464		37,464		5,588
Personal		66,043		66,043		16,955		—		—		66,043		66,043		16,955
Auto		2,117		2,117		474		—		—		2,117		2,117		474
Other		991		991		168		—		—		991		991		168
Total Puerto Rico	$	817,866	$	898,124	$	108,523	$	126,476	$	179,009	$	944,342	$	1,077,133	$	108,523

139

December 31, 2016
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Mortgage	$	6,381	$	7,971	$	2,182	$	2,495	$	3,369	$	8,876	$	11,340	$	2,182
Consumer:
HELOCs		2,421		2,429		667		300		315		2,721		2,744		667
Personal		39		39		5		79		79		118		118		5
Total U.S. mainland	$	8,841	$	10,439	$	2,854	$	2,874	$	3,763	$	11,715	$	14,202	$	2,854
December 31, 2016
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial multi-family	$	82	$	82	$	34	$	—	$	—	$	82	$	82	$	34
Commercial real estate non-owner occupied		104,119		105,047		24,537		15,935		29,631		120,054		134,678		24,537
Commercial real estate owner occupied		131,634		169,013		13,007		31,962		50,094		163,596		219,107		13,007
Commercial and industrial		46,862		49,301		4,797		7,828		11,478		54,690		60,779		4,797
Mortgage		433,118		474,220		44,610		73,246		91,175		506,364		565,395		44,610
Leasing		1,817		1,817		535		—		—		1,817		1,817		535
Consumer:
Credit Cards		37,464		37,464		5,588		—		—		37,464		37,464		5,588
HELOCs		2,421		2,429		667		300		315		2,721		2,744		667
Personal		66,082		66,082		16,960		79		79		66,161		66,161		16,960
Auto		2,117		2,117		474		—		—		2,117		2,117		474
Other		991		991		168		—		—		991		991		168
Total Popular, Inc.	$	826,707	$	908,563	$	111,377	$	129,350	$	182,772	$	956,057	$	1,091,335	$	111,377
December 31, 2015
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial real estate non-owner occupied	$	102,199	$	106,466	$	30,980	$	13,779	$	23,896	$	115,978	$	130,362	$	30,980
Commercial real estate owner occupied		118,253		137,193		12,564		38,955		63,383		157,208		200,576		12,564
Commercial and industrial		42,043		43,629		5,699		21,904		32,922		63,947		76,551		5,699
Construction		2,481		7,878		264		—		—		2,481		7,878		264
Mortgage		424,885		468,240		42,965		40,232		45,881		465,117		514,121		42,965
Leasing		2,404		2,404		573		—		—		2,404		2,404		573
Consumer:
Credit cards		38,734		38,734		6,675		—		—		38,734		38,734		6,675
Personal		68,509		68,509		16,365		—		—		68,509		68,509		16,365
Auto		1,893		1,893		338		—		—		1,893		1,893		338
Other		524		525		100		—		—		524		525		100
Total Puerto Rico	$	801,925	$	875,471	$	116,523	$	114,870	$	166,082	$	916,795	$	1,041,553	$	116,523

December 31, 2015
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Mortgage	$	4,143	$	5,018	$	1,064	$	2,672	$	3,574	$	6,815	$	8,592	$	1,064
Consumer:
HELOCs		778		796		259		783		783		1,561		1,579		259
Personal		534		534		226		81		81		615		615		226
Total U.S. mainland	$	5,455	$	6,348	$	1,549	$	3,536	$	4,438	$	8,991	$	10,786	$	1,549

140

December 31, 2015
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
			Unpaid						Unpaid				Unpaid
	Recorded		principal		Related		Recorded		principal		Recorded		principal		Related
(In thousands)	investment		balance		allowance		investment		balance		investment		balance		allowance
Commercial real estate non-owner occupied	$	102,199	$	106,466	$	30,980	$	13,779	$	23,896	$	115,978	$	130,362	$	30,980
Commercial real estate owner occupied		118,253		137,193		12,564		38,955		63,383		157,208		200,576		12,564
Commercial and industrial		42,043		43,629		5,699		21,904		32,922		63,947		76,551		5,699
Construction		2,481		7,878		264		—		—		2,481		7,878		264
Mortgage		429,028		473,258		44,029		42,904		49,455		471,932		522,713		44,029
Leasing		2,404		2,404		573		—		—		2,404		2,404		573
Consumer:
Credit Cards		38,734		38,734		6,675		—		—		38,734		38,734		6,675
HELOCs		778		796		259		783		783		1,561		1,579		259
Personal		69,043		69,043		16,591		81		81		69,124		69,124		16,591
Auto		1,893		1,893		338		—		—		1,893		1,893		338
Other		524		525		100		—		—		524		525		100
Total Popular, Inc.	$	807,380	$	881,819	$	118,072	$	118,406	$	170,520	$	925,786	$	1,052,339	$	118,072

The following tables present the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2016 and 2015.

For the year ended December 31, 2016
	Puerto Rico				U.S. Mainland				Popular, Inc.
	Average		Interest		Average		Interest		Average		Interest
	recorded		income		recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized		investment		recognized
Commercial multi-family	$	33	$	6	$	—	$	—	$	33	$	6
Commercial real estate non-owner occupied		127,508		5,275		—		—		127,508		5,275
Commercial real estate owner occupied		150,563		5,757		—		—		150,563		5,757
Commercial and industrial		57,752		1,959		—		—		57,752		1,959
Construction		1,107		—		—		—		1,107		—
Mortgage		479,584		13,860		8,212		178		487,796		14,038
Leasing		2,124		—		—		—		2,124		—
Consumer:
Credit cards		38,168		—		—		—		38,168		—
HELOCs		—		—		1,937		—		1,937		—
Personal		67,308		—		529		—		67,837		—
Auto		2,575		—		—		—		2,575		—
Other		683		—		—		—		683		—
Total Popular, Inc.	$	927,405	$	26,857	$	10,678	$	178	$	938,083	$	27,035

For the year ended December 31, 2015
	Puerto Rico				U.S. Mainland				Popular, Inc.
	Average		Interest		Average		Interest		Average		Interest
	recorded		income		recorded		income		recorded		income
(In thousands)	investment		recognized		investment		recognized		investment		recognized
Commercial multi-family	$	606	$	—	$	—	$	—	$	606	$	—
Commercial real estate non-owner occupied		107,442		5,062		—		—		107,442		5,062
Commercial real estate owner occupied		138,651		6,936		—		—		138,651		6,936
Commercial and industrial		121,315		4,001		50		—		121,365		4,001
Construction		6,350		88		—		—		6,350		88
Mortgage		450,122		16,128		5,279		89		455,401		16,217
Legacy		—		—		509		—		509		—
Leasing		2,710		—		—		—		2,710		—
Consumer:
Credit cards		40,239		—		—		—		40,239		—
HELOCs		—		—		1,660		—		1,660		—
Personal		70,046		—		427		—		70,473		—
Auto		2,005		—		—		—		2,005		—
Other		561		—		17		—		578		—
Covered loans		3,527		153		—		—		3,527		153
Total Popular, Inc.	$	943,574	$	32,368	$	7,942	$	89	$	951,516	$	32,457

141

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.2 billion at December 31, 2016 (December 31, 2015 - $ 1.2 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $8 million related to the commercial loan portfolio at December 31, 2016 (December 31, 2015 - $11 million).

At December 31, 2016, the mortgage loan TDRs include $407 million guaranteed by U.S. sponsored entities at BPPR, this compares with $359 million at December 31, 2015.

A modification of a loan constitutes a troubled debt restructuring (“TDR”) 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 2 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, 2016 and December 31, 2015.

	Popular, Inc.
	Non-Covered Loans
	December 31, 2016								December 31, 2015
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Commercial	$	176,887	$	83,157	$	260,044	$	40,810	$	166,415	$	88,117	$	254,532	$	37,355
Construction		—		—		—		—		221		2,259		2,480		264
Mortgage		744,926		127,071		871,997		44,610		644,013		130,483		774,496		44,029
Leases		1,383		434		1,817		535		1,791		609		2,400		573
Consumer		100,277		12,442		112,719		23,857		104,630		12,805		117,435		23,963
Total	$	1,023,473	$	223,104	$	1,246,577	$	109,812	$	917,070	$	234,273	$	1,151,343	$	106,184

	Popular, Inc.
	Covered Loans
	December 31, 2016								December 31, 2015
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Mortgage	$	2,950	$	2,580	$	5,530	$	—	$	3,328	$	3,268	$	6,596	$	—
Total	$	2,950	$	2,580	$	5,530	$	—	$	3,328	$	3,268	$	6,596	$	—

142

The following tables present the loan count by type of modification for those loans modified in a TDR during the years ended December 31, 2016 and 2015. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

Popular, Inc.
For the year ended December 31, 2016
	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		7		1		—		—
Commercial real estate owner occupied		43		7		—		—
Commercial and industrial		36		7		—		—
Mortgage		78		80		505		170
Leasing		—		1		1		—
Consumer:
Credit cards		766		—		2		668
HELOCs		—		1		5		1
Personal		1,007		19		1		1
Auto		—		12		8		2
Other		35		—		—		—
Total		1,972		128		522		842

Popular, Inc.
For the year ended December 31, 2015
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial multi-family		—		2		—		—
Commercial real estate non-owner occupied		9		12		—		—
Commercial real estate owner occupied		39		20		—		—
Commercial and industrial		32		18		—		—
Construction		1		1		—		—
Mortgage		57		56		418		113
Leasing		—		7		16		—
Consumer:
Credit cards		802		—		—		700
HELOCs		—		1		1		2
Personal		1,012		31		—		1
Auto		—		11		3		—
Other		49		—		—		—
Total		2,001		159		438		816

143

The following tables present by class, quantitative information related to loans modified as TDRs during the years ended December 31, 2016 and 2015. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

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		8	$	7,667	$	10,272	$	5,109
Commercial real estate owner occupied		50		29,935		30,097		894
Commercial and industrial		43		8,402		9,733		242
Mortgage		833		93,511		90,840		6,822
Leasing		2		36		37		8
Consumer:
Credit cards		1,436		13,329		14,918		2,042
HELOCs		7		602		662		296
Personal		1,028		17,192		17,296		3,548
Auto		22		263		281		54
Other		35		96		98		17
Total		3,464	$	171,033	$	174,234	$	19,032

Popular, Inc.
For the year ended December 31, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family		2	$	551	$	551	$	2
Commercial real estate non-owner occupied		21		69,442		69,595		14,339
Commercial real estate owner occupied		59		20,323		19,195		889
Commercial and industrial		50		22,818		23,757		(6,994	)
Construction		2		308		298		(170	)
Mortgage		644		53,575		70,527		6,128
Leasing		23		651		651		148
Consumer:
Credit cards		1,502		12,857		14,552		2,238
HELOCs		4		197		295		79
Personal		1,044		17,671		17,734		3,771
Auto		14		142		199		35
Other		49		121		132		20
Total		3,414	$	198,656	$	217,486	$	20,485

The following tables present by class, TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, whichever occurs first. The recorded investment at December 31, 2016 is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

144

Popular, Inc.
Defaulted during the year ended December 31, 2016
(Dollars In thousands)	Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		2	$	327
Commercial real estate owner occupied		11		3,296
Commercial and industrial		7		905
Mortgage		169		18,261
Leasing		3		28
Consumer:
Credit cards		451		4,794
HELOCs		1		43
Personal		135		3,329
Auto		9		171
Other		3		8
Total		791	$	31,162

Popular, Inc.
Defaulted during the year ended December 31, 2015
(Dollars In thousands)	Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		3	$	7,269
Commercial real estate owner occupied		1		291
Commercial and industrial		7		1,990
Construction		3		1,442
Mortgage		189		28,364
Consumer:
Credit cards		415		4,185
Personal		97		3,006
Auto		6		97
Other		2		1
Total		723	$	46,645

Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR 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.

Watch (Scale 9) – Loans classified as watch have acceptable business credit, but borrower’s operations, cash flow or financial condition evidence more than average risk, requires above average levels of supervision and attention from Loan Officers.

Special Mention (Scale 10) - Loans classified as special mention have potential weaknesses that deserve management’s close attention. If 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.

145

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 jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful (Scale 13) - Loans classified as doubtful have all the weaknesses inherent 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.

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 originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, the Loan Review Group recommends corrective actions, if necessary, that help in 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.

146

The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at December 31, 2016 and 2015.

December 31, 2016
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Sub-total		Pass/ Unrated		Total
Puerto Rico[1]
Commercial multi-family	$	2,016	$	383	$	6,108	$	—	$	—	$	8,507	$	166,033	$	174,540
Commercial real estate non-owner occupied		310,510		377,858		342,054		155		—		1,030,577		1,533,708		2,564,285
Commercial real estate owner occupied		310,484		109,873		360,941		17,788		—		799,086		992,389		1,791,475
Commercial and industrial		136,091		133,270		227,360		11,514		12		508,247		2,163,670		2,671,917
Total Commercial		759,101		621,384		936,463		29,457		12		2,346,417		4,855,800		7,202,217
Construction		50		1,705		1,668		—		—		3,423		82,135		85,558
Mortgage		4,407		1,987		190,090		—		—		196,484		5,720,016		5,916,500
Leasing		—		—		3,062		—		—		3,062		699,831		702,893
Consumer:
Credit cards		—		—		18,725		—		—		18,725		1,081,882		1,100,607
HELOCs		—		—		185		—		—		185		8,166		8,351
Personal		1,068		812		21,496		—		—		23,376		1,126,801		1,150,177
Auto		—		—		12,321		—		—		12,321		814,271		826,592
Other		—		—		19,311		—		—		19,311		156,218		175,529
Total Consumer		1,068		812		72,038		—		—		73,918		3,187,338		3,261,256
Total Puerto Rico	$	764,626	$	625,888	$	1,203,321	$	29,457	$	12	$	2,623,304	$	14,545,120	$	17,168,424
U.S. mainland
Commercial multi-family	$	13,537	$	7,796	$	658	$	—	$	—	$	21,991	$	1,042,305	$	1,064,296
Commercial real estate non-owner occupied		57,111		9,778		1,720		—		—		68,609		1,288,707		1,357,316
Commercial real estate owner occupied		9,271		—		9,119		—		—		18,390		225,355		243,745
Commercial and industrial		3,048		937		153,793		—		—		157,778		773,155		930,933
Total Commercial		82,967		18,511		165,290		—		—		266,768		3,329,522		3,596,290
Construction		3,000		8,153		16,950		—		—		28,103		662,639		690,742
Mortgage		—		—		11,711		—		—		11,711		768,150		779,861
Legacy		921		786		4,400		—		—		6,107		39,186		45,293
Consumer:
Credit cards		—		—		30		—		—		30		128		158
HELOCs		—		—		1,923		—		2,839		4,762		247,413		252,175
Personal		—		—		1,252		—		609		1,861		238,746		240,607
Auto		—		—		—		—		—		—		9		9
Other		—		—		8		—		—		8		180		188
Total Consumer		—		—		3,213		—		3,448		6,661		486,476		493,137
Total U.S. mainland	$	86,888	$	27,450	$	201,564	$	—	$	3,448	$	319,350	$	5,285,973	$	5,605,323
Popular, Inc.
Commercial multi-family	$	15,553	$	8,179	$	6,766	$	—	$	—	$	30,498	$	1,208,338	$	1,238,836
Commercial real estate non-owner occupied		367,621		387,636		343,774		155		—		1,099,186		2,822,415		3,921,601
Commercial real estate owner occupied		319,755		109,873		370,060		17,788		—		817,476		1,217,744		2,035,220
Commercial and industrial		139,139		134,207		381,153		11,514		12		666,025		2,936,825		3,602,850
Total Commercial		842,068		639,895		1,101,753		29,457		12		2,613,185		8,185,322		10,798,507
Construction		3,050		9,858		18,618		—		—		31,526		744,774		776,300
Mortgage		4,407		1,987		201,801		—		—		208,195		6,488,166		6,696,361
Legacy		921		786		4,400		—		—		6,107		39,186		45,293
Leasing		—		—		3,062		—		—		3,062		699,831		702,893
Consumer:
Credit cards		—		—		18,755		—		—		18,755		1,082,010		1,100,765
HELOCs		—		—		2,108		—		2,839		4,947		255,579		260,526
Personal		1,068		812		22,748		—		609		25,237		1,365,547		1,390,784
Auto		—		—		12,321		—		—		12,321		814,280		826,601
Other		—		—		19,319		—		—		19,319		156,398		175,717
Total Consumer		1,068		812		75,251		—		3,448		80,579		3,673,814		3,754,393
Total Popular, Inc.	$	851,514	$	653,338	$	1,404,885	$	29,457	$	3,460	$	2,942,654	$	19,831,093	$	22,773,747

147

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	(Scales 11 and 12)		(Scales 1 through 8)
Puerto Rico:[1]	Substandard		Pass
Commercial multi-family		11.12		5.95
Commercial real estate non-owner occupied		11.07		6.91
Commercial real estate owner occupied		11.23		7.09
Commercial and industrial		11.09		7.19
Total Commercial		11.14		7.06
Construction		11.00		7.67
U.S. mainland:	Substandard		Pass
Commercial multi-family		11.31		7.26
Commercial real estate non-owner occupied		11.70		6.67
Commercial real estate owner occupied		11.05		7.32
Commercial and industrial		11.65		6.15
Total Commercial		11.62		6.78
Construction		11.00		7.67
Legacy		11.10		7.91

[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.

148

December 31, 2015
			Special										Pass/
(In thousands)	Watch		Mention		Substandard		Doubtful		Loss		Sub-total		Unrated		Total
Puerto Rico[1]
Commercial multi-family	$	1,750	$	1,280	$	8,103	$	—	$	—	$	11,133	$	121,013	$	132,146
Commercial real estate non-owner occupied		319,564		423,095		399,076		—		—		1,141,735		1,527,357		2,669,092
Commercial real estate owner occupied		316,079		162,395		436,442		1,915		—		916,831		992,413		1,909,244
Commercial and industrial		187,620		146,216		256,821		690		29		591,376		2,066,361		2,657,737
Total Commercial		825,013		732,986		1,100,442		2,605		29		2,661,075		4,707,144		7,368,219
Construction		7,269		5,522		19,806		—		—		32,597		68,351		100,948
Mortgage		4,810		2,794		238,002		—		—		245,606		5,881,885		6,127,491
Leasing		—		—		3,009		—		—		3,009		624,641		627,650
Consumer:
Credit cards		—		—		19,098		—		—		19,098		1,109,247		1,128,345
HELOCs		—		—		394		—		—		394		10,294		10,688
Personal		1,606		1,448		23,116		—		—		26,170		1,176,665		1,202,835
Auto		—		—		11,609		—		30		11,639		804,311		815,950
Other		—		—		18,656		—		575		19,231		169,253		188,484
Total Consumer		1,606		1,448		72,873		—		605		76,532		3,269,770		3,346,302
Total Puerto Rico	$	838,698	$	742,750	$	1,434,132	$	2,605	$	634	$	3,018,819	$	14,551,791	$	17,570,610
U.S. mainland
Commercial multi-family	$	14,129	$	7,189	$	427	$	—	$	—	$	21,745	$	672,188	$	693,933
Commercial real estate non-owner occupied		57,450		6,741		16,646		—		—		80,837		882,186		963,023
Commercial real estate owner occupied		11,978		1,074		2,967		—		—		16,019		186,325		202,344
Commercial and industrial		10,827		5,344		131,933		—		—		148,104		723,540		871,644
Total Commercial		94,384		20,348		151,973		—		—		266,705		2,464,239		2,730,944
Construction		15,091		16,948		18,856		—		—		50,895		529,263		580,158
Mortgage		—		—		13,537		—		—		13,537		895,053		908,590
Legacy		1,823		1,973		6,134		—		—		9,930		54,506		64,436
Consumer:
Credit cards		—		—		—		—		—		—		13,935		13,935
HELOCs		—		—		1,550		—		2,626		4,176		300,308		304,484
Personal		—		—		637		—		603		1,240		171,386		172,626
Auto		—		—		—		—		—		—		28		28
Other		—		—		—		—		5		5		299		304
Total Consumer		—		—		2,187		—		3,234		5,421		485,956		491,377
Total U.S. mainland	$	111,298	$	39,269	$	192,687	$	—	$	3,234	$	346,488	$	4,429,017	$	4,775,505
Popular, Inc.
Commercial multi-family	$	15,879	$	8,469	$	8,530	$	—	$	—	$	32,878	$	793,201	$	826,079
Commercial real estate non-owner occupied		377,014		429,836		415,722		—		—		1,222,572		2,409,543		3,632,115
Commercial real estate owner occupied		328,057		163,469		439,409		1,915		—		932,850		1,178,738		2,111,588
Commercial and industrial		198,447		151,560		388,754		690		29		739,480		2,789,901		3,529,381
Total Commercial		919,397		753,334		1,252,415		2,605		29		2,927,780		7,171,383		10,099,163
Construction		22,360		22,470		38,662		—		—		83,492		597,614		681,106
Mortgage		4,810		2,794		251,539		—		—		259,143		6,776,938		7,036,081
Legacy		1,823		1,973		6,134		—		—		9,930		54,506		64,436
Leasing		—		—		3,009		—		—		3,009		624,641		627,650
Consumer:
Credit cards		—		—		19,098		—		—		19,098		1,123,182		1,142,280
HELOCs		—		—		1,944		—		2,626		4,570		310,602		315,172
Personal		1,606		1,448		23,753		—		603		27,410		1,348,051		1,375,461
Auto		—		—		11,609		—		30		11,639		804,339		815,978
Other		—		—		18,656		—		580		19,236		169,552		188,788
Total Consumer		1,606		1,448		75,060		—		3,839		81,953		3,755,726		3,837,679
Total Popular, Inc.	$	949,996	$	782,019	$	1,626,819	$	2,605	$	3,868	$	3,365,307	$	18,980,808	$	22,346,115

149

The following table presents the weighted average obligor risk rating at December 31, 2015 for those classifications that consider a range of rating scales.

Weighted average obligor risk rating	(Scales 11 and 12)		(Scales 1 through 8)
Puerto Rico:[1]	Substandard		Pass
Commercial multi-family		11.13		6.04
Commercial real estate non-owner occupied		11.09		6.67
Commercial real estate owner occupied		11.23		7.08
Commercial and industrial		11.15		7.13
Total Commercial		11.16		6.95
Construction		11.18		7.56
U.S. mainland:	Substandard		Pass
Commercial multi-family		11.00		7.15
Commercial real estate non-owner occupied		11.02		6.92
Commercial real estate owner occupied		11.07		7.23
Commercial and industrial		11.57		6.24
Total Commercial		11.50		6.81
Construction		11.00		7.79
Legacy		11.11		7.78

[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.

150

Note 12 – FDIC loss-share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss-share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss-share arrangements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 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.

	Years ended December 31,
(In thousands)	2016			2015			2014
Balance at beginning of year	$	310,221		$	542,454		$	909,414
Amortization of loss share indemnification asset		(10,201	)		(66,238	)		(189,959	)
Reversal of accelerated amortization		—			—			12,492
Credit impairment losses to be covered under loss sharing agreements		(239	)		15,658			32,038
Reimbursable expenses		8,433			73,205			58,117
Recoveries reimbursable to the FDIC		(4,093	)		—			—
Net payments from FDIC under loss sharing agreements		(98,518	)		(247,976	)		(256,498	)
Arbitration decision charge		(136,197	)		—			—
Other adjustments attributable to FDIC loss sharing agreements		(72	)		(6,882	)		(23,150	)
Balance at end of period	$	69,334		$	310,221		$	542,454

The loss-share component of the arrangements applicable to commercial (including construction) loans expired during the quarter ended June 30, 2015. The agreement provides for reimbursement to the FDIC to continue through the quarter ending June 30, 2018, and for the single family mortgage loss-share component of such agreement to expire on April 30, 2020.

During 2016, BPPR recognized pre-tax charges amounting to $136.2 million and a corresponding reduction to its FDIC indemnification asset related to the FDIC arbitration decision denying BPPR’s claim under the loss sharing agreement and $45.4 million additional adjustments related to the impact in the true-up payment obligation and other LSA adjustments. Refer to Note 28, Commitments and Contingencies, for further details.

The weighted average life of the single family loan portfolio accounted for under ASC 310-30 subject to the FDIC loss-sharing agreement at December 31, 2016 is 7.4 years.

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 date”) of the final shared-loss month, or upon the final 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 the four components used to estimate the true-up payment obligation (intrinsic loss estimate, asset discount, cumulative shared-loss payments, 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 true-up obligation, actual and expected portfolio performance for loans under both the commercial and 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.

151

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, 2016 and 2015.

(In thousands)	December 31, 2016		December 31, 2015
Carrying amount (fair value)	$	153,158	$	119,745
Undiscounted amount	$	188,258	$	168,692

The increase in the fair value of the true-up payment obligation was principally due to a decrease in the discount rate from 7.64% in 2015 to 5.97% in 2016 driven by a lower risk premium and an unfavorable adjustment of $17.8 million related to the FDIC arbitration decision. The estimated fair value of the true-up payment obligation corresponds to the difference between the initial estimated losses to be reimbursed by the FDIC and the revised estimate of reimbursable losses. As the amount of estimated reimbursable losses decreases, the value of the true-up payment obligation increases.

As described above, the estimate of the true-up payment obligation is determined by applying the provisions of the loss sharing agreements and will change on a quarterly basis. The amount of the estimate of the true-up payment obligation is expected to change in future periods and may be subject to the interpretation of provision of the loss sharing agreements.

The loss-share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss-share agreements, BPPR must:

• 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 family shared-loss loans, 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;

• exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;

• use commercially reasonable efforts 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;

• retain sufficient staff to perform the duties under the loss-share agreements;

• adopt and implement accounting, reporting, record-keeping and similar systems with respect to the 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 specifying the amount of losses, charge-offs and recoveries; and

• maintain books and records sufficient to ensure and document compliance with the terms of the loss-share agreements.

152

Note 13 – Mortgage banking activities

Income from mortgage banking activities includes mortgage servicing fees earned in connection with administering residential mortgage loans and valuation adjustments on mortgage servicing rights. It also includes gain on sales and securitizations of residential mortgage loans and trading gains and losses on derivative contracts used to hedge the Corporation’s securitization activities. In 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.

The following table presents the components of mortgage banking activities:

	Years ended December 31,
(In thousands)	2016			2015			2014
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees	$	58,208		$	59,461		$	41,761
Mortgage servicing rights fair value adjustments		(25,336	)		(7,904	)		(24,683	)
Total mortgage servicing fees, net of fair value adjustments		32,872			51,557			17,078
Net gain on sale of loans, including valuation on loans held for sale		26,976			35,336			31,213
Trading account (loss) profit:
Unrealized (losses) gains on outstanding derivative positions		(1	)		17			(726	)
Realized (losses) on closed derivative positions		(3,309	)		(5,108	)		(16,950	)
Total trading account (loss) profit		(3,310	)		(5,091	)		(17,676	)
Total mortgage banking activities	$	56,538		$	81,802		$	30,615

153

Note 14 – Transfers of financial assets and mortgage servicing assets

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 27 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the years ended December 31, 2016 and 2015 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $24.6 million and $32.6 million, respectively, during the years ended December 31, 2016 and 2015 related to the residential mortgage loan securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the years ended December 31, 2016 and 2015:

	Proceeds obtained during the year ended December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Initial fair value
Assets
Investments securities available for sale:
Mortgage-backed securities - GNMA	$	—	$	41,466	$	—	$	41,466
Mortgage-backed securities - FNMA		—		18,605		—		18,605
Total investment securities available-for-sale	$	—	$	60,071	$	—	$	60,071
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	571,602	$	—	$	571,602
Mortgage-backed securities - FNMA		—		143,939		—		143,939
Total trading account securities	$	—	$	715,541	$	—	$	715,541
Mortgage servicing rights	$	—	$	—	$	9,889	$	9,889
Total	$	—	$	775,612	$	9,889	$	785,501

	Proceeds obtained during the year ended December 31, 2015
(In thousands)	Level 1		Level 2		Level 3		Initial fair value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	869,210	$	—	$	869,210
Mortgage-backed securities - FNMA		—		218,911		—		218,911
Total trading account securities	$	—	$	1,088,121	$	—	$	1,088,121
Mortgage servicing rights	$	—	$	—	$	12,549	$	12,549
Total	$	—	$	1,088,121	$	12,549	$	1,100,670

During the year ended December 31, 2016, the Corporation retained servicing rights on whole loan sales involving approximately $70 million in principal balance outstanding (2015 - $69 million), with net realized gains of approximately $2.3 million (2015 - $2.7 million). All loan sales performed during the years ended December 31, 2016 and 2015 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would 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 and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior.

154

The following table presents the changes in MSRs measured using the fair value method for the years ended December 31, 2016 and 2015.

Residential MSRs
(In thousands)	December 31, 2016			December 31, 2015
Fair value at beginning of period	$	211,405		$	148,694
Additions		10,835			76,060
Changes due to payments on loans[1]		(17,482	)		(17,539	)
Reduction due to loan repurchases		(3,109	)		(1,897	)
Changes in fair value due to changes in valuation model inputs or assumptions		(4,745	)		6,087
Other disposals		(15	)		—
Fair value at end of period	$	196,889		$	211,405

[1] Represents the change due to collection / realization of expected cash flow over time.

Additions to mortgage servicing rights for the year ended December 31, 2015 include those acquired as part of the Doral Bank Transaction and those assumed for a portfolio previously serviced by Doral Bank in connection with a pre-existing backup servicing agreement.

Residential mortgage loans serviced for others were $18.0 billion at December 31, 2016 (2015 - $20.6 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At December 31, 2016, those weighted average mortgage servicing fees were 0.30% (2015 – 0.28%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the years ended December 31, 2016 and 2015 were as follows:

	Years ended
	December 31, 2016	December 31, 2015
Prepayment speed	5.2%	8.6%
Weighted average life (in years)	10.2	7.1
Discount rate (annual rate)	11.0%	11.1%

155

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:

	Originated MSRs December 31,						Purchased MSRs December 31,
(In thousands)	2016			2015			2016			2015
Fair value of servicing rights	$	88,056		$	98,648		$	108,833		$	112,757
Weighted average life (in years)		7.8			7.3			6.9			6.2
Weighted average prepayment speed (annual rate)		4.6	%		6.0	%		4.8	%		6.9	%
Impact on fair value of 10% adverse change	$	(1,668	)	$	(2,488	)	$	(2,051	)	$	(2,871	)
Impact on fair value of 20% adverse change	$	(3,590	)	$	(5,241	)	$	(4,400	)	$	(6,034	)
Weighted average discount rate (annual rate)		11.5	%		11.5	%		11.0	%		11.0	%
Impact on fair value of 10% adverse change	$	(3,851	)	$	(4,083	)	$	(4,369	)	$	(4,211	)
Impact on fair value of 20% adverse change	$	(7,699	)	$	(8,206	)	$	(8,778	)	$	(8,525	)

The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

At December 31, 2016, the Corporation serviced $1.7 billion (2015 - $1.9 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the 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 that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At December 31, 2016, the Corporation had recorded $49 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (2015 - $140 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation. During the year ended December 31, 2016, the Corporation repurchased approximately $224 million of mortgage loans under the GNMA buy-back option program (2015 - $80 million). The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and 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, for the years ended December 31, 2016 and 2015, are disclosed in the following tables. Loans securitized/sold represent loans in which the Corporation has continuing involvement in the form of credit recourse.

156

2016
(In thousands)	Total principal amount of loans, net of unearned		Principal amount 60 days or more past due		Net credit losses (recoveries)
Loans (owned and managed):
Commercial	$	10,798,507	$	314,339	$	13,073
Construction		776,300		1,668		(2,935	)
Legacy		45,293		3,683		(1,913	)
Lease financing		702,893		4,418		3,888
Mortgage		8,448,883		1,074,252		68,530
Consumer		3,754,393		104,895		85,398
Covered loans		572,878		84,079		2,716
Less:
Loans securitized / sold		1,663,701		119,458		2,281
Loans held-for-sale		88,821		—		(5,445	)
Loans held-in-portfolio	$	23,346,625	$	1,467,876	$	171,921

2015
(In thousands)	Total principal amount of loans, net of unearned		Principal amount 60 days or more past due		Net credit losses (recoveries)
Loans (owned and managed):
Commercial	$	10,144,237	$	411,291	$	107,955
Construction		681,201		14,086		(886	)
Legacy		64,436		4,311		(2,760	)
Lease financing		627,650		4,639		3,303
Mortgage		9,011,473		1,188,290		47,552
Consumer		3,837,679		106,194		92,926
Covered loans		646,115		101,451		58,880
Less:
Loans securitized / sold		1,883,561		144,568		811
Loans held-for-sale		137,000		45,719		37,602
Loans held-in-portfolio	$	22,992,230	$	1,639,975	$	268,557

157

Note 15 - Premises and equipment

The premises and equipment are stated at cost less accumulated depreciation and amortization as follows:

(In thousands)	Useful life in years	2016		2015
Land		$	120,519	$	116,701
Buildings	10-50		516,758		495,631
Equipment	2-10		309,294		302,656
Leasehold improvements	3-10		76,637		70,449
			902,689		868,736
Less - Accumulated depreciation and amortization			514,892		503,829
Subtotal			387,797		364,907
Construction in progress			35,665		21,003
Total premises and equipment, net		$	543,981	$	502,611

Depreciation and amortization of premises and equipment for the year 2016 was $46.9 million (2015 -$47.5 million; 2014 - $47.1 million), of which $22.6 million (2015 - $22.9 million; 2014 - $23.8 million) was charged to occupancy expense and $24.3 million (2015 - $24.6 million; 2014 - $23.3 million) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $27.8 million (2015 - $28.1 million; 2014 - $28.1 million).

158

Note 16 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the years ended December 31, 2016, 2015 and 2014. During the second quarter of 2015, the Corporation completed a bulk sale of $37 million of covered OREOs.

	For the year ended December 31, 2016
(In thousands)	Non-covered OREO Commercial/Construction			Non-covered OREO Mortgage			Covered OREO Mortgage			Total
Balance at beginning of period	$	32,471		$	122,760		$	36,685		$	191,916
Write-downs in value		(2,909	)		(9,889	)		(2,273	)		(15,071	)
Additions		7,372			105,140			17,588			130,100
Sales		(15,894	)		(56,826	)		(18,206	)		(90,926	)
Other adjustments		(639	)		(1,141	)		(1,666	)		(3,446	)
Ending balance	$	20,401		$	160,044		$	32,128		$	212,573

	For the year ended December 31, 2015
(In thousands)	Non-covered OREO Commercial/Construction			Non-covered OREO Mortgage			Covered OREO Commercial/Construction			Covered OREO Mortgage			Total
Balance at beginning of period	$	38,983		$	96,517		$	85,394		$	44,872		$	265,766
Write-downs in value		(13,356	)		(8,567	)		(20,350	)		(3,891	)		(46,164	)
Additions		17,671			86,040			9,661			25,019			138,391
Sales		(25,065	)		(53,782	)		(59,749	)		(25,990	)		(164,586	)
Other adjustments		(266	)		(540	)		(452	)		(233	)		(1,491	)
Transfer to non-covered status[1]		14,504			3,092			(14,504	)		(3,092	)		—
Ending balance	$	32,471		$	122,760		$	—		$	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.

	For the year ended December 31, 2014
(In thousands)	Non-covered OREO Commercial/Construction			Non-covered OREO Mortgage			Covered OREO Commercial/Construction			Covered OREO Mortgage			Total
Balance at beginning of period	$	48,649		$	86,852		$	120,215		$	47,792		$	303,508
Write-downs in value		(7,112	)		(3,628	)		(26,657	)		(4,969	)		(42,366	)
Additions		16,200			65,300			55,582			21,769			158,851
Sales		(20,042	)		(49,618	)		(59,219	)		(19,028	)		(147,907	)
Other adjustments		1,288			(2,389	)		(4,527	)		(692	)		(6,320	)
Ending balance	$	38,983		$	96,517		$	85,394		$	44,872		$	265,766

159

Note 17 – Other assets

The caption of other assets in the consolidated statements of financial condition consists of the following major categories:

(In thousands)	2016		2015
Net deferred tax assets (net of valuation allowance)	$	1,243,668	$	1,302,452
Investments under the equity method		218,062		212,838
Prepaid taxes		172,550		180,969
Other prepaid expenses		90,320		79,215
Derivative assets		14,085		16,959
Trades receivable from brokers and counterparties		46,630		78,759
Principal, interest and escrow servicing advances		69,711		79,862
Guaranteed mortgage loan claims receivable		152,403		101,628
Others		138,081		140,480
Total other assets	$	2,145,510	$	2,193,162

160

Note 18 - Investments in equity investees

During the year ended December 31, 2016, the Corporation recorded earnings of $31.3 million, from its equity investments, compared to $24.4 million for the year ended December 31, 2015. The carrying value of the Corporation’s equity method investments was $ 218 million and $ 213 million at December 31, 2016 and 2015, respectively.

The following table presents aggregated summarized financial information of the Corporation’s equity method investees:

Years ended December 31,	2016		2015		2014
(In thousands)
Operating results:
Total revenues	$	852,160	$	643,632	$	715,966
Total expenses		634,173		414,975		343,100
Income tax expense		47,434		33,920		43,993
Net income	$	170,553	$	194,737	$	328,873

At December 31,	2016		2015
(In thousands)
Balance Sheet:
Total assets	$	7,640,819	$	7,647,048
Total liabilities	$	5,778,619	$	5,388,229

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.

161

Note 19 – Goodwill and other intangible assets

The changes in the carrying amount of goodwill for the years ended December 31, 2016, and 2015, allocated by reportable segments, were as follows (refer to Note 42 for the definition of the Corporation’s reportable segments):

2016
(In thousands)	Balance at January 1, 2016		Goodwill on acquisition		Purchase accounting adjustments		Goodwill impairment			Balance at December 31,2016
Banco Popular de Puerto Rico	$	280,221	$	—	$	—	$	(3,801	)	$	276,420
Banco Popular North America		346,167		—		4,707		—			350,874
Total Popular, Inc.	$	626,388	$	—	$	4,707	$	(3,801	)	$	627,294
2015
(In thousands)	Balance at January 1, 2015		Goodwill on acquisition		Purchase accounting adjustments		Goodwill impairment			Balance at December 31, 2015
Banco Popular de Puerto Rico	$	250,109	$	3,899	$	26,213	$	—		$	280,221
Banco Popular North America		215,567		38,735		91,865		—			346,167
Total Popular, Inc.	$	465,676	$	42,634	$	118,078	$	—		$	626,388

During the year ended December 31, 2016, the Corporation recorded a goodwill impairment charge of $3.8 million at Popular Securities as part of its annual goodwill impairment test and purchase accounting adjustments of $4.7 million related to the Doral Bank Transaction.

During the year ended December 31, 2015, the goodwill recorded of $163.1 million, after purchase accounting adjustments of $120.5 million, was related to the Doral Bank Transaction. The Corporation also recorded purchase accounting adjustments during 2015 of $2.4 million to reduce the goodwill related to the acquisition of an insurance benefits business during 2014.

At December 31, 2016 and 2015, the Corporation had $ 6.1 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark.

The following table reflects the components of other intangible assets subject to amortization:

(In thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
December 31, 2016
Core deposits	$	37,274	$	18,624	$	18,650
Other customer relationships		36,449		16,162		20,287
Total other intangible assets	$	73,723	$	34,786	$	38,937
December 31, 2015
Core deposits	$	63,539	$	38,464	$	25,075
Other customer relationships		37,665		10,745		26,920
Total other intangible assets	$	101,204	$	49,209	$	51,995

162

During the year ended December 31, 2016, core deposit intangibles with a gross amount of $26.3 million became fully amortized during 2016.

During the year ended December 31, 2015, the Corporation recorded $12.8 million in core deposit intangibles related to the Doral Bank Transaction, net of purchase accounting adjustments of $10.8 million. Also, the Corporation recorded $17.3 million in customer relationship intangibles related to the purchase of the Doral Insurance Agency portfolio which was part of a separate bidding process after Doral Financial Corporation filed for bankruptcy.

During the year ended December 31, 2016, the Corporation recognized $ 12.1 million in amortization expense related to other intangible assets with definite useful lives (2015 - $ 11.0 million; 2014 - $8.2 million).

The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:

(In thousands)
Year 2017	$	9,378
Year 2018		9,286
Year 2019		9,042
Year 2020		4,967
Year 2021		2,157

Results of the Goodwill Impairment Test

The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for 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 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 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.

The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2016 using July 31, 2016 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodwill is assigned to the reporting units when carrying out a business combination.

163

In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units.

The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include:

• a selection of comparable publicly traded companies, based on nature of business, location and size;

• a selection of comparable acquisition and capital raising transactions;

• the discount rate applied to future earnings, based on an estimate of the cost of equity;

• the potential future earnings of the reporting unit; and

• the market growth and new business assumptions.

For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no control premium adjustment is made to the comparable companies market multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment.

For purposes of the discounted cash flows (“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) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 9.47% to 13.72% for the 2016 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary.

Popular Securities failed Step 1 of the annual goodwill impairment evaluation as of July 31, 2016 requiring the completion of Step 2. The results of the Step 2 indicated that the implied fair value of goodwill was below the carrying value resulting in an impairment charge of all goodwill in that reporting unit of $3.8 million at July 31, 2016.

For the BPPR reporting unit, the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPPR’s equity value by approximately $549 million or 16% in the July 31, 2016 annual test.

BPNA failed Step 1 in the annual test as of July 31, 2016 since its carrying amount exceeded its fair value by $84 million or 5% requiring the completion of Step 2. The results of Step 2 indicated that the implied fair value of goodwill exceeded the goodwill carrying value at July 31, 2016 by $166 million resulting in no goodwill impairment. If the fair value of BPNA, which is principally impacted by its expected level of profitability, declines further in the future without a corresponding decrease in the fair value of its net assets or if loan discounts improve without a corresponding increase in fair value of the BPNA reporting unit, the Corporation may be required to record a goodwill impairment charge.

The goodwill balance of BPPR and BPNA, as legal entities, represented approximately 98% of the Corporation’s total goodwill balance as of the July 31, 2016 valuation date.

Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of Popular, Inc. concluding that the fair value results determined for the reporting units in the July 31, 2016 annual assessment were reasonable.

164

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 is recorded. Declines in the Corporation’s market capitalization could increase the risk of goodwill impairment in the future.

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.

December 31, 2016
(In thousands)	Balance at January 1, 2016 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2016 (net amounts)		Balance at December 31, 2016 (gross amounts)		Accumulated impairment losses		Balance at December 31, 2016 (net amounts)
Banco Popular de Puerto Rico	$	280,221	$	—	$	280,221	$	280,221	$	3,801	$	276,420
Banco Popular North America		510,578		164,411		346,167		515,285		164,411		350,874
Total Popular, Inc.	$	790,799	$	164,411	$	626,388	$	795,506	$	168,212	$	627,294

December 31, 2015
(In thousands)	Balance at January 1, 2015 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2015 (net amounts)		Balance at December 31, 2015 (gross amounts)		Accumulated impairment losses		Balance at December 31, 2015 (net amounts)
Banco Popular de Puerto Rico	$	250,109	$	—	$	250,109	$	280,221	$	—	$	280,221
Banco Popular North America		379,978		164,411		215,567		510,578		164,411		346,167
Total Popular, Inc.	$	630,087	$	164,411	$	465,676	$	790,799	$	164,411	$	626,388

165

Note 20 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:

(In thousands)	December 31, 2016		December 31, 2015
Savings accounts	$	7,793,533	$	7,010,391
NOW, money market and other interest bearing demand deposits		8,012,706		5,632,449
Total savings, NOW, money market and other interest bearing demand deposits		15,806,239		12,642,840
Certificates of deposit:
Under $100,000		3,570,956		4,014,359
$100,000 and over		4,138,586		4,151,009
Total certificates of deposit		7,709,542		8,165,368
Total interest bearing deposits	$	23,515,781	$	20,808,208

A summary of certificates of deposit by maturity at December 31, 2016 follows:

(In thousands)
2017	$	3,946,867
2018		1,347,604
2019		653,080
2020		907,971
2021		802,593
2022 and thereafter		51,427
Total certificates of deposit	$	7,709,542

At December 31, 2016, the Corporation had brokered deposits amounting to $ 0.6 billion (December 31, 2015 - $ 1.3 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $6 million at December 31, 2016 (December 31, 2015 - $11 million).

166

Note 21 – Borrowings

The following table presents the composition of fed funds purchased and assets sold under agreements to repurchase at December 31, 2016 and December 31, 2015.

(In thousands)	December 31, 2016		December 31, 2015
Federal funds purchased	$	—	$	50,000
Assets sold under agreements to repurchase		479,425		712,145
Total federal funds purchased and assets sold under agreements to repurchase	$	479,425	$	762,145

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

	December 31, 2016					December 31, 2015
(Dollars in thousands)	Repurchase liability		Repurchase liability weighted average interest rate			Repurchase liability		Repurchase liability weighted average interest rate
U.S. Treasury Securities
Within 30 days	$	32,700		0.85	%	$	—		—	%
After 90 days		19,819		1.61			—		—
Total U.S. Treasury Securities		52,519		1.14			—		—
Obligations of U.S. government sponsored entities
Within 30 days		95,720		1.00			243,708		0.07
After 30 to 90 days		142,299		0.91			—		—
After 90 days		25,380		1.08			23,366		0.60
Total obligations of U.S. government sponsored entities		263,399		0.96			267,074		0.12
Mortgage-backed securities
Within 30 days		39,108		1.05			124,878		0.72
After 30 to 90 days		58,552		0.94			154,582		0.75
After 90 days		54,560		1.09			142,441		1.84
Total mortgage-backed securities		152,220		1.02			421,901		1.11
Collateralized mortgage obligations
Within 30 days		11,287		0.28			10,298		0.28
After 30 to 90 days		—		—			12,872		0.75
Total collateralized mortgage obligations		11,287		0.28			23,170		0.54
Total	$	479,425		0.98	%	$	712,145		0.72	%

Repurchase agreements in portfolio are generally short-term, often overnight and Popular acts as borrowers transferring assets to the counterparty. As such our risk is very limited. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.

167

Federal funds purchased and assets sold under agreements to repurchase:

(Dollars in thousands)	2016			2015
Maximum aggregate balance outstanding at any month-end	$	954,253		$	1,224,064
Average monthly aggregate balance outstanding	$	757,230		$	1,023,905
Weighted average interest rate:
For the year		1.01	%		0.73	%
At December 31		1.12	%		0.88	%

The following table presents information related to the Corporation’s other short-term borrowings for the periods ended December 31, 2016 and 2015.

Other short-term borrowings:

(Dollars in thousands)	2016			2015
Balance outstanding at the end of the period	$	1,200		$	1,200
Maximum aggregate balance outstanding at any month-end	$	31,200		$	128,200
Average monthly aggregate balance outstanding	$	6,266		$	4,501
Weighted average interest rate:
For the year		2.15	%		2.69	%
At December 31		9.00	%		9.00	%

The following table presents the composition of notes payable at December 31, 2016 and December 31, 2015.

(In thousands)	December 31, 2016		December 31, 2015
Advances with the FHLB with maturities ranging from 2017 through 2029 paying interest at monthly fixed rates ranging from 0.81% to 4.19 % (2015 - 0.41% to 4.19%)	$	608,193	$	747,072
Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest monthly at a floating rates ranging from 0.22% to 0.34% over the 1 month LIBOR		34,164		—
Advances with the FHLB with maturities ranging from 2017 through 2019 paying interest quarterly at a floating rate from (0.01)% to 0.24% over the 3 month LIBOR (2015 - 0.24% over the 3 month LIBOR)		30,313		14,429
Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $5,212 (2015 - $7,296)		444,788		442,704
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327%, net of debt issuance costs of $476 (2015 - $505)		439,323		439,295
Others		18,071		19,008
Total notes payable	$	1,574,852	$	1,662,508

168

A breakdown of borrowings by contractual maturities at December 31, 2016 is included in the table below.

(In thousands)	Assets sold under agreements to repurchase		Short-term borrowings		Notes payable		Total
Year
2017	$	479,425	$	1,200	$	155,122	$	635,747
2018		—		—		183,920		183,920
2019		—		—		564,699		564,699
2020		—		—		112,309		112,309
2021		—		—		21,694		21,694
Later years		—		—		537,108		537,108
Total borrowings	$	479,425	$	1,200	$	1,574,852	$	2,055,477

At December 31, 2016 and 2015, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.8 billion and $3.9 billion, respectively, of which $673 million and $762 million, respectively, were used. In addition, at December 31, 2016, the Corporation had placed $200 million of the available FHLB credit facility as collateral for a municipal letter of credit to secure deposits. The FHLB borrowing facilities are collateralized with loans held-in-portfolio, and do not have restrictive covenants or callable features.

Also, at December 31, 2016, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York amounting to $1.2 billion (2015 - $1.3 billion), which remained unused at December 31, 2016 and 2015. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions.

169

Note 22 – Offsetting of financial assets and liabilities

The following tables present the potential effect of rights of setoff associated with the Corporation’s recognized financial assets and liabilities at December 31, 2016 and 2015.

As of December 31, 2016
(In thousands)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position
							Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
Derivatives	$	14,094	$	—	$	14,094	$	551	$	—	$	—	$	13,543
Reverse repurchase agreements		23,637		—		23,637		—		23,637		—		—
Total	$	37,731	$	—	$	37,731	$	551	$	23,637	$	—	$	13,543
As of December 31, 2016
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position
							Financial Instruments		Securities Collateral Pledged		Cash Collateral Pledged		Net Amount
Derivatives	$	12,842	$	—	$	12,842	$	551	$	747	$	—	$	11,544
Repurchase agreements		479,425		—		479,425		—		479,425		—		—
Total	$	492,267	$	—	$	492,267	$	551	$	480,172	$	—	$	11,544
As of December 31, 2015
(In thousands)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position
							Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
Derivatives	$	16,959	$	—	$	16,959	$	114	$	—	$	—	$	16,845
Reverse repurchase agreements		96,338		—		96,338		—		96,338		—		—
Total	$	113,297	$	—	$	113,297	$	114	$	96,338	$	—	$	16,845

170

As of December 31, 2015
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position
							Financial Instruments		Securities Collateral Pledged		Cash Collateral Received		Net Amount
Derivatives	$	14,343	$	—	$	14,343	$	114	$	4,050	$	—	$	10,179
Repurchase agreements		712,145		—		712,145		—		712,145		—		—
Total	$	726,488	$	—	$	726,488	$	114	$	716,195	$	—	$	10,179

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.

171

Note 23 – Trust preferred securities

At December 31, 2016 and 2015, statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation.

The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America.

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of financial condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.

The following table presents financial data pertaining to the different trusts at December 31, 2016 and 2015.

(Dollars in thousands)
							Popular
	BanPonce			Popular			North America			Popular
Issuer	Trust I			Capital Trust I			Capital Trust I			Capital Trust II
Capital securities	$	52,865		$	181,063		$	91,651		$	101,023
Distribution rate		8.327	%		6.700	%		6.564	%		6.125	%
Common securities	$	1,637		$	5,601		$	2,835		$	3,125
Junior subordinated debentures aggregate liquidation amount	$	54,502		$	186,664		$	94,486		$	104,148
Stated maturity date		February			November			September			December
		2027			2033			2034			2034
Reference notes		[1],[3],[6]			[2],[4],[5]			[1],[3],[5]			[2],[4],[5]

[1] Statutory business trust that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation.

[2] Statutory business trust that is wholly-owned by the Corporation.

[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.

[6] Same as [5] above, except that the investment company event does not apply for early redemption.

Basel III capital rules require the phase out of non-qualifying Tier 1 capital instruments such as trust preferred securities. At December 31, 2016, the Corporation had $427 million in trust preferred securities outstanding which no longer qualified for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment.

172

Note 24 – Stockholders’ equity

The Corporation has 30,000,000 shares of authorized preferred stock that may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s shares of preferred stock issued and outstanding at December 31, 2016 and 2015 consisted of:

• 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, 2016, 2015 and 2014. Outstanding shares of 2003 Series A Preferred Stock amounted to 885,726 at December 31, 2016, 2015 and 2014.

• 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 Corporation with the consent of the Board 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, 2016, 2015 and 2014. Outstanding shares of 2008 Series B Preferred Stock amounted to 1,120,665 at December 31, 2016, 2015 and 2014.

As part of the Series C Preferred Stock transaction with the U.S. Treasury effected on December 5, 2008, the Corporation issued to the U.S. Treasury a warrant to purchase 2,093,284 shares of the Corporation’s common stock at an exercise price of $67 per share. On July 23, 2014, the Corporation completed the repurchase of the outstanding warrant at a repurchase price of $3.0 million. With the completion of this transaction, the Corporation completed its exit from the TARP Capital Purchase Program.

The Corporation’s common stock trades on the NASDAQ Stock Market LLC (the “NASDAQ”) under the symbol BPOP. The Corporation voluntarily delisted its 2003 Series A and 2008 Series B Preferred Stock from the NASDAQ effective October 8, 2009.

The Corporation’s common stock ranks junior to all series of preferred stock as to dividend rights and / or as to rights on liquidation, dissolution or winding up of the Corporation. Dividends on each series of preferred stocks are payable if declared. The Corporation’s ability to declare or pay dividends 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. Cash dividends of $ 0.60 and $0.30 per common share outstanding were declared during 2016 and 2015, respectively (no dividends were declared in 2014). The dividends declared during 2016 amounted to $ 62.2 million and $31.1 million in 2015, of which $ 15.6 million and $15.5 million were payable to shareholders of common stock at December 31, 2016 and 2015, respectively ($0 as of December 31, 2014). On January 23, 2017, the Corporation’s Board of Directors approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. The dividend is payable on April 3, 2017 to shareholders of record as of March 17, 2017. The Board also approved a common stock repurchase plan of up to $75 million, which may be executed in the open market or in privately negotiated transactions. The timing and exact amount of the share repurchases will be subject to various factors, including the Company’s capital position, financial performance and market condition.

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

173

the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund amounted to $ 513 million at December 31, 2016 (2015 - $ 495 million; 2014 - $ 469 million). During 2016, $ 18 million was transferred to the statutory reserve account (2015 - $ 26 million, 2014 - $ 24 million). BPPR was in compliance with the statutory reserve requirement in 2016, 2015 and 2014.

174

Note 25 – Regulatory capital requirements

The Corporation and its banking subsidiaries are subject to various regulatory capital requirements imposed by the federal banking agencies. Failure 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, BPPR and BPNA became subject to Basel III capital requirements, including also revised minimum and well capitalized regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets.

The Basel III Capital Rules introduced a new capital measure known as Common Equity Tier I (“CET1”) and related regulatory capital ratio CET1 to risk-weighted assets.

The Basel III Capital Rules provide that a depository institution will be deemed to be well capitalized if it maintained a leverage ratio of at least 5%, a CET1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8% and a total risk-based ratio of at least 10%. Management has determined that at December 31, 2016 and 2015, the Corporation exceeded all capital adequacy requirements to which it is subject.

At December 31, 2016 and 2015, BPPR and BPNA were well-capitalized under the regulatory framework of Basel III.

The Corporation has been designated by the Federal Reserve Board as a Financial Holding Company (“FHC”) and is eligible to engage in certain financial activities permitted under the Gramm-Leach-Bliley Act of 1999.

The following tables present the Corporation’s risk-based capital and leverage ratios at December 31, 2016 and 2015 under the Basel III regulatory guidance.

	Actual					Capital adequacy minimum requirement (including conservation capital buffer)
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
	2016
Total Capital (to Risk-Weighted Assets):
Corporation	$	4,869,215		19.48	%	$	2,156,365		8.625	%
BPPR		3,678,619		19.53			1,624,727		8.625
BPNA		1,040,234		17.91			501,075		8.625
Common Equity Tier I Capital (to Risk-Weighted Assets):
Corporation	$	4,121,208		16.48	%	$	1,281,318		5.125	%
BPPR		3,436,615		18.24			965,417		5.125
BPNA		997,094		17.16			297,740		5.125
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	4,121,208		16.48	%	$	1,656,338		6.625	%
BPPR		3,436,615		18.24			1,247,979		6.625
BPNA		997,094		17.16			384,883		6.625
Tier I Capital (to Average Assets):
Corporation	$	4,121,208		10.91	%	$	1,511,403		4	%
BPPR		3,436,615		11.53			1,191,783		4
BPNA		997,094		13.02			306,375		4

175

	Actual					Capital adequacy minimum requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
	2015
Total Capital (to Risk-Weighted Assets):
Corporation	$	4,692,409		18.78	%	$	1,998,971		8	%
BPPR		3,591,547		18.27			1,572,988		8
BPNA		945,132		19.02			397,519		8
Common Equity Tier I Capital (to Risk-Weighted Assets):
Corporation	$	4,049,576		16.21	%	$	1,124,421		4.5	%
BPPR		3,339,165		16.98			884,806		4.5
BPNA		908,722		18.29			223,604		4.5
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	4,049,576		16.21	%	$	1,499,229		6	%
BPPR		3,339,165		16.98			1,179,741		6
BPNA		908,722		18.29			298,139		6
Tier I Capital (to Average Assets):
Corporation	$	4,049,576		11.82	%	$	1,370,145		4	%
BPPR		3,339,165		12.21			1,094,291		4
BPNA		908,722		13.74			264,547		4

The following table presents the minimum amounts and ratios for the Corporation’s banks to be categorized as well-capitalized.

176

	2016					2015
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets):
BPPR	$	1,883,741		10	%	$	1,966,236		10	%
BPNA		580,956		10			496,899		10
Common Equity Tier I Capital (to Risk-Weighted Assets):
BPPR	$	1,224,432		6.5	%	$	1,278,053		6.5	%
BPNA		377,621		6.5			322,984		6.5
Tier I Capital (to Risk-Weighted Assets):
BPPR	$	1,506,993		8	%	$	1,572,988		8	%
BPNA		464,765		8			397,519		8
Tier I Capital (to Average Assets):
BPPR	$	1,489,729		5	%	$	1,367,864		5	%
BPNA		382,968		5			330,683		5

The final Basel III capital rules require the phase out of non-qualifying Tier 1 capital instruments such as trust preferred securities. At December 31, 2016, the Corporation had $427 million in trust preferred securities outstanding. On January 1, 2016, all $427 million in principal amount of the trust preferred securities no longer qualified for Tier 1 capital treatment, but instead qualified for Tier 2 capital treatment.

Beginning January 1, 2016, the Basel III final rules introduce a phase-in capital conservation buffer of 2.5% of risk-weighted assets that is effectively layered on top of the minimum capital risk-based ratios, which places restrictions on the amount of retained earnings that may be used for distributions or discretionary bonus payments as risk-based capital ratios approach their respective “adequately capitalized minimums.”

The following table presents the capital requirements for a standardized approach banking organization under Basel III final rules.

							Minimum Capital Plus Capital Conservation Buffer
	Minimum Capital			Well-Capitalized			2016			2017			2018			2019
Common Equity Tier 1 to Risk-Weighted Assets		4.5	%		6.5	%		5.125	%		5.750	%		6.375	%		7.000	%
Tier 1 Capital to Risk-Weighted Assets		6.0			8.0			6.625			7.250			7.875			8.500
Total Capital to Risk-Weighted Assets		8.0			10.0			8.625			9.250			9.875			10.500
Leverage Ratio		4.0			5.0			N/A			N/A			N/A			N/A

177

Note 26 – Other comprehensive loss

The following table presents changes in accumulated other comprehensive loss by component for the years ended December 31, 2016, 2015 and 2014.

	Changes in Accumulated Other Comprehensive Loss by Component [1]
		Years ended December 31,
(In thousands)		2016			2015			2014
Foreign currency translation	Beginning Balance	$	(35,930	)	$	(32,832	)	$	(36,099	)
	Other comprehensive loss before reclassifications		(4,026	)		(3,098	)		(4,451	)
	Amounts reclassified from accumulated other comprehensive loss		—			—			7,718
	Net change		(4,026	)		(3,098	)		3,267
	Ending balance	$	(39,956	)	$	(35,930	)	$	(32,832	)
Adjustment of pension and postretirement benefit plans	Beginning Balance	$	(211,276	)	$	(205,187	)	$	(104,302	)
	Other comprehensive loss before reclassifications		(11,402	)		(16,032	)		(98,015	)
	Amounts reclassified from accumulated other comprehensive loss for amortization of net losses		13,386			12,261			(5,188	)
	Amounts reclassified from accumulated other comprehensive loss for amortization of prior service credit		(2,318	)		(2,318	)		2,318
	Net change		(334	)		(6,089	)		(100,885	)
	Ending balance	$	(211,610	)	$	(211,276	)	$	(205,187	)
Unrealized net holding gains (losses) on investments	Beginning Balance	$	(9,560	)	$	8,465		$	(48,344	)
	Other comprehensive (loss) income before reclassifications		(58,585	)		(29,871	)		55,987
	Other-than-temporary impairment amounts reclassified from accumulated other comprehensive (loss) income		167			11,959			—
	Amounts reclassified from accumulated other comprehensive (loss) income		(340	)		(113	)		822
	Net change		(58,758	)		(18,025	)		56,809
	Ending balance	$	(68,318	)	$	(9,560	)	$	8,465
Unrealized net losses on cash flow hedges	Beginning Balance	$	(120	)	$	(318	)	$	—
	Other comprehensive loss before reclassifications		(2,203	)		(2,669	)		(4,034	)
	Amounts reclassified from other accumulated other comprehensive loss		1,921			2,867			3,716
	Net change		(282	)		198			(318	)
	Ending balance	$	(402	)	$	(120	)	$	(318	)
	Total	$	(320,286	)	$	(256,886	)	$	(229,872	)

[1] All amounts presented are net of tax.

178

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2016, 2015, and 2014.

	Reclassifications Out of Accumulated Other Comprehensive Loss
	Affected Line Item in the	Years ended December 31,
(In thousands)	Consolidated Statements of Operations	2016			2015			2014
Foreign currency translation
Cumulative translation adjustment reclassified into earnings	Other operating income	$	—		$	—		$	(7,718	)
	Total before tax		—			—			(7,718	)
	Income tax (expense) benefit		—			—			—
	Total net of tax	$	—		$	—		$	(7,718	)
Adjustment of pension and postretirement benefit plans
Amortization of net losses	Personnel costs	$	(21,948	)	$	(20,100	)	$	8,505
Amortization of prior service credit	Personnel costs		3,800			3,800			(3,800	)
	Total before tax		(18,148	)		(16,300	)		4,705
	Income tax benefit (expense)		7,080			6,357			(1,835	)
	Total net of tax	$	(11,068	)	$	(9,943	)	$	2,870
Unrealized holding gains (losses) on investments
Realized gain (loss) on sale of securities	Net gain (loss) on sale and valuation adjustments of investment securities	$	379		$	141		$	(870	)
	Other-than-temporary impairment losses on available-for-sale debt securities		(209	)		(14,445	)		—
	Total before tax		170			(14,304	)		(870	)
	Income tax benefit		3			2,458			48
	Total net of tax	$	173		$	(11,846	)	$	(822	)
Unrealized net losses on cash flow hedges
Forward contracts	Mortgage banking activities	$	(3,149	)	$	(4,702	)	$	(6,091	)
	Total before tax		(3,149	)		(4,702	)		(6,091	)
	Income tax benefit		1,228			1,835			2,375
	Total net of tax	$	(1,921	)	$	(2,867	)	$	(3,716	)
	Total reclassification adjustments, net of tax	$	(12,816	)	$	(24,656	)	$	(9,386	)

179

Note 27 – Guarantees

The Corporation has obligations upon the occurrence of certain events under financial guarantees provided in certain contractual agreements as summarized below.

The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by other financial institutions, in each case to guarantee the performance of various customers to third parties. If the customers failed to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. At December 31, 2016, the Corporation recorded a liability of $0.3 million (December 31, 2015 - $0.5 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. In accordance with the provisions of ASC Topic 460, the Corporation recognizes at fair value the obligation at inception of the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contracts amount in standby letters of credit outstanding at December 31, 2016 and 2015, shown in Note 28, represent the maximum potential amount of future payments that the Corporation could be 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, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject in certain instances, to lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. The Corporation has not sold any mortgage loans subject to credit recourse since 2009. Also, from time to time, the Corporation may sell, in bulk sale transactions, residential mortgage loans and Small Business Administration (“SBA”) commercial loans subject to credit recourse or to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties.

At December 31, 2016, the Corporation serviced $1.7 billion (December 31, 2015 - $1.9 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2016, the Corporation repurchased approximately $ 44 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (2015 - $ 59 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At December 31, 2016, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 54 million (December 31, 2015 - $ 59 million). The following table shows the changes in the Corporation’s liability of estimated losses from these credit recourses agreements, included in the consolidated statements of financial condition during the years ended December 31, 2016 and 2015.

	December 31,
(In thousands)	2016			2015
Balance as of beginning of period	$	58,663		$	59,438
Provision for recourse liability		14,548			22,938
Net charge-offs		(18,722	)		(23,713	)
Balance as of end of period	$	54,489		$	58,663

180

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 sold” in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios, and loan aging, among others.

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. There were no repurchases under BPPR’s representation and warranty arrangements during the year ended December 31, 2016, compared to $ 175 thousand for the year ended December 31, 2015. A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

The following table presents the changes in the Corporation’s liability for estimated losses associated with the indemnifications and representations and warranties related to loans sold by BPPR for during the years ended December 31, 2016 and 2015.

(In thousands)	2016			2015
Balance as of beginning of period	$	8,087		$	15,959
Provision (reversal) for representation and warranties		3,140			(5,446	)
Net charge-offs		(291	)		(176	)
Settlements paid		—			(2,250	)
Balance as of end of period	$	10,936		$	8,087

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At December 31, 2016, the Corporation serviced $18.0 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2015 - $20.6 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At December 31, 2016, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $70 million, including advances on the portfolio acquired from Doral Bank (December 31, 2015 - $80 million). To the extent the mortgage loans underlying the Corporation’s 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.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $149 million at December 31, 2016 and December 31, 2015. In addition, at December 31, 2016 and December 31, 2015, PIHC fully and unconditionally guaranteed on a subordinated basis $427 million, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 23 to the consolidated financial statements for further information on the trust preferred securities.

181

Note 28 – Commitments and contingencies

Off-balance sheet risk

The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of financial condition.

Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows:

(In thousands)	December 31, 2016		December 31, 2015
Commitments to extend credit:
Credit card lines	$	4,562,981	$	4,552,331
Commercial and construction lines of credit		2,966,656		2,619,092
Other consumer unused credit commitments		261,856		262,685
Commercial letters of credit		1,490		2,040
Standby letters of credit		34,644		49,670
Commitments to originate or fund mortgage loans		25,622		21,311

At December 31, 2016 and December 31, 2015, the Corporation maintained a reserve of approximately $9 million and $10 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.

Other commitments

At December 31, 2016 and December 31, 2015, the Corporation also maintained other non-credit commitments for approximately $372 thousand and $9 million, respectively, primarily for the acquisition of other investments.

Business concentration

Since the Corporation’s business activities are currently concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 42 to the consolidated financial statements.

Since February 2014, the three principal rating agencies (Moody’s, S&P and Fitch) have lowered their ratings on the General Obligation bonds of the Commonwealth and the bonds of several other Commonwealth instrumentalities to non-investment grade ratings. In connection with their rating actions, the rating agencies noted various factors, including high levels of public debt, the lack of a clear economic growth catalyst, recurring fiscal budget deficits, the financial condition of the public sector employee pension plans and, more recently, liquidity concerns regarding the Commonwealth and the GDB and their ability to access the capital markets. Currently, the Commonwealth’s general obligation ratings are as follows: S&P, ‘D’, Moody’s, ‘Caa3’, and Fitch, ‘D’.

PROMESA and the Commonwealth’s Fiscal Plan

On June 30, 2016, President Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) into law. PROMESA established a seven-member oversight board with broad powers over the finances of the Commonwealth and its instrumentalities (the “Oversight Board”).

182

Among other things, PROMESA provides for: (i) a stay on litigation to enforce remedies or rights related to outstanding liabilities of the Commonwealth, its political subdivisions, including municipalities, instrumentalities and public corporations and (ii) two separate processes for the restructuring of the debt obligations of such entities. PROMESA also includes other miscellaneous provisions, including relief from certain wage and hour laws and regulations and provisions for identification and expedited permitting of critical infrastructure projects.

During the first meeting of the Oversight Board, held on September 30, 2016, the Oversight Board announced the designation of a number of entities as covered entities under PROMESA, including the Commonwealth, all of its public corporations and retirement systems, UPR, and all affiliates and subsidiaries of the foregoing. While the Oversight Board has the power to designate any of the Commonwealth’s municipalities as covered entities under PROMESA, it has not done so as of the date hereof.

The designation of an entity as a covered entity has various implications under PROMESA. First, it means that the Governor will have to submit such entity’s annual budgets and, if the Oversight Board so requests, its fiscal plans, to the Oversight Board for its review and approval. Second, covered territorial instrumentalities may not issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to their debts without the prior approval of the Oversight Board. Third, pursuant to certain contracting guidelines approved by the Oversight Board, prior Oversight Board approval is required in connection with any transaction undertaken by a covered entity that (i) is outside the ordinary course of business or (ii) has a material financial impact. Finally, covered entities could also potentially be eligible to use the restructuring procedures provided by PROMESA. The first, Title VI, is a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debt. If a supermajority of creditors of a certain category agree, that agreement can bind all other creditors in such category. The second, Title III, draws on the federal bankruptcy code and provides a court-supervised process for a comprehensive restructuring led by the Oversight Board.

At December 31, 2016, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 584 million, of which approximately $ 529 million is outstanding ($669 million and $ 578 million, respectively, at December 31, 2015). Of the amount outstanding, $ 459 million consists of loans and $ 70 million are securities ($ 502 million and $ 76 million at December 31, 2015). Also, of the amount outstanding, $ 17 million represents obligations from the Government of Puerto Rico or its public corporations each of which has been designated as a covered entity under PROMESA ($ 76 million at December 31, 2015). During the quarter ended September 30, 2016, BPPR sold its $40 million credit facility from Puerto Rico Electric Power Authority (“PREPA”). The remaining $ 512 million outstanding represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment ($ 502 million at December 31, 2015). These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. These loans have seniority to the payment of operating cost and expenses of the municipality. The automatic stay on litigation imposed by PROMESA applies to all municipal obligations to which we are a party. Furthermore, although the PROMESA Oversight Board has not designated any of the Commonwealth’s 78 municipalities as covered entities under PROMESA, it may decide to do so in the future. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these loans

183

and securities, resulting in losses to us. 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)	Investment Portfolio		Loans		Total Outstanding		Total Exposure
Central Government
Within 1 year	$	—	$	—	$	—	$	50,000
After 1 to 5 years		3,456		—		3,456		3,456
After 5 to 10 years		13,116		—		13,116		13,116
After 10 years		407		—		407		407
Total Central Government		16,979		—		16,979		66,979
Government Development Bank (GDB)
After 1 to 5 years		2		—		2		2
Total Government Development Bank (GDB)		2		—		2		2
Public Corporations:
Puerto Rico Aqueduct and Sewer Authority
After 10 years		460		—		460		460
Total Puerto Rico Aqueduct and Sewer Authority		460		—		460		460
Puerto Rico Highways and Transportation Authority
After 5 to 10 years		4		—		4		4
Total Puerto Rico Highways and Transportation Authority		4		—		4		4
Municipalities
Within 1 year		3,105		37,621		40,726		45,878
After 1 to 5 years		14,540		128,008		142,548		142,548
After 5 to 10 years		18,635		145,005		163,640		163,640
After 10 years		16,820		148,160		164,980		164,980
Total Municipalities		53,100		458,794		511,894		517,046
Total Direct Government Exposure	$	70,545	$	458,794	$	529,339	$	584,491

In addition, at December 31, 2016, the Corporation had $406 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $326 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2015 - $316 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Under recently enacted legislation, the Governor is authorized to impose a temporary moratorium on the financial obligations of Puerto Housing Finance Authority. Also, the Corporation had $49 million in Puerto Rico housing bonds pass-through securities backed by FNMA, GNMA or residential loans, and $31 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($50 million and $28 million at December 31, 2015, respectively).

Other contingencies

As indicated in Note 12 to the consolidated financial statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The fair value of the true-up payment obligation was estimated at $ 153 million at December 31, 2016 (December 31, 2015 - $ 120 million). For additional information refer to Note 12.

Legal Proceedings

The nature of Popular’s business ordinarily results in a certain number of claims, litigation, investigations, and legal and administrative cases and 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 it has meritorious defenses) when, in management’s judgment, it is in the best interest of both the Corporation and its shareholders to do so.

On at least a quarterly basis, Popular assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable that the Corporation will incur a material loss and the

184

amount can be reasonably estimated, the Corporation 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.

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates that the aggregate range of reasonably possible losses (with respect to those matters where such limits may be determined, in excess of amounts accrued), for current legal proceedings ranges from $0 to approximately $33.9 million as of December 31, 2016. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, management believes that the amount it has already accrued is adequate and any incremental liability arising from the Corporation’s legal proceedings will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation’s consolidated financial position in a particular period.

Set forth below are descriptions of the Corporation’s significant legal proceedings.

Josefina Valle v. Popular Community Bank

PCB has been named a defendant in a putative class action complaint captioned Josefina Valle, et al. v. Popular Community Bank, filed in November 2012 in the New York State Supreme Court (New York County). Plaintiffs, PCB customers, allege among other things that PCB has engaged in unfair and deceptive acts and trade practices in connection with the assessment of overdraft fees and payment processing on consumer deposit accounts. The complaint further alleges that PCB improperly disclosed its consumer overdraft policies and that the overdraft rates and fees assessed by PCB violate New York’s usury laws. Plaintiffs seek unspecified damages, 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 certain claims based on item processing reordering, misstatement of balance information and failure to notify customers in advance of potential overdrafts. The Court did not, however, allow plaintiffs to replead their claim for the alleged breach of the implied covenant of good faith and fair dealing. On August 12, 2015, the Plaintiffs filed a second amended complaint. On August 24, 2015, PCB filed a Notice of Appeal as to the order granting leave to file the second amended complaint and on September 17, 2015, it filed a motion to dismiss the second amended complaint. On February 18, 2016, the Court granted in part and denied in part PCB’s pending motion to dismiss. The Court dismissed plaintiffs’ unfair and deceptive acts and trade practices claim to the extent it sought to recover overdraft fees incurred prior to September 2011. On March 28, 2016, PCB filed an answer to second amended complaint and on April 7, 2016, it filed a notice of appeal on the partial denial of PCB’s motion to dismiss. A mediation session held on September 21, 2016 proved unsuccessful. Discovery is ongoing.

E-LOAN

PCB has also been named a defendant in a complaint for breach of contract regarding certain alleged repurchase obligations in connection with the origination and sale of residential mortgage loans sold by E-LOAN to plaintiff. In January 2015, the court consolidated this action with the matter of In re: RFC and RESCAP Liquidating Trust Litigation, which is composed of approximately 70 other matters involving repurchase obligation claims filed by RFC, for pretrial purposes. A joint mediation hearing was held on September 21, 2016 but did not result in the settlement of this matter. The case is currently in discovery.

185

Nora Fernandez v. UBS

BPPR and Popular Securities have also been named defendants in a putative class action complaint captioned Nora Fernandez, et al. v. UBS, et al., filed in the United States District Court for the Southern District of New York (SDNY) on May 5, 2014 on behalf of investors in 23 Puerto Rico closed-end investment companies. UBS Financial Services Incorporated of Puerto Rico, another named defendant, is the sponsor and co-sponsor of all 23 funds, while BPPR was co-sponsor, together with UBS, of nine (9) of those funds. Plaintiffs allege breach of fiduciary duty and breach of contract against Popular Securities, aiding and abetting breach of fiduciary duty against BPPR, and similar claims against the UBS entities. The complaint seeks unspecified damages, including disgorgement of fees and attorneys’ fees. On May 30, 2014, plaintiffs voluntarily dismissed their class action in the SDNY and on that same date, they filed a virtually identical complaint in the USDC-PR and requested that the case be consolidated with the matter of In re: UBS Financial Services Securities Litigation, a class action currently pending before the USDC-PR in which neither BPPR nor Popular Securities are parties. The UBS defendants filed an opposition to the consolidation request and moved to transfer the case back to the SDNY on the ground that the relevant agreements between the parties contain a choice of forum clause, with New York as the selected forum. The Popular defendants joined the opposition and motion filed by UBS. By order dated January 30, 2015, the court denied the plaintiffs’ motion to consolidate. By order dated March 30, 2015, the court granted defendants’ motion to transfer. On May 8, 2015, plaintiffs filed an amended complaint in the SDNY containing virtually identical allegations with respect to Popular Securities and BPPR. Defendants filed motions to dismiss the amended complaint on June 18, 2015. Oral arguments were held on the motions to dismiss in front of Judge Stein of the SDNY on October 14, 2016. On December 7, 2016, Judge Stein largely granted the motion to dismiss of BPPR and Popular Securities. Judge Stein’s order (“Order”) dismissed all claims against BPPR and all but two breach of contract claims against Popular Securities brought by one named plaintiff. Specifically, the Order dismissed claims stemming from purchases of the funds in 2005, 2007 and 2011 as time-barred by the Puerto Rico Uniform Securities Act. The Order also dismissed the claims for breach of fiduciary duty, aiding and abetting of a breach of fiduciary duty, and breach of the covenant of good faith and fair dealing stemming from a 2012 purchase for failure to state a claim. The Court granted Plaintiffs 21 days to amend the complaint for the 2012 claims only, but plaintiffs chose not to replead. The Order stated that the final two contract claims, which allege that Popular Securities failed to conduct a suitability analysis for the named plaintiff as required by the parties’ contract would be allowed to proceed, because the Court was not prepared at the motion to dismiss stage, to conclude that the plaintiff was responsible for all investments enough to eliminate Popular Securities’ obligations regarding suitability. The parties are currently in the discovery phase of the case.

Hazard Insurance Commission-Related Litigation

Popular, Inc., BPPR and Popular Insurance, LLC (the “Popular Defendants”) have recently been named defendants in a putative class action complaint captioned Perez Díaz v. Popular, Inc., et al. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the Popular Defendants, as well as Antilles Insurance Company, Real Legacy Insurance Company and MAPFRE-PRAICO Insurance Company (the “Defendant Insurance 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 $400,000,000, 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 filed by all defendants, which was unopposed as of the date of the hearing, was denied with a right to replead following limited targeted discovery.

BPPR has separately been named a defendant in a putative class action complaint captioned Ramirez Torres, et al. v. Banco Popular de Puerto Rico, et al. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the Popular Defendants, as well other financial institutions with insurance brokerage subsidiaries in Puerto Rico. Plaintiffs essentially contend that in November 2015, Antilles Insurance Company obtained approval from the Puerto Rico Insurance Commissioner to market an endorsement that allowed its customers to obtain a reimbursement on their insurance deductible for good experience, but that defendants failed to offer this product or disclose its existence to their customers, favoring other products instead, in violation of their duties as insurance brokers. Plaintiffs seek a determination that defendants unlawfully failed to comply with their legal and contractual duty to disclose the existence of this new insurance product, as well as double or treble damages (the latter subject to a determination that defendants engaged in anti-monopolistic practices in failing to offer this product).

186

Other Matters

Puerto Rico Bonds and Closed-End Investment Funds

The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities. Popular Securities has received customer complaints and is named as a respondent (among other broker-dealers) in 59 arbitration proceedings with aggregate claimed damages of approximately $168 million, including one arbitration with claimed damages of $78 million in which one other Puerto Rico broker-dealer is a co-defendant. It is the view of the Corporation that Popular Securities has meritorious defenses to the claims asserted. The Government’s defaults on its debt, its intention to pursue a comprehensive debt restructuring, including specifically its decisions to declare a moratorium on certain principal payments on bonds including those issued by Government Development Bank for Puerto Rico (the “GDB”), may increase the number of customer complaints (and claimed damages) against Popular Securities concerning Puerto Rico bonds, including bonds issued by GDB, and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the matters described above or a significant increase in customer complaints could have a material adverse effect on Popular.

Mortgage-Related Investigations

The Corporation and its subsidiaries from time to time receive requests for information from departments of the U.S. government that investigate mortgage-related conduct. In particular, the BPPR has received subpoenas and other requests for information from the Federal Housing Finance Agency’s Office of the Inspector General, the Civil Division of the Department of Justice, the Special Inspector General for the Troubled Asset Relief Program and the Federal Department of Housing and Urban Development’s Office of the Inspector General mainly concerning real estate appraisals and residential and construction loans in Puerto Rico. The Corporation is cooperating with these requests.

FDIC Commercial Loss Share Arbitration Proceedings

As described under “Note 12 – FDIC loss share asset and true-up payment obligation”, in connection with the Westernbank FDIC-assisted transaction, on April 30, 2010, BPPR entered into loss share agreements with the FDIC, as receiver, with respect to the covered loans and other real estate owned (“OREO”) that it acquired in the transaction. Pursuant to the terms of the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets began with the first dollar of loss incurred. The FDIC was obligated to reimburse BPPR for 80% of losses with respect to covered assets, and BPPR must reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 80% reimbursement under those loss share agreements. The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement for losses from the FDIC. BPPR believes that it has complied with such terms and conditions. The loss share agreement applicable to the covered commercial and OREO described below provided for loss sharing by the FDIC through the quarter ending June 30, 2015 and provides for reimbursement to the FDIC for recoveries through the quarter ending June 30, 2018.

December 2014 Dispute

On November 25, 2014, the FDIC notified BPPR that it (a) would not reimburse BPPR under the commercial loss share agreement for a $66.6 million loss claim on eight related real estate loans that BPPR restructured and consolidated (collectively, the “Disputed Asset”), and (b) would no longer treat the Disputed Asset as a “Shared-Loss Asset” under the commercial loss share agreement. The FDIC alleged that BPPR’s restructuring and modification of the underlying loans did not constitute a “Permitted Amendment” under the commercial loss share agreement, thereby causing the bank to breach Article III of the commercial loss share agreement. BPPR disagreed with the FDIC’s determinations relating to the Disputed Asset, and accordingly, on December 19, 2014, delivered to the FDIC a notice of dispute under the commercial loss share agreement.

187

BPPR’s loss share agreements with the FDIC specify that disputes can be submitted to arbitration before a review board under the commercial arbitration rules of the American Arbitration Association. On March 19, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board determine BPPR and the FDIC’s disputes concerning the Disputed Asset. The statement of claim requested a declaration that the Disputed Asset was properly considered a “Shared-Loss Asset” under the commercial loss share agreement, a declaration that the restructuring was a “Permitted Amendment” under the commercial loss share agreement, and an order that the FDIC reimburse the bank for approximately $53.3 million for the Charge-Off of the Disputed Asset, plus interest at the applicable rate. On April 1, 2015, the FDIC notified BPPR that it was clawing back approximately $1.7 million in reimbursable expenses relating to the Disputed Asset that the FDIC had previously paid to BPPR. Thus, on April 13, 2015, BPPR notified the American Arbitration Association and the FDIC of an increase in the amount of its damages by approximately $1.7 million. The review board in the arbitration concerning the Disputed Asset was comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. The arbitration hearing was held in August 2016.

On October 3, 2016, the review board in the arbitration described above issued a final award denying BPPR’s request for reimbursement on the Disputed Asset. As a result, for the quarter ended September 30, 2016, the Corporation recognized a pre-tax charge of approximately $55 million and a corresponding reduction to its FDIC indemnification asset.

March 2015 Dispute

In addition, in November and December 2014, BPPR proposed two separate portfolio sales of Shared-Loss Assets to the FDIC. The FDIC refused to consent to either sale, stating that those sales did not represent best efforts to maximize collections on Shared-Loss Assets under the commercial loss share agreement. In March 2015, BPPR proposed a third portfolio sale to the FDIC, and in May 2015, BPPR proposed a fourth portfolio sale to the FDIC.

BPPR disagreed with the FDIC’s characterization of the November and December 2014 portfolio sale proposals and with the FDIC’s interpretation of the commercial loss share agreement provision governing portfolio sales. Accordingly, on March 13, 2015, BPPR delivered to the FDIC a notice of dispute under the commercial loss share agreement. On June 8, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board resolve the disputes concerning those proposed portfolio sales. On June 15, 2015, BPPR amended its statement of claim to include a claim for the FDIC-R’s refusal to timely concur in the third sale proposed in March 2015. On June 29, 2015, the FDIC informed BPPR that it would reimburse the bank for losses arising from the primary portfolio of the third proposed sale, but only subject to conditions to which BPPR objected. The FDIC also informed BPPR that it would not concur in the sale of the remainder (the “secondary portfolio”) of the third proposed sale or in the fourth proposed sale. On September 4, 2015, BPPR filed a second amended statement of claim concerning the FDIC’s refusal to concur in the third and fourth portfolio sales as proposed by BPPR.

On November 25, 2015, BPPR completed the sale of the loans in the primary portfolio of the third proposed sale, the losses from which the FDIC partially reimbursed on July 18, 2016. On June 30, 2016, BPPR completed the sales of the remaining loans included in all of its proposed portfolio sales.

In connection with the arbitration concerning the proposed portfolio sales, BPPR sought damages in the amount of $88.5 million plus interest. The FDIC filed a counterclaim for recoveries allegedly lost on six loans included in the third proposed sale and on the loans and related assets included in the subsequent sales. The arbitration hearing was held in November 2016. The review board in the arbitration was comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. On December 12, 2016, the Review Board issued an award denying BPPR’s loss-share claims on the portfolio sales. As a result, for the quarter ended December 31, 2016, the Corporation recognized a pre-tax charge of approximately $116.8 million in connection with unreimbursed losses considered in the arbitration, the related adjustment to the true-up obligation owed to the FDIC at the end of the loss-share agreements in 2020 and recoveries previously incorporated in the net damages claimed in the arbitration. On January 11, 2017, the FDIC dismissed its counterclaim without prejudice.

January 2016 Dispute

On November 12, 2015, the FDIC notified BPPR that it (a) would deny certain claims included in BPPR’s Second Quarter 2015 Quarterly Certificate and (b) withhold payment of approximately $5.5 million attributed to $6.9 million in losses BPPR claimed under that certificate. In support of its denial, the FDIC alleged that BPPR did not comply with its obligations under the commercial loss

188

share agreement, including compliance with certain provisions of GAAP, acting in accordance with prudent banking practices, managing Shared-Loss Assets in the same manner as BPPR’s non-Shared-Loss Assets, and using best efforts to maximize collections on the Shared-Loss Assets. BPPR disagreed with the FDIC’s allegations relating to the denied claims included in BPPR’s Second Quarter 2015 Quarterly Certificate, and accordingly, on January 27, 2016 delivered to the FDIC a notice of dispute under the commercial loss share agreement. On May 20, 2016, BPPR filed a demand for arbitration with the American Arbitration Association requesting that a review board, comprised of one arbitrator appointed by the BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators, resolve the disputes arising from BPPR’s filing of the Second Quarter 2015 Quarterly Certificate and award BPPR damages in the amount of $4.9 million. On June 29, 2016, the FDIC filed its answering statement and counterclaim, seeking a declaration that the FDIC properly denied a portion of the bank’s shared-loss claim for one of the subject assets. In December 2016, the FDIC withdrew its counterclaim with prejudice on the condition that BPPR agree not to challenge the FDIC’s refusal to reimburse the losses on the loan that was the subject of the FDIC’s counterclaim. On February 10, 2017, BPPR withdrew one of its claims, as a result of which its damages demand was reduced to approximately $4.3 million.

December 2016 Dispute

On December 16, 2016, the FDIC initiated a proceeding before the same panel that sat on a prior arbitration proceeding between BPPR and the FDIC that resulted in a settlement among the parties dated as of October 2014. The panel’s chair also sat on the December 2015 Dispute that resulted in an adverse award for BPPR. Through this proceeding, the FDIC sought to claw back a $12.6 million reimbursement paid on one of the Shared-Loss Assets at issue in the January 2016 Dispute.

On February 23, 2017, the FDIC and BPPR entered into a settlement in principle whereby the parties agreed to withdraw both the January 2016 and the December 2016 Disputes in exchange for a payment by BPPR to the FDIC of approximately $5.5 million. The Corporation does not expect such payment to have a material impact on the value of our loss share asset and related true-up payment obligation to the FDIC.

The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and BPPR reimbursement to the FDIC for ten years (ending on June 30, 2020). As of December 31, 2016, the carrying value of covered loans approximated $573 million, mainly comprised of single-family residential mortgage loans. To the extent that estimated losses on covered loans are not realized before the expiration of the applicable loss sharing agreement, such losses would not be subject to reimbursement from the FDIC and, accordingly, would require us to make a material adjustment in the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken.

189

Note 29 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision-making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt.

Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE.

The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 32 to the consolidated financial statements for additional information on the debt securities outstanding at December 31, 2016 and 2015, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation holds variable interests in the form of servicing fees, since it retains the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party.

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer of GNMA and FNMA loans at December 31, 2016 and 2015.

(In thousands)	2016		2015
Assets
Servicing assets:
Mortgage servicing rights	$	158,562	$	163,224
Total servicing assets	$	158,562	$	163,224
Other assets:
Servicing advances	$	20,787	$	24,431
Total other assets	$	20,787	$	24,431
Total assets	$	179,349	$	187,655
Maximum exposure to loss	$	179,349	$	187,655

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $12.3 billion at December 31, 2016 (December 31, 2015 - $12.8 billion).

The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at December 31, 2016 and 2015 will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

190

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 the acquiring entity’s assets. In addition, BPPR provided these joint ventures with a non-revolving advance facility (the “advance facility”) of $69 million and $35 million, respectively, to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $20 million and $30 million, respectively, to fund certain operating expenses of the joint venture. As part of these transactions, BPPR received $ 48 million and $92 million, respectively, in cash and a 24.9% equity interest in each joint venture. The Corporation is not required to provide any other financial support to these joint ventures.

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 classification of the assets and liabilities related to the Corporation’s variable interests in the non-consolidated VIEs, PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013- International, LLC, and their maximum exposure to loss at December 31, 2016 and 2015.

	PRLP 2011 Holdings, LLC						PR Asset Portfolio 2013-1 International, LLC
(In thousands)	2016			2015			2016			2015
Assets
Loans held-in-portfolio:
Acquisition loan	$	—		$	—		$	—		$	35,121
Advances under the working capital line		—			579			1,391			885
Advances under the advance facility		—			401			2,475			22,296
Total loans held-in-portfolio	$	—		$	980		$	3,866		$	58,302
Accrued interest receivable	$	—		$	10		$	19		$	169
Other assets:
Equity investment	$	9,167		$	13,069		$	22,378		$	25,094
Total assets	$	9,167		$	14,059		$	26,263		$	83,565
Liabilities
Deposits	$	(1,127	)	$	(18,808	)	$	(9,692	)	$	(11,772	)
Total liabilities	$	(1,127	)	$	(18,808	)	$	(9,692	)	$	(11,772	)
Total net assets (liabilities)	$	8,040		$	(4,749	)	$	16,571		$	71,793
Maximum exposure to loss	$	8,040		$	—		$	16,571		$	71,793

191

The Corporation determined that the maximum exposure to loss under a worst case scenario at December 31, 2016 would be not recovering the net assets held by the Corporation as of the reporting date.

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these non-consolidated VIEs has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, these VIEs are not required to be consolidated in the Corporation’s financial statements at December 31, 2016.

192

Note 30 – Derivative instruments and hedging activities

The use of derivatives is incorporated as part of the 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.

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 fair value of the derivative asset. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Corporation, thus creating a repayment risk for the Corporation. To manage the level of credit 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 is negative, 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.

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 guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2016, inclusion of the credit risk in the fair value of the derivatives resulted in loss of $0.9 million (2015 –loss of $ 0.8 million; 2014 –loss of $ 0.1 million) from the Corporation’s credit standing adjustment and a gain of $0.4 million (2015 – gain of $ 0.3 million; 2014 – gain of $1.2 million) from the assessment of the counterparties’ credit risk.

Market risk is the adverse effect that a change in interest rates, currency exchange rates, or implied volatility rates might have on the value of a financial instrument. The Corporation manages the market risk associated with interest rates and, to a limited extent, with fluctuations in foreign currency exchange rates by establishing and monitoring limits for the types and degree of risk that may be undertaken.

Pursuant to the Corporation’s accounting policy, the fair value of derivatives is not offset with the amounts for the right to reclaim cash collateral or the obligation to return cash collateral. At December 31, 2016, the amount recognized for the right to reclaim cash collateral under master netting agreements was $4 million and no amount was recognized for the obligation to return cash collateral (December 31, 2015 - $ 10 million and no amount, respectively).

Certain of the Corporation’s derivative instruments include financial covenants tied to the corresponding banking subsidiary’s well-capitalized status and credit rating. These agreements could require exposure collateralization, early termination or both. The aggregate fair value of all derivative instruments with contingent features that were in a liability position at December 31, 2016 was $0.8 million (December 31, 2015 - $ 4 million). Based on the contractual obligations established on these derivative instruments, the Corporation has fully collateralized these positions by pledging collateral of $4 million at December 31, 2016 (December 31, 2015 - $ 10 million).

193

Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding at December 31, 2016 and 2015 were as follows:

	Notional amount				Derivative assets					Derivative liabilities
	At December 31,				Statement of condition	Fair value at December 31,				Statement of condition	Fair value at December 31,
(In thousands)	2016		2015		classification	2016		2015		classification	2016		2015
Derivatives designated as hedging instruments:
Forward contracts	$	105,290	$	109,900	Other assets	$	34	$	24	Other liabilities	$	715	$	232
Total derivatives designated as hedging instruments	$	105,290	$	109,900		$	34	$	24		$	715	$	232
Derivatives not designated as hedging instruments:
Forward contracts	$	709	$	—	Trading account securities	$	9	$	—	Other liabilities	$	—	$	—
Interest rate swaps		112,554		189,152	Other assets		759		3,760	Other liabilities		810		4,144
Foreign currency forward contracts		2,637		140	Other assets		36		1	Other liabilities		22		—
Interest rate caps		191,738		94,680	Other assets		388		94	Other liabilities		331		94
Indexed options on deposits		73,470		90,409	Other assets		12,868		13,080	—		—		—
Bifurcated embedded options		69,957		86,283	—		—		—	Interest bearing deposits		10,964		9,873
Total derivatives not designated as hedging instruments:	$	451,065	$	460,664		$	14,060	$	16,935		$	12,127	$	14,111
Total derivative assets and liabilities	$	556,355	$	570,564		$	14,094	$	16,959		$	12,842	$	14,343

Cash Flow Hedges

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities, which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are hedging a forecasted transaction and thus qualify for cash flow hedge accounting. Changes in the fair value of the derivatives are recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. These contracts have a maximum remaining maturity of 80 days at December 31, 2016.

194

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, 2016
(In thousands)	Amount of net gain (loss) recognized in OCI on derivatives (effective portion)			Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing)		Amount of net gain (loss) reclassified from AOCI into income (effective portion)			Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Forward contracts	$	(3,612	)		Mortgage banking activities	$	(3,148	)	$	(1	)
Total	$	(3,612	)			$	(3,148	)	$	(1	)
Year ended December 31, 2015
(In thousands)	Amount of net gain (loss) recognized in OCI on derivatives (effective portion)			Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing)		Amount of net gain (loss) reclassified from AOCI into income (effective portion)			Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Forward contracts	$	(4,376	)		Mortgage banking activities	$	(4,719	)	$	17
Total	$	(4,376	)			$	(4,719	)	$	17
Year ended December 31, 2014
(In thousands)	Amount of net gain (loss) recognized in OCI on derivatives (effective portion)			Classification in the statement of operations of the net gain (loss) reclassified from AOCI into income (effective portion, ineffective portion, and amount excluded from effectiveness testing)		Amount of net gain (loss) reclassified from AOCI into income (effective portion)			Amount of net gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Forward contracts	$	(6,613	)		Mortgage banking activities	$	(6,091	)	$	(109	)
Total	$	(6,613	)			$	(6,091	)	$	(109	)

Fair Value Hedges

At December 31, 2016 and 2015, there were no derivatives designated as fair value hedges.

Non-Hedging Activities

For the year ended December 31, 2016, the Corporation recognized a loss of $ 0.1 million (2015 – loss of $ 0.3 million; 2014 – loss of $ 8.5 million) related to its non-hedging derivatives, as detailed in the table below.

195

	Amount of Net Gain (Loss) Recognized in Income on Derivatives
(In thousands)	Classification of Net Gain (Loss) Recognized in Income on Derivatives	Year ended December 31, 2016			Year ended December 31, 2015			Year ended December 31, 2014
Forward contracts	Mortgage banking activities	$	(160	)	$	(389	)	$	(10,876	)
Interest rate swaps	Other operating income		333			300			1,223
Foreign currency forward contracts	Other operating income		27			49			8
Foreign currency forward contracts	Interest expense		12			(4	)		5
Interest rate caps	Other operating income		57			—			—
Indexed options on deposits	Interest expense		1,981			(334	)		2,815
Bifurcated embedded options	Interest expense		(2,374	)		73			(1,666	)
Total		$	(124	)	$	(305	)	$	(8,491	)

Forward Contracts

The Corporation has forward contracts to sell mortgage-backed securities, which are accounted for as trading derivatives. Changes in their fair value are recognized in mortgage banking activities.

Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments

In addition to using derivative instruments as part of its interest rate risk management strategy, the Corporation also utilizes derivatives, such as interest rate swaps and foreign exchange forward contracts, in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and conditions with credit limit approvals and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in earnings in the period of change.

Interest Rate Caps

The Corporation enters into interest rate caps as an intermediary on behalf of its customers and simultaneously takes offsetting positions under the same terms and conditions, thus minimizing its market and credit risks.

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.

196

Note 31 – Related party transactions

The Corporation grants loans to its directors, executive officers, including certain related individuals or organizations, and affiliates in the ordinary course of business. The activity and balance of these loans were as follows:

(In thousands)
Balance at December 31, 2014	$	158,094
New loans		29,488
Payments		(45,951	)
Other changes		23,607
Balance at December 31, 2015	$	165,238
New loans		2,639
Payments		(30,369	)
Other changes		(687	)
Balance at December 31, 2016	$	136,551

New loans and payments includes disbursements and collections from existing lines of credit.

In June 2006, family members of a director of the Corporation, obtained a $0.8 million mortgage loan from Popular Mortgage, Inc., secured by a residential property. The director was not a director of the Corporation at the time the loan was made. In March, 2012 the loan was restructured under the Corporation’s loss mitigation program. The balance due on the loan at December 31, 2016 was approximately $0.9 million.

The brother-in-law of an Executive Vice President of the Corporation, became delinquent on a series of commercial loans granted to him by BPPR. Certain of the loans are secured by real estate and BPPR commenced collection and foreclosure proceedings in February 2014. The foreclosure proceedings were completed in June 2016, when the loans had a principal outstanding balance of $0.7 million. BPPR had charged off $0.5 million on these loans. The same brother-in law of the Executive Vice President of the Corporation, also has a participation in two entities, each of which has a real estate development loan with BPPR. The first loan is to an entity in which he owns a 50% equity interest. The loan is payable from the proceeds of the sale of residential units. The outstanding balance on the loan as of December 31, 2016 was approximately $0.1 million. The second loan is to an entity in which this individual owns a 33% equity interest and which was secured with undeveloped land. In June 2016, this loan had a balance of approximately $0.4 million and was resolved through a discounted payoff in for the amount of $0.3 million. The brother of this same Executive Vice President of the Corporation was granted a commercial loan in 2008. During 2015 and 2016, this loan was modified under a payment plan. The outstanding balance of the loan as of December 31, 2016 was of approximately $0.2 million.

On April 10, 2014, BPPR sold two undeveloped parcels of land, which had been foreclosed by BPPR, for the aggregate price of $2.7 million to an entity controlled by a shareholder of the Corporation. On June 30, 2014, BPPR sold a parcel of land, which had been foreclosed by BPPR, to an entity controlled by this same shareholder of the Corporation for $5.3 million. These sales were made on terms and conditions similar to the sale to unaffiliated parties of other real estate assets that have been foreclosed by BPPR and are held for sale. On June 5, 2014, certain borrowers of BPPR sold five real estate properties to affiliates of this same shareholder of the Corporation, as part of a settlement agreement that was executed by said borrowers with BPPR. As part of this settlement, BPPR received payments amounting to $16.7 million from the borrowers and guarantors of the loans that were settled. The settlement of these loans was made on terms and conditions similar to the settlement of other non-performing loans previously settled by BPPR in transactions where only unaffiliated parties were involved.

The Corporation has had loan transactions with the Corporation’s directors, executive officers, including certain related individuals or organizations, and affiliates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable loan transactions with third parties, except as disclosed above. Except as discussed above, the extensions of credit have not involved and do not currently involve more than normal risks of collection or present other unfavorable features.

At December 31, 2016, the Corporation’s banking subsidiaries held deposits from related parties, excluding EVERTEC, Inc. (“EVERTEC”) amounting to $328 million (2015 - $234 million).

197

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 2014, the Corporation engaged, in the ordinary course of business, the legal services of a law firm in Puerto Rico, in which the Secretary of the Board of Directors of Popular, Inc. acted as senior counsel or as partner. The fees paid to this law firm for the year 2014 amounted to approximately $0.7 million . During 2014, the Corporation also engaged, in the ordinary course of business, the legal services of a law firm in Puerto Rico, of which the Corporation’s Executive Vice President and Chief Legal Officer and Secretary of the Board of Directors was a member until September 2014. The fees paid to this law firm for fiscal year 2014 amounted to approximately $3.8 million, which include $0.6 million paid by the Corporation’s clients in connection with commercial loan transactions. In addition, this law firm leased office space in the Corporation’s headquarters building, which is owned by BPPR, and engaged BPPR as custodian of its retirement plan. During 2014, this law firm made lease payments to BPPR of approximately $0.7 million and paid BPPR approximately $0.1 million for its services as custodian. The rent and trustee fees paid by this law firm were at market rates.

For the year ended December 31, 2016, the Corporation made contributions of approximately $1.5 million to Banco Popular Foundations, which are not-for-profit corporations dedicated to philanthropic work (2015 - $0.7 million).

The Corporation provides advisory services to several Puerto Rico investment companies in exchange for a fee. The Corporation also provides administrative, custody and transfer agency services to these investment companies. These fees are calculated at an annual rate of the average net assets of the investment company, as defined in each agreement. Due to its advisory role, the Corporation considers these investment companies as related parties.

For the year ended December 31, 2016 administrative fees charged to these investment companies amounted to $8.6 million (2015 - $9.1 million) and waived fees amounted to $2.8 million (2015 - $3.3 million), for a net fee of $5.8 million (2015 - $5.8 million).

The Corporation, through its subsidiary Banco Popular de Puerto Rico, has also entered into lines of credit facilities with these companies. As of December 31, 2016, the available lines of credit facilities amounted to $357 million (2015 - $364 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those Puerto Rico investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital.

The Corporation also considers its equity method investees as related parties. On December 2016, BPPR extended a credit facility of $50 million to one of its equity method investees, Banco BHD León. The following provides additional information on transactions with equity method investees considered related parties.

198

Related party transactions with EVERTEC, as an affiliate

The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. As of December 31, 2016, the Corporation’s stake in EVERTEC was 16.05%.The Corporation continues to have significant 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.

On May 26, 2016, EVERTEC, Inc. filed its Annual Report on Form 10-K for the year ended December 31, 2015, which included restated audited results for the years ended December 31, 2014 and 2013, correcting certain errors involved with the accounting for tax positions taken by EVERTEC in the 2010 tax year and other miscellaneous accounting adjustments. The Corporation’s proportionate share of the cumulative impact of the EVERTEC restatement and other corrective adjustments to its financial statements was approximately $2.2 million and is reflected as part of other non-interest income.

The Corporation received $4.7 million in dividend distributions during the year ended December 31, 2016 from its investments in EVERTEC’s holding company (December 31, 2015 - $4.7 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the consolidated statement of financial condition.

(In thousands)	December 31, 2016		December 31, 2015
Equity investment in EVERTEC	$	38,904	$	33,590

The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2016 and December 31, 2015. Items that represent liabilities to the Corporation are presented with parenthesis.

(In thousands)	December 31, 2016			December 31, 2015
Accounts receivable (Other assets)	$	6,394		$	3,148
Deposits		(14,899	)		(23,973	)
Accounts payable (Other liabilities)		(20,372	)		(16,192	)
Net total	$	(28,877	)	$	(37,017	)

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income and changes in stockholders’ equity for the years ended December 31, 2016, 2015 and 2014.

	Years ended December 31,
(In thousands)	2016			2015		2014
Share of income from investment in EVERTEC	$	11,796		$	11,593	$	10,536
Share of other changes in EVERTEC’s stockholders’ equity		(573	)		1,636		381
Share of EVERTEC’s changes in equity recognized in income	$	11,223		$	13,229	$	10,917

199

The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the years ended December 31, 2016, 2015 and 2014. Items that represent expenses to the Corporation are presented with parenthesis.

	Years ended December 31,
(In thousands)	2016			2015			2014			Category
Interest expense on deposits	$	(64	)	$	(58	)	$	(67	)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		29,739			27,816			26,646		Other service fees
Rental income charged to EVERTEC		6,995			6,898			6,874		Net occupancy
Processing fees on services provided by EVERTEC		(178,524	)		(164,809	)		(154,839	)	Professional fees
Other services provided to EVERTEC		1,052			1,311			1,012		Other operating expenses
Total	$	(140,802	)	$	(128,842	)	$	(120,374	)

EVERTEC had a letter of credit issued by BPPR, for the amount of $4.2 million at December 31, 2015, which expired on February 10, 2016.

PRLP 2011 Holdings, LLC

As indicated in Note 29 to the consolidated financial statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings, LLC and currently holds certain deposits from the entity.

The Corporation’s equity in PRLP 2011 Holdings, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

(In thousands)	December 31, 2016		December 31, 2015
Equity investment in PRLP 2011 Holdings, LLC	$	9,167	$	13,069

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at December 31, 2016 and December 31, 2015.

(In thousands)	December 31, 2016			December 31, 2015
Loans	$	—		$	980
Accrued interest receivable		—			10
Deposits (non-interest bearing)		(1,127	)		(18,808	)
Net total	$	(1,127	)	$	(17,818	)

The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of loss from PRLP 2011 Holdings, LLC for the years ended December 31, 2016, 2015 and 2014.

	Years ended December 31,
(In thousands)	2016			2015			2014
Share of loss from the equity investment in PRLP 2011 Holdings, LLC	$	(502	)	$	(4,021	)	$	(2,947	)

During the year ended December 31, 2016 the Corporation received $3.4 million in capital distributions from its investment in PRLP 2011 Holdings, LLC (December 31, 2015 - $6.6 million). The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation’s results of operations for the years ended December 31, 2016, 2015 and 2014.

200

	For the years ended December 31,
(In thousands)	2016		2015		2014		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	11	$	189	$	425		Interest income

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 29 to the consolidated financial statements, effective March 2013 the Corporation holds a 24.9% equity interest in PR Asset Portfolio 2013-1 International, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The Corporation’s equity in PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

(In thousands)	December 31, 2016		December 31, 2015
Equity investment in PR Asset Portfolio 2013-1 International, LLC	$	22,378	$	25,094

The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at December 31, 2016 and December 31, 2015.

(In thousands)	December 31, 2016			December 31, 2015
Loans	$	3,866		$	58,302
Accrued interest receivable		19			169
Deposits		(9,692	)		(11,772	)
Net total	$	(5,807	)	$	46,699

The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PR Asset Portfolio 2013-1 International, LLC for years ended December 31, 2016, 2015 and 2014.

	Years ended December 31,
(In thousands)	2016			2015			2014
Share of (loss) income from the equity investment in PR Asset Portfolio 2013-1 International, LLC	$	(2,057	)	$	(6,280	)	$	745

The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation’s results of operations for the years December 31, 2016, 2015 and 2014.

	Years ended December 31,
(In thousands)	2016			2015			2014		Category
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC	$	1,011		$	2,805		$	4,340		Interest income
Interest expense on deposits		(4	)		(4	)		—		Interest expense
Servicing fee paid by PR Asset Portfolio 2013-1 International, LLC		—			—			70		Other service fees
Total	$	1,007		$	2,801			4,410

201

Note 32 – Fair value measurement

ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order 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:

• Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.

• Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.

• Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability.

The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently.

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.

202

Fair Value on a Recurring and Nonrecurring Basis

The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015 and on a nonrecurring basis in periods subsequent to initial recognition for the years ended December 31, 2016, 2015, and 2014:

At December 31, 2016
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	2,136,620		$	—		$	2,136,620
Obligations of U.S. Government sponsored entities		—		711,850			—			711,850
Obligations of Puerto Rico, States and political subdivisions		—		22,771			—			22,771
Collateralized mortgage obligations - federal agencies		—		1,221,526			—			1,221,526
Mortgage-backed securities		—		4,103,940			1,392			4,105,332
Equity securities		—		2,122			—			2,122
Other		—		9,585			—			9,585
Total investment securities available-for-sale	$	—	$	8,208,414		$	1,392		$	8,209,806
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	1,164		$	—		$	1,164
Collateralized mortgage obligations		—		—			1,321			1,321
Mortgage-backed securities - federal agencies		—		37,991			4,755			42,746
Other		—		13,963			602			14,565
Total trading account securities, excluding derivatives	$	—	$	53,118		$	6,678		$	59,796
Mortgage servicing rights	$	—	$	—		$	196,889		$	196,889
Derivatives		—		14,094			—			14,094
Total assets measured at fair value on a recurring basis	$	—	$	8,275,626		$	204,959		$	8,480,585
Liabilities
Derivatives	$	—	$	(12,842	)	$	—		$	(12,842	)
Contingent consideration		—		—			(153,158	)		(153,158	)
Total liabilities measured at fair value on a recurring basis	$	—	$	(12,842	)	$	(153,158	)	$	(166,000	)

203

At December 31, 2015
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	1,183,328		$	—		$	1,183,328
Obligations of U.S. Government sponsored entities		—		939,641			—			939,641
Obligations of Puerto Rico, States and political subdivisions		—		22,359			—			22,359
Collateralized mortgage obligations - federal agencies		—		1,560,837			—			1,560,837
Mortgage-backed securities		—		2,342,762			1,434			2,344,196
Equity securities		276		2,122			—			2,398
Other		—		10,233			—			10,233
Total investment securities available-for-sale	$	276	$	6,061,282		$	1,434		$	6,062,992
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	4,590		$	—		$	4,590
Collateralized mortgage obligations		—		223			1,831			2,054
Mortgage-backed securities - federal agencies		—		44,701			6,454			51,155
Other		—		13,173			687			13,860
Total trading account securities	$	—	$	62,687		$	8,972		$	71,659
Mortgage servicing rights	$	—	$	—		$	211,405		$	211,405
Derivatives		—		16,959			—			16,959
Total assets measured at fair value on a recurring basis	$	276	$	6,140,928		$	221,811		$	6,363,015
Liabilities
Derivatives	$	—	$	(14,343	)	$	—		$	(14,343	)
Contingent consideration		—		—			(120,380	)		(120,380	)
Total liabilities measured at fair value on a recurring basis	$	—	$	(14,343	)	$	(120,380	)	$	(134,723	)

The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement was recorded during the years ended December 31, 2016, 2015 and 2014 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

Year ended December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans[1]	$	—	$	—	$	79,175	$	79,175	$	(26,272	)
Other real estate owned[2]		—		—		44,735		44,735		(10,260	)
Other foreclosed assets[2]		—		—		25		25		(12	)
Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	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.

204

Year ended December 31, 2015
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans[1]	$	—	$	—	$	67,915	$	67,915	$	(63,002	)
Loans held-for-sale[2]		—		—		44,923		44,923		(66	)
Other real estate owned[3]		—		574		66,694		67,268		(46,164	)
Other foreclosed assets[3]		—		—		75		75		(847	)
Total assets measured at fair value on a nonrecurring basis	$	—	$	574	$	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.

Year ended December 31, 2014
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans[1]	$	—	$	—	$	71,750	$	71,750	$	(15,405	)
Loans held-for-sale[2]		—		—		21,609		21,609		(38	)
Other real estate owned[3]		—		6,610		86,520		93,130		(42,366	)
Other foreclosed assets[3]		—		—		1,368		1,368		(1,622	)
Total assets measured at fair value on a nonrecurring basis	$	—	$	6,610	$	181,247	$	187,857	$	(59,431	)

[1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount.

[2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. Costs to sell are excluded from the reported fair value amount.

[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

205

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2016, 2015, and 2014.

Year ended December 31, 2016
	MBS									Other
	classified			CMOs						securities
	as investment			classified			MBS			classified
	securities			as trading			classified as			as trading			Mortgage
	available-			account			trading account			account			servicing			Total			Contingent			Total
(In thousands)	for-sale			securities			securities			securities			rights			assets			consideration			liabilities
Balance at January 1, 2016	$	1,434		$	1,831		$	6,454		$	687		$	211,405		$	221,811		$	(120,380	)	$	(120,380	)
Gains (losses) included in earnings		(3	)		(4	)		(86	)		(85	)		(25,336	)		(25,514	)		(32,778	)		(32,778	)
Gains (losses) included in OCI		11			—			—			—			—			11			—			—
Additions		—			233			1,128			—			10,835			12,196			—			—
Sales		—			(309	)		(1,852	)		—			—			(2,161	)		—			—
Settlements		(50	)		(430	)		(889	)		—			(15	)		(1,384	)		—			—
Balance at December 31, 2016	$	1,392		$	1,321		$	4,755		$	602		$	196,889		$	204,959		$	(153,158	)	$	(153,158	)
Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2016	$	—		$	2		$	(84	)	$	39		$	(4,745	)	$	(4,788	)	$	(32,778	)	$	(32,778	)
Year ended December 31, 2015
	MBS									Other
	classified			CMOs						securities
	as investment			classified			MBS			classified
	securities			as trading			classified as			as trading			Mortgage
	available-			account			trading account			account			servicing			Total			Contingent			Total
(In thousands)	for-sale			securities			securities			securities			rights			assets			consideration			liabilities
Balance at January 1, 2015	$	1,325		$	1,375		$	6,229		$	1,563		$	148,694		$	159,186		$	(133,634	)	$	(133,634	)
Gains (losses) included in earnings		(2	)		(2	)		(42	)		94			(13,349	)		(13,301	)		12,292			12,292
Gains (losses) included in OCI		(7	)		—			—			—			—			(7	)		—			—
Additions		118			808			1,126			—			76,060			78,112			—			—
Sales		—			(43	)		(187	)		—			—			(230	)		—			—
Settlements		—			(307	)		(672	)		(970	)		—			(1,949	)		—			—
Adjustments		—			—			—			—			—			—			962			962
Balance at December 31, 2015	$	1,434		$	1,831		$	6,454		$	687		$	211,405		$	221,811		$	(120,380	)	$	(120,380	)
Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2015	$	—		$	2		$	(21	)	$	38		$	6,087		$	6,106		$	12,292		$	12,292
Year ended December 31, 2014
	MBS									Other
	classified			CMOs						securities
	as investment			classified			MBS			classified
	securities			as trading			classified as			as trading			Mortgage
	available-			account			trading account			account			servicing			Total			Contingent			Total
(In thousands)	for-sale			securities			securities			securities			rights			assets			consideration			liabilities
Balance at January 1, 2014	$	6,523		$	1,423		$	9,799		$	1,929		$	161,099		$	180,773		$	(128,299	)	$	(128,299	)
Gains (losses) included in earnings		(31	)		(11	)		(165	)		(366	)		(24,773	)		(25,346	)		(1,791	)		(1,791	)
Gains (losses) included in OCI		(249	)		—			—			—			—			(249	)		—			—
Additions		—			270			805			—			12,583			13,658			(4,330	)		(4,330	)
Sales		(4,350	)		—			(2,110	)		—			—			(6,460	)		—			—
Settlements		(568	)		(307	)		(2,100	)		—			(215	)		(3,190	)		786			786
Balance at December 31, 2014	$	1,325		$	1,375		$	6,229		$	1,563		$	148,694		$	159,186		$	(133,634	)	$	(133,634	)
Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2014	$	—		$	(7	)	$	(72	)	$	(144	)	$	(6,120	)	$	(6,343	)	$	(1,791	)	$	(1,791	)

There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2016, 2015 and 2014.

206

Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2016, 2015, and 2014 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

	2016						2015					2014
(In thousands)	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
Interest income	$	(3	)	$	—		$	(2	)	$	—	$	(31	)	$	—
FDIC loss share (expense) income		(33,413	)		(33,413	)		9,559			9,559		(1,791	)		(1,791	)
Mortgage banking activities		(25,336	)		(4,745	)		(13,349	)		6,087		(24,773	)		(6,120	)
Trading account (loss) profit		(175	)		(43	)		50			19		(542	)		(223	)
Other operating income		635			635			2,733			2,733		—			—
Total	$	(58,292	)	$	(37,566	)	$	(1,009	)	$	18,398	$	(27,137	)	$	(8,134	)

The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.

(In thousands)	Fair value at December 31, 2016			Valuation technique	Unobservable inputs	Weighted average (range)
CMO’s - trading	$	1,321		Discounted cash flow model	Weighted average life		3.1 years (0.2 - 4.4 years	)
					Yield		3.4% (0.7% - 4.2	%)
					Prepayment speed		19.6% (16.5% - 26.7	%)
Other - trading	$	602		Discounted cash flow model	Weighted average life		5.4 years
					Yield		12.4	%
					Prepayment speed		10.8	%
Mortgage servicing rights	$	196,889		Discounted cash flow model	Prepayment speed		4.7% (0.2% - 12.9	%)
					Weighted average life		7.3 years (0.1 - 17.3 years	)
					Discount rate		11.2% (9.5% - 15.0	%)
Contingent consideration	$	(153,158	)	Discounted cash flow model	Credit loss rate on covered loans		3.6% (0.0% - 100.0	%)
					Risk premium component
					of discount rate		4.3	%
Loans held-in-portfolio	$	79,123	[1]	External appraisal	Haircut applied on
					external appraisals		24.5% (15.0% - 25.0	%)
Other real estate owned	$	43,497	[2]	External appraisal	Haircut applied on
					external appraisals		18.8% (15.0% - 40.0	%)

[1] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.

[2] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial 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.

207

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 aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation.

Trading Account Securities and Investment Securities Available-for-Sale

• U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2.

• Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2.

• Obligations of Puerto Rico, States and 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 sector. Their 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.

• Collateralized mortgage obligations: Agency and private-label collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as broker quotes, executed trades, credit information and cash flows.

• Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1. Other equity securities that do not trade in highly liquid markets are classified as Level 2.

• Corporate securities (included as “other” in the “available-for-sale” category): Given that the quoted prices are for similar instruments, these securities are classified as Level 2.

• Corporate securities and mutual funds (included as “other” in the “trading account securities” category): Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. The important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price.

208

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 incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio 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.

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 12 to the consolidated financial statements for a description of the formula established in the loss share agreements for determining the true-up payment.

On a quarterly basis, management evaluates and revises the estimated credit loss rates that are used to determine expected cash flows on the covered loan pools. The expected credit losses on the loan pools are used to determine the loss share cash flows expected to be paid to the FDIC when the true-up payment is due.

The true-up payment obligation was discounted using a term rate consistent with the time remaining until the payment is due. The discount rate was an estimate of the sum of the risk-free benchmark rate for the term remaining before the true-up payment is due and a risk premium to account for the credit risk profile of BPPR. The risk premium was calculated based on a 12-month trailing average spread of the yields on corporate bonds with credit ratings similar to BPPR. The true-up payment obligation is classified as Level 3.

Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent

The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35, and which could be subject to internal adjustments based on the age of the appraisal. Currently, the associated loans considered impaired are classified as Level 3.

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, internal valuation or binding offer. The majority of these foreclosed assets are classified as Level 3 since they are subject to internal adjustments. Certain foreclosed assets which are measured based on binding offers are classified as Level 2.

209

Note 33 – Fair value of financial instruments

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The fair values reflected herein have been determined based on the prevailing rate environment at December 31, 2016 and December 31, 2015, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern.

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.

	December 31, 2016
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	362,394	$	362,394	$	—	$	—	$	362,394
Money market investments		2,890,217		2,854,777		35,440		—		2,890,217
Trading account securities, excluding derivatives[1]		59,796		—		53,118		6,678		59,796
Investment securities available-for-sale[1]		8,209,806		—		8,208,414		1,392		8,209,806
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	96,027	$	—	$	—	$	73,540	$	73,540
Collateralized mortgage obligation-federal agency		74		—		—		78		78
Other		2,000		—		1,738		220		1,958
Total investment securities held-to-maturity	$	98,101	$	—	$	1,738	$	73,838	$	75,576
Other investment securities:
FHLB stock	$	58,033	$	—	$	58,033	$	—	$	58,033
FRB stock		94,672		—		94,672		—		94,672
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,915		—		—		4,987		4,987
Total other investment securities	$	167,818	$	—	$	165,903	$	4,987	$	170,890
Loans held-for-sale	$	88,821	$	—	$	504	$	89,509	$	90,013
Loans not covered under loss sharing agreement with the FDIC		22,263,446		—		—		20,578,904		20,578,904
Loans covered under loss sharing agreements with the FDIC		542,528		—		—		515,808		515,808
FDIC loss share asset		69,334		—		—		63,187		63,187
Mortgage servicing rights		196,889		—		—		196,889		196,889
Derivatives		14,094		—		14,094		—		14,094

210

	December 31, 2016
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	22,786,682	$	—	$	22,786,682	$	—	$	22,786,682
Time deposits		7,709,542		—		7,708,724		—		7,708,724
Total deposits	$	30,496,224	$	—	$	30,495,406	$	—	$	30,495,406
Federal funds purchased and assets sold under agreements to repurchase	$	479,425	$	—	$	479,439	$	—	$	479,439
Other short-term borrowings[2]	$	1,200	$	—	$	1,200	$	—	$	1,200
Notes payable:
FHLB advances	$	672,670	$	—	$	671,872	$	—	$	671,872
Unsecured senior debt securities		444,788		—		466,263		—		466,263
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,323		—		399,370		—		399,370
Others		18,071		—		—		18,071		18,071
Total notes payable	$	1,574,852	$	—	$	1,537,505	$	18,071	$	1,555,576
Derivatives	$	12,842	$	—	$	12,842	$	—	$	12,842
Contingent consideration	$	153,158	$	—	$	—	$	153,158	$	153,158

[1] Refer to Note 32 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 21 to the consolidated financial statements for the composition of other short-term borrowings.

211

	December 31, 2015
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	363,674	$	363,674	$	—	$	—	$	363,674
Money market investments		2,180,092		2,083,839		96,253		—		2,180,092
Trading account securities, excluding derivatives[1]		71,659		—		62,687		8,972		71,659
Investment securities available-for-sale[1]		6,062,992		276		6,061,282		1,434		6,062,992
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	98,817	$	—	$	—	$	80,815	$	80,815
Collateralized mortgage obligation-federal agency		86		—		—		91		91
Other		2,000		—		1,740		243		1,983
Total investment securities held-to-maturity	$	100,903	$	—	$	1,740	$	81,149	$	82,889
Other investment securities:
FHLB stock	$	59,387	$	—	$	59,387	$	—	$	59,387
FRB stock		97,740		—		97,740		—		97,740
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,923		—		—		4,966		4,966
Total other investment securities	$	172,248	$	—	$	170,325	$	4,966	$	175,291
Loans held-for-sale	$	137,000	$	—	$	1,364	$	138,031	$	139,395
Loans not covered under loss sharing agreement with the FDIC		21,843,180		—		—		20,849,150		20,849,150
Loans covered under loss sharing agreements with the FDIC		611,939		—		—		593,002		593,002
FDIC loss share asset		310,221		—		—		313,224		313,224
Mortgage servicing rights		211,405		—		—		211,405		211,405
Derivatives		16,959		—		16,959		—		16,959
	December 31, 2015
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	19,044,355	$	—	$	19,044,355	$	—	$	19,044,355
Time deposits		8,165,368		—		8,134,029		—		8,134,029
Total deposits	$	27,209,723	$	—	$	27,178,384	$	—	$	27,178,384
Federal funds purchased and assets sold under agreements to repurchase	$	762,145	$	—	$	764,599	$	—	$	764,599
Other short-term borrowings[2]	$	1,200	$	—	$	1,200	$	—	$	1,200
Notes payable:
FHLB advances	$	761,501	$	—	$	780,411	$	—	$	780,411
Unsecured senior debt		442,704		—		435,186		—		435,186
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,295		—		352,673		—		352,673
Others		19,008		—		—		19,008		19,008
Total notes payable	$	1,662,508	$	—	$	1,568,270	$	19,008	$	1,587,278
Derivatives	$	14,343	$	—	$	14,343	$	—	$	14,343
Contingent consideration	$	120,380	$	—	$	—	$	120,380	$	120,380

[1] Refer to Note 32 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 21 to the consolidated financial statements for the composition of other short-term borrowings.

212

The notional amount of commitments to extend credit at December 31, 2016 and 2015 is $ 7.8 billion and $ 7.4 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at December 31, 2016 and December 31, 2015 is $ 36 million and $ 52 million, respectively, and represents the contractual amount that is required to be paid in the event of nonperformance. The fair value of commitments to extend credit and letters of credit, which are based on the fees charged to enter into those agreements, are not material to Popular’s financial statements.

Following is a description of the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed.

Cash and due from banks

Cash and due from banks include cash on hand, cash items in process of collection, and non-interest bearing deposits due from other financial institutions. The carrying amount of cash and due from banks is a reasonable estimate of its fair value. Cash and due from banks are classified as Level 1.

Money market investments

Investments in money market instruments include highly liquid instruments with an average maturity of three months or less. For this reason, they carry a low risk of changes in value as a result of changes in interest rates, and the carrying amount approximates their fair value. Money market investments include federal funds sold, 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.

Investment securities held-to-maturity

• Obligations of Puerto Rico, States and political subdivisions: Municipal bonds include Puerto Rico public municipalities debt and bonds collateralized by second mortgages under the Home Purchase Stimulus Program. Puerto Rico public municipalities debt was valued internally based on benchmark treasury notes and a credit spread derived from comparable general obligations of the Government of Puerto Rico municipal bonds trades and recent issuances. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was based on internal yield and prepayment speed assumptions, these municipal bonds are classified as Level 3.

• 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.

213

• 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.

• 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 values, private equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3.

Loans held-for-sale

For loans held-for-sale originated with the intent to sell in the secondary market, its fair value was determined using similar characteristics of loans and secondary market prices assuming the conversion to mortgage-backed securities. Given that the valuation methodology uses internal assumptions based on loan level data, these loans are classified as Level 3. The fair value of certain other loans held-for-sale is based on bids received from potential buyers; binding offers; or external appraisals, net of internal adjustments and estimated costs to sell. Loans held-for-sale based on binding offers are classified as Level 2. Loans held-for-sale based on indicative offers and/or external appraisals are classified as Level 3.

Loans held-in-portfolio

The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting expected cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Loans held-in-portfolio are classified as Level 3.

FDIC loss share asset

Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net losses were discounted using the U.S. Government agency curve. The loss share asset is classified as Level 3.

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 certificates of deposit incorporate an early cancellation estimate based on historical experience. Time deposits are classified as Level 2.

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 considered. Securities sold under agreements to repurchase are classified as Level 2.

214

Other short-term borrowings

The carrying amount of other short-term borrowings 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 their contractual term. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2.

• 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 subordinated deferrable interest debentures (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.

• Others: The other category includes capital 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.

215

Note 34 – Employee benefits

Pension and benefit restoration plans

Certain employees of BPPR are covered by non-contributory defined benefit pension plans. Pension benefits are based on age, years of credited service, and final average compensation.

BPPR’s non-contributory, defined benefit retirement plan are currently closed to new hires and the accrual of benefits are frozen to all participants. The retirement plan’s benefit formula is based on a percentage of average final compensation and years of service as of the plan freeze date. Normal retirement age under the retirement plans is age 65 with 5 years of service. Pension costs are funded in accordance with minimum funding standards under the Employee Retirement Income Security Act of 1974 (“ERISA”). Benefits under the BPPR retirement plan are subject to the U.S. and PR Internal Revenue Code limits on compensation and benefits. Benefits under restoration plans restore benefits to selected employees that are limited under the retirement plan due to U.S. and PR Internal Revenue Code limits and a compensation definition that excludes amounts deferred pursuant to nonqualified arrangements. The freeze applied to the restoration plan as well.

The Corporation’s funding policy is to make annual contributions to the plans, when necessary, in amounts which fully provide for all benefits as they become due under the plans.

The Corporation’s pension fund investment strategy is to invest in a prudent manner for the exclusive purpose of providing benefits to participants. A well defined internal structure has been established to develop and implement a risk-controlled investment strategy that is targeted to produce a total return that, when combined with the bank’s contributions to the fund, will maintain the fund’s ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income.

Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee periodically reviews the performance of the pension plans’ investments and assets allocation. The Trustee and the money managers are allowed to exercise investment discretion, subject to limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee.

The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place.

The plans’ target allocation based on market value for years 2016 and 2015, by asset category, is summarized in the table below.

	Minimum allotment			Maximum allotment
Equity		0	%		70	%
Debt securities		0	%		100	%
Popular related securities		0	%		5	%
Cash and cash equivalents		0	%		100	%

216

The following table sets forth by level, within the fair value hierarchy, the pension and benefit restoration plans’ assets at fair value at December 31, 2016 and 2015. Investments measured at net asset value per share (“NAV”) as a practical expedient have not been classified in the fair value hierarchy, but are presented in order to permit reconciliation of the plans’ assets.

	2016										2015
(In thousands)	Level 1		Level 2		Level 3		Measured at NAV		Total		Level 1		Level 2		Level 3		Measured at NAV		Total
Obligations of the U.S. Government and its agencies	$	—	$	108,572	$	—	$	6,731	$	115,303	$	—	$	165,960	$	—	$	—	$	165,960
Corporate bonds and debentures		—		171,632		—		6,856		178,488		—		79,175		—		—		79,175
Equity securities - Common Stocks		134,015		—		—		—		134,015		218,894		—		—		—		218,894
Equity securities - ETF’s		62,524		75,801		—		—		138,325		32,540		26,835		—		—		59,375
Foreing commingled trust funds		—		—		—		70,589		70,589		—		—		—		79,046		79,046
Mutual fund		—		13,910		—		—		13,910		—		10,016		—		—		10,016
Mortgage-backed securities		—		4,786		—		—		4,786		—		16,315		—		—		16,315
Private equity investments		—		—		336		—		336		—		—		400		—		400
Cash and cash equivalents		38,158		—		—		—		38,158		13,540		—		—		—		13,540
Accrued investment income		—		—		3,219		—		3,219		—		—		1,693		—		1,693
Total assets	$	234,697	$	374,701	$	3,555	$	84,176	$	697,129	$	264,974	$	298,301	$	2,093	$	79,046	$	644,414

The closing prices reported in the active markets in which the securities are traded are used to value the investments.

Following is a description of the valuation methodologies 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 for the 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.

• 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.

• Mortgage-backed securities – The fair value is based on trade data from brokers and exchange platforms where these instruments regularly 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.

217

• Accrued investment income – Given the short-term nature of these assets, their carrying amount approximates fair value. Since there is a lack of observable inputs related to instrument specific attributes, these are reported as Level 3.

The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, the use 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 following table presents the change in Level 3 assets measured at fair value.

(In thousands)	2016		2015
Balance at beginning of year	$	2,093	$	2,103
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)		1,462		(10	)
Balance at end of year	$	3,555	$	2,093

There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2016 and 2015. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2016 and 2015.

Information on the shares of common stock held by the pension and restoration plans is provided in the table that follows.

	2016		2015
Shares of Popular, Inc. common stock		145,637		275,996
Fair value of shares of Popular, Inc. common stock	$	6,381,805	$	7,821,713
Dividends paid on shares of Popular, Inc. common stock held by the plan	$	21,846	$	41,399

218

The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2016 and 2015.

	Pension plan						Benefit restoration plans
(In thousands)	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	736,140		$	777,815		$	40,773		$	42,664
Interest cost		25,166			29,613			1,392			1,630
Actuarial (gain) loss		12,219			(34,538	)		2,533			(1,738	)
Benefits paid		(37,443	)		(36,750	)		(2,122	)		(1,783	)
Benefit obligation at end of year	$	736,082		$	736,140		$	42,576		$	40,773
Change in fair value of plan assets:
Fair value of plan assets at beginning of year	$	612,283		$	662,765		$	32,131		$	34,475
Actual return on plan assets		30,395			(13,732	)		1,480			(734	)
Employer contributions		60,000			—			405			173
Benefits paid		(37,443	)		(36,750	)		(2,122	)		(1,783	)
Fair value of plan assets at end of year	$	665,235		$	612,283		$	31,894		$	32,131
Amounts recognized in accumulated other comprehensive loss:
Net loss	$	295,589		$	294,792		$	15,577		$	13,699
Accumulated other comprehensive loss (AOCL)	$	295,589		$	294,792		$	15,577		$	13,699
Reconciliation of net (liabilities) assets:
Net (liabilities) assets at beginning of year	$	(123,857	)	$	(115,050	)	$	(8,642	)	$	(8,189	)
Amount recognized in AOCL at beginning of year, pre-tax		294,792			289,233			13,699			13,588
Amount prepaid at beginning of year		170,935			174,183			5,057			5,399
Net periodic benefit income (cost)		(6,193	)		(3,248	)		(567	)		(515	)
Contributions		60,000			—			405			173
Amount prepaid at end of year		224,742			170,935			4,895			5,057
Amount recognized in AOCL		(295,589	)		(294,792	)		(15,577	)		(13,699	)
Net (liabilities) assets at end of year	$	(70,847	)	$	(123,857	)	$	(10,682	)	$	(8,642	)

The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2016 and 2015.

	Pension plan				Benefit restoration plans
(In thousands)	2016		2015		2016		2015
Current liabilities	$	—	$	—	$	234	$	173
Non-current liabilities		70,847		123,857		10,448		8,469

The following table presents the funded status of the plans at December 31, 2016 and 2015.

	Pension Plan						Benefit Restoration Plan
(In thousands)	2016			2015			2016			2015
Benefit obligation at end of year	$	(736,082	)	$	(736,140	)	$	(42,576	)	$	(40,773	)
Fair value of plan assets at end of year		665,235			612,283			31,894			32,131
Funded status at year end	$	(70,847	)	$	(123,857	)	$	(10,682	)	$	(8,642	)

219

The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2016 and 2015.

(In thousands)	Pension plan						Benefit restoration plans
	2016			2015			2016			2015
Accumulated other comprehensive loss at beginning of year	$	294,792		$	289,233		$	13,699		$	13,588
Increase (decrease) in AOCL:
Recognized during the year:
Amortization of actuarial losses		(19,521	)		(17,860	)		(1,328	)		(1,244	)
Occurring during the year:
Net actuarial (gains) losses		20,318			23,419			3,206			1,355
Total (decrease) increase in AOCL		797			5,559			1,878			111
Accumulated other comprehensive loss at end of year	$	295,589		$	294,792		$	15,577		$	13,699

The following table presents the amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2017.

(In thousands)	Pension plan		Benefit restoration plans
Net actuarial loss	$	20,215	$	1,645

The following table presents information for plans with a projected benefit obligation in excess of plan assets for the years ended December 31, 2016 and 2015.

	Pension plan				Benefit restoration plans
(In thousands)	2016		2015		2016		2015
Projected benefit obligation	$	736,082	$	736,140	$	42,576	$	40,773
Accumulated benefit obligation		736,082		736,140		42,576		40,773
Fair value of plan assets		665,235		612,283		31,894		32,131

Effective December 31, 2015 the Corporation changed its estimate of the service and interest cost components of net periodic benefit cost for its pension and postretirement benefits plans. Previously, the Corporation estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change does not affect the measurement of the Corporation’s pension and postretirement benefit obligations and it is accounted for as a change in accounting estimate, which is applied prospectively.

To determine benefit obligation at year end, the Corporation used a weighted average of annual spot rates applied to future expected cash flows for years ended December 31, 2016 and 2015.

The following table presents weighted - average actuarial assumptions used to determine the benefit obligations at December 31, 2016 and 2015:

	Pension plan						Tax qualified restoration plans						Benefit restoration plans
	2016			2015			2016			2015			2016			2015
Discount rate		4.02	%		4.27	%		3.98	%		4.23	%		3.99	%		4.20	%

220

The following table presents the actuarial assumptions used to determine the components of net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014.

	Pension plan									Benefit restoration plans
	2016			2015			2014			2016			2015			2014
Discount rate for benefit obligation		4.27	%		3.90	%		4.70	%		4.23;4.20	%		3.90	%		4.70	%
Discount rate for interest cost		3.52			3.90			4.70	%		3.51;3.39			3.90			4.70	%
Expected return on plan assets		6.88	%		7.00	%		7.25	%		6.88	%		7.00	%		7.25	%

The following table presents the components of net periodic benefit cost for the years ended December 31, 2016 and 2015.

	Pension plan									Benefit restoration plans
(In thousands)	2016			2015			2014			2016			2015			2014
Interest cost	$	25,166		$	29,613		$	29,844		$	1,392		$	1,630		$	1,659
Expected return on plan assets		(38,493	)		(44,225	)		(46,521	)		(2,153	)		(2,359	)		(2,422	)
Recognized net actuarial loss		19,521			17,860			8,074			1,328			1,244			431
Net periodic benefit (credit) cost	$	6,194		$	3,248		$	(8,603	)	$	567		$	515		$	(332	)

The Corporation expects to pay the following contributions to the benefit plans during the year ended December 31, 2017.

(In thousands)	2017
Pension plan	$	—
Benefit restoration plans	$	236

Benefit payments projected to be made from the pension and benefit restoration plans during the next ten years are presented in the table below.

(In thousands)	Pension plan		Benefit restoration plans
2017	$	38,855	$	2,158
2018		39,420		2,247
2019		39,993		2,317
2020		40,529		2,378
2021		40,993		2,433
2022 - 2026		209,166		12,827

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.

221

The following table presents the status of the Corporation’s unfunded postretirement health care benefit plan and the related amounts recognized in the consolidated financial statements at December 31, 2016 and 2015.

(In thousands)	2016			2015
Change in benefit obligation:
Benefit obligation at beginning of the year	$	165,999		$	161,818
Service cost		1,156			1,470
Interest cost		6,021			6,356
Benefits paid		(6,509	)		(5,360	)
Actuarial (gain) loss		(4,302	)	$	1,715
Benefit obligation end of year	$	162,365			165,999
Amounts recognized in accumulated other comprehensive loss:
Net prior service cost	$	(7,270	)	$	(11,070	)
Net loss		21,135			26,536
Accumulated other comprehensive loss	$	13,865		$	15,466
Reconciliation of net liability:
Net liability at beginning of year	$	(165,999	)	$	(161,818	)
Amount recognized in accumulated other comprehensive loss at beginning of year, pre-tax		15,466			10,947
Amount accrued at beginning of year		(150,533	)		(150,871	)
Net periodic benefit cost		(4,476	)		(5,022	)
Contributions		6,509			5,360
Amount accrued at end of year		(148,500	)		(150,533	)
Amount recognized in accumulated other comprehensive loss		(13,865	)		(15,466	)
Net liability at end of year	$	(162,365	)	$	(165,999	)

The table below presents a breakdown of the liability associated with the postretirement health care benefit plan.

(In thousands)	2016		2015
Current liabilities	$	6,328	$	6,417
Non-current liabilities		156,037		159,582

The following table presents the funded status of the postretirement health care benefit plan at year end December 31, 2016 and 2015.

(In thousands)	2016			2015
Benefit obligation at end of year	$	(162,365	)	$	(165,999	)
Fair value of plan assets at end of year		—			—
Funded status at year end		(162,365	)		(165,999	)

222

The following table presents the changes in accumulated other comprehensive loss (income), pre-tax, for the postretirement health care benefit plan.

(In thousands)	2016			2015
Accumulated other comprehensive (income) loss at beginning of year	$	15,466		$	10,947
Increase (decrease) in accumulated other comprehensive loss:
Recognized during the year:
Prior service credit		3,800			3,800
Amortization of actuarial losses		(1,099	)		(996	)
Occurring during the year:
Net actuarial (gains) losses		(4,302	)		1,715
Total increase (decrease) in accumulated other comprehensive loss		(1,601	)		4,519
Accumulated other comprehensive (income) loss at end of year	$	13,865		$	15,466

The following table presents the amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost for the postretirement health care benefit plan during the year ended December 31, 2017.

(In thousands)	2017
Net prior service credit	$	(3,800	)
Net actuarial loss	$	570

The following table presents the components of net periodic postretirement health care benefit cost.

(In thousands)	2016			2015			2014
Service cost	$	1,156		$	1,470		$	1,457
Interest cost		6,021			6,356			6,846
Amortization of prior service credit		(3,800	)		(3,800	)		(3,800	)
Recognized net actuarial loss (gain)		1,099			996			—
Net periodic benefit cost	$	4,476		$	5,022		$	4,503

To determine benefit obligation at year end, the Corporation used a weighted average of annual spot rates applied to future expected cash flows for years ended December 31, 2016 and 2015.

223

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 cost for the postretirement health care benefit plan.

Weighted average assumptions used to determine benefit obligation at year ended December 31:	2016			2015
Discount rate for benefit obligation		4.10	%		4.37	%
Initial health care cost trend rate		6.00	%		6.50	%
Ultimate health care cost trend rate		5.00	%		5.00	%
Year that the ultimate trend rate is reached		2019			2019

Weighted average assumptions used to determine net periodic benefit cost for the year ended December 31:	2016			2015			2014
Discount rate for benefit obligation		4.37	%		4.00	%		4.80	%
Discount rate for service cost		4.63	%		4.00	%		4.80	%
Discount rate for interest cost		3.70	%		4.00	%		4.80	%
Initial health care cost trend rate		6.50	%		7.00	%		7.50	%
Ultimate health care cost trend rate		5.00	%		5.00	%		5.00	%
Year that the ultimate trend rate is reached		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.

	December 31, 2016
	1-percentage point		1-percentage point
(In thousands)	increase		decrease
Effect on total service cost and interest cost components for the year ended	$	213	$	(243	)
Effect on accumulated postretirement benefit obligation at year end	$	4,928	$	(6,153	)

The following table presents information for the postretirement health care benefit plan with an accumulated post retirement benefit obligation in excess of plan assets.

(In thousands)	2016		2015
Projected benefit obligation	$	162,365	$	165,999
Accumulated benefit obligation		162,365		165,999
Fair value of plan assets		—		—

The Corporation expects to contribute $6.4 million to the postretirement benefit plan in 2017 to fund current benefit payment requirements.

Benefit payments projected to be made on the postretirement health care benefit plan during the next ten years are presented in the following table.

(In thousands)
2017	$	6,365
2018		6,651
2019		6,924
2020		7,167
2021		7,424
2022 - 2026		40,683

224

Savings plans

The Corporation also provides defined contribution savings plans pursuant to Section 1081.01(d) of the Puerto Rico Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant-directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in the year ended December 31, 2016 was $8.8 million (2015 - $6.4 million, 2014 - $5.0 million).

The plans held 1,797,267 (2015 – 1,979,558) shares of common stock of the Corporation with a market value of approximately $78.8 million at December 31, 2016 (2015 - $56.1 million).

225

Note 35 – Net income (loss) per common share

The following table sets forth the computation of net income (loss) per common share (“EPS”), basic and diluted, for the years ended December 31, 2016, 2015 and 2014:

(In thousands, except per share information)	2016			2015			2014
Net income (loss) from continuing operations	$	215,556		$	893,997		$	(190,510	)
Net income (loss) from discontinued operations		1,135			1,347			(122,980	)
Preferred stock dividends		(3,723	)		(3,723	)		(3,723	)
Net income (loss) applicable to common stock	$	212,968		$	891,621		$	(317,213	)
Average common shares outstanding		103,275,264			102,967,186			102,848,792
Average potential dilutive common shares		102,019			157,123			—
Average common shares outstanding - assuming dilution		103,377,283			103,124,309			102,848,792
Basic EPS from continuing operations	$	2.05		$	8.65		$	(1.88	)
Basic EPS from discontinued operations	$	0.01		$	0.01		$	(1.20	)
Total Basic EPS	$	2.06		$	8.66		$	(3.08	)
Diluted EPS from continuing operations	$	2.05		$	8.64		$	(1.88	)
Diluted EPS from discontinued operations	$	0.01		$	0.01		$	(1.20	)
Total Diluted EPS	$	2.06		$	8.65		$	(3.08	)

Potential common shares consist of common stock issuable under the assumed exercise of stock options, restricted stock and performance shares awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options, restricted stock and performance shares awards, if any, that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share.

For the years ended December 31, 2016 and 2015, there were no stock options outstanding. There were 45,205 weighted average antidilutive stock options outstanding for the year ended December 31, 2014.

226

Note 36 – Rental expense and commitments

At December 31, 2016, the Corporation was obligated under a number of non-cancelable leases for land, buildings, and equipment which require rentals as follows:

Year	Minimum payments[1]
	(In thousands)
2017	$	34,530
2018		30,463
2019		28,510
2020		26,861
2021		24,696
Later years		126,308
	$	271,368

[1] Minimum payments have not been reduced by minimum non-cancelable sublease rentals due in the future of $ 0.9 million at December 31, 2016.

Total rental expense for all operating leases, except those with terms of a month or less that were not renewed, for the year ended December 31, 2016 was $ 32.4 million (2015 - $ 35.9 million; 2014 - $ 35.0 million), which is included in net occupancy, equipment and communication expenses, according to their nature.

227

Note 37 – Other service fees

The following table presents the major categories of other service fees for the years ended December 31, 2016, 2015 and 2014.

(In thousands)	2016		2015		2014
Debit card fees	$	46,241	$	46,176	$	43,146
Insurance fees		63,482		63,976		54,158
Credit card fees		70,526		68,166		67,639
Sale and administration of investment products		21,450		23,846		27,711
Trust fees		18,811		18,866		18,209
Other fees		14,260		15,060		14,402
Total other service fees	$	234,770	$	236,090	$	225,265

228

Note 38 – FDIC loss share (expense) income

The caption of FDIC loss-share (expense) income in the consolidated statements of operations consists of the following major categories:

	Years ended December 31,
(In thousands)	2016			2015			2014
Amortization of loss share indemnification asset	$	(10,201	)	$	(66,238	)	$	(189,959	)
Reversal of accelerated amortization in prior periods		—			—			12,492
80% mirror accounting on credit impairment losses[1]		(239	)		15,658			32,038
80% mirror accounting on reimbursable expenses		8,433			73,205			58,117
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		(31,338	)		(13,836	)		(13,124	)
Change in true-up payment obligation		(33,413	)		9,559			(1,791	)
Arbitration decision charge[2]		(136,197	)		—			—
Other		(4,824	)		1,714			(797	)
Total FDIC loss share (expense) income	$	(207,779	)	$	20,062		$	(103,024	)

[1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

[2] Refer to Note 28, Commitments and Contingencies, for additional information on the FDIC arbitration decision.

229

Note 39 - Stock-based compensation

The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

As of December 31, 2016 there were no stock options outstanding. During the first quarter of 2015, all stock options outstanding which amounted to 44,797 with a weighted-average exercise price of $ 272 expired.

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.

Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on 2014 and thereafter was modified as follows, the first part ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The restricted shares granted, consistent with the requirements of the Troubled Asset Relief Program (“TARP”) Interim Final Rule, vest in two years from grant date.

230

The following table summarizes the restricted stock activity under the Incentive Plan for members of management.

(Not in thousands)	Shares			Weighted-average grant date fair value
Non-vested at January 1, 2014		585,247		$	21.16
Granted		365,831			29.86
Vested		(311,078	)		19.02
Forfeited		(11,991	)		29.33
Non-vested at December 31, 2014		628,009		$	27.13
Granted		323,814			33.37
Vested		(430,646	)		30.45
Forfeited		(25,446	)		28.65
Non-vested at December 31, 2015		495,731		$	28.25
Granted		344,488			25.86
Quantity adjusted by TSR factor		39,566			24.37
Vested		(487,784	)		27.72
Forfeited		(8,019	)		29.13
Non-vested at December 31, 2016		383,982		$	26.35

During the year ended December 31, 2016, 279,890 shares of restricted stock (2015 - 231,830; 2014 - 365,831) were awarded to management under the Incentive Plan, from which no shares were awarded to management consistent with the requirements of the TARP Interim Final Rule during 2016 and 2015 (2014 - 162,332).

Beginning in 2015, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS performance metric is considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS goal as of each reporting period. The TSR and EPS metrics are equally weighted and work independently. The number of shares that will ultimately vest ranges from 50% to a 150% of target based on both market (TSR) and performance (EPS) conditions. The performance shares vest at the end of the three-year performance cycle. The vesting is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. For the year ended December 31, 2016, 64,598 performance shares (2015 - 91,984) were granted under this plan.

During the year ended December 31, 2016, the Corporation recognized $ 7.3 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 1.4 million (2015 - $ 10.7 million, with a tax benefit of $ 1.6 million; 2014 - $ 6.8 million, with a tax benefit of $ 1.1 million). During the year ended December 31, 2016, the fair market value of the restricted stock vested was $8.7 million at grant date and $9.0 million at vesting date. This triggers a windfall, net of shortfalls, of $0.1 million of which $47 thousand was recorded as a windfall pool in additional paid in capital. No windfall pool was recorded for the remaining $54 thousand due to the valuation allowance of the deferred tax asset. During the year ended December 31, 2016 the Corporation recognized $1.5 million of performance shares expense, with a tax benefit of $ 0.1 million (2015 - $2.2 million, with a tax benefit of $ 0.2 million). The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at December 31, 2016 was $ 7.4 million and is expected to be recognized over a weighted-average period of 2.4 years.

231

The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:

(Not in thousands)	Restricted stock			Weighted-average grant date fair value
Nonvested at January 1, 2014		—			—
Granted		23,135		$	30.43
Vested		(23,135	)		30.43
Forfeited		—			—
Non-vested at December 31, 2014		—			—
Granted		22,119		$	32.29
Vested		(22,119	)		32.29
Forfeited		—			—
Non-vested at December 31, 2015		—			—
Granted		40,517		$	29.77
Vested		(40,517	)		29.77
Forfeited		—			—
Non-vested at December 31, 2016		—			—

During the year ended December 31, 2016, the Corporation granted 40,517 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (2015 - 22,119; 2014 – 23,135). During this period, the Corporation recognized $1.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $0.1 million (2015 - $0.5 million, with a tax benefit of $77 thousand; 2014 - $0.5 million, with a tax benefit of $57 thousand). The fair value at vesting date of the restricted stock vested during the year ended December 31, 2016 for directors was $1.2 million.

232

Note 40 – Income taxes

The components of income tax expense (benefit) for the years ended December 31, are summarized in the following table.

(In thousands)	2016		2015			2014
Current income tax expense:
Puerto Rico	$	11,031	$	16,675		$	7,814
Federal and States		7,059		7,281			6,953
Subtotal		18,090		23,956			14,767
Deferred income tax expense (benefit):
Puerto Rico		36,423		63,808			12,569
Federal and States		24,271		(582,936	)		2,861
Valuation allowance - Initial recognition		—		—			8,034
Adjustment for enacted changes in income tax laws		—		—			20,048
Subtotal		60,694		(519,128	)		43,512
Total income tax expense (benefit)	$	78,784	$	(495,172	)	$	58,279

The reasons for the difference between the income tax expense (benefit) applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico were as follows:

	2016						2015						2014
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax at statutory rates	$	114,792			39	%	$	155,542			39	%		(51,570	)		39	%
Benefit of net tax exempt interest income		(63,053	)		(22	)		(60,049	)		(15	)		(67,636	)		51
Effect of income subject to preferential tax rate [1]		11,155			4			(10,010	)		(3	)		(21,909	)		18
Deferred tax asset valuation allowance		16,585			6			(586,159	)		(147	)		(4,281	)		3
Non-deductible expenses [2]		—			—			—			—			178,219			(135	)
Difference in tax rates due to multiple jurisdictions		(4,092	)		(1	)		(3,008	)		(1	)		(2,403	)		2
Initial adjustment in deferred tax due to change in tax rate		—			—			—			—			20,048			(16	)
Unrecognized tax benefits		(4,442	)		(2	)		—			—			(3,601	)		3
State and local taxes		9,081			3			4,543			1			6,248			(5	)
Others		(1,242	)		—			3,969			1			5,164			(4	)
Income tax expense (benefit)	$	78,784			27	%	$	(495,172	)		(125	)%	$	58,279			(44	)%

[1] Includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014.

[2] For the year ended December 31, 2014, includes approximately $161.5 million of amortization of the discount and deferred cost associated with the TARP funds, which are not deductible.

The results for the year ended December 31, 2015, reflect a tax benefit of $589 million as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from the U.S. operation as further explain below.

During the third quarter of 2016, a reversal of $4.4 million in the reserve for uncertain tax positions, including interest was recognized due to the expiration of the statute of limitation in the P.R. operations.

During the year ended December 31, 2014, the Corporation recognized an income tax expense of $20.0 million mainly related to the deferred tax liability associated with the portfolio acquired from Westernbank, as a result of the increase in the income tax for capital gains from 15% to 20%. Additionally, during the second quarter of 2014 the Corporation entered into a Closing Agreement with the

233

Puerto Rico Department of the Treasury. The Agreement, among other matters, was related to the income tax treatment of certain charge-offs related to the loans acquired from Westernbank as part of the FDIC assisted transaction in the year 2010. As a result of the Agreement, the Corporation recorded a tax benefit of $23.4 million due to a reduction in the deferred tax liability associated with Westernbank loan portfolio.

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)	December 31, 2016		December 31, 2015
Deferred tax assets:
Tax credits available for carry forward	$	18,510	$	13,651
Net operating loss and other carry forward available		1,238,222		1,262,197
Postretirement and pension benefits		94,741		116,036
Deferred loan origination fees		6,622		6,420
Allowance for loan losses		649,107		670,592
Deferred gains		4,884		5,966
Accelerated depreciation		9,828		8,335
Intercompany deferred gains		2,496		2,743
Differences between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations		13,160		12,684
Other temporary differences		31,127		29,208
Total gross deferred tax assets		2,068,697		2,127,832
Deferred tax liabilities:
FDIC-assisted transaction		58,363		90,778
Indefinite-lived intangibles		73,974		63,573
Unrealized net gain on trading and available-for-sale securities		21,335		22,281
Other temporary differences		8,477		6,670
Total gross deferred tax liabilities		162,149		183,302
Valuation allowance		664,287		642,727
Net deferred tax asset	$	1,242,261	$	1,301,803

The net deferred tax asset shown in the table above at December 31, 2016 is reflected in the consolidated statements of financial condition as $1.2 billion in net deferred tax assets (in the “other assets” caption) (2015 - $1.3 billion in deferred tax asset in the “other assets” caption) and $1.4 million in deferred tax liabilities (in the “other liabilities” caption) (2015 - $649 thousand in deferred tax liabilities in the “other liabilities” caption), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

234

Included as part of the other carryforwards available are $44.2 million related to contributions to BPPR’s qualified pension plan and $30.4 million of other net operating loss carryforwards (“NOLs”) primarily related to the loss on sale of non-performing assets that have no expiration date since they were realize through a single member limited liability company with partnership election. Additionally, the deferred tax asset related to the NOLs outstanding at December 31, 2016 expires as follows:

(In thousands)
2018	$	5,116
2019		1,080
2021		108
2022		2,071
2023		1,444
2024		9,548
2025		14,057
2026		13,359
2027		42,062
2028		504,976
2029		170,691
2030		171,897
2031		134,106
2032		25,043
2033		1,757
2034		66,268
	$	1,163,583

A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

At December 31, 2016 the net deferred tax asset of the U.S. operations amounted to $1.1 billion with a valuation allowance of approximately $617 million, for a net deferred tax asset after valuation allowance of approximately $525 million. During the year ended December 31, 2015, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that a portion of the total deferred tax asset from the U.S. operations, comprised mainly of net operating losses, will be realized. The Corporation based this determination on its estimated earnings for the remaining carryforward period of eighteen years beginning with the 2016 fiscal year, available to utilize the deferred tax asset, to reduce its income tax obligations. The historical level of book income adjusted by permanent differences, together with the estimated earnings 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. operations will be realized. Accordingly, the Corporation recorded a partial reversal of the valuation allowance on the deferred tax asset from the U.S. operations amounting to approximately $589 million. As of December 31, 2016, management estimated that the U.S. operations would earn enough pre-tax Income during the carryover period to realize the total amount of net deferred tax asset after valuation allowance. After weighting all available positive and negative evidence, management concluded that is more likely than not that a portion of the deferred tax asset from the U.S. operation, amounting to approximately $525 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arises.

235

At December 31, 2016, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $718 million.

The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended December 31, 2016. This is considered a strong piece of objectively verifiable positive evidence that out weights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized.

The Holding Company operation is in a cumulative loss position, taking into account taxable income exclusive of reversing temporary differences, for the three years period ending December 31, 2016 Management expect these losses will be a trend in future years. This objectively verifiable negative evidence is considered by management a strong negative evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of 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 $47 million as of December 2016.

Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividends-received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis.

The following table presents a reconciliation of unrecognized tax benefits.

(In millions)
Balance at January 1, 2015	$	8.0
Additions for tax positions related to 2015		1.5
Reduction as a result of settlements		(0.5	)
Balance at December 31, 2015	$	9.0
Additions for tax positions related to 2016		1.1
Additions for tax positions taken in prior years		0.3
Reduction as a result of lapse of statute of limitations		(3.0	)
Balance at December 31, 2016	$	7.4

At December 31, 2016, the total amount of interest recognized in the statement of financial condition approximated $2.9 million (2015 - $3.2 million). The total interest expense recognized during 2016 was $1.2 million (2015 - $57 thousand), which is net of the reversal of $1.4 million due to the expiration of the statute of limitations. Management determined that, as of December 31, 2016 and 2015, there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating expenses in the consolidated statements of operations.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $9.0 million at December 31, 2016 (2015 - $11.2 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions.

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of December 31, 2016, the following years remain subject to examination: U.S. Federal jurisdiction – 2013 through 2016 and Puerto Rico – 2012 through 2016. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.8 million.

236

Note 41 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the years ended December 31, 2016, 2015 and 2014 are listed in the following table:

(In thousands)	2016		2015		2014
Income taxes paid	$	3,763	$	7,152	$	54,520
Interest paid		212,353		193,503		696,631
Non-cash activities:
Loans transferred to other real estate	$	117,334	$	136,368	$	154,358
Loans transferred to other property		28,614		36,106		38,958
Total loans transferred to foreclosed assets		145,948		172,474		193,316
Financed sales of other real estate assets		15,452		24,104		26,869
Financed sales of other foreclosed assets		17,351		22,745		23,762
Total financed sales of foreclosed assets		32,803		46,849		50,631
Transfers from loans held-in-portfolio to loans held-for-sale		7,249		65,063		2,161,669
Transfers from loans held-for-sale to loans held-in-portfolio		5,947		17,065		41,293
Transfers from trading securities to available-for-sale securities		—		63,645		—
Loans securitized into investment securities[1]		775,612		1,088,121		899,604
Trades receivables from brokers and counterparties		46,630		78,759		66,949
Trades payable to brokers and counterparties		102		6,150		2,000
Recognition of mortgage servicing rights on securitizations or asset transfers		10,884		13,460		12,583

[1] Includes loans securitized into trading securities and subsequently sold before year end.

As previously disclosed in Note 5, Business Combination, on February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, BPPR, in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver. As part of this transaction, BPPR received net cash proceeds of approximately $ 731 million for consideration of the assets and liabilities acquired.

During the year ended December 31, 2014 BPNA completed the sale of its Illinois, Central Florida and California regional operations. As part of these transactions, BPNA made a net cash disbursement of $206.0 million for consideration of the assets and liabilities sold, as follows:

(In thousands)	December 31, 2014
Loans held-for-sale	$	1,739,101
Premises and equipment, net		16,223
Other assets		16,853
Deposits		(2,009,816	)
Other liabilities		(6,611	)
Net liabilities sold	$	(244,250	)

237

Note 42 – Segment reporting

The Corporation’s corporate structure consists of 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. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations and sold during 2014.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were 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, 2016, additional disclosures are provided for the business areas included in this reportable segment, as described below:

• Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

• Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage 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.

• Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during 2008. During the third quarter of 2015, BPNA and E-LOAN completed an asset purchase and sale transaction in which E-LOAN sold to BPNA all of its outstanding loan portfolio, including residential mortgage loans and home equity lines of 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. After the close of the above mentioned asset purchase and sale transaction, additional disclosures with respect to E-LOAN are no longer considered relevant to the financial statements and accordingly are not presented. 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: Finance, Risk Management and Legal.

The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

238

The tables that follow present the results of operations and total assets by reportable segments:

December 31, 2016
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	1,224,771	$	258,416	$	(474	)
Provision for loan losses		154,785		15,266		—
Non-interest income		243,368		21,651		(119	)
Amortization of intangibles		11,479		665		—
Goodwill impairment charge		3,801		—		—
Depreciation expense		39,505		6,715		—
Other operating expenses		952,894		174,585		(779	)
Income tax expense		75,615		36,712		92
Net income	$	230,060	$	46,124	$	94
Segment assets	$	29,841,854	$	8,629,439	$	(31,397	)

December 31, 2016
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	1,482,713	$	(60,658	)	$	—		$	1,422,055
Provision (reversal of provision) for loan losses		170,051		(35	)		—			170,016
Non-interest income		264,900		35,705			(2,669	)		297,936
Amortization of intangibles		12,144		—			—			12,144
Goodwill impairment charge		3,801		—			—			3,801
Depreciation expense		46,220		654			—			46,874
Other operating expenses		1,126,700		68,694			(2,578	)		1,192,816
Income tax expense (benefit)		112,419		(33,617	)		(18	)		78,784
Net income (loss)	$	276,278	$	(60,649	)	$	(73	)	$	215,556
Segment assets	$	38,439,896	$	4,982,113		$	(4,760,400	)	$	38,661,609

December 31, 2015
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	1,231,585	$	239,379		$	—
Provision for loan losses		240,817		626			—
Non-interest income		464,786		22,667			125
Amortization of intangibles		10,465		554			—
Depreciation expense		40,440		6,272			—
Other operating expenses		970,201		188,102			—
Income tax expense (benefit)		116,058		(580,738	)		—
Net income	$	318,390	$	647,230		$	125
Segment assets		27,907,350		7,780,002			(129,038	)

December 31, 2015
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	1,470,964		$	(61,981	)	$	—		$	1,408,983
Provision for loan losses		241,443			35			—			241,478
Non-interest income		487,578			34,486			(2,523	)		519,541
Amortization of intangibles		11,019			—			—			11,019
Depreciation expense		46,712			762			—			47,474
Other operating expenses		1,158,303			74,212			(2,787	)		1,229,728
Income tax benefit		(464,680	)		(30,595	)		103			(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

239

December 31, 2014
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	1,288,889	$	157,701		$	—
Provision (reversal of provision) for loan losses		289,184		(18,850	)		—
Non-interest income		283,251		64,319			—
Amortization of intangibles		7,351		809			—
Depreciation expense		39,062		6,617			—
Loss on early extinguishment of debt		—		532			—
Other operating expenses		884,289		184,369			—
Income tax expense		77,973		3,101			—
Net income	$	274,281	$	45,442		$	—
Segment assets	$	27,384,169	$	5,503,433		$	(17,972	)

December 31, 2014
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	1,446,590	$	(501,518	)	$	—		$	945,072
Provision (reversal of provision) for loan losses		270,334		(200	)		—			270,134
Non-interest income		347,570		41,695			(2,750	)		386,515
Amortization of intangibles		8,160		—			—			8,160
Depreciation expense		45,679		648			—			46,327
Loss on early extinguishment of debt		532		—			—			532
Other operating expenses		1,068,658		72,759			(2,752	)		1,138,665
Income tax expense (benefit)		81,074		(22,796	)		1			58,279
Net income (loss)	$	319,723	$	(510,234	)	$	1		$	(190,510	)
Segment assets	$	32,869,630	$	4,927,448		$	(4,710,307	)	$	33,086,771

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

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	$	472,948		$	742,854	$	6,172	$	2,797		$	1,224,771
Provision for loan losses		12,884			141,901		—		—			154,785
Non-interest income		(91,411	)		232,113		103,005		(339	)		243,368
Amortization of intangibles		145			7,042		4,292		—			11,479
Goodwill impairment charge		—			—		3,801		—			3,801
Depreciation expense		16,956			21,684		865		—			39,505
Other operating expenses		251,375			631,234		70,624		(339	)		952,894
Income tax expense		41,639			24,068		9,908		—			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

240

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	$	457,119	$	760,157	$	7,793	$	6,516		$	1,231,585
Provision for loan losses		101,840		138,977		—		—			240,817
Non-interest income		113,697		248,024		103,464		(399	)		464,786
Amortization of intangibles		7		7,330		3,128		—			10,465
Depreciation expense		16,984		22,385		1,071		—			40,440
Other operating expenses		281,995		617,973		70,632		(399	)		970,201
Income tax expense		48,793		55,429		11,836		—			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, 2014
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking		Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	512,920	$	766,758	$	9,207	$	4		$	1,288,889
Provision for loan losses		138,247		150,937		—		—			289,184
Non-interest income		6,217		178,434		98,794		(194	)		283,251
Amortization of intangibles		4		6,836		511		—			7,351
Depreciation expense		16,445		21,513		1,104		—			39,062
Other operating expenses		257,970		558,521		67,992		(194	)		884,289
Income tax expense		22,899		38,825		16,249		—			77,973
Net income	$	83,572	$	168,560	$	22,145	$	4		$	274,281
Segment assets	$	11,508,845	$	17,654,762	$	591,955	$	(2,371,393	)	$	27,384,169

Geographic Information

(In thousands)	2016		2015		2014
Revenues:[1]
Puerto Rico	$	1,361,663	$	1,598,066	$	1,024,416
United States		283,349		255,714		223,264
Other		74,979		74,744		83,907
Total consolidated revenues	$	1,719,991	$	1,928,524	$	1,331,587

[1] Total revenues include net interest income (expense), service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) and valuation adjustments on investment securities, trading account (loss) profit, net (loss) gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income and other operating income.

241

Selected Balance Sheet Information

(In thousands)	2016		2015		2014
Puerto Rico
Total assets	$	28,813,289	$	26,764,689	$	26,267,180
Loans		16,880,868		17,477,070		17,704,170
Deposits		23,185,551		20,893,232		20,365,445
United States
Total assets	$	8,928,475	$	7,858,712	$	5,689,061
Loans		5,799,562		4,873,504		3,568,564
Deposits		6,266,473		5,288,886		3,442,084
Other
Total assets	$	919,845	$	1,138,332	$	1,130,530
Loans		755,017		778,656		780,483
Deposits [1]		1,044,200		1,027,605		1,000,006

[1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.    

242

Note 43 - Popular, Inc. (holding company only) financial information

The following condensed financial information presents the financial position of Popular, Inc. Holding Company only at December 31, 2016 and 2015, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2016.

Condensed Statements of Condition

	December 31,
(In thousands)	2016		2015
ASSETS
Cash and due from banks (includes $47,614 due from bank subsidiary (2015 - $24,124))	$	47,783	$	24,298
Money market investments		252,347		262,204
Trading account securities		2,640		2,020
Investment securities available-for-sale, at fair value		—		216
Other investment securities, at lower of cost or realizable value (includes $8,725 in common securities from statutory trusts (2015 - $8,725))[1]		9,850		9,850
Investment in BPPR and subsidiaries, at equity		3,658,451		3,598,393
Investment in Popular North America and subsidiaries, at equity		1,707,167		1,687,104
Investment in other non-bank subsidiaries, at equity		243,993		253,828
Other loans		1,142		1,176
Less - Allowance for loan losses		2		3
Premises and equipment		3,067		2,823
Investment in equity method investees		51,259		45,262
Other assets (includes $936 due from subsidiaries and affiliate (2015 - $1,667))		11,257		10,817
Total assets	$	5,988,954	$	5,897,988
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable	$	735,600	$	733,516
Other liabilities (includes $2,574 due to subsidiaries and affiliate (2015 - $1,133))		55,309		59,148
Stockholders’ equity		5,198,045		5,105,324
Total liabilities and stockholders’ equity	$	5,988,954	$	5,897,988

[1] Refer to Note 23 to the consolidated financial statements for information on the statutory trusts.

243

Condensed Statements of Operations

	Years ended December 31,
(In thousands)	2016			2015			2014
Income:
Dividends from subsidiaries	$	102,300		$	41,350		$	—
Interest income (includes $1,965 due from subsidiaries and affiliates (2015 - $1,188; 2014 - $1,829))		2,141			1,332			1,931
Earnings from investments in equity method investees		12,352			13,710			12,291
Gain on sale and valuation adjustment of investment securities		1,767			—			—
Trading account profit (loss)		90			(187	)		(40	)
Total income		118,650			56,205			14,182
Expenses:
Interest expense		52,470			52,470			492,657
Provision (reversal of provision) for loan losses		(35	)		35			(200	)
Operating expenses (includes expenses for services provided by subsidiaries and affiliate of $8,160 (2015 - $7,309 ; 2014 - $6,882)), net of reimbursement by subsidiaries for services provided by parent of $74,573 (2015 - $74,799 ; 2014 - $67,021)		(4,208	)		(1,293	)		1,633
Total expenses		48,227			51,212			494,090
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries		70,423			4,993			(479,908	)
Income tax expense (benefit)		19			(186	)		5,580
Income (loss) before equity in undistributed earnings of subsidiaries		70,404			5,179			(485,488	)
Equity in undistributed earnings of subsidiaries		145,152			888,818			294,978
Income (loss) from continuing operations		215,556			893,997			(190,510	)
Equity in undistributed earnings (losses) of discontinued operations		1,135			1,347			(122,980	)
Net income (loss)	$	216,691		$	895,344		$	(313,490	)
Comprehensive income (loss), net of tax	$	153,291		$	868,330		$	(354,617	)

244

Condensed Statements of Cash Flows
	Years ended December 31,
(In thousands)	2016			2015			2014
Cash flows from operating activities:
Net income (loss)	$	216,691		$	895,344		$	(313,490	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries and dividends from subsidiaries		(146,287	)		(890,165	)		(171,998	)
Provision (reversal) for loan losses		(35	)		35			(200	)
Net accretion of discounts and amortization of premiums and deferred fees		2,087			2			404,461
Earnings from investments under the equity method		(12,352	)		(13,710	)		(12,291	)
Deferred income tax expense (benefit)		19			(186	)		8,203
Sale and valuation adjustments of investment securities		(1,767	)		—			—
Net (increase) decrease in:
Trading securities		(620	)		(380	)		(288	)
Other assets		4,473			8,781			4,736
Net increase (decrease) in:
Interest payable		—			—			7,066
Other liabilities		(3,854	)		(5,622	)		(180	)
Total adjustments		(158,336	)		(901,245	)		239,509
Net cash provided by (used in) operating activities		58,355			(5,901	)		(73,981	)
Cash flows from investing activities:
Net decrease (increase) in money market investments		9,857			(242,457	)		(1,026	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Other		—			—			1,000
Proceeds from sale of investment securities:
Available-for-sale		278			—			—
Other		1,583			—			—
Capital contribution to subsidiaries		—			—			(100,000	)
Net decrease in advances to subsidiaries and affiliates		—			53,769			465,731
Net repayments (originations) on other loans		35			24			(279	)
Return of capital from equity method investments		433			11,500			—
Return of capital from wholly owned subsidiaries		14,000			203,000			210,000
Acquisition of premises and equipment		(953	)		(1,079	)		(1,075	)
Proceeds from sale of:
Premises and equipment		56			9			48
Foreclosed assets		434			—			—
Net cash provided by investing activities		25,723			24,766			574,399
Cash flows from financing activities:
Payments of notes payable and subordinated notes		—			—			(936,000	)
Proceeds from issuance of notes payable		—			—			450,000
Proceeds from issuance of common stock		7,437			6,226			5,394
Dividends paid		(65,932	)		(19,257	)		(3,723	)
Repurchase of TARP-related warrants		—			—			(3,000	)
Net payments for repurchase of common stock		(2,098	)		(1,984	)		(3,236	)
Net cash used in financing activities		(60,593	)		(15,015	)		(490,565	)
Net increase in cash and due from banks		23,485			3,850			9,853
Cash and due from banks at beginning of period		24,298			20,448			10,595
Cash and due from banks at end of period	$	47,783		$	24,298		$	20,448

Popular, Inc. (parent company only) received dividend distributions from its direct equity method investees amounting to $4.7 million for the year ended December 31, 2016 (2015 - $4.7 million).

245

Notes payable include junior subordinated debentures issued by the Corporation that are associated to capital securities issued by the Popular Capital Trust I, Popular Capital Trust II and Popular Capital Trust III and medium-term notes. Refer to Note 23 for a description of significant provisions related to these junior subordinated debentures. The following table presents the aggregate amounts by contractual maturities of notes payable at December 31, 2016:

Year	(In thousands)
2017	$	—
2018		—
2019		444,788
2020		—
2021		—
Later years		290,812
No stated maturity		—
Total	$	735,600

246

Note 44 – Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular North America, Inc. (“PNA”) and all other subsidiaries of the Corporation at December 31, 2016 and 2015, and the results of their operations and cash flows for the periods ended December 31, 2016, 2015 and 2014.

PNA is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Equity One, Inc. and Banco Popular North America (“BPNA”), including BPNA’s wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.

PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.

247

Condensed Consolidating Statement of Financial Condition

	At December 31, 2016
	Popular Inc.			PNA			All other subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Assets:
Cash and due from banks	$	47,783		$	591		$	362,101		$	(48,081	)	$	362,394
Money market investments		252,347			13,263			2,891,670			(267,063	)		2,890,217
Trading account securities, at fair value		2,640			—			57,297			(132	)		59,805
Investment securities available-for-sale, at fair value		—			—			8,209,806			—			8,209,806
Investment securities held-to-maturity, at amortized cost		—			—			98,101			—			98,101
Other investment securities, at lower of cost or realizable value		9,850			4,492			153,476			—			167,818
Investment in subsidiaries		5,609,611			1,818,127			—			(7,427,738	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			88,821			—			88,821
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,142			—			22,894,030			—			22,895,172
Loans covered under loss-sharing agreements with the FDIC		—			—			572,878			—			572,878
Less - Unearned income		—			—			121,425			—			121,425
Allowance for loan losses		2			—			540,649			—			540,651
Total loans held-in-portfolio, net		1,140			—			22,804,834			—			22,805,974
FDIC loss-share asset		—			—			69,334			—			69,334
Premises and equipment, net		3,067			—			540,914			—			543,981
Other real estate not covered under loss- sharing agreements with the FDIC		81			—			180,364			—			180,445
Other real estate covered under loss- sharing agreements with the FDIC		—			—			32,128			—			32,128
Accrued income receivable		112			138			137,882			(90	)		138,042
Mortgage servicing assets, at fair value		—			—			196,889			—			196,889
Other assets		61,770			25,146			2,073,562			(14,968	)		2,145,510
Goodwill		—			—			627,294			—			627,294
Other intangible assets		553			—			44,497			—			45,050
Total assets	$	5,988,954		$	1,861,757		$	38,568,970		$	(7,758,072	)	$	38,661,609
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	7,028,524		$	(48,081	)	$	6,980,443
Interest bearing		—			—			23,782,844			(267,063	)		23,515,781
Total deposits		—			—			30,811,368			(315,144	)		30,496,224
Federal funds purchased and assets sold under agreements to repurchase		—			—			479,425			—			479,425
Other short-term borrowings		—			—			1,200			—			1,200
Notes payable		735,600			148,512			690,740			—			1,574,852
Other liabilities		55,309			6,034			865,861			(15,253	)		911,951
Total liabilities		790,909			154,546			32,848,594			(330,397	)		33,463,652
Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,040			2			56,307			(56,309	)		1,040
Surplus		4,246,495			4,111,207			5,717,066			(9,819,746	)		4,255,022
Retained earnings (accumulated deficit)		1,228,834			(2,382,049	)		264,944			2,108,578			1,220,307
Treasury stock, at cost		(8,198	)		—			—			(88	)		(8,286	)
Accumulated other comprehensive loss, net of tax		(320,286	)		(21,949	)		(317,941	)		339,890			(320,286	)
Total stockholders’ equity		5,198,045			1,707,211			5,720,376			(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

248

Condensed Consolidating Statement of Financial Condition

	At December 31, 2015
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Assets:
Cash and due from banks	$	24,298		$	600		$	363,620		$	(24,844	)	$	363,674
Money market investments		262,204			23,931			2,179,887			(285,930	)		2,180,092
Trading account securities, at fair value		2,020			—			69,639			—			71,659
Investment securities available-for-sale, at fair value		216			—			6,062,776			—			6,062,992
Investment securities held-to-maturity, at amortized cost		—			—			100,903			—			100,903
Other investment securities, at lower of cost or realizable value		9,850			4,492			157,906			—			172,248
Investment in subsidiaries		5,539,325			1,789,512			—			(7,328,837	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			137,000			—			137,000
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,176			—			22,452,637			—			22,453,813
Loans covered under loss-sharing agreements with the FDIC		—			—			646,115			—			646,115
Less - Unearned income		—			—			107,698			—			107,698
Allowance for loan losses		3			—			537,108			—			537,111
Total loans held-in-portfolio, net		1,173			—			22,453,946			—			22,455,119
FDIC loss-share asset		—			—			310,221			—			310,221
Premises and equipment, net		2,823			—			499,788			—			502,611
Other real estate not covered under loss-sharing agreements with the FDIC		532			—			154,699			—			155,231
Other real estate covered under loss-sharing agreements with the FDIC		—			—			36,685			—			36,685
Accrued income receivable		85			115			124,070			(36	)		124,234
Mortgage servicing assets, at fair value		—			—			211,405			—			211,405
Other assets		54,908			23,596			2,132,616			(17,958	)		2,193,162
Goodwill		—			—			626,388			—			626,388
Other intangible assets		554			—			57,555			—			58,109
Total assets	$	5,897,988		$	1,842,246		$	35,679,104		$	(7,657,605	)	$	35,761,733
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	6,426,359		$	(24,844	)	$	6,401,515
Interest bearing		—			—			21,094,138			(285,930	)		20,808,208
Total deposits		—			—			27,520,497			(310,774	)		27,209,723
Federal funds purchased and assets sold under agreements to repurchase		—			—			762,145			—			762,145
Other short-term borrowings		—			—			1,200			—			1,200
Notes payable		733,516			148,483			780,509			—			1,662,508
Other liabilities		59,148			6,659			971,429			(18,218	)		1,019,018
Liabilities from discontinued operations		—			—			1,815			—			1,815
Total liabilities		792,664			155,142			30,037,595			(328,992	)		30,656,409
Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,038			2			56,307			(56,309	)		1,038
Surplus		4,220,629			4,111,208			5,712,635			(9,815,316	)		4,229,156
Retained earnings (accumulated deficit)		1,096,484			(2,416,251	)		128,459			2,279,265			1,087,957
Treasury stock, at cost		(6,101	)		—			—			—			(6,101	)
Accumulated other comprehensive loss, net of tax		(256,886	)		(7,855	)		(255,892	)		263,747			(256,886	)
Total stockholders’ equity		5,105,324			1,687,104			5,641,509			(7,328,613	)		5,105,324
Total liabilities and stockholders’ equity	$	5,897,988		$	1,842,246		$	35,679,104		$	(7,657,605	)	$	35,761,733

249

Condensed Consolidating Statement of Operations

	Year ended December 31, 2016
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	102,300		$	—		$	—		$	(102,300	)	$	—
Loans		78			—			1,459,642			—			1,459,720
Money market investments		1,399			101			16,428			(1,500	)		16,428
Investment securities		664			322			151,025			—			152,011
Trading account securities		—			—			6,414			—			6,414
Total interest and dividend income		104,441			423			1,633,509			(103,800	)		1,634,573
Interest expense:
Deposits		—			—			129,077			(1,500	)		127,577
Short-term borrowings		—			—			7,812			—			7,812
Long-term debt		52,470			10,769			13,890			—			77,129
Total interest expense		52,470			10,769			150,779			(1,500	)		212,518
Net interest income (expense)		51,971			(10,346	)		1,482,730			(102,300	)		1,422,055
Provision (reversal) for loan losses- non-covered loans		(35	)		—			171,161			—			171,126
Provision (reversal) for loan losses- covered loans		—			—			(1,110	)		—			(1,110	)
Net interest income (expense) after provision for loan losses		52,006			(10,346	)		1,312,679			(102,300	)		1,252,039
Service charges on deposit accounts		—			—			160,836			—			160,836
Other service fees		—			—			237,342			(2,572	)		234,770
Mortgage banking activities		—			—			56,538			—			56,538
Net gain on sale of investment securities		1,767			—			195			—			1,962
Other-than-temporary impairment losses on investment securities		—			—			(209	)		—			(209	)
Trading account profit (loss)		90			—			(831	)		(44	)		(785	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			8,245			—			8,245
Adjustments (expense) to indemnity reserves on loans sold		—			—			(17,285	)		—			(17,285	)
FDIC loss-share expense		—			—			(207,779	)		—			(207,779	)
Other operating income (loss)		12,352			(2,559	)		51,903			(53	)		61,643
Total non-interest income (loss)		14,209			(2,559	)		288,955			(2,669	)		297,936
Operating expenses:
Personnel costs		48,032			—			439,444			—			487,476
Net occupancy expenses		3,630			—			82,023			—			85,653
Equipment expenses		2,807			—			59,418			—			62,225
Other taxes		187			1			42,116			—			42,304
Professional fees		10,817			122			312,517			(413	)		323,043
Communications		520			—			23,377			—			23,897
Business promotion		2,261			—			50,753			—			53,014
FDIC deposit insurance		—			—			24,512			—			24,512
Other real estate owned (OREO) expenses		52			—			47,067			—			47,119
Other operating expenses		(72,514	)		60			165,066			(2,165	)		90,447
Amortization of intangibles		—			—			12,144			—			12,144
Goodwill impairment charge		—			—			3,801			—			3,801
Total operating expenses		(4,208	)		183			1,262,238			(2,578	)		1,255,635
Income (loss) before income tax and equity in earnings of subsidiaries		70,423			(13,088	)		339,396			(102,391	)		294,340
Income tax expense (benefit)		19			(4,581	)		83,364			(18	)		78,784
Income (loss) before equity in earnings of subsidiaries		70,404			(8,507	)		256,032			(102,373	)		215,556
Equity in undistributed earnings of subsidiaries		145,152			41,574			—			(186,726	)		—
Income from continuing operations		215,556			33,067			256,032			(289,099	)		215,556
Income from discontinued operations, net of tax		—			—			1,135			—			1,135
Equity in undistributed earnings of discontinued operations		1,135			1,135			—			(2,270	)		—
Net Income	$	216,691		$	34,202		$	257,167		$	(291,369	)	$	216,691
Comprehensive income, net of tax	$	153,291		$	20,108		$	195,118		$	(215,226	)	$	153,291

250

Condensed Consolidating Statement of Operations

	Year ended December 31, 2015
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	41,350		$	—		$	—		$	(41,350	)	$	—
Loans		673			3			1,458,613			(583	)		1,458,706
Money market investments		40			8			7,245			(50	)		7,243
Investment securities		619			322			125,123			—			126,064
Trading account securities		—			—			11,001			—			11,001
Total interest and dividend income		42,682			333			1,601,982			(41,983	)		1,603,014
Interest expense:
Deposits		—			—			107,583			(50	)		107,533
Short-term borrowings		—			502			7,593			(583	)		7,512
Long-term debt		52,470			10,779			15,737			—			78,986
Total interest expense		52,470			11,281			130,913			(633	)		194,031
Net interest (expense) income		(9,788	)		(10,948	)		1,471,069			(41,350	)		1,408,983
Provision for loan losses- non-covered loans		35			—			217,423			—			217,458
Provision for loan losses- covered loans		—			—			24,020			—			24,020
Net interest (expense) income after provision for loan losses		(9,823	)		(10,948	)		1,229,626			(41,350	)		1,167,505
Service charges on deposit accounts		—			—			160,108			—			160,108
Other service fees		—			—			238,566			(2,476	)		236,090
Mortgage banking activities		—			—			81,802			—			81,802
Net gain on sale of investment securities		—			—			141			—			141
Other-than temporary impairment losses on investment securities		—			—			(14,445	)		—			(14,445	)
Trading account loss		(187	)		—			(4,536	)		—			(4,723	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			542			—			542
Adjustments (expense) to indemnity reserves on loans sold		—			—			(18,628	)		—			(18,628	)
FDIC loss-share income		—			—			20,062			—			20,062
Other operating income (loss)		13,710			(244	)		45,173			(47	)		58,592
Total non-interest income (loss)		13,523			(244	)		508,785			(2,523	)		519,541
Operating expenses:
Personnel costs		49,112			—			428,407			—			477,519
Net occupancy expenses		3,591			—			83,297			—			86,888
Equipment expenses		2,240			—			57,870			—			60,110
Other taxes		(822	)		—			40,619			—			39,797
Professional fees		11,384			504			297,392			(295	)		308,985
Communications		519			—			24,627			—			25,146
Business promotion		1,868			—			50,208			—			52,076
FDIC deposit insurance		—			—			27,626			—			27,626
Other real estate owned (OREO) expenses		—			—			85,568			—			85,568
Other operating expenses		(69,185	)		463			166,289			(2,492	)		95,075
Amortization of intangibles		—			—			11,019			—			11,019
Restructuring costs		—			—			18,412			—			18,412
Total operating expenses		(1,293	)		967			1,291,334			(2,787	)		1,288,221
Income (loss) before income tax and equity in earnings of subsidiaries		4,993			(12,159	)		447,077			(41,086	)		398,825
Income tax (benefit) expense		(186	)		305			(495,394	)		103			(495,172	)
Income (loss) before equity in earnings of subsidiaries		5,179			(12,464	)		942,471			(41,189	)		893,997
Equity in undistributed earnings of subsidiaries		888,818			638,341			—			(1,527,159	)		—
Income from continuing operations		893,997			625,877			942,471			(1,568,348	)		893,997
Income from discontinued operations, net of tax		—			—			1,347			—			1,347
Equity in undistributed earnings of discontinued operations		1,347			1,347			—			(2,694	)		—
Net Income	$	895,344		$	627,224		$	943,818		$	(1,571,042	)	$	895,344
Comprehensive income, net of tax	$	868,330		$	623,433		$	916,942		$	(1,540,375	)	$	868,330

251

Condensed Consolidating Statement of Operations

	Year ended December 31, 2014
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Interest Income:
Loans	$	1,294		$	—		$	1,478,658		$	(1,202	)	$	1,478,750
Money market investments		20			7			4,219			(22	)		4,224
Investment securities		617			322			131,692			—			132,631
Trading account securities		—			—			17,938			—			17,938
Total interest income		1,931			329			1,632,507			(1,224	)		1,633,543
Interest Expense:
Deposits		—			—			105,095			(8	)		105,087
Short-term borrowings		—			405			68,187			(1,216	)		67,376
Long-term debt		492,657			10,826			12,525			—			516,008
Total interest expense		492,657			11,231			185,807			(1,224	)		688,471
Net interest (expense) income		(490,726	)		(10,902	)		1,446,700			—			945,072
Provision (reversal) for loan losses- non-covered loans		(200	)		—			224,199			—			223,999
Provision for loan losses- covered loans		—			—			46,135			—			46,135
Net interest (expense) income after provision for loan losses		(490,526	)		(10,902	)		1,176,366			—			674,938
Service charges on deposit accounts		—			—			158,637			—			158,637
Other service fees		—			—			228,006			(2,741	)		225,265
Mortgage banking activities		—			—			30,615			—			30,615
Net loss and valuation adjustments on investment securities		—			—			(870	)		—			(870	)
Trading account (loss) profit		(40	)		—			4,398			—			4,358
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			40,591			—			40,591
Adjustments (expense) to indemnity reserves on loans sold		—			—			(40,629	)		—			(40,629	)
FDIC loss-share expense		—			—			(103,024	)		—			(103,024	)
Other operating income (loss)		12,291			(16	)		59,306			(9	)		71,572
Total non-interest income (loss)		12,251			(16	)		377,030			(2,750	)		386,515
Operating expenses:
Personnel costs		39,457			—			379,222			—			418,679
Net occupancy expenses		3,952			—			82,755			—			86,707
Equipment expenses		3,764			—			45,153			—			48,917
Other taxes		1,019			—			55,899			—			56,918
Professional fees		14,963			1,119			266,202			(229	)		282,055
Communications		496			—			25,188			—			25,684
Business promotion		1,731			—			52,285			—			54,016
FDIC deposit insurance		—			—			40,307			—			40,307
Loss on early extinguishment of debt		—			—			532			—			532
Other real estate owned (OREO) expenses		6			—			49,605			—			49,611
Other operating expenses		(63,755	)		435			161,216			(2,523	)		95,373
Amortization of intangibles		—			—			8,160			—			8,160
Restructuring costs		—			—			26,725			—			26,725
Total operating expenses		1,633			1,554			1,193,249			(2,752	)		1,193,684
(Loss) income before income tax and equity in earnings of subsidiaries		(479,908	)		(12,472	)		360,147			2			(132,231	)
Income tax expense		5,580			—			52,698			1			58,279
(Loss) income before equity in earnings of subsidiaries		(485,488	)		(12,472	)		307,449			1			(190,510	)
Equity in undistributed earnings of subsidiaries		294,978			32,484			—			(327,462	)		—
(Loss) income from continuing operations	$	(190,510	)	$	20,012		$	307,449		$	(327,461	)	$	(190,510	)
Loss from discontinued operations, net of tax		—			—			(122,980	)		—			(122,980	)
Equity in undistributed losses of discontinued operations		(122,980	)		(122,980	)		—			245,960			—
Net (Loss) Income		(313,490	)		(102,968	)		184,469			(81,501	)		(313,490	)
Comprehensive (loss) income, net of tax	$	(354,617	)	$	(79,665	)	$	144,355		$	(64,690	)	$	(354,617	)

252

Condensed Consolidating Statement of Cash Flows

	Year ended December 31, 2016
(In thousands)	Popular, Inc. Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net income	$	216,691		$	34,202		$	257,167		$	(291,369	)	$	216,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(146,287	)		(42,709	)		—			188,996			—
Provision (reversal) for loan losses		(35	)		—			170,051			—			170,016
Goodwill impairment losses		—			—			3,801			—			3,801
Amortization of intangibles		—			—			12,144			—			12,144
Depreciation and amortization of premises and equipment		654			—			46,220			—			46,874
Net accretion of discounts and amortization of premiums and deferred fees		2,087			28			(42,901	)		—			(40,786	)
Other-than-temporary impairment on investment securities		—			—			209			—			209
Fair value adjustments on mortgage servicing rights		—			—			25,336			—			25,336
FDIC loss-share expense		—			—			207,779			—			207,779
Adjustments (expense) to indemnity reserves on loans sold		—			—			17,285			—			17,285
(Earnings) losses from investments under the equity method		(12,352	)		2,559			(21,495	)		—			(31,288	)
Deferred income tax expense (benefit)		19			(4,581	)		66,154			(18	)		61,574
(Gain) loss on:
Disposition of premises and equipment and other productive assets		(2	)		—			4,096			—			4,094
Sale and valuation adjustments of investment securities		(1,767	)		—			(195	)		—			(1,962	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(35,517	)		—			(35,517	)
Sale of foreclosed assets, including write-downs		52			—			19,305			—			19,357
Acquisitions of loans held-for-sale		—			—			(310,217	)		—			(310,217	)
Proceeds from sale of loans held-for-sale		—			—			89,887			—			89,887
Net originations on loans held-for-sale		—			—			(510,783	)		—			(510,783	)
Net (increase) decrease in:
Trading securities		(620	)		—			754,326			133			753,839
Accrued income receivable		(27	)		(23	)		(13,812	)		54			(13,808	)
Other assets		3,796			(3	)		(27,125	)		(2,972	)		(26,304	)
Net increase (decrease) in:
Interest payable		—			—			219			(54	)		165
Pension and other postretirement benefits obligations		—			—			(55,678	)		—			(55,678	)
Other liabilities		(3,854	)		(624	)		(11,781	)		3,018			(13,241	)
Total adjustments		(158,336	)		(45,353	)		387,308			189,157			372,776
Net cash provided by (used in) operating activities		58,355			(11,151	)		644,475			(102,212	)		589,467
Cash flows from investing activities:
Net decrease (increase) in money market investments		9,857			10,668			(711,782	)		(18,868	)		(710,125	)
Purchases of investment securities:
Available-for-sale		—			—			(3,407,779	)		—			(3,407,779	)
Other		—			—			(14,130	)		—			(14,130	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			1,227,966			—			1,227,966
Held-to-maturity		—			—			4,588			—			4,588
Other		—			—			11,122			—			11,122
Proceeds from sale of investment securities:
Available for sale		278			—			4,981			—			5,259
Other		1,583			—			7,438			—			9,021
Net repayments (disbursements) on loans		35			—			(267,240	)		—			(267,205	)
Proceeds from sale of loans		—			—			141,363			—			141,363
Acquisition of loan portfolios		—			—			(535,445	)		—			(535,445	)
Net payments from FDIC under loss-sharing agreements		—			—			98,518			—			98,518
Return of capital from equity method investments		433			474			—			—			907
Return of capital from wholly-owned subsidiaries		14,000			—			—			(14,000	)		—
Acquisition of premises and equipment		(953	)		—			(99,367	)		—			(100,320	)
Proceeds from sale of:
Premises and equipment and other productive assets		56			—			8,841			—			8,897
Foreclosed assets		434			—			82,923			—			83,357
Net cash provided by (used in) investing activities		25,723			11,142			(3,448,003	)		(32,868	)		(3,444,006	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			3,290,797			(4,369	)		3,286,428
Federal funds purchased and assets sold under agreements to repurchase		—			—			(282,719	)		—			(282,719	)
Payments of notes payable		—			—			(254,816	)		—			(254,816	)
Proceeds from issuance of notes payable		—			—			165,047			—			165,047
Proceeds from issuance of common stock		7,437			—			—			—			7,437
Dividends paid to parent company		—			—			(102,300	)		102,300			—
Dividends paid		(65,932	)		—			—			—			(65,932	)
Net payments for repurchase of common stock		(2,098	)		—			—			(88	)		(2,186	)
Return of capital to parent company		—			—			(14,000	)		14,000			—
Net cash (used in) provided by financing activities		(60,593	)		—			2,802,009			111,843			2,853,259
Net increase (decrease) in cash and due from banks		23,485			(9	)		(1,519	)		(23,237	)		(1,280	)
Cash and due from banks at beginning of period		24,298			600			363,620			(24,844	)		363,674
Cash and due from banks at end of period	$	47,783		$	591		$	362,101		$	(48,081	)	$	362,394

During the ended December 31, 2016 there have not been any cash flows associated with discontinued operations.

253

Condensed Consolidating Statement of Cash Flows

	Year ended December 31, 2015
							All other
	Popular, Inc.			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			and eliminations			entries			Consolidated
Cash flows from operating activities:
Net income	$	895,344		$	627,224		$	943,818		$	(1,571,042	)	$	895,344
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(890,165	)		(639,688	)		—			1,529,853			—
Provision for loan losses		35			—			241,443			—			241,478
Amortization of intangibles		—			—			11,019			—			11,019
Depreciation and amortization of premises and equipment		761			—			46,713			—			47,474
Net accretion of discounts and amortization of premiums and deferred fees		2			—			(73,498	)		—			(73,496	)
Other-than-temporary impairment on investment securities		—			—			14,445			—			14,445
Fair value adjustments on mortgage servicing rights		—			—			7,904			—			7,904
FDIC loss-share income		—			—			(20,062	)		—			(20,062	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			18,628			—			18,628
Earnings losses from investments under the equity method		(13,710	)		244			(10,907	)		—			(24,373	)
Deferred income tax benefit		(186	)		—			(519,045	)		103			(519,128	)
(Gain) loss on:
Disposition of premises and equipment		(2	)		—			(3,627	)		—			(3,629	)
Sale and valuation adjustments of investment securities		—			—			(141	)		—			(141	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(35,013	)		—			(35,013	)
Sale of foreclosed assets, including write-downs		—			—			60,378			—			60,378
Acquisitions of loans held-for-sale		—			—			(401,991	)		—			(401,991	)
Proceeds from sale of loans held-for-sale		—			—			124,111			—			124,111
Net originations on loans held-for-sale		—			—			(792,821	)		—			(792,821	)
Net (increase) decrease in:
Trading securities		(380	)		—			1,084,063			—			1,083,683
Accrued income receivable		(10	)		(3	)		5,395			10			5,392
Other assets		8,032			342			92,032			(273	)		100,133
Net (decrease) increase in:
Interest payable		—			(26	)		564			(10	)		528
Pension and other postretirement benefits obligations		—			—			3,252			—			3,252
Other liabilities		(5,622	)		(187	)		(67,180	)		9			(72,980	)
Total adjustments		(901,245	)		(639,318	)		(214,338	)		1,529,692			(225,209	)
Net cash (used in) provided by operating activities		(5,901	)		(12,094	)		729,480			(41,350	)		670,135
Cash flows from investing activities:
Net increase in money market investments		(242,457	)		(23,574	)		(376,248	)		284,573			(357,706	)
Purchases of investment securities:
Available-for-sale		—			—			(2,014,315	)		—			(2,014,315	)
Held-to-maturity		—			—			(750	)		—			(750	)
Other		—			—			(40,847	)		—			(40,847	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			1,362,712			—			1,362,712
Held-to-maturity		—			—			4,856			—			4,856
Other		—			—			46,341			—			46,341
Proceeds from sale of investment securities:
Available for sale		—			—			96,760			—			96,760
Other		—			—			14,950			—			14,950
Net repayments on loans		53,793			350			431,302			(53,769	)		431,676
Proceeds from sale of loans		—			—			30,160			—			30,160
Acquisition of loan portfolios		—			(350	)		(338,097	)		—			(338,447	)
Acquisition of trademark		—			—			(50	)		—			(50	)
Net payments from FDIC under loss-sharing agreements		—			—			247,976			—			247,976
Net cash received and acquired from business combination		—			—			731,279			—			731,279
Acquisition of servicing assets		—			—			(61,304	)		—			(61,304	)
Cash paid related to business acquisitions		—			—			(17,250	)		—			(17,250	)
Return of capital from equity method investments		11,500			1,829			—			—			13,329
Return of capital from wholly-owned subsidiaries		203,000			200,000			—			(403,000	)		—
Mortgage servicing rights purchased		—			—			(2,400	)		—			(2,400	)
Acquisition of premises and equipment		(1,079	)		—			(61,577	)		—			(62,656	)
Proceeds from sale of:
Premises and equipment		9			—			12,871			—			12,880
Foreclosed assets		—			—			141,145			—			141,145
Net cash provided by investing activities		24,766			178,255			207,514			(172,196	)		238,339
Cash flows from financing activities:
Net (decrease) increase in:
Deposits		—			—			495,904			(288,566	)		207,338
Federal funds purchased and assets sold under agreements to repurchase		—			—			(509,512	)		—			(509,512	)
Other short-term borrowings		—			—			(201,984	)		53,769			(148,215	)
Payments of notes payable		—			(8,169	)		(729,720	)		—			(737,889	)
Proceeds from issuance of notes payable		—			—			277,398			—			277,398
Proceeds from issuance of common stock		6,226			—			—			—			6,226
Dividends paid to parent company		—			—			(41,350	)		41,350			—
Dividends paid		(19,257	)		—			—			—			(19,257	)
Net payments for repurchase of common stock		(1,984	)		—			—			—			(1,984	)
Return of capital to parent company		—			(158,000	)		(245,000	)		403,000			—
Net cash used in financing activities		(15,015	)		(166,169	)		(954,264	)		209,553			(925,895	)
Net increase (decrease) in cash and due from banks		3,850			(8	)		(17,270	)		(3,993	)		(17,421	)
Cash and due from banks at beginning of period		20,448			608			380,890			(20,851	)		381,095
Cash and due from banks at end of period	$	24,298		$	600		$	363,620		$	(24,844	)	$	363,674

The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.

254

Condensed Consolidating Statement of Cash Flows

	Year ended December 31, 2014
							All other
	Popular, Inc.			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			and eliminations			entries			Consolidated
Cash flows from operating activities:
Net (loss) income	$	(313,490	)	$	(102,968	)	$	184,469		$	(81,501	)	$	(313,490	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries		(171,998	)		90,496			—			81,502			—
Provision (reversal) for loan losses		(200	)		—			263,569			—			263,369
Goodwill impairment losses		—			—			186,511			—			186,511
Amortization of intangibles		—			—			9,434			—			9,434
Depreciation and amortization of premises and equipment		648			—			46,489			—			47,137
Net accretion of discounts and amortization of premiums and deferred fees		404,461			—			(125,885	)		—			278,576
Fair value adjustments on mortgage servicing rights		—			—			24,683			—			24,683
FDIC loss share expense		—			—			103,024			—			103,024
Adjustments (expense) to indemnity reserves on loans sold		—			—			40,629			—			40,629
Earnings from investments under the equity method		(12,291	)		16			(27,303	)		—			(39,578	)
Deferred income tax expense		8,203			—			35,308			1			43,512
Loss (gain) on:
Disposition of premises and equipment		1			—			(1,717	)		—			(1,716	)
Sale and valuation adjustments of investment securities		—			—			870			—			870
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(88,724	)		—			(88,724	)
Sale of foreclosed assets, including write-downs		—			—			28,005			—			28,005
Disposal of discontinued business		—			—			(38,355	)		—			(38,355	)
Acquisitions of loans held-for-sale		—			—			(308,600	)		—			(308,600	)
Proceeds from sale of loans held-for-sale		—			—			123,375			—			123,375
Net originations on loans held-for-sale		—			—			(753,312	)		—			(753,312	)
Net (increase) decrease in:
Trading securities		(288	)		—			1,105,662			—			1,105,374
Accrued income receivable		(12	)		2			9,712			17			9,719
Other assets		4,099			(7,124	)		158,585			(23,060	)		132,500
Net increase (decrease) in:
Interest payable		7,066			20			(7,776	)		(17	)		(707	)
Pension and other postretirement benefits obligations		—			—			(10,171	)		—			(10,171	)
Other liabilities		(180	)		(32,391	)		40,449			23,059			30,937
Total adjustments		239,509			51,019			814,462			81,502			1,186,492
Net cash (used in) provided by operating activities		(73,981	)		(51,949	)		998,931			1			873,002
Cash flows from investing activities:
Net (increase) decrease in money market investments		(1,026	)		4,447			(963,907	)		(3,447	)		(963,933	)
Purchases of investment securities:
Available-for-sale		—			—			(2,001,940	)		—			(2,001,940	)
Held-to-maturity		—			—			(1,000	)		—			(1,000	)
Other		—			—			(110,010	)		—			(110,010	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			1,722,650			—			1,722,650
Held-to-maturity		—			—			39,962			—			39,962
Other		1,000			—			91,752			—			92,752
Proceeds from sale of investment securities:
Available for sale		—			—			310,210			—			310,210
Other		—			—			37,104			—			37,104
Net repayments on loans		465,452			—			776,179			(465,731	)		775,900
Proceeds from sale of loans		—			—			355,145			—			355,145
Acquisition of loan portfolios		—			—			(389,067	)		—			(389,067	)
Net payments from FDIC under loss-sharing agreements		—			—			256,498			—			256,498
Cash paid related to business acquisitions		—			—			(6,330	)		—			(6,330	)
Capital contribution to subsidiary		(100,000	)		—			—			100,000			—
Return of capital from wholly-owned subsidiaries		210,000			250,000			—			(460,000	)		—
Net cash disbursed from disposal of discontinued business		—			—			(205,895	)		—			(205,895	)
Acquisition of premises and equipment		(1,075	)		—			(49,971	)		—			(51,046	)
Proceeds from sale of:
Premises and equipment		48			—			14,289			—			14,337
Foreclosed assets		—			—			150,115			—			150,115
Net cash provided by investing activities		574,399			254,447			25,784			(829,178	)		25,452
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			115,453			(6,438	)		109,015
Federal funds purchased and assets sold under agreements to repurchase		—			—			(387,635	)		—			(387,635	)
Other short-term borrowings		—			8,169			(853,900	)		465,731			(380,000	)
Payments of notes payable		(936,000	)		(675	)		(122,615	)		—			(1,059,290	)
Proceeds from issuance of notes payable		450,000			—			331,905			—			781,905
Proceeds from issuance of common stock		5,394			—			—			—			5,394
Dividends paid		(3,723	)		—			—			—			(3,723	)
Repurchase of TARP-related warrants		(3,000	)		—			—			—			(3,000	)
Net payments for repurchase of common stock		(3,236	)		—			—			—			(3,236	)
Return of capital to parent company		—			(210,000	)		(250,000	)		460,000			—
Capital contribution from parent		—			—			100,000			(100,000	)		—
Net cash used in financing activities		(490,565	)		(202,506	)		(1,066,792	)		819,293			(940,570	)
Net increase (decrease) in cash and due from banks		9,853			(8	)		(42,077	)		(9,884	)		(42,116	)
Cash and due from banks at beginning of period		10,595			616			422,967			(10,967	)		423,211
Cash and due from banks at end of period	$	20,448		$	608		$	380,890		$	(20,851	)	$	381,095

The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.

255