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POPULAR, INC. - Quarter Report: 2017 March (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

Commission File Number: 001-34084

 

 

POPULAR, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Puerto Rico   66-0667416

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification Number)

Popular Center Building

209 Muñoz Rivera Avenue

Hato Rey, Puerto Rico

  00918
(Address of principal executive offices)   (Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes  ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 101,986,341 shares outstanding as of May 5, 2017.

 

 

 


Table of Contents

POPULAR, INC.

INDEX

 

     Page  

Part I – Financial Information

  

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition at March  31, 2017 and December 31, 2016

     3  

Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2017 and 2016

     4  

Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2017 and 2016

     5  

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2017 and 2016

     6  

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2017 and 2016

     7  

Notes to Unaudited Consolidated Financial Statements

     8  

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

     107  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     152  

Item 4. Controls and Procedures

     152  

Part II – Other Information

  

Item 1. Legal Proceedings

     152  

Item 1A. Risk Factors

     153  

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

     153  

Item 3. Defaults upon Senior Securities

     153  

Item 4. Mine Safety Disclosures

     153  

Item 5. Other Information

     153  

Item 6. Exhibits

     154  

Signatures

     155  

 

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Forward-Looking Information

The information included in this Form 10-Q 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 (the “Corporation,” “Popular,” “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 markets conditions, capital adequacy and liquidity, 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.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict.

Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

    the rate of growth in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve;

 

    the impact of the current fiscal and economic crisis of the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”) and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board on the economy, our customers and our business;

 

    the impact of the pending debt restructuring proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) and of other actions taken or to be taken to address Puerto Rico’s fiscal crisis on the value of our portfolio of Puerto Rico government securities and loans to governmental entities, and the possibility that these actions may result in credit losses that are higher than currently expected;

 

    changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets;

 

    the fiscal and monetary policies of the federal government and its agencies;

 

    changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios;

 

    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

 

    regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;

 

    the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;

 

    the performance of the stock and bond markets;

 

    competition in the financial services industry;

 

    additional Federal Deposit Insurance Corporation (“FDIC”) assessments;

 

    possible legislative, tax or regulatory changes; and

 

    a failure in or breach of our operational or security systems or infrastructure or those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, as a result of cyberattacks, including e-fraud, denial-of-services and computer intrusion, that might result in loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular.

 

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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 housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense;

 

    changes in market rates and prices which may adversely impact the value of financial assets and liabilities;

 

    liabilities resulting from litigation and regulatory investigations;

 

    changes in accounting standards, rules and interpretations;

 

    our ability to grow our core businesses;

 

    decisions to downsize, sell or close units or otherwise change our business mix; and

 

    management’s ability to identify and manage these and other risks.

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

All forward-looking statements included in this Form 10-Q are based upon information available to Popular as of the date of this Form 10-Q, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

     March 31,     December 31,  

(In thousands, except share information)

   2017     2016  

Assets:

    

Cash and due from banks

   $ 340,225     $ 362,394  
  

 

 

   

 

 

 

Money market investments:

    

Securities purchased under agreements to resell

     —         23,637  

Time deposits with other banks

     3,653,347       2,866,580  
  

 

 

   

 

 

 

Total money market investments

     3,653,347       2,890,217  
  

 

 

   

 

 

 

Trading account securities, at fair value:

    

Pledged securities with creditors’ right to repledge

     1,811       11,486  

Other trading securities

     49,174       48,319  

Investment securities available-for-sale, at fair value:

    

Pledged securities with creditors’ right to repledge

     452,568       491,843  

Other investment securities available-for-sale

     8,744,959       7,717,963  

Investment securities held-to-maturity, at amortized cost (fair value 2017 - $73,628; 2016 - $75,576)

     96,326       98,101  

Other investment securities, at lower of cost or realizable value (realizable value 2017 - $169,617; 2016 - $170,890)

     166,286       167,818  

Loans held-for-sale, at lower of cost or fair value

     85,309       88,821  
  

 

 

   

 

 

 

Loans held-in-portfolio:

    

Loans not covered under loss-sharing agreements with the FDIC

     22,858,556       22,895,172  

Loans covered under loss-sharing agreements with the FDIC

     551,980       572,878  

Less – Unearned income

     123,835       121,425  

   Allowance for loan losses

     544,496       540,651  
  

 

 

   

 

 

 

Total loans held-in-portfolio, net

     22,742,205       22,805,974  
  

 

 

   

 

 

 

FDIC loss-share asset

     58,793       69,334  

Premises and equipment, net

     548,995       543,981  

Other real estate not covered under loss-sharing agreements with the FDIC

     185,836       180,445  

Other real estate covered under loss-sharing agreements with the FDIC

     29,926       32,128  

Accrued income receivable

     128,018       138,042  

Mortgage servicing assets, at fair value

     193,698       196,889  

Other assets

     2,111,806       2,145,510  

Goodwill

     627,294       627,294  

Other intangible assets

     42,706       45,050  
  

 

 

   

 

 

 

Total assets

   $ 40,259,282     $ 38,661,609  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 7,262,328     $ 6,980,443  

Interest bearing

     24,950,251       23,515,781  
  

 

 

   

 

 

 

Total deposits

     32,212,579       30,496,224  
  

 

 

   

 

 

 

Assets sold under agreements to repurchase

     434,714       479,425  

Other short-term borrowings

     1,200       1,200  

Notes payable

     1,557,972       1,574,852  

Other liabilities

     862,604       911,951  
  

 

 

   

 

 

 

Total liabilities

     35,069,069       33,463,652  
  

 

 

   

 

 

 

Commitments and contingencies (Refer to Note 21)

    

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; 104,101,618 shares issued (2016 - 104,058,684) and 101,956,740 shares outstanding (2016 - 103,790,932)

     1,041       1,040  

Surplus

     4,261,346       4,255,022  

Retained earnings

     1,286,706       1,220,307  

Treasury stock - at cost, 2,144,878 shares (2016 - 267,752)

     (89,128     (8,286

Accumulated other comprehensive loss, net of tax

     (319,912     (320,286
  

 

 

   

 

 

 

Total stockholders’ equity

     5,190,213       5,197,957  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 40,259,282     $ 38,661,609  
  

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2017     2016  

Interest income:

    

Loans

   $ 363,136     $ 363,197  

Money market investments

     6,573       2,863  

Investment securities

     44,886       36,271  

Trading account securities

     1,400       1,689  
  

 

 

   

 

 

 

Total interest income

     415,995       404,020  
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     33,757       29,874  

Short-term borrowings

     1,095       1,861  

Long-term debt

     19,045       19,873  
  

 

 

   

 

 

 

Total interest expense

     53,897       51,608  
  

 

 

   

 

 

 

Net interest income

     362,098       352,412  

Provision for loan losses - non-covered loans

     42,057       47,940  

Provision (reversal) for loan losses - covered loans

     (1,359     (3,105
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     321,400       307,577  
  

 

 

   

 

 

 

Service charges on deposit accounts

     39,536       39,862  

Other service fees (Refer to Note 27)

     56,175       53,382  

Mortgage banking activities (Refer to Note 10)

     11,369       10,551  

Net gain on sale and valuation adjustments of investment securities

     162       —    

Trading account loss

     (278     (162

Net loss on sale of loans, including valuation adjustments on loans held-for-sale

     —         (304

Adjustments (expense) to indemnity reserves on loans sold

     (1,966     (4,098

FDIC loss share expense (Refer to Note 28)

     (8,257     (3,146

Other operating income

     19,128       15,545  
  

 

 

   

 

 

 

Total non-interest income

     115,869       111,630  
  

 

 

   

 

 

 

Operating expenses:

    

Personnel costs

     125,607       127,091  

Net occupancy expenses

     20,776       20,430  

Equipment expenses

     15,970       14,548  

Other taxes

     10,969       10,195  

Professional fees

     69,250       75,459  

Communications

     5,949       6,320  

Business promotion

     11,576       11,110  

FDIC deposit insurance

     6,493       7,370  

Other real estate owned (OREO) expenses

     12,818       9,141  

Other operating expenses

     29,565       17,165  

Amortization of intangibles

     2,345       3,114  
  

 

 

   

 

 

 

Total operating expenses

     311,318       301,943  
  

 

 

   

 

 

 

Income from continuing operations before income tax

     125,951       117,264  

Income tax expense

     33,006       32,265  
  

 

 

   

 

 

 

Net Income

   $ 92,945     $ 84,999  
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 92,014     $ 84,068  
  

 

 

   

 

 

 

Net Income per Common Share – Basic

   $ 0.89     $ 0.81  
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

   $ 0.89     $ 0.81  
  

 

 

   

 

 

 

Dividends Declared per Common Share

   $ 0.25     $ 0.15  
  

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands)

   2017     2016  

Net income

   $ 92,945     $ 84,999  
  

 

 

   

 

 

 

Other comprehensive income before tax:

    

Foreign currency translation adjustment

     139       (705

Amortization of net losses on pension and postretirement benefit plans

     5,607       5,486  

Amortization of prior service credit of pension and postretirement benefit plans

     (950     (950

Unrealized holding (losses) gains on investments arising during the period

     (2,907     76,236  

Reclassification adjustment for gains included in net income

     (162     —    

Unrealized net losses on cash flow hedges

     (637     (2,000

Reclassification adjustment for net losses included in net income

     855       1,545  
  

 

 

   

 

 

 

Other comprehensive income before tax

     1,945       79,612  

Income tax expense

     (1,571     (4,476
  

 

 

   

 

 

 

Total other comprehensive income, net of tax

     374       75,136  
  

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 93,319     $ 160,135  
  

 

 

   

 

 

 

 

Tax effect allocated to each component of other comprehensive income:

 

 

     Quarters ended March 31,  

(In thousands)

   2017     2016  

Amortization of net losses on pension and postretirement benefit plans

   $ (2,186   $ (2,140

Amortization of prior service credit of pension and postretirement benefit plans

     370       370  

Unrealized holding (losses) gains on investments arising during the period

     298       (2,885

Reclassification adjustment for gains included in net income

     32       —    

Unrealized net losses on cash flow hedges

     248       781  

Reclassification adjustment for net losses included in net income

     (333     (602
  

 

 

   

 

 

 

Income tax expense

   $ (1,571   $ (4,476
  

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                     Accumulated        
                                     other        
     Common      Preferred            Retained     Treasury     comprehensive        

(In thousands)

   stock      stock      Surplus     earnings     stock     loss     Total  

Balance at December 31, 2015

   $ 1,038      $ 50,160      $ 4,229,156     $ 1,087,957     $ (6,101   $ (256,886   $ 5,105,324  

Net income

             84,999           84,999  

Issuance of stock

     1           2,108             2,109  

Tax windfall benefit on vesting of restricted stock

           (31           (31

Dividends declared:

                

Common stock

             (15,549         (15,549

Preferred stock

             (931         (931

Common stock purchases

               (764       (764

Common stock reissuance

               7         7  

Other comprehensive income, net of tax

                 75,136       75,136  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 1,039      $ 50,160      $ 4,231,233     $ 1,156,476     $ (6,858   $ (181,750   $ 5,250,300  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   $ 1,040      $ 50,160      $ 4,255,022     $ 1,220,307     $ (8,286   $ (320,286   $ 5,197,957  

Net income

             92,945           92,945  

Issuance of stock

     1           1,806             1,807  

Dividends declared:

                

Common stock

             (25,615         (25,615

Preferred stock

             (931         (931

Common stock purchases

           4,518         (80,842       (76,324

Other comprehensive income, net of tax

                 374       374  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ 1,041      $ 50,160      $ 4,261,346     $ 1,286,706     $ (89,128   $ (319,912   $ 5,190,213  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                     March 31,     March 31,  

Disclosure of changes in number of shares:

                                   2017     2016  

Preferred Stock:

                

Balance at beginning and end of period

                 2,006,391       2,006,391  
              

 

 

   

 

 

 

Common Stock – Issued:

                

Balance at beginning of period

                 104,058,684       103,816,185  

Issuance of stock

                 42,934       79,457  
              

 

 

   

 

 

 

Balance at end of the period

                 104,101,618       103,895,642  

Treasury stock

                 (2,144,878     (225,637
              

 

 

   

 

 

 

Common Stock – Outstanding

                 101,956,740       103,670,005  
              

 

 

   

 

 

 

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

 

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POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

     Quarter ended March 31,  
(In thousands)    2017     2016  

Cash flows from operating activities:

    

Net income

   $ 92,945     $ 84,999  
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     40,698       44,835  

Amortization of intangibles

     2,345       3,114  

Depreciation and amortization of premises and equipment

     11,799       11,707  

Net accretion of discounts and amortization of premiums and deferred fees

     (6,463     (11,158

Fair value adjustments on mortgage servicing rights

     5,954       8,477  

FDIC loss share expense

     8,257       3,146  

Adjustments (expense) to indemnify reserves on loans sold

     1,966       4,098  

Earnings from investments under the equity method

     (10,879     (7,089

Deferred income tax expense

     25,060       23,218  

Loss (gain) on:

    

Disposition of premises and equipment and other productive assets

     6,466       (1,946

Sale and valuation adjustments of investment securities

     (162      

Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities

     (5,381     (7,101

Sale of foreclosed assets, including write-downs

     4,512       2,802  

Acquisitions of loans held-for-sale

     (73,043     (66,451

Proceeds from sale of loans held-for-sale

     29,364       22,253  

Net originations on loans held-for-sale

     (123,336     (110,528

Net decrease (increase) in:

    

Trading securities

     177,153       176,598  

Accrued income receivable

     10,024       3,926  

Other assets

     13,161       20,996  

Net (decrease) increase in:

    

Interest payable

     (11,281     (12,261

Pension and other postretirement benefits obligation

     331       1,536  

Other liabilities

     (13,654     (17,010
  

 

 

   

 

 

 

Total adjustments

     92,891       93,162  
  

 

 

   

 

 

 

Net cash provided by operating activities

     185,836       178,161  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net (increase) decrease in money market investments

     (763,130     262,632  

Purchases of investment securities:

    

Available-for-sale

     (1,216,880     (742,859

Other

     (225     (59,786

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

    

Available-for-sale

     222,677       239,399  

Held-to-maturity

     2,184       2,108  

Other

           41,664  

Proceeds from sale of investment securities:

    

Available-for-sale

     381        

Other

     1,757       26,346  

Net repayments on loans

     99,306       13,335  

Proceeds from sale of loans

           1,128  

Acquisition of loan portfolios

     (109,098     (212,798

Net payments (to) from FDIC under loss sharing agreements

     (23,574     88,588  

Return of capital from equity method investments

     3,862       206  

Acquisition of premises and equipment

     (18,646     (38,819

Proceeds from sale of:

    

Premises and equipment and other productive assets

     3,011       5,092  

Foreclosed assets

     27,547       14,513  
  

 

 

   

 

 

 

Net cash used in by investing activities

     (1,770,828     (359,251
  

 

 

   

 

 

 

Cash flows from financing activities:

 

Net increase (decrease) in:

    

Deposits

     1,715,958       318,550  

Federal funds purchased and assets sold under agreements to repurchase

     (44,711     (1,991

Other short-term borrowings

           5,170  

Payments of notes payable

     (17,408     (108,452

Proceeds from issuance of notes payable

           28,883  

Proceeds from issuance of common stock

     1,806       2,109  

Dividends paid

     (16,499     (16,473

Net payments for repurchase of common stock

     (75,604     (77

Payments related to tax withholding for shared-based compensation

     (719     (680
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,562,823       227,039  
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (22,169     45,949  

Cash and due from banks at beginning of period

     362,394       363,674  
  

 

 

   

 

 

 

Cash and due from banks at the end of the period

   $ 340,225     $ 409,623  
  

 

 

   

 

 

 

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

 

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Table of Contents

Notes to Consolidated Financial

Statements (Unaudited)

 

Note 1

 

-

 

Nature of operations

     9  

Note 2

 

-

 

Basis of presentation and summary of significant accounting policies

     10  

Note 3

 

-

 

New accounting pronouncements

     11  

Note 4

 

-

 

Restrictions on cash and due from banks and certain securities

     13  

Note 5

 

-

 

Investment securities available-for-sale

     14  

Note 6

 

-

 

Investment securities held-to-maturity

     18  

Note 7

 

-

 

Loans

     20  

Note 8

 

-

 

Allowance for loan losses

     28  

Note 9

 

-

 

FDIC loss share asset and true-up payment obligation

     42  

Note 10

 

-

 

Mortgage banking activities

     44  

Note 11

 

-

 

Transfers of financial assets and mortgage servicing assets

     45  

Note 12

 

-

 

Other real estate owned

     48  

Note 13

 

-

 

Other assets

     49  

Note 14

 

-

 

Goodwill and other intangible assets

     50  

Note 15

 

-

 

Deposits

     52  

Note 16

 

-

 

Borrowings

     53  

Note 17

 

-

 

Offsetting of financial assets and liabilities

     55  

Note 18

 

-

 

Stockholders’ equity

     57  

Note 19

 

-

 

Other comprehensive loss

     58  

Note 20

 

-

 

Guarantees

     60  

Note 21

 

-

 

Commitments and contingencies

     62  

Note 22

 

-

 

Non-consolidated variable interest entities

     70  

Note 23

 

-

 

Related party transactions

     73  

Note 24

 

-

 

Fair value measurement

     76  

Note 25

 

-

 

Fair value of financial instruments

     82  

Note 26

 

-

 

Net income per common share

     86  

Note 27

 

-

 

Other service fees

     87  

Note 28

 

-

 

FDIC loss share (expense) income

     88  

Note 29

 

-

 

Pension and postretirement benefits

     89  

Note 30

 

-

 

Stock-based compensation

     90  

Note 31

 

-

 

Income taxes

     92  

Note 32

 

-

 

Supplemental disclosure on the consolidated statements of cash flows

     95  

Note 33

 

-

 

Segment reporting

     96  

Note 34

 

-

 

Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

     100  

 

8


Table of Contents

Note 1 – Nature of operations

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

 

9


Table of Contents

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2016 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2016, included in the Corporation’s 2016 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

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

 

10


Table of Contents

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

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 to this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. As a result of the adoption of this accounting pronouncement during the first quarter of 2017, the Corporation recognized excess tax benefits and shortfalls as income tax benefit or expense in the income statement and revised the presentation of its statements of cash flows, all of which had an immaterial impact to the financial statements taken as a whole.

Additionally, adoption of the following standards effective during the first quarter of 2017 did not have a significant impact on its Consolidated Financial Statements:

 

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

 

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

 

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

 

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

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2017-08, Receivables– Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

The FASB issued ASU 2017-08 in March 2017, which amends the amortization period for certain callable debt securities held at a premium by shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The amendments in this Update should be applied on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition and results of operations since the premium of purchased callable debt securities is not significant.

FASB Accounting Standards Update (“ASU”) 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

The FASB issued ASU 2017-07 in March 2017, which requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization.

 

11


Table of Contents

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and other components of net benefit cost and prospectively for the capitalization of the service cost component.

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.

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the Consolidated Financial Statements included in the 2016 Form 10-K.

 

12


Table of Contents

Note 4 - 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 March 31, 2017 (December 31, 2016 - $ 1.2 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2017, the Corporation held $45 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2016 - $31 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

13


Table of Contents

Note 5 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at March 31, 2017 and December 31, 2016.

 

     At March 31, 2017  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

U.S. Treasury securities

              

Within 1 year

   $ 944,180      $ 408      $ 242      $ 944,346        0.98

After 1 to 5 years

     2,007,013        1,039        9,278        1,998,774        1.24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     2,951,193        1,447        9,520        2,943,120        1.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     125,028        39        46        125,021        0.97  

After 1 to 5 years

     588,119        724        1,785        587,058        1.40  

After 5 to 10 years

     200        3        —          203        5.64  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     713,347        766        1,831        712,282        1.32  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     6,480        —          127        6,353        2.78  

After 5 to 10 years

     5,000        —          1,967        3,033        3.80  

After 10 years

     17,625        —          6,102        11,523        7.09  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     29,105        —          8,196        20,909        5.56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

              

Within 1 year

     48        —          —          48        4.00  

After 1 to 5 years

     18,086        349        50        18,385        2.87  

After 5 to 10 years

     35,328        354        59        35,623        2.67  

After 10 years

     1,111,730        5,130        24,030        1,092,830        1.99  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

     1,165,192        5,833        24,139        1,146,886        2.02  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     49        —          —          49        4.73  

After 1 to 5 years

     18,205        441        77        18,569        3.80  

After 5 to 10 years

     333,619        3,071        2,324        334,366        2.23  

After 10 years

     4,049,014        27,557        66,499        4,010,072        2.48  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     4,400,887        31,069        68,900        4,363,056        2.46  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     1,026        833        —          1,859        8.13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

Within 1 year

     8,445        9        —          8,454        1.86  

After 5 to 10 years

     935        26        —          961        3.62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     9,380        35        —          9,415        2.04  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale[1]

   $ 9,270,130      $ 39,983      $ 112,586      $ 9,197,527        1.91
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $4.9 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 $4.2 billion serve as collateral for public funds.

 

14


Table of Contents
     At December 31, 2016  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
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.

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.

During the quarter ended March 31, 2017, the Corporation sold equity securities with a realized gain of $162 thousand. The proceeds from these sales were $381 thousand. There were no securities sold during the quarter ended March 31, 2016.

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 March 31, 2017 and December 31, 2016.

 

15


Table of Contents
     At March 31, 2017  
     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

   $ 1,711,899      $ 9,520      $ —        $ —        $ 1,711,899      $ 9,520  

Obligations of U.S. Government sponsored entities

     405,934        1,797        2,945        34        408,879        1,831  

Obligations of Puerto Rico, States and political subdivisions

     6,353        127        14,556        8,069        20,909        8,196  

Collateralized mortgage obligations - federal agencies

     471,245        8,778        325,069        15,361        796,314        24,139  

Mortgage-backed securities

     3,601,972        68,519        14,453        381        3,616,425        68,900  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 6,197,403      $ 88,741      $ 357,023      $ 23,845      $ 6,554,426      $ 112,586  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2017, 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.

The portfolio of “Obligations of Puerto Rico, States and Political subdivisions” include senior obligations from the Puerto Rico Sales Tax Financing Corporation (“COFINA”) with a fair value of $15 million (December 31, 2016 - $17 million) that had an unrealized loss of $8 million, included in accumulated other comprehensive income, at March 31, 2017 (December 31, 2016 - $6 million). As further discussed in Note 21, on May 3, 2017, the Oversight Board established pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”) filed a petition in the Federal Court for the District of Puerto Rico to utilize the restructuring authority provided by Title III of PROMESA for the Commonwealth; on May 5, 2017, the Oversight Board sought relief under Title III with respect to COFINA. Act No. 26-2017 of 2017, signed on April 29, 2017, also allows the Commonwealth to use COFINA revenues for operational expenses, subject to certain conditions and restrictions. Although to date, COFINA has made all debt service payments and has certain moneys in reserve to make certain additional debt service payments in the ordinary course, the Corporation, in light of these developments, will re-evaluate during the second quarter of 2017 whether the decline in value of these investments is other-than-temporary, which would result in the recognition of a charge to earnings related to credit losses with respect to such COFINA senior obligations. Further negative evidence impacting the liquidity and sources of repayment of the obligations of Puerto Rico and its political subdivisions, or any further actions taken by the Commonwealth or the Oversight Board that affect our holdings of obligations of the Commonwealth or its instrumentalities, could result in additional charges to earnings to recognize estimated credit losses determined to be other-than-temporary.

At March 31, 2017, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the investments securities prior to recovery of their amortized cost basis.

 

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Table of Contents

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.

 

     March 31, 2017      December 31, 2016  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 3,435,528      $ 3,392,789      $ 3,255,844      $ 3,211,443  

Freddie Mac

     1,391,110        1,371,949        1,381,197        1,361,933  

 

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Table of Contents

Note 6 – 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 March 31, 2017 and December 31, 2016.

 

     At March 31, 2017  

(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

   $ 3,235      $ —        $ 1,375      $ 1,860        5.95

After 1 to 5 years

     15,200        —          6,627        8,573        6.03  

After 5 to 10 years

     17,485        —          7,689        9,796        6.24  

After 10 years

     58,333        1,387        8,360        51,360        1.80  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     94,253        1,387        24,051        71,589        3.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - federal agencies

              

After 5 to 10 years

     73        4        —          77        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - federal agencies

     73        4        —          77        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

Within 1 year

     1,250        —          25        1,225        1.62  

After 1 to 5 years

     750        —          13        737        2.75  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     2,000        —          38        1,962        2.04  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity[1]

   $ 96,326      $ 1,391      $ 24,089      $ 73,628        3.42
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $94.3 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

 

     At December 31, 2016  
            Gross      Gross             Weighted  

(In thousands)

   Amortized
cost
     unrealized
gains
     unrealized
losses
     Fair
value
     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.

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

The following tables present the Corporation’s fair value and gross unrealized losses of 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 March 31, 2017 and December 31, 2016.

 

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Table of Contents
     At March 31, 2017  
     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

   $ 31,526      $ 1,764      $ 28,703      $ 22,287      $ 60,229      $ 24,051  

Other

     737        13        1,225        25        1,962        38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ 32,263      $ 1,777      $ 29,928      $ 22,312      $ 62,191      $ 24,089  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in Note 5 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 March 31, 2017 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $51 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from, and have a lien on, certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality and issuing municipalities are required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligations bonds.

The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which a government instrumentality provides a guarantee in the event of default.

The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security was other-than-temporarily impaired at March 31, 2017. 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.

Refer to Note 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.

 

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Table of Contents

Note 7 – 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 9.

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 of the 2016 Form10K.

During the quarter ended March 31, 2017, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $136 million, consumer loans of $42 million and leasing loans of $2 million. During the quarter ended March 31, 2016, the Corporation recorded purchases of mortgage loans amounting to $122 million, consumer loans of $106 million and commercial loans of $51 million.

The Corporation performed whole-loan sales involving approximately $28 million of residential mortgage loans during the quarter ended March 31, 2017 (March 31, 2016 - $21 million). Also, during the quarter ended March 31, 2017, the Corporation securitized approximately $147 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $28 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $134 million and $36 million, respectively, during the quarter ended March 31, 2016.

Non-covered loans

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, by past due status at March 31, 2017 and December 31, 2016, including loans previously covered by the commercial FDIC loss sharing agreements.

 

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Table of Contents

March 31, 2017

 

Puerto Rico

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Puerto Rico
 

Commercial multi-family

   $ 1,727      $ —        $ 578      $ 2,305      $ 144,547      $ 146,852  

Commercial real estate non-owner occupied

     97,018        1,487        34,932        133,437        2,380,158        2,513,595  

Commercial real estate owner occupied

     13,055        1,768        115,260        130,083        1,608,195        1,738,278  

Commercial and industrial

     7,127        1,286        46,968        55,381        2,610,224        2,665,605  

Construction

     —          —          1,668        1,668        93,791        95,459  

Mortgage

     293,694        146,474        777,260        1,217,428        4,652,290        5,869,718  

Leasing

     8,141        1,052        2,444        11,637        708,006        719,643  

Consumer:

                 

Credit cards

     12,330        7,835        19,330        39,495        1,038,989        1,078,484  

Home equity lines of credit

     492        —          572        1,064        7,085        8,149  

Personal

     13,131        7,382        19,460        39,973        1,103,362        1,143,335  

Auto

     30,214        6,228        12,685        49,127        779,832        828,959  

Other

     729        611        19,480        20,820        147,332        168,152  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 477,658      $ 174,123      $ 1,050,637      $ 1,702,418      $ 15,273,811      $ 16,976,229  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2017

 

U.S. mainland

 
     Past due                

(In thousands)

   30-59 days      60-89 days      90 days
or more
     Total
past due
     Current      Loans HIP
U.S. mainland
 

Commercial multi-family

   $ 26      $ —        $ 199      $ 225      $ 1,108,347      $ 1,108,572  

Commercial real estate non-owner occupied

     1,030        —          1,629        2,659        1,445,550        1,448,209  

Commercial real estate owner occupied

     2,451        —          762        3,213        239,642        242,855  

Commercial and industrial

     5,426        1        101,756        107,183        840,551        947,734  

Construction

     100        —          —          100        735,746        735,846  

Mortgage

     13,873        3,458        11,889        29,220        729,049        758,269  

Legacy

     660        267        3,335        4,262        36,426        40,688  

Consumer:

                 

Credit cards

     6        1        35        42        115        157  

Home equity lines of credit

     2,085        453        5,801        8,339        228,306        236,645  

Personal

     2,311        1,424        2,404        6,139        233,188        239,327  

Auto

     —          —          —          —          7        7  

Other

     —          4        —          4        179        183  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,968      $ 5,608      $ 127,810      $ 161,386      $ 5,597,106      $ 5,758,492  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

March 31, 2017

 

Popular, Inc.

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
Popular, Inc.[1] [2]
 

Commercial multi-family

   $ 1,753      $ —        $ 777      $ 2,530      $ 1,252,894      $ 1,255,424  

Commercial real estate non-owner occupied

     98,048        1,487        36,561        136,096        3,825,708        3,961,804  

Commercial real estate owner occupied

     15,506        1,768        116,022        133,296        1,847,837        1,981,133  

Commercial and industrial

     12,553        1,287        148,724        162,564        3,450,775        3,613,339  

Construction

     100        —          1,668        1,768        829,537        831,305  

Mortgage

     307,567        149,932        789,149        1,246,648        5,381,339        6,627,987  

Leasing

     8,141        1,052        2,444        11,637        708,006        719,643  

Legacy[3]

     660        267        3,335        4,262        36,426        40,688  

Consumer:

                 

Credit cards

     12,336        7,836        19,365        39,537        1,039,104        1,078,641  

Home equity lines of credit

     2,577        453        6,373        9,403        235,391        244,794  

Personal

     15,442        8,806        21,864        46,112        1,336,550        1,382,662  

Auto

     30,214        6,228        12,685        49,127        779,839        828,966  

Other

     729        615        19,480        20,824        147,511        168,335  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 505,626      $ 179,731      $ 1,178,447      $ 1,863,804      $ 20,870,917      $ 22,734,721  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio are net of $124 million in unearned income and exclude $85 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 Federal Home Loan Bank(“FHLB”) as collateral for borrowings, $2.3 billion at the Federal Reserve Bank (“FRB”) for discount window borrowings and $0.5 billion serve as collateral for public funds.
[3] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.

 

December 31, 2016

 

Puerto Rico

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2016

 

U.S. mainland

 
     Past due                

(In thousands)

   30-59 days      60-89 days      90 days
or more
     Total
past due
     Current      Loans HIP
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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

 

Popular, Inc.

 
     Past due             Non-covered  

(In thousands)

   30-59
days
     60-89
days
     90 days
or more
     Total
past due
     Current      loans HIP
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.

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 March 31, 2017 and December 31, 2016. Accruing loans past due 90 days or more consist primarily of credit cards, Federal Housing Administration (“FHA”) / U.S. Department of Veterans Affairs (“VA”) and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

 

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Table of Contents

At March 31, 2017

 
     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

   $ 578      $ —        $ 199      $ —        $ 777      $ —    

Commercial real estate non-owner occupied

     23,259        —          1,629        —          24,888        —    

Commercial real estate owner occupied

     104,950        —          762        —          105,712        —    

Commercial and industrial

     46,690        278        1,174        —          47,864        278  

Mortgage[3]

     319,450        387,641        11,889        —          331,339        387,641  

Leasing

     2,444        —          —          —          2,444        —    

Legacy

     —          —          3,335        —          3,335        —    

Consumer:

                 

Credit cards

     —          19,330        35        —          35        19,330  

Home equity lines of credit

     —          572        5,801        —          5,801        572  

Personal

     19,365        9        2,404        —          21,769        9  

Auto

     12,685        —          —          —          12,685        —    

Other

     18,964        516        —          —          18,964        516  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

   $ 548,385      $ 408,346      $ 27,228      $ —        $ 575,613      $ 408,346  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans of $194 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 $173 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2017. Furthermore, the Corporation has approximately $59 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, 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 by $215 million accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analysis.
[2] For purposes of this table non-performing loans exclude non-performing loans held-for-sale.
[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $181 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2016. Furthermore, the Corporation has approximately $68 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.

 

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Table of Contents

Covered loans

The following tables present the composition of loans by past due status at March 31, 2017 and December 31, 2016 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

 

March 31, 2017

 
     Past due                
     30-59      60-89      90 days      Total             Covered  

(In thousands)

   days      days      or more      past due      Current      loans HIP [1]  

Mortgage

   $ 33,374      $ 2,897      $ 63,073      $ 99,344      $ 436,943      $ 536,287  

Consumer

     1,164        —          732        1,896        13,797        15,693  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 34,538      $ 2,897      $ 63,805      $ 101,240      $ 450,740      $ 551,980  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $325 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

 

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.

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at March 31, 2017 and December 31, 2016.

 

     March 31, 2017      December 31, 2016  
     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

   $ 3,798      $ —        $ 3,794      $ —    

Consumer

     142        —          121        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 3,940      $ —        $ 3,915      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income 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 March 31, 2017 (December 31, 2016 - $10 million).

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.

Loans acquired from Westernbank as part of an FDIC-assisted transaction

The carrying amount of the Westernbank loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 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.

 

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Table of Contents
     March 31, 2017     December 31, 2016  
     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

   $ 957,360     $ 14,031     $ 971,391     $ 985,181     $ 14,440     $ 999,621  

Commercial and industrial

     100,759       —         100,759       103,476       —         103,476  

Construction

     —         1,668       1,668       —         1,668       1,668  

Mortgage

     571,594       23,990       595,584       587,949       25,781       613,730  

Consumer

     18,615       883       19,498       18,775       1,059       19,834  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount [1]

     1,648,328       40,572       1,688,900       1,695,381       42,948       1,738,329  

Allowance for loan losses

     (59,283     (7,261     (66,544     (61,855     (7,022     (68,877
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

   $ 1,589,045     $ 33,311     $ 1,622,356     $ 1,633,526     $ 35,926     $ 1,669,452  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $542 million as of March 31, 2017 and $563 million as of December 31, 2016.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.1 billion at March 31, 2017 (December 31, 2016 - $2.1 billion). At March 31, 2017, 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 quarters ended March 31, 2017 and 2016, were as follows:

 

     Activity in the accretable yield  
     Westernbank loans ASC 310-30  
     For the quarters ended  
     March 31, 2017     March 31, 2016  

(In thousands)

   Non-credit
impaired loans
    Credit
impaired loans
    Total     Non-credit
impaired loans
    Credit
impaired loans
    Total  

Beginning balance

   $ 1,001,908     $ 8,179     $ 1,010,087     $ 1,105,732     $ 6,726     $ 1,112,458  

Accretion

     (36,016     (876     (36,892     (42,000     (1,533     (43,533

Change in expected cash flows

     7,789       222       8,011       54,544       5,339       59,883  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 973,681     $ 7,525     $ 981,206     $ 1,118,276     $ 10,532     $ 1,128,808  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30  
     For the quarters ended  
     March 31, 2017     March 31, 2016  

(In thousands)

   Non-credit
impaired loans
    Credit
impaired loans
    Total     Non-credit
impaired loans
    Credit
impaired loans
    Total  

Beginning balance

   $ 1,695,381     $ 42,948     $ 1,738,329     $ 1,898,146     $ 76,355     $ 1,974,501  

Accretion

     36,016       876       36,892       42,000       1,533       43,533  

Collections / loan sales / charge-offs

     (83,069     (3,252     (86,321     (74,206     (8,387     (82,593
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance[1]

   $ 1,648,328     $ 40,572     $ 1,688,900     $ 1,865,940     $ 69,501     $ 1,935,441  

Allowance for loan losses ASC 310-30 Westernbank loans

     (59,283     (7,261     (66,544     (58,703     (4,264     (62,967
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 1,589,045     $ 33,311     $ 1,622,356     $ 1,807,237     $ 65,237     $ 1,872,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] 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 $ 542 million as of March 31, 2017 (March 31, 2016-$615 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 $689 million at March 31, 2017 (December 31, 2016 - $700 million). At March 31, 2017, none of the other acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2017 and 2016 were as follows:

 

Activity in the accretable yield - Other acquired loans ASC 310-30

 
     For the quarters ended  

(In thousands)

   March 31, 2017      March 31, 2016  

Beginning balance

   $ 278,896      $ 221,128  

Additions

     3,254        4,340  

Accretion

     (8,836      (8,555

Change in expected cash flows

     36,464        50,855  
  

 

 

    

 

 

 

Ending balance

   $ 309,778      $ 267,768  
  

 

 

    

 

 

 

 

Carrying amount of other acquired loans accounted for pursuant to ASC 310-30

 
     For the quarters ended  

(In thousands)

   March 31, 2017      March 31, 2016  

Beginning balance

   $ 562,695      $ 564,050  

Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note14)

     —          (4,707

Additions

     5,581        10,051  

Accretion

     8,836        8,555  

Collections and charge-offs

     (20,388      (15,226
  

 

 

    

 

 

 

Ending balance

   $ 556,724      $ 562,723  

Allowance for loan losses ASC 310-30 non-covered loans

     (28,909      (15,258
  

 

 

    

 

 

 

Ending balance, net of allowance for loan losses

   $ 527,815      $ 547,465  
  

 

 

    

 

 

 

 

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Table of Contents

Note 8 – 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 March 31, 2017, 55% (March 31, 2016 - 44%) 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 mortgage, other consumer and commercial real estate owner occupied portfolios for 2017 and in the mortgage, commercial multi-family and commercial and industrial loan portfolios for 2016.

For the period ended March 31, 2017, 0.35% (March 31, 2016 - 2%) 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 and legacy portfolios for 2017 and in the consumer loan portfolio for 2016.

 

    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.

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the quarters ended March 31, 2017 and 2016.

 

28


Table of Contents

For the quarter ended March 31, 2017

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 189,686     $ 1,353     $ 143,320     $ 7,662     $ 125,963     $ 467,984  

Provision

     583       464       15,172       1,048       14,211       31,478  

Charge-offs

     (11,071     (3,587     (14,983     (1,341     (21,812     (52,794

Recoveries

     8,433       3,731       1,428       528       5,729       19,849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 187,631     $ 1,961     $ 144,937     $ 7,897     $ 124,091     $ 466,517  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 51,276     $ —       $ 41,067     $ 522     $ 22,331     $ 115,196  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 136,355     $ 1,961     $ 103,870     $ 7,375     $ 101,760     $ 351,321  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired non-covered loans

   $ 348,823     $ —       $ 501,647     $ 1,803     $ 106,236     $ 958,509  

Non-covered loans held-in-portfolio excluding impaired loans

     6,715,507       95,459       5,368,071       717,840       3,120,843       16,017,720  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held-in-portfolio

   $ 7,064,330     $ 95,459     $ 5,869,718     $ 719,643     $ 3,227,079     $ 16,976,229  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2017

 

Puerto Rico - Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ —       $ —       $ 30,159     $ —       $ 191     $ 30,350  

Provision (reversal of provision)

     —         —         (1,690     —         331       (1,359

Charge-offs

     —         —         (1,231     —         (93     (1,324

Recoveries

     —         —         103       —         1       104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —       $ —       $ 27,341     $ —       $ 430     $ 27,771  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —       $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ —       $ —       $ 27,341     $ —       $ 430     $ 27,771  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired covered loans

   $ —       $ —       $ —       $ —       $ —       $ —    

Covered loans held-in-portfolio excluding impaired loans

     —         —         536,287       —         15,693       551,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans held-in-portfolio

   $ —       $ —       $ 536,287     $ —       $ 15,693     $ 551,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2017

 

U.S. Mainland

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 12,968     $ 8,172     $ 4,614     $ 1,343     $ 15,220     $ 42,317  

Provision (reversal of provision)

     7,622       (136     (436     (665     4,194       10,579  

Charge-offs

     (70     —         (106     (41     (4,733     (4,950

Recoveries

     533       —         210       529       990       2,262  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,053     $ 8,036     $ 4,282     $ 1,166     $ 15,671     $ 50,208  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —       $ —       $ 2,197     $ —       $ 679     $ 2,876  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 21,053     $ 8,036     $ 2,085     $ 1,166     $ 14,992     $ 47,332  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired loans

   $ —       $ —       $ 8,921     $ —       $ 2,780     $ 11,701  

Loans held-in-portfolio excluding impaired loans

     3,747,370       735,846       749,348       40,688       473,539       5,746,791  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 3,747,370     $ 735,846     $ 758,269     $ 40,688     $ 476,319     $ 5,758,492  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

For the quarter ended March 31, 2017

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 202,654     $ 9,525     $ 178,093     $ 1,343     $ 7,662     $ 141,374     $ 540,651  

Provision (reversal of provision)

     8,205       328       13,046       (665     1,048       18,736       40,698  

Charge-offs

     (11,141     (3,587     (16,320     (41     (1,341     (26,638     (59,068

Recoveries

     8,966       3,731       1,741       529       528       6,720       22,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 208,684     $ 9,997     $ 176,560     $ 1,166     $ 7,897     $ 140,192     $ 544,496  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 51,276     $ —       $ 43,264     $ —       $ 522     $ 23,010     $ 118,072  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 157,408     $ 9,997     $ 133,296     $ 1,166     $ 7,375     $ 117,182     $ 426,424  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

              

Impaired loans

   $ 348,823     $ —       $ 510,568     $ —       $ 1,803     $ 109,016     $ 970,210  

Loans held-in-portfolio excluding impaired loans

     10,462,877       831,305       6,653,706       40,688       717,840       3,610,075       22,316,491  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 10,811,700     $ 831,305     $ 7,164,274     $ 40,688     $ 719,643     $ 3,719,091     $ 23,286,701  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 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)

     13,369       (409     10,869       1,680       18,362       43,871  

Charge-offs

     (8,968     (544     (15,972     (2,127     (27,379     (54,990

Recoveries

     6,264       233       1,276       489       6,081       14,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 197,590     $ 4,237     $ 124,500     $ 11,035     $ 135,785     $ 473,147  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 55,098     $ 172     $ 41,660     $ 608     $ 24,326     $ 121,864  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 142,492     $ 4,065     $ 82,840     $ 10,427     $ 111,459     $ 351,283  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired non-covered loans

   $ 338,980     $ 2,020     $ 471,183     $ 2,391     $ 109,920     $ 924,494  

Non-covered loans held-in-portfolio excluding impaired loans

     7,029,311       103,124       5,628,576       640,751       3,199,171       16,600,933  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held-in-portfolio

   $ 7,368,291     $ 105,144     $ 6,099,759     $ 643,142     $ 3,309,091     $ 17,525,427  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 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)

     —         —         (3,149     —         44       (3,105

Charge-offs

     —         —         (1,221     —         (33     (1,254

Recoveries

     —         —         225       —         3       228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —       $ —       $ 29,822     $ —       $ 223     $ 30,045  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —       $ —       $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ —       $ —       $ 29,822     $ —       $ 223     $ 30,045  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired covered loans

   $ —       $ —       $ —       $ —       $ —       $ —    

Covered loans held-in-portfolio excluding impaired loans

     —         —         606,711       —         18,419       625,130  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans held-in-portfolio

   $ —       $ —       $ 606,711     $ —       $ 18,419     $ 625,130  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

For the quarter ended March 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)

     (116     827        344       (450     3,464       4,069  

Charge-offs

     (495     —          (441     (109     (2,648     (3,693

Recoveries

     290       —          211       356       1,035       1,892  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,587     $ 4,739      $ 5,099     $ 2,484     $ 13,371     $ 35,280  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —       $ —        $ 1,592     $ —       $ 581     $ 2,173  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 9,587     $ 4,739      $ 3,507     $ 2,484     $ 12,790     $ 33,107  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

             

Impaired loans

   $ —       $ —        $ 7,909     $ —       $ 2,247     $ 10,156  

Loans held-in-portfolio excluding impaired loans

     2,860,098       629,714        871,533       61,044       549,765       4,972,154  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 2,860,098     $ 629,714      $ 879,442     $ 61,044     $ 552,012     $ 4,982,310  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 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)

     13,253       418       8,064       (450     1,680       21,870       44,835  

Charge-offs

     (9,463     (544     (17,634     (109     (2,127     (30,060     (59,937

Recoveries

     6,554       233       1,712       356       489       7,119       16,463  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 207,177     $ 8,976     $ 159,421     $ 2,484     $ 11,035     $ 149,379     $ 538,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 55,098     $ 172     $ 43,252     $ —       $ 608     $ 24,907     $ 124,037  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 152,079     $ 8,804     $ 116,169     $ 2,484     $ 10,427     $ 124,472     $ 414,435  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

              

Impaired loans

   $ 338,980     $ 2,020     $ 479,092     $ —       $ 2,391     $ 112,167     $ 934,650  

Loans held-in-portfolio excluding impaired loans

     9,889,409       732,838       7,106,820       61,044       640,751       3,767,355       22,198,217  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 10,228,389     $ 734,858     $ 7,585,912     $ 61,044     $ 643,142     $ 3,879,522     $ 23,132,867  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 quarters ended  

(In thousands)

   March 31, 2017      March 31, 2016  

Balance at beginning of period

   $ 68,877      $ 63,563  

Provision for loan losses

     (322      1,791  

Net charge-offs

     (2,011      (2,387
  

 

 

    

 

 

 

Balance at end of period

   $ 66,544      $ 62,967  
  

 

 

    

 

 

 

Impaired loans

The following tables present loans individually evaluated for impairment at March 31, 2017 and December 31, 2016.

 

31


Table of Contents

March 31, 2017

 

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

  $ 79     $ 79     $ 29     $ —       $ —       $ 79     $ 79     $ 29  

Commercial real estate non-owner occupied

    103,811       104,740       23,847       13,807       27,503       117,618       132,243       23,847  

Commercial real estate owner occupied

    134,455       173,707       16,873       30,972       46,625       165,427       220,332       16,873  

Commercial and industrial

    53,283       55,352       10,527       12,416       16,067       65,699       71,419       10,527  

Mortgage

    424,770       466,629       41,067       76,877       94,113       501,647       560,742       41,067  

Leasing

    1,803       1,803       522       —         —         1,803       1,803       522  

Consumer:

               

Credit cards

    37,952       37,952       5,686       —         —         37,952       37,952       5,686  

Personal

    65,622       65,622       16,145       —         —         65,622       65,622       16,145  

Auto

    2,070       2,070       409       —         —         2,070       2,070       409  

Other

    592       592       91       —         —         592       592       91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Puerto Rico

  $ 824,437     $ 908,546     $ 115,196     $ 134,072     $ 184,308     $ 958,509     $ 1,092,854     $ 115,196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2017

 

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

  $ 6,449     $ 8,130     $ 2,197     $ 2,472     $ 3,364     $ 8,921     $ 11,494     $ 2,197  

Consumer:

               

HELOCs

    2,367       2,375       673       298       313       2,665       2,688       673  

Personal

    38       38       6       77       77       115       115       6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. mainland

  $ 8,854     $ 10,543     $ 2,876     $ 2,847     $ 3,754     $ 11,701     $ 14,297     $ 2,876  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2017

 

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

  $ 79     $ 79     $ 29     $ —       $ —       $ 79     $ 79     $ 29  

Commercial real estate non-owner occupied

    103,811       104,740       23,847       13,807       27,503       117,618       132,243       23,847  

Commercial real estate owner occupied

    134,455       173,707       16,873       30,972       46,625       165,427       220,332       16,873  

Commercial and industrial

    53,283       55,352       10,527       12,416       16,067       65,699       71,419       10,527  

Mortgage

    431,219       474,759       43,264       79,349       97,477       510,568       572,236       43,264  

Leasing

    1,803       1,803       522       —         —         1,803       1,803       522  

Consumer:

               

Credit Cards

    37,952       37,952       5,686       —         —         37,952       37,952       5,686  

HELOCs

    2,367       2,375       673       298       313       2,665       2,688       673  

Personal

    65,660       65,660       16,151       77       77       65,737       65,737       16,151  

Auto

    2,070       2,070       409       —         —         2,070       2,070       409  

Other

    592       592       91       —         —         592       592       91  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Popular, Inc.

  $ 833,291     $ 919,089     $ 118,072     $ 136,919     $ 188,062     $ 970,210     $ 1,107,151     $ 118,072  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2017 and 2016.

 

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Table of Contents

For the quarter ended March 31, 2017

 
     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

   $ 81      $ 1      $ —        $ —        $ 81      $ 1  

Commercial real estate non-owner occupied

     118,836        1,375        —          —          118,836        1,375  

Commercial real estate owner occupied

     164,512        1,598        —          —          164,512        1,598  

Commercial and industrial

     60,195        497        —          —          60,195        497  

Mortgage

     499,568        3,369        8,899        44        508,467        3,413  

Leasing

     1,810        —          —          —          1,810        —    

Consumer:

                 

Credit cards

     37,708        —          —          —          37,708        —    

Helocs

     —          —          2,693        —          2,693        —    

Personal

     65,833        —          117        —          65,950        —    

Auto

     2,094        —          —          —          2,094        —    

Other

     792        —          —          —          792        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 951,429      $ 6,840      $ 11,709      $ 44      $ 963,138      $ 6,884  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the quarter ended March 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 real estate non-owner occupied

   $ 118,660      $ 1,159      $ —        $ —        $ 118,660      $ 1,159  

Commercial real estate owner occupied

     158,046        1,393        —          —          158,046        1,393  

Commercial and industrial

     61,351        516        —          —          61,351        516  

Construction

     2,251        21        —          —          2,251        21  

Mortgage

     468,150        3,387        7,362        —          475,512        3,387  

Leasing

     2,398        —          —          —          2,398        —    

Consumer:

                 

Credit cards

     38,256        —          —          —          38,256        —    

Helocs

     —          —          1,599        —          1,599        —    

Personal

     68,172        —          613        —          68,785        —    

Auto

     2,878        —          —          —          2,878        —    

Other

     485        —          —          —          485        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 920,647      $ 6,476      $ 9,574      $ —        $ 930,221      $ 6,476  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.3 billion at March 31, 2017 (December 31, 2016 - $ 1.2 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $10 million related to the commercial loan portfolio at March 31, 2017 (December 31, 2016 - $8 million).

At March 31, 2017, the mortgage loan TDRs include $421 million guaranteed by U.S. sponsored entities at BPPR, compared to $407 million at December 31, 2016.

A modification of a loan constitutes a troubled debt restructuring (“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 of the 2016 Form 10-K.

The following tables present the non-covered and covered loans classified as TDRs according to their accruing status and the related allowance at March 31, 2017 and December 31, 2016.

 

34


Table of Contents
     Popular, Inc.  
     Non-Covered Loans  
     March 31, 2017      December 31, 2016  

(In thousands)

   Accruing      Non-Accruing      Total      Related
Allowance
     Accruing      Non-Accruing      Total      Related
Allowance
 

Commercial

   $ 171,238      $ 79,571      $ 250,809      $ 45,327      $ 176,887      $ 83,157      $ 260,044      $ 40,810  

Mortgage

     761,151        130,589        891,740        43,264        744,926        127,071        871,997        44,610  

Leases

     1,574        230        1,804        522        1,383        434        1,817        535  

Consumer

     98,581        12,421        111,002        23,010        100,277        12,442        112,719        23,857  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,032,544      $ 222,811      $ 1,255,355      $ 112,123      $ 1,023,473      $ 223,104      $ 1,246,577      $ 109,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Popular, Inc.  
     Covered Loans  
     March 31, 2017      December 31, 2016  

(In thousands)

   Accruing      Non-Accruing      Total      Related
Allowance
     Accruing      Non-Accruing      Total      Related
Allowance
 

Mortgage

   $ 2,954      $ 2,804      $ 5,758      $ —        $ 2,950      $ 2,580      $ 5,530      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,954      $ 2,804      $ 5,758      $ —        $ 2,950      $ 2,580      $ 5,530      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters ended March 31, 2017 and 2016. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

 

Popular, Inc.

 

For the quarter ended March 31, 2017

 
     Reduction in interest
rate
     Extension of
maturity date
     Combination of
reduction in interest
rate and extension of
maturity date
     Other  

Commercial real estate non-owner occupied

     —          1        —          —    

Commercial real estate owner occupied

     2        1        —          —    

Commercial and industrial

     2        6        —          —    

Mortgage

     14        6        104        68  

Leasing

     —          —          3        —    

Consumer:

           

Credit cards

     126        —          1        158  

Personal

     262        4        —          1  

Auto

     —          1        1        —    

Other

     8        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     414        19        109        227  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

35


Table of Contents

Popular, Inc.

 

For the quarter ended March 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

     1        1        —          —    

Commercial real estate owner occupied

     16        1        —          —    

Commercial and industrial

     6        —          —          —    

Mortgage

     20        10        123        55  

Consumer:

           

Credit cards

     175        —          —          174  

HELOCs

     —          —          1        —    

Personal

     261        5        —          —    

Auto

     —          2        2        —    

Other

     10        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     489        19        126        229  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present by class, quantitative information related to loans modified as TDRs during the quarters ended March 31, 2017 and 2016. Loans modified as TDRs for the U.S. operations are considered insignificant to the Corporation.

 

Popular, Inc.

 

For the quarter ended March 31, 2017

 

(Dollars in thousands)

  Loan count     Pre-modification outstanding
recorded investment
    Post-modification
outstanding recorded
investment
    Increase (decrease) in the
allowance for loan losses as
a result of modification
 

Commercial real estate non-owner occupied

    1     $ 141     $ 139     $ (11

Commercial real estate owner occupied

    3       1,157       1,147       56  

Commercial and industrial

    8       319       2,388       419  

Mortgage

    192       21,068       19,513       1,014  

Leasing

    3       114       115       32  

Consumer:

       

Credit cards

    285       2,402       2,643       312  

Personal

    267       4,598       4,595       1,033  

Auto

    2       36       37       6  

Other

    8       65       65       9  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    769     $ 29,900     $ 30,642     $ 2,870  
 

 

 

   

 

 

   

 

 

   

 

 

 

Popular, Inc.

 

For the quarter ended March 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

    2     $ 6,323     $ 6,307     $ 4,163  

Commercial real estate owner occupied

    17       3,095       3,149       136  

Commercial and industrial

    6       2,529       2,527       5  

Mortgage

    208       25,572       24,474       2,229  

Consumer:

       

Credit cards

    349       3,256       3,665       576  

HELOCs

    1       147       147       77  

Personal

    266       4,413       4,411       887  

Auto

    4       72       76       12  

Other

    10       23       24       4  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    863     $ 45,430     $ 44,780     $ 8,089  
 

 

 

   

 

 

   

 

 

   

 

 

 

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 March 31, 2017 is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

 

36


Table of Contents

Popular, Inc.

 

Defaulted during the quarter ended March 31, 2017

 

(Dollars In thousands)

   Loan count      Recorded investment as of first default date  

Commercial real estate non-owner occupied

     1      $ 262  

Commercial real estate owner occupied

     1        267  

Commercial and industrial

     2        544  

Mortgage

     36        3,695  

Leasing

     1        45  

Consumer:

     

Credit cards

     128        1,349  

HELOCs

     1        97  

Personal

     42        1,024  

Auto

     2        57  
  

 

 

    

 

 

 

Total

     214      $ 7,340  
  

 

 

    

 

 

 

Popular, Inc.

 

Defaulted during the quarter ended March 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

     6        2,456  

Mortgage

     27        3,235  

Consumer:

     

Credit cards

     106        1,122  

Personal

     43        1,139  

Auto

     1        17  

Other

     1        4  
  

 

 

    

 

 

 

Total

     186      $ 8,300  
  

 

 

    

 

 

 

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 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 March 31, 2017 and December 31, 2016.

 

37


Table of Contents

March 31, 2017

 

(In thousands)

  Watch     Special
Mention
    Substandard     Doubtful     Loss     Sub-total     Pass/
Unrated
    Total  

Puerto Rico[1]

               

Commercial multi-family

  $ 2,231     $ 371     $ 5,943     $ —       $ —       $ 8,545     $ 138,307     $ 146,852  

Commercial real estate non-owner occupied

    322,673       367,288       348,580       133       —         1,038,674       1,474,921       2,513,595  

Commercial real estate owner occupied

    281,761       129,010       356,280       17,749       —         784,800       953,478       1,738,278  

Commercial and industrial

    261,003       149,306       207,528       11,159       10       629,006       2,036,599       2,665,605  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    867,668       645,975       918,331       29,041       10       2,461,025       4,603,305       7,064,330  

Construction

    100       3,091       1,668       —         —         4,859       90,600       95,459  

Mortgage

    4,187       1,664       192,283       —         —         198,134       5,671,584       5,869,718  

Leasing

    —         —         2,427       —         17       2,444       717,199       719,643  

Consumer:

               

Credit cards

    —         —         19,330       —         —         19,330       1,059,154       1,078,484  

HELOCs

    —         —         572       —         —         572       7,577       8,149  

Personal

    1,146       599       20,157       —         —         21,902       1,121,433       1,143,335  

Auto

    —         —         12,484       —         201       12,685       816,274       828,959  

Other

    —         —         17,590       —         2,004       19,594       148,558       168,152  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

    1,146       599       70,133       —         2,205       74,083       3,152,996       3,227,079  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Puerto Rico

  $ 873,101     $ 651,329     $ 1,184,842     $ 29,041     $ 2,232     $ 2,740,545     $ 14,235,684     $ 16,976,229  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

U.S. mainland

               

Commercial multi-family

  $ 16,085     $ 7,749     $ 645     $ —       $ —       $ 24,479     $ 1,084,093     $ 1,108,572  

Commercial real estate non-owner occupied

    78,015       17,140       2,465       —         —         97,620       1,350,589       1,448,209  

Commercial real estate owner occupied

    15,569       895       9,629       —         —         26,093       216,762       242,855  

Commercial and industrial

    1,060       1,437       152,118       —         —         154,615       793,119       947,734  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    110,729       27,221       164,857       —         —         302,807       3,444,563       3,747,370  

Construction

    2,966       85       26,222       —         —         29,273       706,573       735,846  

Mortgage

    —         —         11,888       —         —         11,888       746,381       758,269  

Legacy

    856       549       4,195       —         —         5,600       35,088       40,688  

Consumer:

               

Credit cards

    —         —         35       —         —         35       122       157  

HELOCs

    —         —         2,276       —         3,525       5,801       230,844       236,645  

Personal

    —         —         1,452       —         950       2,402       236,925       239,327  

Auto

    —         —         —         —         —         —         7       7  

Other

    —         —         —         —         —         —         183       183  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

    —         —         3,763       —         4,475       8,238       468,081       476,319  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. mainland

  $ 114,551     $ 27,855     $ 210,925     $ —       $ 4,475     $ 357,806     $ 5,400,686     $ 5,758,492  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Popular, Inc.

               

Commercial multi-family

  $ 18,316     $ 8,120     $ 6,588     $ —       $ —       $ 33,024     $ 1,222,400     $ 1,255,424  

Commercial real estate non-owner occupied

    400,688       384,428       351,045       133       —         1,136,294       2,825,510       3,961,804  

Commercial real estate owner occupied

    297,330       129,905       365,909       17,749       —         810,893       1,170,240       1,981,133  

Commercial and industrial

    262,063       150,743       359,646       11,159       10       783,621       2,829,718       3,613,339  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial

    978,397       673,196       1,083,188       29,041       10       2,763,832       8,047,868       10,811,700  

Construction

    3,066       3,176       27,890       —         —         34,132       797,173       831,305  

Mortgage

    4,187       1,664       204,171       —         —         210,022       6,417,965       6,627,987  

Legacy

    856       549       4,195       —         —         5,600       35,088       40,688  

Leasing

    —         —         2,427       —         17       2,444       717,199       719,643  

Consumer:

               

Credit cards

    —         —         19,365       —         —         19,365       1,059,276       1,078,641  

HELOCs

    —         —         2,848       —         3,525       6,373       238,421       244,794  

Personal

    1,146       599       21,609       —         950       24,304       1,358,358       1,382,662  

Auto

    —         —         12,484       —         201       12,685       816,281       828,966  

Other

    —         —         17,590       —         2,004       19,594       148,741       168,335  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

    1,146       599       73,896       —         6,680       82,321       3,621,077       3,703,398  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Popular, Inc.

  $ 987,652     $ 679,184     $ 1,395,767     $ 29,041     $ 6,707     $ 3,098,351     $ 19,636,370     $ 22,734,721  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


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The following table presents the weighted average obligor risk rating at March 31, 2017 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

     11.11        6.13  

Commercial real estate non-owner occupied

     11.07        6.89  

Commercial real estate owner occupied

     11.23        7.08  

Commercial and industrial

     11.14        7.14  
  

 

 

    

 

 

 

Total Commercial

     11.15        7.03  
  

 

 

    

 

 

 

Construction

     11.00        7.65  
  

 

 

    

 

 

 
U.S. mainland:    Substandard      Pass  

Commercial multi-family

     11.31        7.22  

Commercial real estate non-owner occupied

     11.66        6.65  

Commercial real estate owner occupied

     11.11        7.24  

Commercial and industrial

     11.67        6.12  
  

 

 

    

 

 

 

Total Commercial

     11.63        6.75  
  

 

 

    

 

 

 

Construction

     11.00        7.64  
  

 

 

    

 

 

 

Legacy

     11.11        7.91  
  

 

 

    

 

 

 

 

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

 

39


Table of Contents

December 31, 2016

 
          Special                             Pass/        

(In thousands)

  Watch     Mention     Substandard     Doubtful     Loss     Sub-total     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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

The following table presents the weighted average obligor risk rating at December 31, 2016 for those classifications that consider a range of rating scales.

 

Weighted average obligor risk rating

Puerto Rico:[1]

   (Scales 11 and 12)
Substandard
     (Scales 1 through 8)
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.

 

41


Table of Contents

Note 9 – 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.

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Balance at beginning of period

   $ 69,334      $ 310,221  

Amortization of loss-share indemnification asset

     (776      (4,042

Credit impairment losses (reversal) to be covered under loss-sharing agreements

     148        (2,093

Reimbursable expenses

     921        3,950  

Net payments from FDIC under loss-sharing agreements

     —          (88,588

Other adjustments attributable to FDIC loss-sharing agreements

     (5,550      —    
  

 

 

    

 

 

 

Balance at end of period

   $ 64,077      $ 219,448  
  

 

 

    

 

 

 

Balance due to the FDIC for recoveries on covered assets [1]

     (5,284      (6,301
  

 

 

    

 

 

 

Balance at end of period

   $ 58,793      $ 213,147  
  

 

 

    

 

 

 

 

[1] Balance due to the FDIC for recoveries on covered assets for the quarter ended March 31, 2016 amounting to $6.3 million was included in other liabilities in the accompanying consolidated statement of condition (December 31, 2016 - $27.6 million).

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 of recoveries to the FDIC to continue through the quarter ending June 30, 2018, and for the single family mortgage loss-share component of such agreement to expire on April 30, 2020.

The weighted average life of the single family loan portfolio accounted for under ASC 310-30 subject to the FDIC loss-sharing agreement at March 31, 2017 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.

 

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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 March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Carrying amount (fair value)

   $ 160,543      $ 153,158  

Undiscounted amount

   $ 188,990      $ 188,258  

The increase in the fair value of the true-up payment obligation was principally driven by a decrease in the discount rate from 5.97% in 2016 to 5.03% in 2017 due to a lower risk premium. The estimated fair value of the true-up payment obligation corresponds to the difference between the initial estimated losses to be reimbursed by the FDIC and the revised estimate of reimbursable losses. As the amount of estimated reimbursable losses decreases, the value of the true-up payment obligation increases.

As described above, the estimate of the true-up payment obligation is determined by applying the provisions of the loss sharing agreements and will change on a quarterly basis. The amount of the estimate of the true-up payment obligation is expected to change in future periods and may be subject to the interpretation of provisions of the loss sharing agreements.

The loss-share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss-share agreements, BPPR must:

 

    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.

 

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Note 10 – 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:

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Mortgage servicing fees, net of fair value adjustments:

     

Mortgage servicing fees

   $ 13,452      $ 14,802  

Mortgage servicing rights fair value adjustments

     (5,954      (8,477
  

 

 

    

 

 

 

Total mortgage servicing fees, net of fair value adjustments

     7,498        6,325  
  

 

 

    

 

 

 

Net gain on sale of loans, including valuation on loans

     5,381        7,110  
  

 

 

    

 

 

 

Trading account loss:

     

Unrealized losses on outstanding derivative positions

     (40      (80

Realized losses on closed derivative positions

     (1,470      (2,804
  

 

 

    

 

 

 

Total trading account loss

     (1,510      (2,884
  

 

 

    

 

 

 

Total mortgage banking activities

   $ 11,369      $ 10,551  
  

 

 

    

 

 

 

 

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Note 11 – 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 20 to the Consolidated Financial Statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters ended March 31, 2017 and 2016 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2017 the Corporation recorded a net gain of $5.0 million (March 31, 2016 - $6.4 million) related to the residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the quarters ended March 31, 2017 and 2016.

 

     Proceeds Obtained During the Quarter Ended March 31, 2017  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Investments securities available for sale:

           

Mortgage-backed securities - FNMA

   $ —        $ 4,752      $ —        $ 4,752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ —        $ 4,752      $ —        $ 4,752  
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account securities:

           

Mortgage-backed securities - GNMA

   $ —        $ 146,977      $ —        $ 146,977  

Mortgage-backed securities - FNMA

     —          22,891        —          22,891  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —        $ 169,868      $ —        $ 169,868  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —        $ —        $ 2,470      $ 2,470  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 174,620      $ 2,470      $ 177,090  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Proceeds Obtained During the Quarter Ended March 31, 2016  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Trading account securities:

           

Mortgage-backed securities - GNMA

   $ —        $ 134,012      $ —        $ 134,012  

Mortgage-backed securities - FNMA

     —          36,236        —          36,236  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —        $ 170,248      $ —        $ 170,248  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —        $ —        $ 1,870      $ 1,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 170,248      $ 1,870      $ 172,118  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2017, the Corporation retained servicing rights on whole loan sales involving approximately $18.2 million in principal balance outstanding (March 31, 2016 - $18.5 million), with realized gains of approximately $0.4 million (March 31, 2016 - gains of $0.7 million). All loan sales performed during the quarters ended March 31, 2017 and 2016 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSR”) are measured at fair value.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior.

 

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The following table presents the changes in MSRs measured using the fair value method for the quarters ended March 31, 2017 and 2016.

 

Residential MSRs

 

(In thousands)

   March 31, 2017      March 31, 2016  

Fair value at beginning of period

   $ 196,889      $ 211,405  

Additions

     2,763        2,123  

Changes due to payments on loans[1]

     (4,587      (4,254

Reduction due to loan repurchases

     (644      (357

Changes in fair value due to changes in valuation model inputs or assumptions

     (723      (3,866
  

 

 

    

 

 

 

Fair value at end of period

   $ 193,698      $ 205,051  
  

 

 

    

 

 

 

 

[1] Represents changes due to collection / realization of expected cash flows over time.

Residential mortgage loans serviced for others were $17.7 billion at March 31, 2017 (December 31, 2016 - $18.0 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 March 31, 2017, those weighted average mortgage servicing fees were 0.30% (March 31, 2016 – 0.29%). 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 quarters ended March 31, 2017 and 2016 were as follows:

 

     Quarters ended  
     March 31, 2017     March 31, 2016  

Prepayment speed

     4.4     5.4

Weighted average life (in years)

     10.9       10.0  

Discount rate (annual rate)

     11.0     11.1

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and servicing rights purchased from other financial institutions, and the sensitivity to immediate changes in those assumptions, were as follows as of the end of the periods reported:

 

     Originated MSRs     Purchased MSRs  

(In thousands)

   March 31,
2017
    December 31,
2016
    March 31,
2017
    December 31,
2016
 

Fair value of servicing rights

   $ 85,508     $ 88,056     $ 108,190     $ 108,833  

Weighted average life (in years)

     7.6       7.8       6.7       6.9  

Weighted average prepayment speed (annual rate)

     5.1     4.6     5.4     4.8

Impact on fair value of 10% adverse change

   $ (1,744   $ (1,668   $ (2,109   $ (2,051

Impact on fair value of 20% adverse change

   $ (3,692   $ (3,590   $ (4,561   $ (4,400

Weighted average discount rate (annual rate)

     11.5     11.5     11.0     11.0

Impact on fair value of 10% adverse change

   $ (3,695   $ (3,851   $ (4,269   $ (4,369

Impact on fair value of 20% adverse change

   $ (7,360   $ (7,699   $ (8,624   $ (8,778

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.

 

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At March 31, 2017, the Corporation serviced $1.6 billion (December 31, 2016 - $1.7 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time 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 March 31, 2017, the Corporation had recorded $46 million in mortgage loans on its Consolidated Statements of Financial Condition related to this buy-back option program (December 31, 2016 - $49 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 quarter ended March 31, 2017, the Corporation repurchased approximately $ 45 million (March 31, 2016 - $17 million) of mortgage loans under the GNMA buy-back option program. 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.

 

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Note 12 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters ended March 31, 2017 and 2016.

 

     For the quarter ended March 31, 2017  

(In thousands)

   Non-covered
OREO
Commercial/ Construction
     Non-covered
OREO
Mortgage
     Covered
OREO
Mortgage
     Total  

Balance at beginning of period

   $ 20,401      $ 160,044      $ 32,128      $ 212,573  

Write-downs in value

     (1,259      (2,755      (772      (4,786

Additions

     4,538        26,254        4,109        34,901  

Sales

     (993      (20,409      (5,397      (26,799

Other adjustments

     (133      148        (142      (127
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 22,554      $ 163,282      $ 29,926      $ 215,762  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the quarter ended March 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

     (1,717      (2,016      (500      (4,233

Additions

     1,810        24,276        4,483        30,569  

Sales

     (1,595      (8,500      (3,649      (13,744

Other adjustments

     (615      (914      (622      (2,151
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 30,354      $ 135,606      $ 36,397      $ 202,357  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 13 – Other assets

The caption of other assets in the consolidated statements of financial condition consists of the following major categories:

 

(In thousands)

   March 31, 2017      December 31, 2016  

Net deferred tax assets (net of valuation allowance)

   $ 1,217,549      $ 1,243,668  

Investments under the equity method

     224,029        218,062  

Prepaid taxes

     161,596        172,550  

Other prepaid expenses

     85,673        90,320  

Derivative assets

     13,097        14,085  

Trades receivable from brokers and counterparties

     53,192        46,630  

Principal, interest and escrow servicing advances

     61,697        69,711  

Guaranteed mortgage loan claims receivable

     171,771        152,403  

Others

     123,202        138,081  
  

 

 

    

 

 

 

Total other assets

   $ 2,111,806      $ 2,145,510  
  

 

 

    

 

 

 

 

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Table of Contents

Note 14 – Goodwill and other intangible assets

Goodwill

There were no changes in the carrying amount of goodwill for the quarter ended March 31, 2017. The changes in the carrying amount of goodwill for the quarter ended March 31, 2016, allocated by reportable segments, were as follows (refer to Note 33 for the definition of the Corporation’s reportable segments):

 

2016

 
                   Purchase                
     Balance at      Goodwill on      accounting      Goodwill      Balance at  

(In thousands)

   January 1, 2016      acquisition      adjustments      impairment      March 31, 2016  

Banco Popular de Puerto Rico

   $ 280,221      $ —        $ —        $ —        $ 280,221  

Banco Popular North America

     346,167        —          4,707        —          350,874  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 626,388      $ —        $ 4,707      $ —        $ 631,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

On February 27, 2015, BPPR, in alliance with other co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank, from the Federal Deposit Insurance Corporation (“FDIC”) as receiver (the “Doral Bank Transaction”). During the quarter ended March 31, 2016, the Corporation recorded purchase accounting adjustments of $4.7 million, resulting in a total goodwill of $167.8 million recognized related to the Doral Bank Transaction.

The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments.

 

March 31, 2017

 
     Balance at             Balance at      Balance at             Balance at  
     January 1,      Accumulated      January 1,      March 31,      Accumulated      March 31,  
     2017      impairment      2017      2017      impairment      2017  

(In thousands)

   (gross amounts)      losses      (net amounts)      (gross amounts)      losses      (net amounts)  

Banco Popular de Puerto Rico

   $ 280,221      $ 3,801      $ 276,420      $ 280,221      $ 3,801      $ 276,420  

Banco Popular North America

     515,285        164,411        350,874        515,285        164,411        350,874  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 795,506      $ 168,212      $ 627,294      $ 795,506      $ 168,212      $ 627,294  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

 
     Balance at             Balance at      Balance at             Balance at  
     January 1,      Accumulated      January 1,      December 31,      Accumulated      December 31,  
     2016      impairment      2016      2016      impairment      2016  

(In thousands)

   (gross amounts)      losses      (net amounts)      (gross amounts)      losses      (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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Intangible Assets

At March 31, 2017 and December 31, 2016, the Corporation had $ 6.1 million of identifiable intangible assets, with indefinite useful lives, mostly associated with the E-LOAN trademark.

 

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The following table reflects the components of other intangible assets subject to amortization:

 

     Gross             Net  
     Carrying      Accumulated      Carrying  

(In thousands)

   Amount      Amortization      Value  

March 31, 2017

        

Core deposits

   $ 37,224      $ 19,555      $ 17,669  

Other customer relationships

     36,449        17,576        18,873  
  

 

 

    

 

 

    

 

 

 

Total other intangible assets

   $ 73,673      $ 37,131      $ 36,542  
  

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2017, the Corporation recognized $ 2.3 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2016 - $ 3.1 million).

The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:

 

(In thousands)

      

Remaining 2017

   $ 7,033  

Year 2018

     9,286  

Year 2019

     9,042  

Year 2020

     4,967  

Year 2021

     2,157  

Year 2022

     1,281  

Later years

     2,776  

 

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Note 15 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:

 

(In thousands)

   March 31, 2017      December 31, 2016  

Savings accounts

   $ 8,040,047      $ 7,793,533  

NOW, money market and other interest bearing demand deposits

     9,197,237        8,012,706  
  

 

 

    

 

 

 

Total savings, NOW, money market and other interest bearing demand deposits

     17,237,284        15,806,239  
  

 

 

    

 

 

 

Certificates of deposit:

     

Under $100,000

     3,552,834        3,570,956  

$100,000 and over

     4,160,133        4,138,586  
  

 

 

    

 

 

 

Total certificates of deposit

     7,712,967        7,709,542  
  

 

 

    

 

 

 

Total interest bearing deposits

   $ 24,950,251      $ 23,515,781  
  

 

 

    

 

 

 

A summary of certificates of deposit by maturity at March 31, 2017 follows:

 

(In thousands)

      

2017

   $ 3,366,802  

2018

     1,625,145  

2019

     742,426  

2020

     976,220  

2021

     772,869  

2022 and thereafter

     229,505  
  

 

 

 

Total certificates of deposit

   $ 7,712,967  
  

 

 

 

At March 31, 2017, the Corporation had brokered deposits amounting to $ 0.6 billion (December 31, 2016 - $ 0.6 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $7 million at March 31, 2017 (December 31, 2016 - $6 million).

 

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Note 16 – Borrowings

The following table presents the composition of assets sold under agreements to repurchase at March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Assets sold under agreements to repurchase

   $ 434,714      $ 479,425  
  

 

 

    

 

 

 

Total assets sold under agreements to repurchase

   $ 434,714      $ 479,425  
  

 

 

    

 

 

 

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

 

     March 31, 2017      December 31, 2016  

(In thousands)

   Repurchase
liability
     Repurchase
liability
 

U.S. Treasury Securities

     

Within 30 days

   $ 103,338      $ 32,700  

After 30 to 90 days

     12,415        —    

After 90 days

     107,354        19,819  
  

 

 

    

 

 

 

Total U.S. Treasury Securities

     223,107        52,519  
  

 

 

    

 

 

 

Obligations of U.S. government sponsored entities

     

Within 30 days

     15,963        95,720  

After 30 to 90 days

     75,368        142,299  

After 90 days

     32,629        25,380  
  

 

 

    

 

 

 

Total obligations of U.S. government sponsored entities

     123,960        263,399  
  

 

 

    

 

 

 

Mortgage-backed securities

     

Within 30 days

     55,817        39,108  

After 30 to 90 days

     24,734        58,552  

After 90 days

     —          54,560  
  

 

 

    

 

 

 

Total mortgage-backed securities

     80,551        152,220  
  

 

 

    

 

 

 

Collateralized mortgage obligations

     

Within 30 days

     7,096        11,287  
  

 

 

    

 

 

 

Total collateralized mortgage obligations

     7,096        11,287  
  

 

 

    

 

 

 

Total

   $ 434,714      $ 479,425  
  

 

 

    

 

 

 

Repurchase agreements in portfolio are generally short-term, often overnight. As such our risk is very limited. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.

The following table presents information related to the Corporation’s other short-term borrowings for the periods ended March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Others

   $ 1,200      $ 1,200  
  

 

 

    

 

 

 

Total other short-term borrowings

   $ 1,200      $ 1,200  
  

 

 

    

 

 

 

Note:     Refer to the Corporation’s 2016 Form 10-K for rates information at December 31, 2016.

 

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The following table presents the composition of notes payable at March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Advances with the FHLB with maturities ranging from 2017 through 2029 paying interest at monthly fixed rates ranging from 0.81% to 4.19 %

   $ 596,338      $ 608,193  

Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest monthly at a floating rate ranging from 0.22% to 0.34% over the 1 month LIBOR

     34,164        34,164  

Advances with the FHLB with maturities ranging from 2018 through 2019 paying interest quarterly at a floating rate from 0.09% to 0.24% over the 3 month LIBOR

     25,019        30,313  

Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $4,691 (2016 - $5,212)

     445,309        444,788  

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 $470 (2016 - $476)

     439,330        439,323  

Others

     17,812        18,071  
  

 

 

    

 

 

 

Total notes payable

   $ 1,557,972      $ 1,574,852  
  

 

 

    

 

 

 

Note:     Refer to the Corporation’s 2016 Form 10-K for rates information at December 31, 2016.

A breakdown of borrowings by contractual maturities at March 31, 2017 is included in the table below.

 

     Assets sold under      Short-term                

(In thousands)

   agreements to repurchase      borrowings      Notes payable      Total  

Year

           

2017

   $ 434,714      $ 1,200      $ 78,854      $ 514,768  

2018

     —          —          210,281        210,281  

2019

     —          —          597,793        597,793  

2020

     —          —          112,237        112,237  

2021

     —          —          21,694        21,694  

Later years

     —          —          537,113        537,113  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 434,714      $ 1,200      $ 1,557,972      $ 1,993,886  
  

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2017 and December 31, 2016, the Corporation had FHLB borrowing facilities whereby the Corporation could borrow up to $3.7 billion and $3.8 billion, respectively, of which $656 million and $673 million, respectively, were used. In addition, at March 31, 2017 and 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 March 31, 2017, the Corporation has a borrowing facility at the discount window of the Federal Reserve Bank of New York amounting to $1.3 billion (2016 - $1.2 billion), which remained unused at March 31, 2017 and December 31, 2016. The facility is a collateralized source of credit that is highly reliable even under difficult market conditions.

 

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Note 17 – 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 March 31, 2017 and December 31, 2016.

 

As of March 31, 2017

 
       Gross Amounts Not Offset in the Statement of
Financial Position
 

(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
     Financial
Instruments
     Securities
Collateral
Received
     Cash
Collateral
Received
     Net Amount  

Derivatives

   $ 13,097      $ —        $ 13,097      $ 85      $ —        $ —        $ 13,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,097      $ —        $ 13,097      $ 85      $ —        $ —        $ 13,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2017

 
       Gross Amounts Not Offset in the Statement of
Financial Position
 

(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
     Financial
Instruments
     Securities
Collateral
Pledged
     Cash
Collateral
Pledged
     Net Amount  

Derivatives

   $ 11,196      $ —        $ 11,196      $ 85      $ 156      $ —        $ 10,955  

Repurchase agreements

     434,714        —          434,714        —          434,714        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 445,910      $ —        $ 445,910      $ 85      $ 434,870      $ —        $ 10,955  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016

 
       Gross Amounts Not Offset in the Statement of
Financial Position
 

(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
     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

As of December 31, 2016

 
       Gross Amounts Not Offset in the Statement of
Financial Position
 

(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
     Financial
Instruments
     Securities
Collateral
Pledged
     Cash
Collateral
Received
     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Note 18 – Stockholders’ equity

On January 23, 2017, the Corporation’s Board of Directors approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. During the quarter ended March 31, 2017, the Corporation declared dividends on its common stock of $ 25.6 million, which were paid on April 3, 2017, and completed a $75 million privately negotiated accelerated share repurchase transaction (“ASR”). As part of this transaction, the Corporation received 1,847,372 shares and recognized $79.5 million in treasury stock, based on the stock’s spot price, offset by a $4.5 million adjustment to capital surplus, resulting from the decline in the Corporation’s stock price during the term of the ASR.

BPPR statutory reserve

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the 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 March 31, 2017 (December 31, 2016 - $513 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters ended March 31, 2017 and March 31, 2016.

 

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Note 19 – Other comprehensive loss

The following table presents changes in accumulated other comprehensive loss by component for the quarters ended March 31, 2017 and 2016.

 

    

Changes in Accumulated Other Comprehensive Loss by Component [1]

 
          Quarters ended  
          March 31,  

(In thousands)

        2017     2016  

Foreign currency translation

   Beginning Balance    $ (39,956   $ (35,930
     

 

 

   

 

 

 
   Other comprehensive income (loss)      139       (705
     

 

 

   

 

 

 
   Net change      139       (705
     

 

 

   

 

 

 
   Ending balance    $ (39,817   $ (36,635
     

 

 

   

 

 

 

Adjustment of pension and postretirement benefit plans

  

Beginning Balance

   $ (211,610   $ (211,276
     

 

 

   

 

 

 
  

Amounts reclassified from accumulated other comprehensive loss for amortization of net losses

     3,421       3,346  
  

Amounts reclassified from accumulated other comprehensive loss for amortization of prior service credit

     (580     (580
     

 

 

   

 

 

 
   Net change      2,841       2,766  
     

 

 

   

 

 

 
   Ending balance    $ (208,769   $ (208,510
     

 

 

   

 

 

 

Unrealized net holding (losses) gains on investments

   Beginning Balance    $ (68,318   $ (9,560
     

 

 

   

 

 

 
  

Other comprehensive (loss) income before reclassifications

     (2,609     73,351  
  

Amounts reclassified from accumulated other comprehensive (loss) income

     (130     —    
     

 

 

   

 

 

 
   Net change      (2,739     73,351  
     

 

 

   

 

 

 
   Ending balance    $ (71,057   $ 63,791  
     

 

 

   

 

 

 

Unrealized net losses on cash flow hedges

   Beginning Balance    $ (402   $ (120
     

 

 

   

 

 

 
  

Other comprehensive loss before reclassifications

     (389     (1,219
  

Amounts reclassified from other accumulated other comprehensive loss

     522       943  
     

 

 

   

 

 

 
   Net change      133       (276
     

 

 

   

 

 

 
   Ending balance    $ (269   $ (396
     

 

 

   

 

 

 
   Total    $ (319,912   $ (181,750
     

 

 

   

 

 

 

 

[1] All amounts presented are net of tax.

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters ended March 31, 2017 and 2016.

 

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Reclassifications Out of Accumulated Other Comprehensive Loss

 
     Affected Line Item in the    Quarters ended March 31,  

(In thousands)

  

Consolidated Statements of Operations

   2017     2016  

Adjustment of pension and postretirement benefit plans

       

Amortization of net losses

  

Personnel costs

   $ (5,607   $ (5,486

Amortization of prior service credit

  

Personnel costs

     950       950  
     

 

 

   

 

 

 
   Total before tax      (4,657     (4,536
     

 

 

   

 

 

 
   Income tax benefit      1,816       1,770  
     

 

 

   

 

 

 
   Total net of tax    $ (2,841   $ (2,766
     

 

 

   

 

 

 

Unrealized holding (losses) gains on investments

       

Realized gain on sale of securities

  

Net gain on sale and valuation adjustments of investment securities

   $ 162     $ —    
     

 

 

   

 

 

 
   Total before tax      162       —    
     

 

 

   

 

 

 
   Income tax expense      (32     —    
     

 

 

   

 

 

 
   Total net of tax    $ 130     $ —    
     

 

 

   

 

 

 

Unrealized net losses on cash flow hedges

       

Forward contracts

  

Mortgage banking activities

   $ (855   $ (1,545
     

 

 

   

 

 

 
   Total before tax      (855     (1,545
     

 

 

   

 

 

 
   Income tax benefit      333       602  
     

 

 

   

 

 

 
   Total net of tax    $ (522   $ (943
     

 

 

   

 

 

 
   Total reclassification adjustments, net of tax    $ (3,233   $ (3,709
     

 

 

   

 

 

 

 

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Note 20 – Guarantees

At March 31, 2017 the Corporation recorded a liability of $0.2 million (December 31, 2016 - $0.3 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.

From time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, 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. At March 31, 2017 the Corporation serviced $1.6 billion (December 31, 2016 - $1.7 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under 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 the quarter ended March 31, 2017, the Corporation repurchased approximately $ 9 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2016 - $ 13 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers ultimate 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 March 31, 2017 the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 52 million (December 31, 2016 - $ 54 million).

The following table shows the changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2017 and 2016.

 

     March 31,  

(In thousands)

   2017      2016  

Balance as of beginning of period

   $ 54,489      $ 58,663  

Provision for recourse liability

     2,134        3,920  

Net charge-offs

     (5,083      (4,589
  

 

 

    

 

 

 

Balance as of end of period

   $ 51,540      $ 57,994  
  

 

 

    

 

 

 

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. 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. During the quarters ended March 31, 2017 and March 31, 2016, BPPR did not repurchase loans under representation and warranty arrangements.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.

From time to time, the Corporation sells loans and agrees to indemnify the purchaser for credit losses or any breach of certain representations and warranties made in connection with the sale. The following table presents the changes in the Corporation’s liability for estimated losses associated with indemnifications and representations and warranties related to loans sold by BPPR for the quarters ended March 31, 2017 and 2016.

 

(In thousands)

   2017      2016  

Balance as of beginning of period

   $ 10,936      $ 8,087  

Provision (reversal) for representation and warranties

     (399      106  

Net charge-offs

     —          (191
  

 

 

    

 

 

 

Balance as of end of period

   $ 10,537      $ 8,002  
  

 

 

    

 

 

 

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

 

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principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2017, the Corporation serviced $17.7 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2016 - $18.0 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation 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 March 31, 2017, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $62 million, including advances on the portfolio acquired from Doral Bank (December 31, 2016 - $70 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

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 March 31, 2017 and December 31, 2016. In addition, at March 31, 2017 and December 31, 2016, PIHC fully and unconditionally guaranteed on a subordinated basis $ 427 million of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 23 to the Consolidated Financial Statements in the 2016 Form 10-K for further information on the trust preferred securities.

 

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Note 21 – 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 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)

   March 31, 2017      December 31, 2016  

Commitments to extend credit:

     

Credit card lines

   $ 4,812,061      $ 4,562,981  

Commercial and construction lines of credit

     2,831,925        2,966,656  

Other consumer unused credit commitments

     264,240        261,856  

Commercial letters of credit

     1,346        1,490  

Standby letters of credit

     28,863        34,644  

Commitments to originate or fund mortgage loans

     21,897        25,622  

At March 31, 2017 and 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.

Other commitments

At March 31, 2017 and December 31, 2016, the Corporation also maintained other non-credit commitments for approximately $372 thousand, primarily for the acquisition of other investments.

Business concentration

Since the Corporation’s business activities are concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto 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 33 to the Consolidated Financial Statements.

Puerto Rico is in the midst of a profound fiscal and economic crisis and has commenced several proceedings under PROMESA to restructure its outstanding obligations and those of certain of its instrumentalities. As of the date of this report, the credit ratings for the Commonwealth’s general obligation bonds are as follows: S&P, ‘D’, Moody’s, ‘Caa3’, and Fitch, ‘D’.

The U.S. Congress enacted PROMESA on June 30, 2016 in response to the Commonwealth’s ongoing fiscal and economic crisis. PROMESA, among other things, (i) established a seven-member oversight board (the “Oversight Board”) with broad powers over the finances of the Commonwealth and its instrumentalities, (ii) established an automatic stay on litigation, which expired on May 1, 2017, that applied to all financial obligations of the Commonwealth, its instrumentalities and municipalities (including to all municipal obligations owned by the Corporation), (iii) required the Commonwealth (and any instrumentality thereof designed as a “covered entity’ under PROMESA) to submit its budgets, and if the Oversight Board so requests, a fiscal plan for certification by the Oversight Board, and (iv) established two separate processes for the restructuring of the outstanding liabilities of the Commonwealth, its instrumentalities and municipalities: (a) Title VI, a largely out-of-court process through which a government entity and its financial creditors can agree on terms to restructure such entity’s debts, and (b) Title III, a court-supervised process for a comprehensive restructuring similar to Chapter 9 of the U.S. Bankruptcy Code.

The Oversight Board has designated a number of entities as “covered entities” under PROMESA, including the Commonwealth, all of its public corporations (including COFINA) 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

 

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municipalities as covered entities under PROMESA, it has not done so as of the date hereof. The Oversight Board has further approved fiscal plans for certain of these “covered entities,” including the Commonwealth, Government Development Bank for Puerto Rico (“GDB”) and several other public corporations. The Commonwealth’s fiscal plan covers various public instrumentalities with outstanding debts payable from taxes, fees or other government revenues, including COFINA. The approved fiscal plans indicate that the applicable government entities are unable to pay their outstanding obligations as currently scheduled, thus recognizing a need for debt restructuring.

On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court for the District of Puerto Rico to restructure the Commonwealth’s liabilities under Title III of PROMESA. On May 5, 2017, the Oversight Board filed an analogous petition with respect to COFINA. As of the date of this report, a plan of adjustment for the Commonwealth’s or COFINA’s debts has not been filed.

Although as of the date hereof the Commonwealth and COFINA are the only entities for which the Oversight Board has sought to use the restructuring authority provided by Title III of PROMESA, the Oversight Board may use the restructuring authority of Title III or Title VI of PROMESA for other Commonwealth instrumentalities, including its municipalities, in the future.

At March 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 520 million, of which approximately $ 516 million is outstanding ($584 million and $ 529 million, respectively, at December 31, 2016). Of the amount outstanding, $ 451 million consists of loans and $ 65 million are securities ($ 459 million and $ 70 million at December 31, 2016). Also, of the amount outstanding, $ 15 million represents senior obligations from COFINA ($ 17 million at December 31, 2016). As indicated in Note 5 to these Consolidated Financial Statements, the Oversight Board has initiated a Title III filing with respect to COFINA, which will require the Corporation to evaluate during the second quarter whether its holdings of senior COFINA obligations are other than temporarily impaired, which could result in a charge to earnings to recognize estimated credit losses determined to be other-than-temporary. The remaining $ 501 million outstanding ($ 512 million at December 31, 2016) 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. Such general obligation bonds and notes are payable primarily from certain special property taxes, which each municipality is required by law to levy in an amount sufficient for the payment of its outstanding general obligation bonds and notes. Said special property taxes are collected by the Municipal Revenue Collection Center (“CRIM”) and deposited into each municipality’s Redemption Fund (a trust for which GDB acts as trustee and which is currently held in various accounts and subaccounts at BPPR (except for the portion corresponding to repayment of municipal general obligation bonds held by GDB, which is held at GDB)). Funds in the Redemption Fund are required to be used for the payment of the municipality’s general obligation bonds and notes. To the extent that the funds deposited in a municipality’s Redemption Fund are insufficient to pay said obligations in full, CRIM is required to transfer to such Redemption Fund other property tax revenues of said municipality to satisfy said insufficiency.

 

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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

           

After 5 to 10 years

   $ 3,054      $ —        $ 3,054      $ 3,054  

After 10 years

     11,563        —          11,563        11,563  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Central Government

     14,617        —          14,617        14,617  
  

 

 

    

 

 

    

 

 

    

 

 

 

Government Development Bank (GDB)

           

After 1 to 5 years

     1        —          1        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Government Development Bank (GDB)

     1        —          1        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     3,235        18,974        22,209        25,659  

After 1 to 5 years

     15,200        128,008        143,208        143,208  

After 5 to 10 years

     17,485        144,975        162,460        162,460  

After 10 years

     15,070        158,660        173,730        173,730  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Municipalities

     50,990        450,617        501,607        505,057  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Government Exposure

   $ 65,612      $ 450,617      $ 516,229      $ 519,679  
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, at March 31, 2017, the Corporation had $400 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 ($406 million at December 31, 2016). These included $320 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2016 - $326 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 Rico Housing Finance Authority. Also, the Corporation had $43 million in Puerto Rico housing bonds which are backed-up by second mortgage residential loans, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $30 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($43 million, $6 million and $31 million at December 31, 2016, respectively).

The Corporation has operations in the United States Virgin Islands (the “USVI”) and has approximately $79 million in direct exposure to USVI government entities. The USVI is experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations.

Other contingencies

As indicated in Note 9 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 $ 161 million at March 31, 2017 (December 31, 2016 - $ 153 million). For additional information refer to Note 9.

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 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.

 

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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 $22.3 million as of March 31, 2017. 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 is a description of the Corporation’s significant legal proceedings.

BANCO POPULAR DE PUERTO RICO

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, filed before the Court of First Instance, Arecibo Part. 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. On March 24, 2017, the Popular defendants filed a certiorari petition with the Puerto Rico Court of Appeals seeking a review of the lower court’s denial of the motion to dismiss. Popular and MAPFRE recently asked the Court of Appeals to stay lower-court proceedings pending resolution of certiorari petitions, which the Court denied. Popular has asked the Court to reconsider such denial. A class certification hearing is scheduled for June 23, 2017.

BPPR has separately been named a defendant in a putative class action complaint captioned Ramirez Torres, et al. v. Banco Popular de Puerto Rico, et al, filed before the Puerto Rico Court of First Instance, San Juan Part. The complaint seeks damages and preliminary and permanent injunctive relief on behalf of the purported class against the 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). Between late March and early April, co-defendants filed motions to dismiss and opposed the request for preliminary injunctive relief. A co-defendant filed a third-party Complaint against Antilles Insurance Company. A preliminary injunction and class certification hearing originally scheduled for April 6th was re-scheduled at the request of plaintiffs’ counsel for May 17, 2017.

 

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Mortgage-Related Litigation

BPPR has been named a defendant in a putative class action captioned Lilliam González Camacho, et al. v. Banco Popular de Puerto Rico, et al., filed before the United States District Court for the District of Puerto Rico on behalf of mortgage-holders who have allegedly been subjected to illegal foreclosures and/or loan modifications through their mortgage servicers. Plaintiffs essentially contend that when they sought to reduce their loan payments, defendants failed to provide them with reduced loan payments, instead subjecting them to lengthy loss mitigation processes while filing foreclosure claims against them in parallel. Plaintiffs assert that such actions violate HAMP, HARP and other loan modification programs, as well as the Puerto Rico Mortgage Debtor Assistance Act and TILA. For the alleged violations stated above, Plaintiffs request that all Defendants (over 20 separate defendants have been named, including all local banks), jointly and severally, respond in an amount of no less than $400,000,000.00. BPPR has not yet been served.

Mortgage-Related Investigations

Separately, 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.

POPULAR SECURITIES

Popular Securities has been named a defendant 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, who was originally named in the complaint as well, 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. On March 24, 2017, the sole named plaintiff filed a Notice of Death, as a result of which plaintiff has 90 days to either find a substitute plaintiff or dismiss the complaint against Popular Securities. This term expires on June 22, 2017.

 

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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 56 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.

POPULAR COMMUNITY BANK

Josefina Valle v. Popular Community Bank

PCB has been named a defendant in a putative class action complaint captioned Josefina Valle, et al. v. Popular Community Bank, filed in November 2012 in the New York State Supreme Court (New York County). Plaintiffs, PCB customers, allege among other things that PCB has engaged in unfair and deceptive acts and trade practices in connection with the assessment of overdraft fees and payment processing on consumer deposit accounts. The complaint further alleges that PCB improperly disclosed its consumer overdraft policies and that the overdraft rates and fees assessed by PCB violate New 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. On January 3, 2017, PCB filed a brief with the Appellate Division in support of its appeal of the lower Court’s prior order that granted in part and denied in part PCB’s motion to dismiss plaintiffs’ second amended complaint. Oral argument was held on April 4, 2017. On April 25, 2017, the Court issued an order denying PCB’s appeal from the partial denial of our motion to dismiss.

In re: RFC and RESCAP Liquidating Trust Litigation

E-LOAN, Inc., a wholly-owned subsidiary of Banco Popular North America, has 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

 

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sold by E-LOAN, Inc., among other mortgage lenders, 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. More recently, however, the parties resumed settlement negotiations and on April 25, 2017, the parties entered into a definitive agreement to settle all claims against E-LOAN, Inc. The terms of the settlement did not have a material effect on the financial results of the Corporation.

FDIC Commercial Loss Share Arbitration Proceedings

As described under “Note 9 – 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.

Between 2013 and 2017, BPPR and the FDIC became involved in five separate proceedings under the commercial loss share agreement. Of these, only two remained active as of December 31, 2016, and as further described below, they were resolved on March 27, 2017.

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 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 chair of the review board 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 review board in the December 2014 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. On March 27, 2017, Banco Popular submitted a payment of $5.5 million in connection with the filing of its quarterly certificate to the FDIC. On March 28, 2017, the parties informed the separate arbitrators that the parties had reached a definitive agreement and the proceedings should be dismissed with prejudice.

 

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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 March 31, 2017, the carrying value of covered loans approximated $552 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.

 

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Note 22 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it created 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 24 to the Consolidated Financial Statements for additional information on the debt securities outstanding at March 31, 2017 and December 31, 2016, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation holds variable interests in the form of servicing fees, since it retains the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party.

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer of GNMA and FNMA loans at March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Assets

     

Servicing assets:

     

Mortgage servicing rights

   $ 156,199      $ 158,562  
  

 

 

    

 

 

 

Total servicing assets

   $ 156,199      $ 158,562  
  

 

 

    

 

 

 

Other assets:

     

Servicing advances

   $ 18,255      $ 20,787  
  

 

 

    

 

 

 

Total other assets

   $ 18,255      $ 20,787  
  

 

 

    

 

 

 

Total assets

   $ 174,454      $ 179,349  
  

 

 

    

 

 

 

Maximum exposure to loss

   $ 174,454      $ 179,349  
  

 

 

    

 

 

 

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 $12.1 billion at March 31, 2017 (December 31, 2016 - $12.3 billion).

 

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The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at March 31, 2017 and December 31, 2016, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

In September of 2011, BPPR sold construction and commercial real estate loans to a newly created joint venture, PRLP 2011 Holdings, LLC. In March of 2013, BPPR completed a sale of commercial and construction loans, and commercial and single family real estate owned to a newly created joint venture, PR Asset Portfolio 2013-1 International, LLC.

These joint ventures were created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint ventures through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC for the acquisition of the assets in an amount equal to the acquisition loan of $86 million and $182 million, respectively. The acquisition loans have a 5-year maturity and bear a variable interest at 30-day LIBOR plus 300 basis points and are secured by a pledge of all of 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.

 

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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 March 31, 2017 and December 31, 2016.

 

     PRLP 2011 Holdings, LLC     PR Asset Portfolio 2013-1 International, LLC  

(In thousands)

   March 31, 2017     December 31, 2016     March 31, 2017     December 31, 2016  

Assets

        

Loans held-in-portfolio:

        

Advances under the working capital line

   $ —       $ —       $ —       $ 1,391  

Advances under the advance facility

     —         —         —         2,475  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ —       $ —       $ —       $ 3,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued interest receivable

   $ —       $ —       $ —       $ 19  

Other assets:

        

Equity investment

   $ 8,656     $ 9,167     $ 18,862     $ 22,378  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,656     $ 9,167     $ 18,862     $ 26,263  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Deposits

   $ (1,118   $ (1,127   $ (22,564   $ (9,692
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $ (1,118   $ (1,127   $ (22,564   $ (9,692
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets (liabilities)

   $ 7,538     $ 8,040     $ (3,702   $ 16,571  
  

 

 

   

 

 

   

 

 

   

 

 

 

Maximum exposure to loss

   $ 7,538     $ 8,040     $ —       $ 16,571  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2017 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 March 31, 2017.

 

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Note 23 – Related party transactions

EVERTEC

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 March 31, 2017, the Corporation’s stake in EVERTEC was 16.06%. 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.

The Corporation received $1.2 million in dividend distributions during the quarter ended March 31, 2017 from its investments in EVERTEC’s holding company (March 31, 2016 - $1.2 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 statements of financial condition.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Equity investment in EVERTEC

   $ 42,408      $ 38,904  

The Corporation had the following financial condition balances outstanding with EVERTEC at March 31, 2017 and December 31, 2016. Items that represent liabilities to the Corporation are presented with parenthesis.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Accounts receivable (Other assets)

   $ 4,424      $ 6,394  

Deposits

     (12,937      (14,899

Accounts payable (Other liabilities)

     (3,154      (20,372
  

 

 

    

 

 

 

Net total

   $ (11,667    $ (28,877
  

 

 

    

 

 

 

The Corporation’s proportionate share of income from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income and changes in stockholders’ equity for the quarters ended March 31, 2017 and 2016.

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Share of income from investment in EVERTEC

   $ 3,700      $ 2,983  

Share of other changes in EVERTEC’s stockholders’ equity

     619        242  
  

 

 

    

 

 

 

Share of EVERTEC’s changes in equity recognized in income

   $ 4,319      $ 3,225  
  

 

 

    

 

 

 

The following table 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 quarters ended March 31, 2017 and 2016. Items that represent expenses to the Corporation are presented with parenthesis.

 

     Quarters ended March 31,         

(In thousands)

   2017      2016      Category  

Interest expense on deposits

   $ (9    $ (19      Interest expense  

ATH and credit cards interchange income from services to EVERTEC

     7,666        6,918        Other service fees  

Rental income charged to EVERTEC

     1,759        1,736        Net occupancy  

Processing fees on services provided by EVERTEC

     (42,370      (43,516      Professional fees  

Other services provided to EVERTEC

     266        256        Other operating expenses  
  

 

 

    

 

 

    

Total

   $ (32,688    $ (34,625   
  

 

 

    

 

 

    

 

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PRLP 2011 Holdings, LLC

As indicated in Note 22 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)

   March 31, 2017      December 31, 2016  

Equity investment in PRLP 2011 Holdings, LLC

   $ 8,656      $ 9,167  

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Deposits (non-interest bearing)

   $ (1,118    $ (1,127
  

 

 

    

 

 

 

The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the Consolidated Statements of Operations. The following table presents the Corporation’s proportionate share of loss from PRLP 2011 Holdings, LLC for the quarters ended March 31, 2017 and 2016.

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Share of loss from the equity investment in PRLP 2011 Holdings, LLC

   $ (511    $ (542

During the quarter ended March 31, 2016, the Corporation received $1.8 million in capital distributions from its investment in PRLP 2011 Holdings, LLC. 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 quarters ended March 31, 2017 and 2016.

 

     Quarters ended March 31,         

(In thousands)

   2017      2016      Category  

Interest income on loan to PRLP 2011 Holdings, LLC

   $ —        $ 11        Interest income  

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 22 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)

   March 31, 2017      December 31, 2016  

Equity investment in PR Asset Portfolio 2013-1 International, LLC

   $ 18,862      $ 22,378  

 

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The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at March 31, 2017 and December 31, 2016.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Loans

   $ —        $ 3,866  

Accrued interest receivable

     —          19  

Deposits

     (22,564      (9,692
  

 

 

    

 

 

 

Net total

   $ (22,564    $ (5,807
  

 

 

    

 

 

 

The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the Consolidated Statements of Operations. The following table presents the Corporation’s proportionate share of loss from PR Asset Portfolio 2013-1 International, LLC for quarters ended March 31, 2017 and 2016.

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC

   $ (154    $ (522

During the quarter ended March 31, 2017, the Corporation received $3.4 million in capital distribution from its investment in PR Asset Portfolio 2013-1 International, LLC. 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 quarters March 31, 2017 and 2016.

 

     Quarters ended March 31,         

(In thousands)

   2017      2016      Category  

Interest income on loan to PR Asset Portfolio 2013-1 International, LLC

   $ 9      $ 445        Interest income  

Interest expense on deposits

     (4      (1      Interest expense  
  

 

 

    

 

 

    

Total

   $ 5      $ 444     
  

 

 

    

 

 

    

Centro Financiero BHD León

At March 31, 2017, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the quarter ended March 31, 2017 the Corporation recorded $6.1 million in earnings from its investment in BHD Leon (2016- $6.2 million), which had a carrying amount of $131.4 million, as of the end of the quarter (December 31, 2016 - $125.5 million). BPPR has extended a credit facility of $50 million to BHD León, which had no outstanding balance at March 31, 2017 (December 31, 2016 – $25 million).

Puerto Rico Investment Companies

The Corporation provides advisory services to several Puerto Rico investment companies in exchange for a fee. The Corporation also provides administrative, custody and transfer agency services to these investment companies. These fees are calculated at an annual rate of the average net assets of the investment company, as defined in each agreement. Due to its advisory role, the Corporation considers these investment companies as related parties.

For the quarter ended March 31, 2017 administrative fees charged to these investment companies amounted to $2.0 million (2016- $2.0 million) and waived fees amounted to $0.6 million (2016 - $0.7million), for a net fee of $1.4 million (2016 - $1.3 million).

The Corporation, through its subsidiary Banco Popular de Puerto Rico, has also entered into lines of credit facilities with these companies. As of March 31, 2017, the available lines of credit facilities amounted to $357 million ( December 31 2016 - $357 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those Puerto Rico investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital.

 

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Note 24 – 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. There have been no changes in the Corporation’s methodologies used to estimate the fair value of assets and liabilities from those disclosed in the 2016 Form 10-K.

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.

 

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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 March 31, 2017 and December 31, 2016:

 

At March 31, 2017

 

(In thousands)

   Level 1      Level 2      Level 3      Total  

RECURRING FAIR VALUE MEASUREMENTS

           

Assets

           

Investment securities available-for-sale:

           

U.S. Treasury securities

   $ —        $ 2,943,120      $ —        $ 2,943,120  

Obligations of U.S. Government sponsored entities

     —          712,282        —          712,282  

Obligations of Puerto Rico, States and political subdivisions

     —          20,909        —          20,909  

Collateralized mortgage obligations - federal agencies

     —          1,146,886        —          1,146,886  

Mortgage-backed securities

     —          4,361,767        1,289        4,363,056  

Equity securities

     —          1,859        —          1,859  

Other

     —          9,415        —          9,415  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ —        $ 9,196,238      $ 1,289      $ 9,197,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account securities:

           

Obligations of Puerto Rico, States and political subdivisions

   $ —        $ 189      $ —        $ 189  

Collateralized mortgage obligations

     —          —          1,061        1,061  

Mortgage-backed securities - federal agencies

     —          31,279        4,345        35,624  

Other

     —          13,528        583        14,111  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —        $ 44,996      $ 5,989      $ 50,985  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —        $ —        $ 193,698      $ 193,698  

Derivatives

     —          13,097        —          13,097  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —        $ 9,254,331      $ 200,976      $ 9,455,307  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

   $ —        $ (11,196    $ —        $ (11,196

Contingent consideration

     —          —          (160,543      (160,543
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ —        $ (11,196    $ (160,543    $ (171,739
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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
  

 

 

    

 

 

    

 

 

    

 

 

 

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 quarters ended March 31, 2017 and 2016 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

 

Quarter ended March 31, 2017

 

(In thousands)

   Level 1      Level 2      Level 3      Total
        

NONRECURRING FAIR VALUE MEASUREMENTS

              

Assets

                

Write-

downs

 

 

Loans[1]

   $ —        $ —        $ 45,133      $ 45,133      $ (16,491

Other real estate owned[2]

     —          —          17,155        17,155        (4,578

Other foreclosed assets[2]

     —          —          165        165        (73
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —        $ —        $ 62,453      $ 62,453      $ (21,142
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[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.

 

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Quarter ended March 31, 2016

 

(In thousands)

   Level 1      Level 2      Level 3      Total         

NONRECURRING FAIR VALUE MEASUREMENTS

              

Assets

                 Write-downs  

Loans[1]

   $ —        $ —        $ 30,785      $ 30,785      $ (22,850

Loans held-for-sale[2]

     —          —          1,829        1,829        (296

Other real estate owned[3]

     —          —          18,592        18,592        (3,920

Other foreclosed assets[3]

     —          —          66        66        (11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —        $ —        $ 51,272      $ 51,272      $ (27,077
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[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.

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2017 and 2016.

 

Quarter ended March 31, 2017

 

(In thousands)

   MBS
classified
as investment
securities
available-
for-sale
    CMOs
classified
as trading
account
securities
    MBS
classified as
trading account
securities
    Other
securities
classified
as trading
account
securities
    Mortgage
servicing
rights
    Total
assets
    Contingent
consideration
    Total
liabilities
 

Balance at January 1, 2017

   $ 1,392     $ 1,321     $ 4,755     $ 602     $ 196,889     $ 204,959     $ (153,158   $ (153,158

Gains (losses) included in earnings

     —         (4     (43     (19     (5,954     (6,020     (7,385     (7,385

Gains (losses) included in OCI

     10       —         —         —         —         10       —         —    

Additions

     —         —         164       —         2,763       2,927       —         —    

Sales

     —         (205     (156     —         —         (361     —         —    

Settlements

     (25     (51     (375     —         —         (451     —         —    

Transfers out of Level 3

     (88     —         —         —         —         (88     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ 1,289     $ 1,061     $ 4,345     $ 583     $ 193,698     $ 200,976     $ (160,543   $ (160,543
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2017

   $ —       $ (4   $ (27   $ 9     $ (723   $ (745   $ (7,385   $ (7,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Quarter ended March 31, 2016

 

(In thousands)

   MBS
classified
as investment
securities
available-
for-sale
    CMOs
classified
as trading
account
securities
    MBS
classified as
trading account
securities
    Other
securities
classified
as trading
account
securities
    Mortgage
servicing
rights
    Total
assets
    Contingent
consideration
    Total
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

     (2     (6     89       (24     (8,477     (8,420     (443     (443

Gains (losses) included in OCI

     15       —         —         —         —         15       —         —    

Additions

     —         174       338       —         2,123       2,635       —         —    

Sales

     —         (106     (1,120     —         —         (1,226     —         —    

Settlements

     (25     (110     (364     —         —         (499     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 1,422     $ 1,783     $ 5,397     $ 663     $ 205,051     $ 214,316     $ (120,823   $ (120,823
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2016

   $ —       $ (3   $ 86     $ 11     $ (3,866   $ (3,772   $ (443   $ (443
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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During the quarter ended March 31, 2017, a certain MBS amounting to $88 thousand was transferred from Level 3 to Level 2 due to a change in valuation technique from an internally-prepared pricing matrix to a bond’s theoretical value. There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the quarter ended March 31, 2016.

Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2017 and 2016 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statements of operations as follows:

 

     Quarter ended March 31, 2017      Quarter ended March 31, 2016  

(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
 

Interest income

   $ —        $ —        $ (2    $ —    

FDIC loss share expense

     (7,385      (7,385      (443      (443

Mortgage banking activities

     (5,954      (723      (8,477      (3,866

Trading account loss

     (66      (22      59        94  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (13,405    $ (8,130    $ (8,863    $ (4,215
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.

 

    Fair value                
    at March 31,                

(In thousands)

  2017    

Valuation technique

 

Unobservable inputs

  Weighted average (range)  

CMO’s - trading

  $ 1,061     Discounted cash flow model   Weighted average life     2.8 years (0.1 - 4.1 years)  
      Yield     3.5% (0.7% - 4.2%)  
      Prepayment speed     20.3% (18.0% - 22.4%)  

Other - trading

  $ 583     Discounted cash flow model   Weighted average life     5.4 years  
      Yield     12.3%  
      Prepayment speed     10.8%  

Mortgage servicing rights

  $ 193,698     Discounted cash flow model   Prepayment speed     5.3% (0.2% - 15.5%)  
      Weighted average life     7.0 years (0.1 - 16.6 years)  
      Discount rate     11.2% (9.5% - 15.0%)  

Contingent consideration

  $ (160,543   Discounted cash flow model   Credit loss rate on covered loans     3.5% (0.0% - 100.0%)  
      Risk premium component  
      of discount rate     3.4%  

Loans held-in-portfolio

  $ 45,133 [1]    External appraisal   Haircut applied on  
      external appraisals     25.1% (22.5% - 27.1%)  

Other real estate owned

  $ 14,049 [2]    External appraisal   Haircut applied on  
      external appraisals     15.5% (15.0% - 30.0%)  

 

[1] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.
[2] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

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

 

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Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and / or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. The Corporation’s Corporate Comptroller’s unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation’s Corporate Treasury unit validates the economic assumptions developed by the external service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s unit. The Corporation’s MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting period. Changes in valuation assumptions must also be approved by the MSR Committee. The fair value of MSRs are compared with those of the external service provider on a quarterly basis in order to validate if the fair values are within the materiality thresholds established by management to monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results.

 

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Note 25 – 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 March 31, 2017 and December 31, 2016, 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. There have been no changes in 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 from those disclosed in the 2016 Form 10-K.

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.

 

     March 31, 2017  
     Carrying                              

(In thousands)

   amount      Level 1      Level 2      Level 3      Fair value  

Financial Assets:

              

Cash and due from banks

   $ 340,225      $ 340,225      $ —        $ —        $ 340,225  

Money market investments

     3,653,347        3,644,623        8,724        —          3,653,347  

Trading account securities, excluding derivatives[1]

     50,985        —          44,996        5,989        50,985  

Investment securities available-for-sale[1]

     9,197,527        —          9,196,238        1,289        9,197,527  

Investment securities held-to-maturity:

              

Obligations of Puerto Rico, States and political subdivisions

   $ 94,253      $ —        $ —        $ 71,589      $ 71,589  

Collateralized mortgage obligation-federal agency

     73        —          —          77        77  

Other

     2,000        —          1,736        226        1,962  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 96,326      $ —        $ 1,736      $ 71,892      $ 73,628  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investment securities:

              

FHLB stock

   $ 57,262      $ —        $ 57,262      $ —        $ 57,262  

FRB stock

     93,911        —          93,911        —          93,911  

Trust preferred securities

     13,198        —          13,198        —          13,198  

Other investments

     1,915        —          —          5,246        5,246  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other investment securities

   $ 166,286      $ —        $ 164,371      $ 5,246      $ 169,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-for-sale

   $ 85,309      $ —        $ 289      $ 87,230      $ 87,519  

Loans not covered under loss sharing agreement with the FDIC

     22,217,996        —          —          20,479,513        20,479,513  

Loans covered under loss sharing agreements with the FDIC

     524,209        —          —          491,393        491,393  

FDIC loss share asset

     58,793        —          —          54,171        54,171  

Mortgage servicing rights

     193,698        —          —          193,698        193,698  

Derivatives

     13,097        —          13,097        —          13,097  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     March 31, 2017  

(In thousands)

   Carrying
amount
     Level 1      Level 2      Level 3      Fair value  

Financial Liabilities:

              

Deposits:

              

Demand deposits

   $ 24,499,612      $ —        $ 24,499,612      $ —        $ 24,499,612  

Time deposits

     7,712,967        —          7,712,363        —          7,712,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 32,212,579      $ —        $ 32,211,975      $ —        $ 32,211,975  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Assets sold under agreements to repurchase

   $ 434,714      $ —        $ 434,715      $ —        $ 434,715  

Other short-term borrowings[2]

   $ 1,200      $ —        $ 1,200      $ —        $ 1,200  

Notes payable:

              

FHLB advances

   $ 655,521      $ —        $ 654,939      $ —        $ 654,939  

Unsecured senior debt securities

     445,309        —          471,753        —          471,753  

Junior subordinated deferrable interest debentures (related to trust preferred securities)

     439,330        —          402,973        —          402,973  

Others

     17,812        —          —          17,812        17,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total notes payable

   $ 1,557,972      $ —        $ 1,529,665      $ 17,812      $ 1,547,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

   $ 11,196      $ —        $ 11,196      $ —        $ 11,196  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contingent consideration

   $ 160,543      $ —        $ —        $ 160,543      $ 160,543  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

 

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     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  
     Carrying                              

(In thousands)

   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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     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 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

 

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The notional amount of commitments to extend credit at March 31, 2017 and December 31, 2016 is $ 7.9 billion and $7.8 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at March 31, 2017 and December 31, 2016 is $30 million and $36 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.

 

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Note 26 – Net income per common share

The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the quarters ended March 31, 2017 and 2016:

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2017      2016  

Net income

   $ 92,945      $ 84,999  

Preferred stock dividends

     (931      (931
  

 

 

    

 

 

 

Net income applicable to common stock

   $ 92,014      $ 84,068  
  

 

 

    

 

 

 

Average common shares outstanding

     102,932,989        103,188,815  

Average potential dilutive common shares

     180,906        80,998  
  

 

 

    

 

 

 

Average common shares outstanding - assuming dilution

     103,113,895        103,269,813  
  

 

 

    

 

 

 

Basic EPS

   $ 0.89      $ 0.81  
  

 

 

    

 

 

 

Diluted EPS

   $ 0.89      $ 0.81  
  

 

 

    

 

 

 

As disclosed in Note 18, during the quarter ended March 31, 2017, the Corporation completed a $75 million privately negotiated accelerated share repurchase transaction. As part of this transaction, the Corporation entered into a forward contract in which the final number of shares delivered at settlement was based on the average daily volume weighted average price (“VWAP”) of its common stock during the term of the ASR, net of a discount. Based on the discounted VWAP of $40.60, the Corporation received 1,847,372 shares of its outstanding common stock.

For the quarter ended March 31, 2017, the Corporation calculated the impact of potential dilutive common shares under the treasury stock method, consistent with the method used for the preparation of the financial statements for the year ended December 31, 2016. For a discussion of the calculation under the treasury stock method, refer to Note 35 of the Consolidated Financial Statements included in the 2016 Form 10-K.

For the quarters ended March 31, 2017 and 2016, there were no stock options outstanding.

 

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Note 27 – Other service fees

The caption of other services fees in the consolidated statements of operations consists of the following major categories:

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Debit card fees

   $ 11,543      $ 11,287  

Insurance fees

     12,805        12,850  

Credit card fees

     18,276        16,858  

Sale and administration of investment products

     5,082        4,839  

Trust fees

     4,955        4,235  

Other fees

     3,514        3,313  
  

 

 

    

 

 

 

Total other service fees

   $ 56,175      $ 53,382  
  

 

 

    

 

 

 

 

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Note 28 – 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:

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Amortization of loss share indemnification asset

   $ (776    $ (4,042

80% mirror accounting on credit impairment losses (reversal)[1]

     148        (2,093

80% mirror accounting on reimbursable expenses

     921        3,950  

80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC

     4,833        (645

Change in true-up payment obligation

     (7,385      (443

Other

     (5,998      127  
  

 

 

    

 

 

 

Total FDIC loss share expense

   $ (8,257    $ (3,146
  

 

 

    

 

 

 

 

[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.

 

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Note 29 – Pension and postretirement benefits

The Corporation has a non-contributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries. The accrual of benefits under the plans is frozen to all participants.

The components of net periodic pension cost for the periods presented were as follows:

 

     Pension Plan      Benefit Restoration Plans  
     Quarters ended March 31,      Quarters ended March 31,  

(In thousands)

   2017      2016      2017      2016  

Interest cost

   $ 6,120      $ 6,291      $ 352      $ 348  

Expected return on plan assets

     (10,186      (9,623      (502      (538

Amortization of net loss

     5,054        4,880        411        331  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost (benefit)

   $ 988      $ 1,548      $ 261      $ 141  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2017 the Corporation made a contribution to the pension and benefit restoration plans of $59 thousand. The total contributions expected to be paid during the year 2017 for the pension and benefit restoration plans amount to approximately $236 thousand.

The Corporation also provides certain postretirement health care benefits for retired employees of certain subsidiaries. The table that follows presents the components of net periodic postretirement benefit cost.

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Service cost

   $ 256      $ 289  

Interest cost

     1,426        1,505  

Amortization of prior service cost

     (950      (950

Amortization of net loss

     142        275  
  

 

 

    

 

 

 

Total postretirement cost

   $ 874      $ 1,119  
  

 

 

    

 

 

 

Contributions made to the postretirement benefit plan for the quarter ended March 31, 2017 amounted to approximately $1.5 million. The total contributions expected to be paid during the year 2017 for the postretirement benefit plan amount to approximately $6.4 million.

 

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Note 30 - Stock-based compensation

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”). The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.

Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting 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 or after 2014 was modified as follows, the first part is vested ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment of 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 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 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  

Granted

     138,163        42.69  

Quantity adjusted by TSR factor

     (55,515      36.09  

Vested

     (67,983      40.28  
  

 

 

    

 

 

 

Non-vested at March 31, 2017

     398,647      $ 28.29  
  

 

 

    

 

 

 

During the quarter ended March 31, 2017, 64,479 shares of restricted stock were awarded to management under the Incentive Plan (March 31, 2016 - 161,500).

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 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 quarter ended March 31, 2017, 73,684 performance shares were granted under this plan (March 31, 2016 - 64,598).

During the quarter ended March 31, 2017, the Corporation recognized $2.0 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (March 31, 2016 - $3.7 million, with a tax benefit of $0.5 million). For the quarter ended March 31, 2017, the fair market value of the restricted stock vested was $1.6 million at grant date and $2.6 million

 

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at vesting date. This triggers a windfall, of $0.4 million that was recorded as a reduction on income tax expense. For the quarter ended March 31, 2017, the Corporation recognized $1.7 million of performance shares expense, with a tax benefit of $0.1 million (March 31, 2016 - $1.0 million, with a tax benefit of $0.1 million). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2017 was $8.3 million and is expected to be recognized over a weighted-average period of 2.3 years.

The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:

 

(Not in thousands)

   Restricted Stock      Weighted-Average
Grant Date Fair
Value
 

Non-vested at December 31, 2015

     —        $ —    

Granted

     40,517        29.77  

Vested

     (40,517      29.77  

Forfeited

     —          —    
  

 

 

    

 

 

 

Non-vested at December 31, 2016

     —        $ —    

Granted

     —          —    

Vested

     —          —    

Forfeited

     —          —    
  

 

 

    

 

 

 

Non-vested at March 31, 2017

     —        $ —    
  

 

 

    

 

 

 

During the quarter ended March 31, 2017, no shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. (March 31, 2016 – 2,338). During this period, the Corporation recognized $0.3 million of restricted stock expense related to restricted stock previously granted, with a tax benefit of $31 thousand (March 31, 2016 - $0.1 million, with a tax benefit of $15 thousand). There was no fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2017 for directors.

 

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Note 31 – Income taxes

The reason for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:

 

     Quarters ended  
     March 31, 2017     March 31, 2016  

(In thousands)

   Amount      % of pre-tax
income
    Amount      % of pre-tax
income
 

Computed income tax expense at statutory rates

   $ 49,121        39   $ 45,733        39

Net benefit of tax exempt interest income

     (18,004      (14     (15,584      (13

Deferred tax asset valuation allowance

     5,056        4       5,273        5  

Difference in tax rates due to multiple jurisdictions

     (959      (1     (864      (1

Effect of income subject to preferential tax rate

     (3,019      (3     (3,414      (3

State and local taxes

     1,279        1       2,927        3  

Others

     (468      —         (1,806      (2
  

 

 

    

 

 

   

 

 

    

 

 

 

Income tax expense

   $ 33,006        26   $ 32,265        28
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.

 

(In thousands)

   March 31, 2017      December 31, 2016  

Deferred tax assets:

     

Tax credits available for carryforward

   $ 20,220      $ 18,510  

Net operating loss and other carryforward available

     1,235,780        1,238,222  

Postretirement and pension benefits

     93,054        94,741  

Deferred loan origination fees

     6,065        6,622  

Allowance for loan losses

     634,690        649,107  

Deferred gains

     4,676        4,884  

Accelerated depreciation

     10,115        9,828  

Intercompany deferred gains

     2,328        2,496  

Difference between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations

     11,344        13,160  

Other temporary differences

     29,922        31,127  
  

 

 

    

 

 

 

Total gross deferred tax assets

     2,048,194        2,068,697  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

FDIC-assisted transaction

     56,331        58,363  

Indefinite-lived intangibles

     76,576        73,974  

Unrealized net gain on trading and available-for-sale securities

     20,851        21,335  

Other temporary differences

     8,959        8,477  
  

 

 

    

 

 

 

Total gross deferred tax liabilities

     162,717        162,149  
  

 

 

    

 

 

 

Valuation allowance

     669,335        664,287  
  

 

 

    

 

 

 

Net deferred tax asset

   $ 1,216,142      $ 1,242,261  
  

 

 

    

 

 

 

The net deferred tax asset shown in the table above at March 31, 2017 is reflected in the consolidated statements of financial condition as $1.2 billion in net deferred tax assets in the “Other assets” caption (December 31, 2016 - $1.2 billion) and $1.4 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2016 - $1.4 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

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

 

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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 March 31, 2017 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 $520 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 March 31, 2017, management estimated that the U.S. operations would earn enough pre-tax Income during the carryover period to realize the total amount of net deferred tax asset after valuation allowance. After weighting 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 $520 million, will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as any changes arises.

At March 31, 2017, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $697 million.

The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position and has sustained profitability for the three year period ended March 31, 2017. This is considered a strong piece of objectively verifiable positive evidence that outweights 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 year period ended March 31, 2017. Management expects 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, a full valuation allowance is recorded on the deferred tax asset at the Holding Company, which amounted to $52 million as of March 31, 2017.

The reconciliation of unrecognized tax benefits, excluding interest, was as follows:

 

(In millions)

   2017      2016  

Balance at January 1

   $ 7.4      $ 9.0  

Additions for tax positions -January through March

     0.2        0.4  
  

 

 

    

 

 

 

Balance at March 31

   $ 7.6      $ 9.4  
  

 

 

    

 

 

 

At March 31, 2017, the total amount of interest recognized in the statement of financial condition approximated $3.0 million (December 31, 2016 - $2.9 million). The total interest expense recognized during the quarter ended March 31, 2017 was $145 thousand (December 31, 2016 - $1.2 million). Management determined that at March 31, 2017 and December 31, 2016 there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, whiles the penalties, if any, are reported in other operating expenses in the consolidated statements of operations.

 

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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 $9.3 million at March 31, 2017 (December 31, 2016 - $9.0 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the 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.

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. At March 31, 2017, the following years remain subject to examination in the U.S. Federal jurisdiction: 2013 and thereafter; and in the Puerto Rico jurisdiction, 2012 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.9 million.

 

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Note 32 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the quarters ended March 31, 2017 and March 31, 2016 are listed in the following table:

 

(In thousands)

   March 31, 2017      March 31, 2016  

Non-cash activities:

     

Loans transferred to other real estate

   $ 32,597      $ 26,919  

Loans transferred to other property

     8,956        7,693  
  

 

 

    

 

 

 

Total loans transferred to foreclosed assets

     41,553        34,612  

Financed sales of other real estate assets

     2,904        3,943  

Financed sales of other foreclosed assets

     3,161        4,072  
  

 

 

    

 

 

 

Total financed sales of foreclosed assets

     6,065        8,015  

Transfers from loans held-for-sale to loans held-in-portfolio

     —          3,821  

Loans securitized into investment securities[1]

     174,620        170,248  

Trades receivable from brokers and counterparties

     53,192        87,590  

Trades payable to brokers and counterparties

     5,128        32,774  

Recognition of mortgage servicing rights on securitizations or asset transfers

     2,763        2,136  
  

 

 

    

 

 

 

 

[1] Includes loans securitized into trading securities and subsequently sold before quarter end.

 

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Note 33 – 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.

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 March 31, 2017, 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, Inc., Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN, Inc. supported BPNA’s deposit gathering through its online platform until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. 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.

 

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The tables that follow present the results of operations and total assets by reportable segments:

 

2017

 

For the quarter ended March 31, 2017

 

(In thousands)

   Banco Popular
de Puerto Rico
     Banco Popular
North America
     Intersegment
Eliminations
 

Net interest income

   $ 310,212      $ 67,119      $ (164

Provision for loan losses

     30,118        10,580        —    

Non-interest income

     99,732        4,931        (144

Amortization of intangibles

     2,179        166        —    

Depreciation expense

     9,733        1,903        —    

Other operating expenses

     236,301        41,713        (138

Income tax expense

     33,998        7,290        (70
  

 

 

    

 

 

    

 

 

 

Net income

   $ 97,615      $ 10,398      $ (100
  

 

 

    

 

 

    

 

 

 

Segment assets

     $31,217,093      $ 8,832,246      $ (22,946
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2017

 

(In thousands)

   Reportable
Segments
     Corporate      Eliminations      Total Popular, Inc.  

Net interest income (expense)

   $ 377,167      $ (15,069    $ —        $ 362,098  

Provision for loan losses

     40,698        —          —          40,698  

Non-interest income

     104,519        11,427        (77      115,869  

Amortization of intangibles

     2,345        —          —          2,345  

Depreciation expense

     11,636        163        —          11,799  

Other operating expenses

     277,876        19,926        (628      297,174  

Income tax expense (benefit)

     41,218        (8,423      211        33,006  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 107,913      $ (15,308    $ 340      $ 92,945  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 40,026,393      $ 5,004,658      $ (4,771,769    $ 40,259,282  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

2016

 

For the quarter ended March 31, 2016

 

(In thousands)

   Banco Popular
de Puerto Rico
     Banco Popular
North America
     Intersegment
Eliminations
 

Net interest income

   $ 305,350      $ 62,257      $ —    

Provision for loan losses

     40,800        4,069        —    

Non-interest income

     98,566        4,950        —    

Amortization of intangibles

     2,948        166        —    

Depreciation expense

     10,197        1,333        —    

Other operating expenses

     224,669        41,331        —    

Income tax expense

     31,877        8,456        —    
  

 

 

    

 

 

    

 

 

 

Net income

   $ 93,425      $ 11,852      $ —    
  

 

 

    

 

 

    

 

 

 

Segment assets

     $28,108,702      $ 7,880,357      $ (52,740
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2016

 

(In thousands)

   Reportable
Segments
     Corporate      Eliminations      Total Popular, Inc.  

Net interest income (expense)

   $ 367,607      $ (15,195    $ —        $ 352,412  

Provision (reversal of provision) for loan losses

     44,869        (34      —          44,835  

Non-interest income

     103,516        8,177        (63      111,630  

Amortization of intangibles

     3,114        —          —          3,114  

Depreciation expense

     11,530        177        —          11,707  

Other operating expenses

     266,000        21,731        (609      287,122  

Income tax expense (benefit)

     40,333        (8,281      213        32,265  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 105,277      $ (20,611    $ 333      $ 84,999  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 35,936,319      $ 4,938,750      $ (4,728,060    $ 36,147,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

 

2017

 

For the quarter ended March 31, 2017

 

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

   $ 120,296     $ 188,132      $ 1,787      $ (3   $ 310,212  

Provision for loan losses

     (573     30,691        —          —         30,118  

Non-interest income

     19,428       58,071        22,311        (78     99,732  

Amortization of intangibles

     54       1,067        1,058        —         2,179  

Depreciation expense

     4,262       5,267        204        —         9,733  

Other operating expenses

     60,833       161,264        14,292        (88     236,301  

Income tax expense

     22,076       8,983        2,939        —         33,998  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 53,072     $ 38,931      $ 5,605      $ 7     $ 97,615  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets

   $ 17,559,586     $ 18,178,373      $ 325,217      $ (4,846,093   $ 31,217,093  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

2016

 

For the quarter ended March 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

   $ 115,553      $ 186,545      $ 1,615      $ 1,637     $ 305,350  

Provision for loan losses

     15,461        25,339        —          —         40,800  

Non-interest income

     22,412        54,927        21,311        (84     98,566  

Amortization of intangibles

     22        1,836        1,090        —         2,948  

Depreciation expense

     4,286        5,680        231        —         10,197  

Other operating expenses

     58,161        149,283        17,309        (84     224,669  

Income tax expense

     18,169        12,379        1,329        —         31,877  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 41,866      $ 46,955      $ 2,967      $ 1,637     $ 93,425  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets

   $ 11,317,146      $ 17,046,370      $ 342,867      $ (597,681   $ 28,108,702  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

Geographic Information

 

     Quarter ended  

(In thousands)

   March 31, 2017      March 31, 2016  

Revenues:[1]

     

Puerto Rico

   $ 384,448      $ 380,036  

United States

     74,843        64,640  

Other

     18,676        19,366  
  

 

 

    

 

 

 

Total consolidated revenues

   $ 477,967      $ 464,042  
  

 

 

    

 

 

 

 

[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.

 

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Selected Balance Sheet Information:

 

(In thousands)

   March 31, 2017      December 31, 2016  

Puerto Rico

     

Total assets

   $ 30,185,470      $ 28,813,289  

Loans

     16,619,906        16,880,868  

Deposits

     24,722,769        23,185,551  

United States

     

Total assets

   $ 9,159,712      $ 8,928,475  

Loans

     6,003,805        5,799,562  

Deposits

     6,445,544        6,266,473  

Other

     

Total assets

   $ 914,100      $ 919,845  

Loans

     748,299        755,017  

Deposits [1]

     1,044,266        1,044,200  

 

[1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

 

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Note 34 – 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 March 31, 2017 and December 31, 2016, and the results of their operations and cash flows for periods ended March 31, 2017 and 2016.

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.

 

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Condensed Consolidating Statement of Financial Condition (Unaudited)

 

     At March 31, 2017  
                 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

   $ 33,766     $ 462     $ 340,239     $ (34,242   $ 340,225  

Money market investments

     282,365       8,209       3,652,982       (290,209     3,653,347  

Trading account securities, at fair value

     2,994       —         48,118       (127     50,985  

Investment securities available-for-sale, at fair value

     —         —         9,197,527       —         9,197,527  

Investment securities held-to-maturity, at amortized cost

     —         —         96,326       —         96,326  

Other investment securities, at lower of cost or realizable value

     9,850       4,492       151,944       —         166,286  

Investment in subsidiaries

     5,581,176       1,826,778       —         (7,407,954     —    

Loans held-for-sale, at lower of cost or fair value

     —         —         85,309       —         85,309  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

          

Loans not covered under loss-sharing agreements with the FDIC

     1,134       —         22,857,422       —         22,858,556  

Loans covered under loss-sharing agreements with the FDIC

     —         —         551,980       —         551,980  

Less - Unearned income

     —         —         123,835       —         123,835  

Allowance for loan losses

     1       —         544,495       —         544,496  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio, net

     1,133       —         22,741,072       —         22,742,205  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FDIC loss-share asset

     —         —         58,793       —         58,793  

Premises and equipment, net

     2,939       —         546,056       —         548,995  

Other real estate not covered under loss- sharing agreements with the FDIC

     81       —         185,755       —         185,836  

Other real estate covered under loss- sharing agreements with the FDIC

     —         —         29,926       —         29,926  

Accrued income receivable

     108       34       127,938       (62     128,018  

Mortgage servicing assets, at fair value

     —         —         193,698       —         193,698  

Other assets

     66,531       26,378       2,034,382       (15,485     2,111,806  

Goodwill

     —         —         627,294       —         627,294  

Other intangible assets

     553       —         42,153       —         42,706  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,981,496     $ 1,866,353     $ 40,159,512     $ (7,748,079   $ 40,259,282  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Liabilities:

          

Deposits:

          

Non-interest bearing

   $ —       $ —       $ 7,296,570     $ (34,242   $ 7,262,328  

Interest bearing

     —         —         25,240,460       (290,209     24,950,251  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     —         —         32,537,030       (324,451     32,212,579  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Assets sold under agreements to repurchase

     —         —         434,714       —         434,714  

Other short-term borrowings

     —         —         1,200       —         1,200  

Notes payable

     736,121       148,518       673,333       —         1,557,972  

Other liabilities

     55,068       2,798       820,810       (16,072     862,604  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     791,189       151,316       34,467,087       (340,523     35,069,069  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock

     50,160       —         —         —         50,160  

Common stock

     1,041       2       56,307       (56,309     1,041  

Surplus

     4,252,819       4,111,207       5,717,066       (9,819,746     4,261,346  

Retained earnings (accumulated deficit)

     1,295,233       (2,374,242     236,969       2,128,746       1,286,706  

Treasury stock, at cost

     (89,034     —         —         (94     (89,128

Accumulated other comprehensive loss, net of tax

     (319,912     (21,930     (317,917     339,847       (319,912
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     5,190,307       1,715,037       5,692,425       (7,407,556     5,190,213  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,981,496     $ 1,866,353     $ 40,159,512     $ (7,748,079   $ 40,259,282  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Financial Condition (Unaudited)

 

     At December 31, 2016  
      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

   $ 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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Operations (Unaudited)

 

     Quarter ended March 31, 2017  
                 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

   $ 129,000     $ —       $ —       $ (129,000   $ —    

Loans

     15       —         363,121       —         363,136  

Money market investments

     481       21       6,572       (501     6,573  

Investment securities

     142       80       44,664       —         44,886  

Trading account securities

     —         —         1,400       —         1,400  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     129,638       101       415,757       (129,501     415,995  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

          

Deposits

     —         —         34,258       (501     33,757  

Short-term borrowings

     —         —         1,095       —         1,095  

Long-term debt

     13,118       2,692       3,235       —         19,045  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     13,118       2,692       38,588       (501     53,897  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     116,520       (2,591     377,169       (129,000     362,098  

Provision for loan losses- non-covered loans

     —         —         42,057       —         42,057  

Provision (reversal) for loan losses- covered loans

     —         —         (1,359     —         (1,359
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for loan losses

     116,520       (2,591     336,471       (129,000     321,400  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —         —         39,536       —         39,536  

Other service fees

     —         —         56,258       (83     56,175  

Mortgage banking activities

     —         —         11,369       —         11,369  

Net gain on sale of investment securities

     —         —         162       —         162  

Trading account loss

     (120     —         (169     11       (278

Adjustments (expense) to indemnity reserves on loans sold

     —         —         (1,966     —         (1,966

FDIC loss-share expense

     —         —         (8,257     —         (8,257

Other operating income

     4,655       809       13,670       (6     19,128  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     4,535       809       110,603       (78     115,869  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Personnel costs

     13,814       —         111,793       —         125,607  

Net occupancy expenses

     914       —         19,862       —         20,776  

Equipment expenses

     582       —         15,388       —         15,970  

Other taxes

     46       —         10,923       —         10,969  

Professional fees

     2,513       (525     67,345       (83     69,250  

Communications

     152       —         5,797       —         5,949  

Business promotion

     419       —         11,157       —         11,576  

FDIC deposit insurance

     —         —         6,493       —         6,493  

Other real estate owned (OREO) expenses

     —         —         12,818       —         12,818  

Other operating expenses

     (18,790     13       48,888       (546     29,565  

Amortization of intangibles

     —         —         2,345       —         2,345  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (350     (512     312,809       (629     311,318  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax and equity in (losses) earnings of subsidiaries

     121,405       (1,270     134,265       (128,449     125,951  

Income tax (benefit) expense

     —         (445     33,240       211       33,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in (losses) earnings of subsidiaries

     121,405       (825     101,025       (128,660     92,945  

Equity in undistributed (losses) earnings of subsidiaries

     (28,460     8,633       —         19,827       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 92,945     $ 7,808     $ 101,025     $ (108,833   $ 92,945  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 93,319     $ 7,827     $ 101,049     $ (108,876   $ 93,319  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Operations (Unaudited)

 

     Quarter ended March 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

   $ 29,700     $ —       $ —       $ (29,700   $ —    

Loans

     19       —         363,178       —         363,197  

Money market investments

     255       21       2,863       (276     2,863  

Investment securities

     238       80       35,953       —         36,271  

Trading account securities

     —         —         1,689       —         1,689  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     30,212       101       403,683       (29,976     404,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

          

Deposits

     —         —         30,150       (276     29,874  

Short-term borrowings

     —         —         1,861       —         1,861  

Long-term debt

     13,117       2,693       4,063       —         19,873  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     13,117       2,693       36,074       (276     51,608  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     17,095       (2,592     367,609       (29,700     352,412  

Provision (reversal) for loan losses- non-covered loans

     (34     —         47,974       —         47,940  

Provision (reversal) for loan losses- covered loans

     —         —         (3,105     —         (3,105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for loan losses

     17,129       (2,592     322,740       (29,700     307,577  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —         —         39,862       —         39,862  

Other service fees

     —         —         53,439       (57     53,382  

Mortgage banking activities

     —         —         10,551       —         10,551  

Trading account profit (loss)

     24       —         (186     —         (162

Net loss on sale of loans, including valuation adjustments on loans held-for-sale

     —         —         (304     —         (304

Adjustments (expense) to indemnity reserves on loans sold

     —         —         (4,098     —         (4,098

FDIC loss-share expense

     —         —         (3,146     —         (3,146

Other operating income (loss)

     3,256       (1,303     13,599       (7     15,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income (expense)

     3,280       (1,303     109,717       (64     111,630  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Personnel costs

     15,421       —         111,670       —         127,091  

Net occupancy expenses

     916       —         19,514       —         20,430  

Equipment expenses

     445       —         14,103       —         14,548  

Other taxes

     47       —         10,148       —         10,195  

Professional fees

     2,881       30       72,605       (57     75,459  

Communications

     137       —         6,183       —         6,320  

Business promotion

     465       —         10,645       —         11,110  

FDIC deposit insurance

     —         —         7,370       —         7,370  

Other real estate owned (OREO) expenses

     —         —         9,141       —         9,141  

Other operating expenses

     (20,428     39       38,106       (552     17,165  

Amortization of intangibles

     —         —         3,114       —         3,114  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (116     69       302,599       (609     301,943  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax and equity in earnings of subsidiaries

     20,525       (3,964     129,858       (29,155     117,264  

Income tax expense (benefit)

     3       (1,387     33,436       213       32,265  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of subsidiaries

     20,522       (2,577     96,422       (29,368     84,999  

Equity in undistributed earnings of subsidiaries

     64,477       8,923       —         (73,400     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 84,999     $ 6,346     $ 96,422     $ (102,768   $ 84,999  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 160,135     $ 27,295     $ 172,035     $ (199,330   $ 160,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

104


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Condensed Consolidating Statement of Cash Flows (Unaudited)

 

     Quarter ended March 31, 2017  

(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

   $ 92,945     $ 7,808     $ 101,025     $ (108,833   $ 92,945  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

          

Equity in losses (earnings) of subsidiaries, net of dividends or distributions

     28,460       (8,633     —         (19,827     —    

Provision for loan losses

     —         —         40,698       —         40,698  

Amortization of intangibles

     —         —         2,345       —         2,345  

Depreciation and amortization of premises and equipment

     163       —         11,636       —         11,799  

Net accretion of discounts and amortization of premiums and deferred fees

     521       7       (6,991     —         (6,463

Fair value adjustments on mortgage servicing rights

     —         —         5,954       —         5,954  

FDIC loss-share expense

     —         —         8,257       —         8,257  

Adjustments (expense) to indemnity reserves on loans sold

     —         —         1,966       —         1,966  

Earnings from investments under the equity method

     (4,652     (809     (5,418     —         (10,879

Deferred income tax (benefit) expense

     —         (445     25,295       210       25,060  

(Gain) loss on:

          

Disposition of premises and equipment and other productive assets

     (17     —         6,483       —         6,466  

Sale and valuation adjustments of investment securities

     —         —         (162     —         (162

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

     —         —         (5,381     —         (5,381

Sale of foreclosed assets, including write-downs

     —         —         4,512       —         4,512  

Acquisitions of loans held-for-sale

     —         —         (73,043     —         (73,043

Proceeds from sale of loans held-for-sale

     —         —         29,364       —         29,364  

Net originations on loans held-for-sale

     —         —         (123,336     —         (123,336

Net (increase) decrease in:

          

Trading securities

     (355     —         177,514       (6     177,153  

Accrued income receivable

     5       104       9,943       (28     10,024  

Other assets

     (256     22       13,088       307       13,161  

Net (decrease) increase in:

          

Interest payable

     (7,875     (2,685     (749     28       (11,281

Pension and other postretirement benefits obligations

     —         —         331       —         331  

Other liabilities

     (2,413     (551     (9,844     (846     (13,654
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     13,581       (12,990     112,462       (20,162     92,891  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     106,526       (5,182     213,487       (128,995     185,836  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Net (increase) decrease in money market investments

     (30,018     5,053       (761,312     23,147       (763,130

Purchases of investment securities:

          

Available-for-sale

     —         —         (1,216,880     —         (1,216,880

Other

     —         —         (225     —         (225

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

          

Available-for-sale

     —         —         222,677       —         222,677  

Held-to-maturity

     —         —         2,184       —         2,184  

Proceeds from sale of investment securities:

          

Available for sale

     —         —         381       —         381  

Other

     —         —         1,757       —         1,757  

Net repayments on loans

     7       —         99,299       —         99,306  

Acquisition of loan portfolios

     —         —         (109,098     —         (109,098

Net payments from FDIC under loss-sharing agreements

     —         —         (23,574     —         (23,574

Return of capital from equity method investments

     500       —         3,362       —         3,862  

Acquisition of premises and equipment

     (39     —         (18,607     —         (18,646

Proceeds from sale of:

          

Premises and equipment and other productive assets

     18       —         2,993       —         3,011  

Foreclosed assets

     —         —         27,547       —         27,547  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (29,532     5,053       (1,769,496     23,147       (1,770,828
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Net increase (decrease) in:

          

Deposits

     —         —         1,725,266       (9,308     1,715,958  

Assets sold under agreements to repurchase

     —         —         (44,711     —         (44,711

Payments of notes payable

     —         —         (17,408     —         (17,408

Proceeds from issuance of common stock

     1,806       —         —         —         1,806  

Dividends paid to parent company

     —         —         (129,000     129,000       —    

Dividends paid

     (16,499     —         —         —         (16,499

Net payments for repurchase of common stock

     (75,599     —         —         (5     (75,604

Payments related to tax withholding for share-based compensation

     (719     —         —         —         (719
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (91,011     —         1,534,147       119,687       1,562,823  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (14,017     (129     (21,862     13,839       (22,169

Cash and due from banks at beginning of period

     47,783       591       362,101       (48,081     362,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 33,766     $ 462     $ 340,239     $ (34,242   $ 340,225  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended March 31, 2017 there have not been any cash flows associated with discontinued operations.

 

105


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Condensed Consolidating Statement of Cash Flows (Unaudited)

 

    Quarter ended March 31, 2016  
                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

  $ 84,999     $ 6,346     $ 96,422     $ (102,768   $ 84,999  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

         

Equity in earnings of subsidiaries, net of dividends or distributions

    (64,477     (8,923     —         73,400       —    

Provision (reversal) for loan losses

    (34     —         44,869       —         44,835  

Amortization of intangibles

    —         —         3,114       —         3,114  

Depreciation and amortization of premises and equipment

    177       —         11,530       —         11,707  

Net accretion of discounts and amortization of premiums and deferred fees

    521       8       (11,687     —         (11,158

Fair value adjustments on mortgage servicing rights

    —         —         8,477       —         8,477  

FDIC loss-share income

    —         —         3,146       —         3,146  

Adjustments (expense) to indemnity reserves on loans sold

    —         —         4,098       —         4,098  

(Earnings) losses from investments under the equity method

    (3,256     1,303       (5,136     —         (7,089

Deferred income tax expense (benefit)

    3       (1,387     24,389       213       23,218  

(Gain) loss on:

         

Disposition of premises and equipment and other productive assets

    —         —         (1,946     —         (1,946

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

    —         —         (7,101     —         (7,101

Sale of foreclosed assets, including write-downs

    —         —         2,802       —         2,802  

Acquisitions of loans held-for-sale

    —         —         (66,451     —         (66,451

Proceeds from sale of loans held-for-sale

    —         —         22,253       —         22,253  

Net originations on loans held-for-sale

    —         —         (110,528     —         (110,528

Net (increase) decrease in:

         

Trading securities

    (101     —         176,699       —         176,598  

Accrued income receivable

    12       79       3,842       (7     3,926  

Other assets

    1       21       22,194       (1,220     20,996  

Net (decrease) increase in:

         

Interest payable

    (7,875     (2,685     (1,708     7       (12,261

Pension and other postretirement benefits obligations

    —         —         1,536       —         1,536  

Other liabilities

    (4,622     (382     (12,681     675       (17,010
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

    (79,651     (11,966     111,711       73,068       93,162  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    5,348       (5,620     208,133       (29,700     178,161  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

         

Net decrease in money market investments

    6,952       5,412       262,679       (12,411     262,632  

Purchases of investment securities:

         

Available-for-sale

    —         —         (742,859     —         (742,859

Other

    —         —         (59,786     —         (59,786

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

         

Available-for-sale

    —         —         239,399       —         239,399  

Held-to-maturity

    —         —         2,108       —         2,108  

Other

    —         —         41,664       —         41,664  

Proceeds from sale of investment securities:

         

Other

    —         —         26,346       —         26,346  

Net repayments on loans

    8       —         13,327       —         13,335  

Proceeds from sale of loans

    —         —         1,128       —         1,128  

Acquisition of loan portfolios

    —         —         (212,798     —         (212,798

Net payments from FDIC under loss-sharing agreements

    —         —         88,588       —         88,588  

Return of capital from equity method investments

    —         206       —         —         206  

Acquisition of premises and equipment

    (398     —         (38,421     —         (38,819

Proceeds from sale of:

         

Premises and equipment and other productive assets

    46       —         5,046       —         5,092  

Foreclosed assets

    —         —         14,513       —         14,513  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    6,608       5,618       (359,066     (12,411     (359,251
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

         

Net increase (decrease) in:

         

Deposits

    —         —         302,718       15,832       318,550  

Federal funds purchased and assets sold under agreements to repurchase

    —         —         (1,991     —         (1,991

Other short-term borrowings

    —         —         5,170       —         5,170  

Payments of notes payable

    —         —         (108,452     —         (108,452

Proceeds from issuance of notes payable

    —         —         28,883       —         28,883  

Proceeds from issuance of common stock

    2,109       —         —         —         2,109  

Dividends paid to parent company

    —         —         (29,700     29,700       —    

Dividends paid

    (16,473     —         —         —         (16,473

Net payments for repurchase of common stock

    (77     —         —         —         (77

Payments related to tax withholding for share-based compensation

    (680     —         —         —         (680
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (15,121     —         196,628       45,532       227,039  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

    (3,165     (2     45,695       3,421       45,949  

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

  $ 21,133     $ 598     $ 409,315     $ (21,423   $ 409,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended March 31, 2016 there have not been any cash flows associated with discontinued operations.

 

106


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly owned subsidiary E-LOAN, Inc. The BPNA franchise operates under the name Popular Community Bank (“PCB”). BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and Southern Florida. E-LOAN, Inc. marketed deposits accounts under its name for the benefit of BPNA until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. Note 33 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. As of March 31, 2017, the Corporation had a 16.06% interest in the holding company of EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s system infrastructures and transaction processing businesses. During the quarter ended March 31, 2017 the Corporation recorded $ 4.3 million in earnings from its investment in EVERTEC which had a carrying amount of $ 42 million as of the end of the quarter. Also, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the quarter ended March 31, 2017 the Corporation recorded $6.1 million in earnings from its investment in BHD Leon, which had a carrying amount of $131 million, as of the end of the quarter.

SIGNIFICANT EVENTS

 

    During the quarter ended March 31, 2017, the Corporation completed the previously announced common stock repurchase plan of $75 million, acquiring 1,847,372 shares at a price of $40.60. The plan was completed under an accelerated share repurchase transaction (“ASR”). The Corporation recognized $79.5 million in treasury stock, based on the Corporation’s stock price at the commencement and settlement of the term of the ASR, offset by a $4.5 million adjustment to capital surplus resulting from the decline in the Corporation’s stock price during the term of the ASR.

 

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OVERVIEW

Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2017 and 2016.

Table 1 - Financial highlights

 

Financial Condition Highlights

                       Average for the First Quarter  

(In thousands)

   March 31,
2017
     December 31,
2016
     Variance     March 31,
2017
     March 31,
2016
     Variance  

Money market investments

   $ 3,653,347      $ 2,890,217      $ 763,130     $ 3,297,350      $ 2,186,771      $ 1,110,579  

Investment and trading securities

     9,511,124        8,535,530        975,594       9,125,496        6,764,453        2,361,043  

Loans

     23,372,010        23,435,446        (63,436     23,352,589        22,985,578        367,011  

Earning assets

     36,536,481        34,861,193        1,675,288       35,775,435        31,936,802        3,838,633  

Total assets

     40,259,282        38,661,609        1,597,673       39,546,252        35,891,768        3,654,484  

Deposits

     32,212,579        30,496,224        1,716,355       31,339,873        27,337,586        4,002,287  

Borrowings

     1,993,886        2,055,477        (61,591     2,024,830        2,440,979        (416,149

Stockholders’ equity

     5,190,213        5,197,957        (7,744     5,285,204        5,191,395        93,809  

Liabilities from discontinued operations

     —          —          —         —          1,815        (1,815

 

Operating Highlights

   First Quarter  

(In thousands, except per share information)

   2017      2016      Variance  

Net interest income

   $ 362,098      $ 352,412      $ 9,686  

Provision for loan losses - non-covered loans

     42,057        47,940        (5,883

Provision for loan losses - covered loans

     (1,359      (3,105      1,746  

Non-interest income

     115,869        111,630        4,239  

Operating expenses

     311,318        301,943        9,375  
  

 

 

    

 

 

    

 

 

 

Income from continuing operations before income tax

     125,951        117,264        8,687  

Income tax expense

     33,006        32,265        741  
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

     92,945      $ 84,999      $ 7,946  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 92,945      $ 84,999      $ 7,946  
  

 

 

    

 

 

    

 

 

 

Net income applicable to common stock

   $ 92,014      $ 84,068      $ 7,946  
  

 

 

    

 

 

    

 

 

 

Net income per common share - Basic

   $ 0.89      $ 0.81      $ 0.08  
  

 

 

    

 

 

    

 

 

 

Net income per common share - Diluted

   $ 0.89      $ 0.81      $ 0.08  
  

 

 

    

 

 

    

 

 

 

Dividends declared per common share - Basic

   $ 0.25      $ 0.15      $ 0.10  
  

 

 

    

 

 

    

 

 

 

 

     First Quarter  

Selected Statistical Information

   2017     2016  

Common Stock Data

    

Market price

    

High

   $ 45.75     $ 28.80  

Low

     38.46       22.62  

End

     40.73       28.61  

Book value per common share at period end

     50.41       50.16  
  

 

 

   

 

 

 

Profitability Ratios

    

Return on assets

     0.95     0.95

Return on common equity

     7.13       6.58  

Net interest spread

     3.86       4.20  

Net interest spread (taxable equivalent) (non-GAAP)

     4.15       4.47  

Net interest margin

     4.08       4.43  

Net interest margin (taxable equivalent) (non-GAAP)

     4.37       4.70  
  

 

 

   

 

 

 

Capitalization Ratios

    

Average equity to average assets

     13.36     14.46

Common equity Tier 1 capital

     16.34       15.79  

Tier I capital

     16.34       15.79  

Total capital

     19.34       18.78  

Tier 1 leverage

     10.61       11.46  
  

 

 

   

 

 

 

 

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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.

For the quarters ended March 31, 2017 and 2016, there were no adjustments identified by management to arrive at an Adjusted net income presentation.

Net interest income on a taxable equivalent basis

Net interest income, on a taxable equivalent basis, is presented with its different components in Table 2 for the quarter ended March 31, 2017 as compared with the same period in 2016, 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 municipalities 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 quarter ended March 31, 2017

 

    For the quarter ended March 31, 2017, the Corporation recorded net income of $ 92.9 million, compared to a net income of $ 85.0 million for the same quarter of the previous year, an increase of 9.3%.

 

    Net interest income was $362.1 million, an increase of $9.7 million when compared to the $352.4 million for the same quarter of 2016. Net interest income, on a taxable equivalent basis, increased by $13.7 million, driven by higher volume of money market and investment securities due to the increase in funds from deposits. Net interest margin was 4.08%, compared to 4.43% for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the first quarter of 2017 was 4.37 %, compared to 4.70% in the same quarter of 2016, due mainly to changes in the asset mix. Refer to the net interest income section of this MD&A for additional information.

 

    Non-interest income increased by $4.2 million mainly due to higher income from equity method investments, higher other service fees and a favorable variance in adjustment to indemnity reserves, offset by an unfavorable variance in the FDIC loss share expense.

 

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    The total provision for loan losses decreased by $4.1 million, reflecting a lower provision in Puerto Rico, partially offset by a higher provision in the U.S., as a result of higher impairments for the taxi medallion portfolio.

 

    Total non-performing assets, including covered assets, were $795 million at March 31, 2017, an increase of $21 million, or 2.6% from December 31, 2016. The increase was mainly due to higher commercial non-performing loans of $16 million, driven by a single $24.5 million relationship at the BPPR segment. At March 31, 2017, NPLs to total loans held-in-portfolio remained at 2.5 % flat from December 31, 2016. Refer to the Credit Risk section of this MD&A for an explanation of the main factors impacting the provision for loan losses and a detailed analysis of net charge-offs, non-performing assets, allowance for loan losses and selected loan losses statistics.

 

    Operating expenses increased by $9.4 million, mainly due to a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software costs for a project which was discontinued by the Corporation.

 

    Total assets at March 31, 2017 amounted to $40.3 billion, compared to $38.7 billion, at December 31, 2016. The increase of $1.6 billion was mainly at BPPR due to higher investment securities available-for-sale due to purchases of U.S. Treasury securities and mortgage-backed agency pools in anticipation of upcoming maturities, and an increase in money market investments due to higher liquidity driven by an increase in deposits balances.

 

    Total deposits increased by $1.7 billion, mainly due to an increase in retail demand deposits and deposits from the Puerto Rico public sector, and increases in savings and time deposits at BPPR and BPNA.

 

    Stockholders’ equity totaled $5.2 billion at March 31, 2017, and at December 31, 2016, reflecting a slight decrease of $7.7 million, from December 31, 2016, resulting from declared dividends of $25.6 million on common stock of $0.25 per share and $0.9 million in dividends on preferred stock and the impact of the $75 million share repurchase completed during the quarter, partially offset by the Corporation’s net income of $93 million. Refer to the Financial Condition Analysis section of this MD&A for additional information.

 

    Capital ratios continued to be strong. As of March 31, 2017, the Corporation’s Common equity Tier 1 Capital ratio was 16.34 % while the Total Capital ratio was 19.34%. Refer to Table 13 for capital ratios.

As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.

The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.

The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation’s business contained in Item 1 of the Corporation’s 2016 Form 10-K, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the

 

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Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. 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.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2016 Form 10-K. Also, refer to Note 2 to the Consolidated Financial Statements included in the 2016 Form 10-K for a summary of the Corporation’s significant accounting policies.

OPERATING RESULTS ANALYSIS

NET INTEREST INCOME

Net interest income was $362.1 million for the first quarter of 2017, an increase of $9.7 million when compared to $352.4 million for the same quarter of 2016. Taxable equivalent net interest income was $387.6 million for the first quarter of 2017, an increase of $13.7 million when compared to $373.9 million for the same quarter of 2016. Net interest margin for the first quarter of 2017 was 4.08%, a decrease of 35 basis points when compared to 4.43% for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the first quarter of 2017 was 4.37%, a decrease of 33 basis points when compared to 4.70% for the same quarter of 2016. The decrease in net interest margin is mostly related to the change in asset mix, due to a higher proportion of money market, investment and trading securities to total earning assets (35% this quarter versus 28% in the first quarter of 2016) as compared to the proportion of loans to earning assets which carry a higher yield. The main reasons for the increase in net interest income are described below:

 

    Higher interest income from investment securities due to higher volumes particularly on the U.S. Treasuries and mortgage-backed securities portfolios related to recent purchases. Also, an increase in volume and yield of money market investments due to the increase in funds available, related mostly to government deposits, and the two 25 basis points increase in rates by the U.S. Federal Reserve in December, 2016 and March, 2017, respectively;

 

    Higher income from the commercial and construction loan portfolios mainly due to higher volume of loans in the U.S. and improved yields in Puerto Rico mostly associated to the impact on the variable rate portfolio of the above mentioned rise in market rates; and

 

    Higher interest income from the leasing portfolio driven by a higher volume of loans from the auto and equipment leasing and financing subsidiary in Puerto Rico.

These positive variances were partially offset by:

 

    Lower interest income from consumer loans driven by a lower volume due to the run-off of high yielding loan portfolios;

 

    Decrease in interest income from mortgage loans related to a lower volume due in part to reduced origination activity; partially offset by higher yields;

 

    Lower interest income from loans acquired in the Westernbank FDIC-assisted transaction (“WB loans”) related to the normal portfolio run-off, as well as lower yields resulting from the quarterly recasting process; and

 

    Higher interest expense on deposits mainly due to higher volumes in most categories, predominantly the increase in deposits from the Puerto Rico government and higher volumes in the U.S. to fund loan growth. These increases were partially offset by a lower average volume of brokered certificates of deposits.

Interest income for the quarter ended March 31, 2017, included the amortization of deferred loans fees, prepayment penalties, late fees and the amortization of premium/ discounts amounting to $6.4 million, compared with $4.8 million for the same period in 2016.

 

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Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations (Non-GAAP)

Quarters ended March 31,

 

                                              Variance  
Average Volume     Average Yields /Costs         Interest     Attributable to  

2017

    2016     Variance     2017     2016     Variance         2017     2016     Variance     Rate     Volume  
($ in millions)                                 (In thousands)  
$ 3,297   $ 2,187     $ 1,110       0.81     0.53     0.28  

Money market investments

  $ 6,573     $ 2,863     $ 3,710     $ 2,041     $ 1,669  
  9,020       6,641       2,379       2.70       2.90       (0.20  

Investment securities

    60,819       48,117       12,702       (2,619     15,321  
  106       123       (17     7.16       7.08       0.08    

Trading securities

    1,872       2,172       (300     6       (306

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Total money market,

         
           

investment and trading

         
  12,423       8,951       3,472       2.24       2.38       (0.14  

securities

    69,264       53,152       16,112       (572     16,684  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Loans:

         
  9,704       8,957       747       5.15       5.12       0.03    

Commercial

    123,250       114,091       9,159       (333     9,492  
  821       704       117       5.41       5.30       0.11    

Construction

    10,943       9,288       1,655       106       1,549  
  708       630       78       6.54       6.78       (0.24  

Leasing

    11,586       10,675       911       (374     1,285  
  6,606       6,830       (224     5.60       5.50       0.10    

Mortgage

    92,444       93,895       (1,451     1,669       (3,120
  3,704       3,807       (103     10.49       10.51       (0.02  

Consumer

    95,846       99,520       (3,674     (1,556     (2,118

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  21,543       20,928       615       6.26       6.28       (0.02  

Sub-total loans

    334,069       327,469       6,600       (488     7,088  
  1,810       2,058       (248     8.53       8.76       (0.23  

WB loans

    38,182       44,904       (6,722     (1,217     (5,505

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  23,353       22,986       367       6.44       6.50       (0.06  

Total loans

    372,251       372,373       (122     (1,705     1,583  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 35,776     $ 31,937     $ 3,839       4.98     5.35     (0.37 )%   

Total earning assets

  $ 441,515     $ 425,525     $ 15,990     $ (2,277   $ 18,267  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Interest bearing deposits:

         
$ 8,516     $ 5,712     $ 2,804       0.41     0.39     0.02  

NOW and money market [1]

  $ 8,514     $ 5,607     $ 2,907     $ 760     $ 2,147  
  8,041       7,275       766       0.25       0.23       0.02    

Savings

    4,897       4,248       649       190       459  
  7,756       8,058       (302     1.06       1.00       0.06    

Time deposits

    20,346       20,019       327       1,009       (682

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  24,313       21,045       3,268       0.56       0.57       (0.01  

Total deposits

    33,757       29,874       3,883       1,959       1,924  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  456       812       (356     0.97       0.92       0.05    

Short-term borrowings

    1,095       1,861       (766     8       (774
           

Other medium and

         
  1,569       1,629       (60     4.88       4.90       (0.02  

long-term debt

    19,045       19,873       (828     (279     (549

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Total interest bearing

         
  26,338       23,486       2,852       0.83       0.88       (0.05  

liabilities

    53,897       51,608       2,289       1,688       601  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Non-interest bearing

         
  7,027       6,293       734          

demand deposits

         
  2,411       2,158       253          

Other sources of funds

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

             
$ 35,776     $ 31,937     $ 3,839       0.61     0.65     (0.04 )%   

Total source of funds

    53,897       51,608       2,289       1,688       601  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

             
           

Net interest margin/

         
        4.37     4.70     (0.33 )%   

income on a taxable equivalent basis

    387,618       373,917       13,701     $ (3,965   $ 17,666  
     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        4.15     4.47     (0.32 )%   

Net interest spread

         
     

 

 

   

 

 

   

 

 

             
           

Taxable equivalent adjustment

    25,520       21,505       4,015      
             

 

 

   

 

 

   

 

 

     
           

Net interest margin/ income

         
        4.08     4.43     (0.35 )%   

non-taxable equivalent basis

  $ 362,098     $ 352,412     $ 9,686      
     

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

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.

 

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Provision for Loan Losses

The Corporation’s total provision for loan losses was $40.7 million for the quarter ended March 31, 2017, compared to $44.8 million for the quarter ended March 31, 2016, a decrease of $4.1 million.

The provision for loan losses for the non-covered loan portfolio totaled $42.1 million, compared to $47.9 million for the same quarter in 2016, a decrease of $5.8 million, mostly related to a lower provision in the BPPR segment. Non-covered total net charge-offs, decreased by $6.8 million when compared with the same quarter in 2016.

The provision for loan losses for the non-covered loan portfolio at the BPPR segment totaled $31.5 million, compared to $43.9 million in the same quarter in 2016. The decrease in provision is mainly due to lower net charge-offs by $7.7 million, mostly in the consumer portfolio.

The provision for loan losses for the BPNA segment amounted to $10.6 million, compared to $4.1 million for the same quarter in 2016. The provision increase was mainly due to higher impairments for the taxi medallion.

For the first quarter of 2017, the covered loan portfolio reflected a reversal of provision of $1.4 million, compared to a provision release of $3.1 million for the same quarter in 2016.

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.

Non-Interest Income

Non-interest income was $115.9 million for the first quarter of 2017, an increase of $4.2 million, when compared with the same quarter of the previous year, driven primarily by the following:

 

    Higher other service fees by $2.8 million mainly in credit card fees as a result of higher interchange income resulting from higher transaction volumes and higher trust fees related to trustee, consulting and retirement plan services;

 

    Lower provision for indemnity reserves by $2.1 million mostly due to lower reserves for loans sold with credit recourse at BPPR; and

 

    Higher other operating income by $3.6 million mainly due to higher aggregated net earnings from investments under the equity method by $3.8 million.

These increases were partially offset by:

 

    Unfavorable variance in FDIC loss share expense of $5.1 million as a result of lower mirror accounting on reimbursable expenses, an unfavorable change in the fair value of the true-up payment obligation, due mainly to changes in the discount rate, and a $5.5 million unfavorable adjustment related to the settlement of claims with the FDIC, partially offset by lower amortization of the indemnification asset, a favorable variance in the mirror accounting on credit impairment losses, and a favorable variance in the mirror accounting on recoveries to be shared with the FDIC on covered assets. Refer to Table 3 for a breakdown of FDIC loss share expense by major categories.

 

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Table 3 - Financial Information - Westernbank FDIC-Assisted Transaction

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Interest income on WB loans

   $ 38,182      $ 44,904  
  

 

 

    

 

 

 

FDIC loss share expense:

     

Amortization of loss share indemnification asset

     (776      (4,042

80% mirror accounting on credit impairment losses (reversal)[1]

     148        (2,093

80% mirror accounting on reimbursable expenses

     921        3,950  

80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC

     4,833        (645

Change in true-up payment obligation

     (7,385      (443

Other

     (5,998      127  
  

 

 

    

 

 

 

Total FDIC loss share expense

     (8,257      (3,146
  

 

 

    

 

 

 

Total (expenses) revenues

     29,925        41,758  
  

 

 

    

 

 

 

Provision (reversal) for loan losses- WB loans

     (499      (356
  

 

 

    

 

 

 

Total (expenses) revenues less provision (reversal) for loan losses

   $ 30,424      $ 42,114  
  

 

 

    

 

 

 

 

[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

 

     Quarters ended March 31,  

(In millions)

   2017      2016  

Loans

   $ 1,810      $ 2,058  

FDIC loss-share asset

     44        233  

Operating Expenses

Operating expenses for the quarter ended March 31, 2017 increased by $ 9.4 million when compared with the same quarter of 2016, driven primarily by:

 

    Higher equipment expense by $1.4 million due to higher software maintenance expense at BPNA;

 

    Higher other real estate owned expense by $3.7 million mainly due to higher loss on sale of mortgage properties at BPPR; and

 

    Higher other operating expenses by $12.4 million as a result of a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software costs for a project that was discontinued by the Corporation and higher mortgage operational losses at BPPR related to mortgage servicing.

These increases were partially offset by:

 

    Lower personnel cost by $1.5 million mainly due to lower medical insurance expense; and

 

    Lower professional fees by $6.2 million due to legal fees related to the FDIC arbitration proceedings incurred during the first quarter of 2016, and lower expenses related to programming, processing and other technology services.

 

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Table 4 - Operating Expenses

 

     Quarters ended March 31,  

(In thousands)

   2017      2016      Variance  

Personnel costs:

        

Salaries

   $ 78,376      $ 77,298      $ 1,078  

Commissions, incentives and other bonuses

     20,079        20,769        (690

Pension, postretirement and medical insurance

     11,244        13,111        (1,867

Other personnel costs, including payroll taxes

     15,908        15,913        (5
  

 

 

    

 

 

    

 

 

 

Total personnel costs

     125,607        127,091        (1,484
  

 

 

    

 

 

    

 

 

 

Net occupancy expenses

     20,776        20,430        346  

Equipment expenses

     15,970        14,548        1,422  

Other taxes

     10,969        10,195        774  

Professional fees:

        

Collections, appraisals and other credit related fees

     3,823        4,500        (677

Programming, processing and other technology services

     48,091        49,864        (1,773

Legal fees, excluding collections

     3,296        6,254        (2,958

Other professional fees

     14,040        14,841        (801
  

 

 

    

 

 

    

 

 

 

Total professional fees

     69,250        75,459        (6,209
  

 

 

    

 

 

    

 

 

 

Communications

     5,949        6,320        (371

Business promotion

     11,576        11,110        466  

FDIC deposit insurance

     6,493        7,370        (877

Other real estate owned (OREO) expenses

     12,818        9,141        3,677  

Other operating expenses:

        

Credit and debit card processing, volume and interchange expenses

     5,532        5,722        (190

Operational losses

     7,536        2,661        4,875  

All other

     16,497        8,782        7,715  
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

     29,565        17,165        12,400  
  

 

 

    

 

 

    

 

 

 

Amortization of intangibles

     2,345        3,114        (769
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 311,318      $ 301,943      $ 9,375  
  

 

 

    

 

 

    

 

 

 

INCOME TAXES

For the quarter ended March 31, 2017, the Corporation recorded income tax expense of $33.0 million, compared to $32.3 million for the same quarter of the previous year. The increase in income tax expense was mainly due to higher income on the Puerto Rico operations, net of higher tax exempt interest income.

The effective income tax rate for the quarter ended March 31, 2017 was 26%, compared to 28% for the same quarter of the previous year. The effective tax rate is impacted by the composition and source of the taxable income.

Refer to Note 31 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.

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 33 to the Consolidated Financial Statements.

The Corporate group reported a net loss of $15.3 million for the quarter ended March 31, 2017, compared with a net loss of $20.6 million for the quarter ended March 31, 2016, mostly driven by higher earnings from investments under the equity method and lower personnel costs.

 

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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 $97.6 million for the quarter ended March 31, 2017, compared with a net income of $93.4 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

 

    Higher net interest income by $4.9 million mostly due to:

 

    Higher income from money market and investment securities by $11.5 million due to higher liquidity driven by higher volume in deposits balances, mainly from P.R. government deposits, and advanced purchases of upcoming investment maturities.

Partially offset by:

 

    Lower income from loans by $7.0 million mostly driven by lower interest income from WB loans due to normal portfolio run-off and loan resolutions and lower interest income from consumer loans due to the run-off of high yielding loan portfolios, partially offset by higher interest income from the leasing portfolio driven by a higher volume of loans from the auto and equipment leasing and financing company and higher interest income from the commercial loan portfolio due to higher yields mostly associated to the impact on the variable rate portfolio as a result of the rise in market rates.

The net interest margin was 4.46% for the quarter ended March 31, 2017, compared to 4.87% for the same period in 2016.

 

    Lower provision for loan losses by $10.7 million, mainly due to lower net charge-offs in the non-covered consumer loan portfolio.

 

    Higher non-interest income by $1.2 million mainly due to:

 

    Higher other service fees by $3.1 million principally due to higher credit card fees and higher trust fees;

 

    Higher mortgage banking activities by $0.8 million driven by a favorable variance in the valuation adjustment on mortgage servicing rights and lower losses on closed derivative positions, partially offset by lower gains from securitization transactions and lower mortgage servicing fees; and

 

    Lower provision for indemnity reserves by $2.1 million principally due to lower reserves for loans sold with credit recourse.

Partially offset by:

 

    Higher FDIC loss share expense by $5.1 million due to lower mirror accounting on reimbursable expenses, an unfavorable change in the fair value of the true-up payment obligation and a $5.5 million unfavorable adjustment related to the settlement of claims with the FDIC, partially offset by lower amortization of the indemnification asset, a favorable variance in the mirror accounting on credit impairment losses, and a favorable variance in the mirror accounting on recoveries to be shared with the FDIC on covered assets; and

 

    Operating expenses were higher by $10.4 million mainly due to:

 

    Higher OREO expenses by $3.6 million due to higher losses on sales of residential properties and higher holding costs on residential properties; and

 

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    Higher other operating expenses by $12.7 million mainly due to the impact of a write-down of $7.6 million recognized during the quarter related to capitalized software costs for a project which was discontinued by the Corporation and higher mortgage servicing operational losses by $5.3 million.

Partially offset by:

 

    Lower professional fees by $5.2 million driven by a decrease in legal fees related to the FDIC arbitration proceedings incurred during the first quarter of 2016 and lower programming, processing and other technology services.

 

    Higher income tax expense by $2.1 million due to higher taxable income.

Banco Popular North America

For the quarter ended March 31, 2017, the reportable segment of Banco Popular North America reported net income of $10.4 million, compared to net income of $11.9 million for the same quarter of the previous year. The factors that contributed to the variance in the financial results included the following:

 

    Higher net interest income by $4.9 million due to:

 

    Higher income from loans by $7.1 million, mostly driven by higher volumes of commercial and construction loan portfolios;

 

    Higher income from investment securities by $1.3 million mainly due to a higher volume of mortgage-backed securities.

Partially offset by:

 

    Higher deposits expense by $3.3 million due to higher volumes and costs, principally in money market and time deposits, to fund loan growth.

Net interest margin was 3.52% for the first quarter of 2017, compared to 3.70% for the same period of the previous year.

 

    The provision for loan losses for the BPNA segment amounted to $10.6 million, compared to $4.1 million for the same quarter in 2016, mostly driven by higher impairments for the taxi medallion loan portfolio.

 

    Non-interest income for first quarter of 2017 was $4.9 million, relatively flat when compared with the same period of the previous year.

 

    Operating expenses for the quarter totaled $43.8 million, an increase of $1.0 million, compared to the first quarter in 2016, mainly driven by an increase in personnel costs due to higher incentive compensation and higher equipment expenses, partially offset by lower FDIC deposit insurance due to a lower assessment rate by the FDIC and lower other operating expenses due to lower operational losses.

 

    Lower income taxes by $1.2 million.

 

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FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $40.3 billion at March 31, 2017 compared to $38.7 billion at December 31, 2016. Refer to the Consolidated Financial Statements included in this report.

Money market investments, trading and investment securities

Money market investments totaled $3.7 billion at March 31, 2017, compared to $2.9 billion at December 31, 2016. The increase was mainly at BPPR due to higher liquidity driven by an increase in deposits.

Trading account securities amounted to $51 million at March 31, 2017, compared to $60 million at December 31, 2016. Refer to the Market 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 $9.3 billion at March 31, 2017, compared with $8.3 billion at December 31, 2016. The increase of $1.0 billion was mainly at BPPR due to purchase of U.S. Treasury securities and mortgage-backed agency pools in anticipation of upcoming maturities.

Table 5 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis. Also, Notes 5 and 6 to the Consolidated Financial Statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

Table 5 - Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity

 

(In thousands)

   March 31, 2017      December 31, 2016  

U.S. Treasury securities

   $ 2,943,120      $ 2,136,620  

Obligations of U.S. Government sponsored entities

     712,282        711,850  

Obligations of Puerto Rico, States and political subdivisions

     115,162        118,798  

Collateralized mortgage obligations

     1,146,959        1,221,600  

Mortgage-backed securities

     4,363,056        4,105,332  

Equity securities

     1,859        2,122  

Others

     11,415        11,585  
  

 

 

    

 

 

 

Total investment securities AFS and HTM

   $ 9,293,853      $ 8,307,907  
  

 

 

    

 

 

 

Loans

Refer to Table 6 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented separately in Table 6. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential loans. As of March 31, 2017, the Corporation’s covered loans portfolio amounted to $552 million, comprised mainly of residential mortgage loans.

The Corporation’s total loan portfolio amounted to $23.4 billion at March 31, 2017, which remained flat when compared to December 31, 2016. Refer to Note 7 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

 

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Table 6 - Loans Ending Balances

 

(In thousands)

   March 31, 2017      December 31, 2016      Variance  

Loans not covered under FDIC loss sharing agreements:

        

Commercial

   $ 10,811,700      $ 10,798,507      $ 13,193  

Construction

     831,305        776,300        55,005  

Legacy[1]

     40,688        45,293        (4,605

Lease financing

     719,643        702,893        16,750  

Mortgage

     6,627,987        6,696,361        (68,374

Consumer

     3,703,398        3,754,393        (50,995
  

 

 

    

 

 

    

 

 

 

Total non-covered loans held-in-portfolio

     22,734,721        22,773,747        (39,026
  

 

 

    

 

 

    

 

 

 

Loans covered under FDIC loss sharing agreements:

        

Mortgage

     536,287        556,570        (20,283

Consumer

     15,693        16,308        (615
  

 

 

    

 

 

    

 

 

 

Total covered loans held-in-portfolio

     551,980        572,878        (20,898
  

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

     23,286,701        23,346,625        (59,924
  

 

 

    

 

 

    

 

 

 

Loans held-for-sale:

        

Mortgage

     85,309        88,821        (3,512
  

 

 

    

 

 

    

 

 

 

Total loans held-for-sale

     85,309        88,821        (3,512
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 23,372,010      $ 23,435,446      $ (63,436
  

 

 

    

 

 

    

 

 

 

 

[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.

Non-covered loans

The non-covered loans held-in-portfolio decreased by $39 million to $22.7 billion at March 31, 2017. The net decrease is mainly at BPPR by $185 million driven by lower balances of residential mortgage and commercial loans, partially offset by growth in the commercial portfolio at BPNA by $151 million.

The loans held-for-sale portfolio decreased by $4 million from December 31, 2016, mainly at BPPR due to lower originations of mortgage loans held-for-sale.

Covered loans

The covered loans portfolio amounted to $552 million at March 31, 2017, compared to $573 million at December 31, 2016. The decrease of $21 million is mostly from residential mortgage loans due to the normal portfolio run-off. Refer to Table 6 for a breakdown of the covered loans by major loan type categories.

Tables 7 and 8 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.

 

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Table 7 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30

 

     Quarters ended  
     March 31,  

(In thousands)

   2017      2016  

Beginning balance

   $ 1,738,329      $ 1,974,501  

Accretion

     36,892        43,533  

Collections / loan sales / charge-offs

     (86,321      (82,593
  

 

 

    

 

 

 

Ending balance[1]

   $ 1,688,900      $ 1,935,441  

Allowance for loan losses (ALLL)

     (66,544      (62,967
  

 

 

    

 

 

 

Ending balance, net of ALLL

   $ 1,622,356      $ 1,872,474  
  

 

 

    

 

 

 

 

[1]  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 $542 million as of March 31, 2017 (March 31, 2016 -$615 million).

Table 8 - Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Beginning balance

   $ 1,010,087      $ 1,112,458  

Accretion[1]

     (36,892      (43,533

Change in expected cash flows

     8,011        59,883  
  

 

 

    

 

 

 

Ending balance

   $ 981,206      $ 1,128,808  
  

 

 

    

 

 

 

 

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

FDIC loss share asset

Table 9 sets forth the activity in the FDIC loss share asset for the quarters ended March 31, 2017 and 2016.

Table 9 – Activity of Loss Share Asset

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Balance at beginning of period

   $ 69,334      $ 310,221  

Amortization of loss-share indemnification asset

     (776      (4,042

Credit impairment losses (reversal) to be covered under loss-sharing agreements

     148        (2,093

Reimbursable expenses

     921        3,950  

Net payments from FDIC under loss-sharing agreements

     —          (88,588

Other adjustments attributable to FDIC loss-sharing agreements

     (5,550      —    
  

 

 

    

 

 

 

Balance at end of period

   $ 64,077      $ 219,448  
  

 

 

    

 

 

 

Balance due to the FDIC for recoveries on covered assets [1]

     (5,284      (6,301
  

 

 

    

 

 

 

Balance at end of period

   $ 58,793      $ 213,147  
  

 

 

    

 

 

 

 

[1] Balance due to the FDIC for recoveries on covered assets for the quarter ended March 31, 2016 amounting to $6.3 million was included in other liablilities in the accompanying consolidated statement of condition.

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. Table 10 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount) for the periods presented.

 

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Table 10 - Activity in the Remaining FDIC Loss Share Asset Discount

 

     Quarters ended March 31,  

(In thousands)

   2017      2016  

Balance at beginning of period[1]

   $ 4,812      $ 26,100  

Amortization of negative discount[2]

     (776      (4,042

Impact of changes in (higher) lower projected losses

     (107      3,147  
  

 

 

    

 

 

 

Balance at end of period

   $ 3,929      $ 25,205  
  

 

 

    

 

 

 

 

[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 income / expense.

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.

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At March 31, 2017, OREO increased to $216 million from $213 million at December 31, 2016 mainly at BPPR on residential and commercial properties, partially offset by sales of BPPR and WB residential OREOs. Refer to Note 12 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 agreements.

Other assets

Refer to Note 13 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the consolidated statements of financial condition at March 31, 2017 and December 31, 2016. Other assets decreased by $34 million from December 31, 2016 to March 31, 2017, mainly driven by a decrease in servicing assets and the change in deferred and prepaid income taxes. These unfavorable variances were partially offset by an increase in guaranteed mortgage loan claims receivables.

Liabilities

The Corporation’s total liabilities were $35.1 billion at March 31, 2017 compared to $33.5 billion at December 31, 2016. Refer to the Corporation’s Consolidated Statements of Financial Condition included in this Form 10-Q.

Deposits and Borrowings

The composition of the Corporation’s financing sources to total assets at March 31, 2017 and December 31, 2016 is included in Table 11.

 

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Table 11 - Financing to Total Assets

 

     March 31,      December 31,      % increase (decrease)     % of total assets  

(In millions)

   2017      2016      from 2016 to 2017     2017     2016  

Non-interest bearing deposits

   $ 7,263      $ 6,980        4.1     18.0     18.0

Interest-bearing core deposits

     20,198        18,776        7.6       50.2       48.6  

Other interest-bearing deposits

     4,752        4,740        0.3       11.8       12.3  

Repurchase agreements

     435        480        (9.4     1.1       1.2  

Other short-term borrowings

     1        1        —         —         —    

Notes payable

     1,558        1,575        (1.1     3.9       4.1  

Other liabilities

     862        912        (5.5     2.1       2.4  

Stockholders’ equity

     5,190        5,198        (0.2     12.9       13.4  

Deposits

The Corporation’s deposits totaled $32.2 billion at March 31, 2017 compared to $30.5 billion at December 31, 2016. The deposits increase of $1.7 billion was mainly due to an increase in retail demand deposits and deposits from the Puerto Rico public sector at BPPR, and increases in savings and time deposits at BPPR and BPNA. Refer to Table 12 for a breakdown of the Corporation’s deposits at March 31, 2017 and December 31, 2016.

Table 12 - Deposits Ending Balances

 

(In thousands)

   March 31, 2017      December 31, 2016      Variance  

Demand deposits [1]

   $ 10,136,435      $ 9,053,897      $ 1,082,538  

Savings, NOW and money market deposits (non-brokered)

     13,939,838        13,327,298        612,540  

Savings, NOW and money market deposits (brokered)

     423,339        405,487        17,852  

Time deposits (non-brokered)

     7,508,726        7,486,717        22,009  

Time deposits (brokered CDs)

     204,241        222,825        (18,584
  

 

 

    

 

 

    

 

 

 

Total deposits

   $ 32,212,579      $ 30,496,224      $ 1,716,355  
  

 

 

    

 

 

    

 

 

 

 

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

Borrowings

The Corporation’s borrowings totaled $2.0 billion at March 31, 2017 compared to $2.1 billion at December 31, 2016. The favorable variance is mostly driven by a decrease in assets sold under agreements to repurchase and a decrease in balance due to advances with the FHLB. Refer to Note 16 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

Stockholders’ Equity

Stockholders’ equity remained flat at $5.2 billion at March 31, 2017. A slight decrease resulted from the declaration of dividends of $25.6 million on common stock of $0.25 per share and $0.9 million in dividends on preferred stock and the impact of the common stock repurchase plan of $75 million completed during the quarter, partially offset by the Corporation’s net income of $93 million for the quarter ended March 31, 2017. Refer to the consolidated statements of financial condition, comprehensive income and of changes in stockholders’ equity for information on the composition of stockholders’ equity.

 

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REGULATORY CAPITAL

The Corporation, BPPR and BPNA are subject to regulatory capital requirements established by the Federal Reserve Board. The current risk-based capital standards applicable to the Corporation, BPPR and BPNA (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of March 31, 2017, the Corporation’s, BPPR’s and BPNA’s capital ratios continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

The risk-based capital ratios presented in Table 13, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of March 31, 2017 and December 31, 2016, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

Table 13 - Capital Adequacy Data

 

(Dollars in thousands)

   March 31, 2017     December 31, 2016  

Common equity tier 1 capital:

    

Common stockholders equity - GAAP basis

   $ 5,140,053     $ 5,147,797  

AOCI related adjustments due to opt-out election

     280,095       280,330  

Goodwill, net of associated deferred tax liability (DTL)

     (551,991     (554,614

Intangible assets, net of associated DTLs

     (32,341     (25,662

Deferred tax assets and other deductions

     (776,102     (726,643
  

 

 

   

 

 

 

Common equity tier 1 capital

   $ 4,059,714     $ 4,121,208  
  

 

 

   

 

 

 

Additional tier 1 capital:

    

Preferred stock

     50,160       50,160  

Trust preferred securities subject to phase out of additional tier 1

     —         —    

Other additional tier 1 capital deductions

     (50,160     (50,160
  

 

 

   

 

 

 

Additional tier 1 capital

   $ —       $ —    
  

 

 

   

 

 

 

Tier 1 capital

   $ 4,059,714     $ 4,121,208  
  

 

 

   

 

 

 

Tier 2 capital:

    

Trust preferred securities subject to phase in as tier 2

     426,602       426,602  

Other inclusions (deductions), net

     318,592       321,405  
  

 

 

   

 

 

 

Tier 2 capital

   $ 745,194     $ 748,007  
  

 

 

   

 

 

 

Total risk-based capital

   $ 4,804,908     $ 4,869,215  
  

 

 

   

 

 

 

Minimum total capital requirement to be well capitalized

   $ 2,484,679     $ 2,500,133  
  

 

 

   

 

 

 

Excess total capital over minimum well capitalized

   $ 2,320,229     $ 2,369,082  
  

 

 

   

 

 

 

Total risk-weighted assets

   $ 24,846,788     $ 25,001,334  
  

 

 

   

 

 

 

Total assets for leverage ratio

   $ 38,255,329     $ 37,785,070  
  

 

 

   

 

 

 

Risk-based capital ratios:

    

Common equity tier 1 capital

     16.34     16.48

Tier 1 capital

     16.34       16.48  

Total capital

     19.34       19.48  

Tier 1 leverage

     10.61       10.91  

The Basel III capital rules provide that a depository institution will be deemed to be well capitalized if it maintains a leverage ratio of at least 5%, a common equity Tier 1 ratio of at least 6.5%, a Tier 1 capital ratio of at least 8% and a total risk-based ratio of at least 10%. Management has determined that as of March 31, 2017, the Corporation, BPPR and BPNA continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

 

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The decrease in the common equity tier I capital ratio, tier I capital ratio and total capital ratio on March 31, 2017 as compared to December 31, 2016 was mainly attributed to the common stock repurchase of $75 million and the transition period impact on deferred tax assets, partially offset by the three month period earnings and a reduction in risk-weighted assets driven by a decrease in loans meeting the high volatility commercial real estate loans criteria. The decrease in the leverage ratio was mainly attributed to the increase in average total assets. Refer to Table 1, Financial Condition Highlights, for information of average assets and to the Financial Condition Analysis section of this MD&A for a discussion of significant variances in assets.

Non-GAAP financial measures

The tangible common equity ratio, tangible assets 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 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.

Table 14 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of March 31, 2017, and December 31, 2016.

Table 14 - Reconciliation of Tangible Common Equity and Tangible Assets

 

(In thousands, except share or per share information)

   March 31, 2017     December 31, 2016  

Total stockholders’ equity

   $ 5,190,213     $ 5,197,957  

Less: Preferred stock

     (50,160     (50,160
  

 

 

   

 

 

 
   $ 5,140,053     $ 5,147,797  

Common shares outstanding at end of period

     101,956,740       103,790,932  

Common equity per share

   $ 50.41     $ 49.60  
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 5,190,213     $ 5,197,957  

Less: Preferred stock

     (50,160     (50,160

Less: Goodwill

     (627,294     (627,294

Less: Other intangibles

     (42,706     (45,050
  

 

 

   

 

 

 

Total tangible common equity

   $ 4,470,053     $ 4,475,453  
  

 

 

   

 

 

 

Total assets

   $ 40,259,282     $ 38,661,609  

Less: Goodwill

     (627,294     (627,294

Less: Other intangibles

     (42,706     (45,050
  

 

 

   

 

 

 

Total tangible assets

   $ 39,589,282     $ 37,989,265  
  

 

 

   

 

 

 

Tangible common equity to tangible assets

     11.29     11.78

Common shares outstanding at end of period

     101,956,740       103,790,932  

Tangible book value per common share

   $ 43.84     $ 43.12  
  

 

 

   

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk 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 20 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

 

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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 March 31, 2017, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions. Purchase obligations amounted to $201 million at March 31, 2017 of which approximately 61% mature in 2017, 21% in 2018, 13% in 2019 and 5% thereafter.

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 Statement 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.

Refer to Note 16 for a breakdown of long-term borrowings by maturity.

The Corporation 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 may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

Table 15 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2017.

Table 15 - 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

   $ 6,661      $ 1,068      $ 92      $ 87      $ 7,908  

Commercial letters of credit

     1        —          —          —          1  

Standby letters of credit

     23        6        —          —          29  

Commitments to originate or fund mortgage loans

     21        1        —          —          22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,706      $ 1,075      $ 92      $ 87      $ 7,960  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2017 and December 31, 2016, the Corporation maintained a reserve of approximately $9 million, for probable losses associated with unfunded loan commitments related to commercial and consumer lines of credit. The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the Corporation’s allowance for loan losses methodology. This reserve for unfunded loan commitments remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of financial condition.

 

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Refer to Note 21 to the Consolidated Financial Statements for additional information on credit commitments and contingencies.

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

 

    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

 

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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.

 

    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.

 

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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 5 and 6 for further information on the investment portfolio. Investment securities classified as available-for-sale amounted to $9.2 billion as of March 31, 2017. Other assets subject to market risk include loans held-for-sale, which amounted to $85 million, mortgage servicing rights (“MSRs”) which amounted to $194 million and securities classified as “trading”, which amounted to $51 million, as of March 31, 2017.

Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $161 million at March 31, 2017.

Management believes that market risk is currently not a material source of risk at the Corporation. A significant portion of the Corporation’s financial activities is concentrated in Puerto Rico, which has been going through a fiscal and economic crisis. 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.

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

 

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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 across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, 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 March 31, 2017 and December 31, 2016, assuming a static balance sheet and a one-year time horizon:

Table 16 - Net Interest Income Sensitivity (One Year Projection)

 

     March 31, 2017     December 31, 2016  

(Dollars in thousands)

   Amount Change      Percent Change     Amount Change      Percent Change  

+400 basis points

   $ 260,536        17.66   $ 236,945        16.52

+200 basis points

     134,380        9.11       121,181        8.45  

-200 basis points

     (66,188      (4.49     (35,314      (2.46
  

 

 

    

 

 

   

 

 

    

 

 

 

At March 31, 2017, the simulations showed that the Corporation maintains an asset-sensitive position. The increase in sensitivity in the +200 and +400 scenarios is mainly driven by a higher balance of money market investments that was due to growth in deposits. In March 2017, the Federal Reserve increased the range for the Federal Funds Target Rate, which led to an increase in the magnitude of the -200 basis points scenario. Mainly as a result of this change, and in part due to the higher levels of money market investments, the Corporation’s sensitivity to declining rates also increased.

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.

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.

 

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At March 31, 2017, the Corporation held trading securities with a fair value of $51 million, representing approximately 0.1% of the Corporation’s total assets, compared with $60 million and 0.2%, respectively, at December 31, 2016. As shown in Table 17, the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at March 31, 2017 were investment grade securities. As of March 31, 2017, the trading portfolio also included $1.5 million in Puerto Rico government obligations and shares of closed-end funds that invest primarily in Puerto Rico government obligations ($2.6 million as of December 31, 2016). Trading instruments 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 gain of $0.3 million for the quarter ended March 31, 2017, compared to a loss of $0.2 million for the quarter ended March 31, 2016. Table 17 provides the composition of the trading portfolio at March 31, 2017 and December 31, 2016.

Table 17 - Trading Portfolio

 

     March 31, 2017     December 31, 2016  

(Dollars in thousands)

   Amount      Weighted Average
Yield [1]
    Amount      Weighted Average
Yield [1]
 

Mortgage-backed securities

   $ 35,624        5.28   $ 42,746        4.85

Collateralized mortgage obligations

     1,061        5.34       1,321        5.27  

Puerto Rico government obligations

     189        1.77       1,164        5.51  

Interest-only strips

     583        12.31       602        12.35  

Other [2]

     13,528        2.79       13,972        3.03  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 50,985        4.69   $ 59,805        4.52
  

 

 

    

 

 

   

 

 

    

 

 

 

 

[1] Not on a taxable equivalent basis.    
[2] Includes related trading derivatives for the period ended December 31, 2016.

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 $0.3 million for the last week in March 2017. 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.

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.

The fair value of assets and liabilities may include market or credit related adjustments, where appropriate. During the quarter ended March 31, 2017, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $106 thousand recorded in the other operating income and interest expense captions of the Consolidated Statement of Operations, which consisted of a loss of $40 thousand resulting from the Corporation’s own credit standing adjustment and a loss of $66 thousand from the assessment of the counterparties’ credit risk.

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.

 

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Refer to Note 24 to the Consolidated Financial Statements for information on the Corporation’s fair value measurement required by the applicable accounting standard. At March 31, 2017, approximately $9.3 billion, or 98%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, including 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 $14 million at March 31, 2017, of which $6 million were Level 3 assets and $8 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from 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.

Refer to Note 34 to the Consolidated Financial Statements in the 2016 Form 10-K for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value. Also, refer to the Critical Accounting Policies / Estimates in the 2016 Form 10-K for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

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, 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 quarter ended March 31, 2017, 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. In addition, during the quarter ended March 31, 2017, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers for its trading account securities and investment securities available-for-sale.

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 fair value hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures with alternate pricing sources when available and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. 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.

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.

 

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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.

On January 23, 2017, the Corporation’s Board of Directors approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. During the quarter ended March 31, 2017, the Corporation declared dividends on its common stock of $25.6 million and completed a $75 million privately negotiated accelerated share repurchase transaction. Refer to additional information on Note 18 – Stockholder’s equity.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 80% of the Corporation’s total assets at March 31, 2017 and 79% at December 31, 2016. The ratio of total ending loans to deposits was 73% at March 31, 2017, compared to 77% at December 31, 2016. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At March 31, 2017, these borrowings consisted primarily of $435 million in assets sold under agreement to repurchase, $656 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 16 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 16 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.

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 “FRB”), 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 quarter ended March 31, 2017, BPPR declared cash dividends of $123 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 34 to the Consolidated Financial Statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the FRB and FHLB, in addition to liquid unpledged securities. The Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits.

 

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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 12 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 $27.5 billion, or 85% of total deposits, at March 31, 2017, compared with $25.8 billion, or 84% of total deposits, at December 31, 2016. Core deposits financed 75% of the Corporation’s earning assets at March 31, 2017, compared with 76% at December 31, 2016.

Certificates of deposit with denominations of $100,000 and over at March 31, 2017 totaled $4.2 billion, or 13% of total deposits (December 31, 2016 - $4.1 billion, or 14% of total deposits). Their distribution by maturity at March 31, 2017 is presented in the table that follows:

Table 18 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over

 

(In thousands)

      

3 months or less

   $ 1,581,162  

3 to 6 months

     389,835  

6 to 12 months

     505,521  

Over 12 months

     1,683,615  
  

 

 

 

Total

   $ 4,160,133  
  

 

 

 

At March 31, 2017 and December 31, 2016 approximately 2% of the Corporation’s assets were financed by brokered deposits. The Corporation had $0.6 billion in brokered deposits at March 31, 2017 and December 31, 2016. 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 March 31, 2017 and December 31, 2016, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.7 billion and $3.8 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $656 million at March 31, 2017 and $673 million at December 31, 2016. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At March 31, 2017 the credit facilities authorized with the FHLB were collateralized by $4.8 billion in loans held-in-portfolio, compared with $4.9 billion at December 31, 2016. Refer to Note 16 to the Consolidated Financial Statements for additional information on the terms of FHLB advances outstanding.

At March 31, 2017 and December 31, 2016, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.3 billion and $1.2 billion, respectively, which remained unused as of both dates. The amount available under this borrowing facility is dependent upon the balance of performing loans, securities pledged as collateral and the haircuts assigned to such collateral. At March 31, 2017 and December 31, 2016, this credit facility with the Fed was collateralized by $2.3 billion, in loans held-in-portfolio.

 

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At March 31, 2017, 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 quarter ended March 31, 2017, PIHC received $123.0 million in dividends from BPPR and $1.2 million in dividends from EVERTEC’s parent company. PIHC also received $0.5 million in distributions from its investment in PRB Investors LP, an equity method investment, and $6.0 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 quarter ended March 31, 2017, the Corporation declared quarterly dividends on its outstanding common stock of $0.25 per share, for a total of $25.6 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $0.9 million for the quarter ended March 31, 2017.

The BHC’s have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries, however, the 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 34 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 $885 million at March 31, 2017, compared with $884 million at December 31, 2016. The repayment of the BHC’s obligations represents a potential cash need which is expected to be met with a combination of internal liquidity resources stemming mainly from future dividend receipts and new borrowings.

The contractual maturities of the BHC’s notes payable at March 31, 2017 are presented in Table 19.

 

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Table 19 - Distribution of BHC’s Notes Payable by Contractual Maturity

 

Year

   (In thousands)  

2017

   $ —    

2018

     —    

2019

     445,309  

2020

     —    

2021

     —    

Later years

     439,330  
  

 

 

 

Total

   $ 884,639  
  

 

 

 

As indicated previously, the BHC did not issue new registered debt in the capital markets during the quarter ended March 31, 2017.

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. 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 $3.9 billion at March 31, 2017 and $3.8 billion at March 31, 2016. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.

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.

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 FRB.

The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit

 

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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 March 31, 2017 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $182 thousand at March 31, 2017, with the Corporation providing collateral totaling $2 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 20 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 $58 million at March 31, 2017. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results.

Credit Risk

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 33 to the Consolidated Financial Statements.

Commonwealth of Puerto Rico

A significant portion of our financial activities and credit exposure is concentrated in the Commonwealth of Puerto Rico (the “Commonwealth” or “Puerto Rico”), which 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. Further, the Commonwealth and one of its public instrumentalities, the Puerto Rico Sales Tax Financing Corporation (“COFINA”), are currently in the process of restructuring their outstanding obligations in bankruptcy-like proceedings pursuant to Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”).

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 through the deferment of 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 the Commonwealth’s recent inability to access the capital markets, resulted in the government becoming unable to pay scheduled debt payments while continuing to provide government services.

 

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In response to this crisis, in June 2016 the U.S. Federal Government enacted PROMESA, discussed below.

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 every year between fiscal year 2007 and fiscal year 2016 (inclusive), with the exception of growth of 0.5% in fiscal year 2012 (likely as a result of the large amount of governmental stimulus and deficit spending in that fiscal year). According to Puerto Rico Planning Board estimates released in March 2017, gross national product is projected to further contract by 1.7% and 1.5% during fiscal years 2017 and 2018, respectively. The latest Economic Activity Index issued by the Puerto Rico Fiscal Agency and Financial Advisory Authority, 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. Measures taken by the previous administration to tackle the government’s structural budgetary imbalance included (a) reforming the Commonwealth’s retirement systems, (b) enacting Act No. 66-2014, as amended (“Act 66”), a fiscal emergency law that, among other things, froze formula appropriations, salaries and benefits under collective bargaining agreements, (c) implementing certain extraordinary 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, (d) requiring the two largest government retirement systems to pre-fund the payment of retirement benefits to participants, (e) delaying the payment of third-party payables, income tax refunds and amounts due to public corporations, and (f) enacting 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).

The Administration of Governor Ricardo Rosselló Nevares, sworn in January 2017, has also implemented various measures to address the Commonwealth’s fiscal crisis and liquidity problems, including enacting legislation to (a) extend until fiscal year 2021 certain of the provisions of Act 66, (b) extend for 10 years the temporary excise tax imposed by Act No. 154-2010, (c) reduce government expenses (including by reducing payroll related-expenses, such as employee benefits), (d) increase government revenues (including by increasing fines and cigarette excise taxes), and (e) authorize the Commonwealth’s central government to use funds from public corporation to cover its liquidity and budgetary needs (including, under certain circumstances, COFINA’s securitized sales-and-use tax revenue).

Pursuant to Executive Orders issued under the Moratorium Act, the following entities have not made payments 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. As of the date hereof, the Governor has not taken action under the Moratorium Act with respect to COFINA, which continues to make debt service payments when due. However, as mentioned above, the Legislative Assembly recently enacted legislation that allows the Commonwealth to use COFINA’s sales tax under certain circumstances and the Oversight Board filed a petition to restructure COFINA’s obligations under Title III of PROMESA on May 5, 2017.

 

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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 (which was extended for an additional three-month by an 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 in upcoming months.

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 (which expired on May 1, 2017) 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.

The Oversight Board has designated 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. 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 expired on May 1, 2017. The automatic stay imposed by PROMESA applied 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.

Fiscal Plans

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.

At the request of the Oversight Board, on October 14, 2016, the previous administration submitted a fiscal plan for consideration by the Oversight Board (the “October Fiscal Plan”). 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. On February 28, 2017, the Rosselló administration submitted its draft fiscal plan to the Oversight Board. The Rosselló administration submitted a revised

 

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version of the Commonwealth’s fiscal plan to the Oversight Board on March 13, 2017, which the Oversight Board certified on such date, after introducing certain amendments. The Commonwealth’s fiscal plan covers, in addition to the Commonwealth itself, various public instrumentalities with outstanding debts payable from taxes, fees or other government revenues (including COFINA).

The Commonwealth’s fiscal plan estimates that, absent the revenue enhancing and expense reduction measures set forth therein and assuming the payment of debt service as contracted, the Commonwealth’s 10-year budget gap would reach approximately $66.9 billion. Further, the fiscal plan projects that, assuming the successful implementation of all measures set forth therein, the Commonwealth and the entities covered by the Commonwealth’s fiscal plan will only have $7.8 billion available for the payment of debt service during said 10-year period (compared to $35 billion of contractual debt service) and thus recognizes the need for debt restructuring by the Commonwealth and the instrumentalities covered by said fiscal plan (including COFINA).

The Commonwealth’s fiscal plan does not contemplate a restructuring of the debt of Puerto Rico’s municipalities. The Commonwealth’s fiscal plan contemplates, however, as part of its expense reduction measures, the gradual elimination of budgetary subsidies provided to municipalities. Those subsidies constitute a material portion of the operating revenues of certain municipalities. The Commonwealth’s fiscal plan is publicly available in the Oversight Board’s website.

Pursuant to PROMESA, the Oversight Board has also requested and approved fiscal plans for (i) GDB, (ii) HTA, (iii) the Puerto Rico Electric Power Authority (“PREPA”) and (iv) the Puerto Rico Aqueduct and Sewer Authority. All such fiscal plans reflect that the applicable government entity is unable to pay its financial obligations in full, thus recognizing the need for debt relief. The Oversight Board has also requested fiscal plans from certain other public corporations and instrumentalities, which are subject to ongoing review and have not been approved by the Oversight Board as of the date hereof.

PREPA’s fiscal plan assumes changes to the treatment of the municipal contribution in lieu of taxes, which could result in increased electricity expenses for municipalities. GDB’s fiscal plan contemplates the wind-down of GDB’s operations and the distribution of the cash flows of GDB’s loan portfolio among its creditors (including its depositors), although it does not resolve the mechanism by which such distribution would be made. It recognizes that deposits of municipalities held at GDB are an important source of funds for their normal operations, and that GDB’s inability to gradually disburse said deposits could affect the ability of municipalities to cover essential services.

Title III Proceedings

On May 3, 2017, the Oversight Board, on behalf of the Commonwealth, filed a petition in the U.S. District Court for the District of Puerto Rico to restructure the Commonwealth’s liabilities under Title III of PROMESA. On May 5, 2017, the Oversight Board filed an analogous petition with respect to COFINA pursuant to Title III of PROMESA. As of the date of this report, a plan of adjustment for the Commonwealth’s or COFINA’s debts has not been filed. Based on the projection of funds available for debt service under the Commonwealth’s fiscal plan, however, the restructuring is expected to result in significant discounts on creditor recoveries.

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 March 31, 2017, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $520 million, of which approximately $516 million is outstanding ($584 million and $529 million, respectively, at December 31, 2016). 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, $451 million consists of loans and $65 million are securities ($459 million and $70 million, respectively, at December 31, 2016). Of the amount outstanding, $15 million represents senior obligations of COFINA, which has been designated as a covered entity under PROMESA and the Oversight Board has initiated Title III proceedings. Obligations from various municipalities in Puerto Rico constitute, however, the bulk of our direct exposure to Puerto Rico government obligations ($17 million at December 31, 2016). The remaining $501 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 pledged other revenues ($512 million at December 31, 2016). 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, refer to Note 21.

 

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In addition, at March 31, 2017, the Corporation had $400 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 ($406 million at December 31, 2016). These included $320 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, 2016 - $326 million). These mortgage loans are secured by the underlying properties and the “HFA” guarantee serves to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $43 million in Puerto Rico housing bonds which are backed-up by second mortgage residential loans, $7 million in pass-through securities that have been economically defeased and refunded and for which collateral including U.S. agencies and Treasury obligations has been escrowed, and $30 million of commercial real estate notes issued by government entities, but payable from rent paid by third parties ($43 million, $6 million and $31 million at December 31, 2016, respectively).

United States Virgin Islands

The Corporation has operations in the United States Virgin Islands (the “USVI”) and has credit exposure to USVI government entities.

The USVI is experiencing a number of fiscal and economic challenges that could adversely affect the ability of its public corporations and instrumentalities to service their outstanding debt obligations. PROMESA does not apply to the USVI and, as such, there is currently no federal legislation permitting the restructuring of the debts of the USVI and its public corporations and instrumentalities.

To the extent that the fiscal condition of the USVI continues to deteriorate, the U.S. Congress or the Government of the USVI may enact legislation allowing for the restructuring of the financial obligations of USVI government entities or imposing a stay on creditor remedies, including by making PROMESA applicable to the USVI.

At March 31, 2017, the Corporation’s direct exposure to USVI instrumentalities and public corporations amounted to approximately $79 million, of which approximately $65 million is outstanding. Of the amount outstanding, approximately (i) $38 million represents loans to the West Indian Company LTD, a government-owned company that owns and operates a cruise ship pier and shopping mall complex in St. Thomas, (ii) $14 million represents loans to the Virgin Islands Water and Power Authority, a public corporation of the USVI that operates USVI’s water production and electric generation plants, and (iii) $13 million represents loans to the Virgin Islands Public Finance Authority, a public corporation of the USVI created for the purpose of raising capital for public projects.

British Virgin Islands

The Corporation has operations in the British Virgin Islands (the “BVI”) and has credit exposure to BVI government entities. The fiscal situation of the BVI government is currently stable. At March 31, 2017, the Corporation’s direct exposure to BVI instrumentalities and public corporations amounted to approximately $36 million, all of which is currently outstanding. Of the amount outstanding, approximately (i) $29 million represents a loan to the BVI government and (ii) $7 million represents a loan to the British Virgin Islands Electricity Corporation, a statutory corporation of the BVI in charge of the generation, supply and distribution of electricity in the BVI.

U.S. Government

As further detailed in Notes 5 and 6 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, $850 million of residential mortgages and $93 million commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2017.

 

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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 20.

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 March 31, 2017.

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.

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, increased by $23 million when compared with December 31, 2016, mostly related to higher commercial NPLs of $16 million due to the addition of a single $25 million relationship.

At March 31, 2017, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $468 million in the Puerto Rico operations and $23 million in the U.S. operations. These figures compare to $467 million in the Puerto Rico operations and $21 million in the U.S. operations at December 31, 2016. In addition to the non-performing loans included in Table 20 at March 31, 2017 and 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.

 

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Table 20 - Non-Performing Assets

 

    March 31, 2017     December 31, 2016  

(Dollars in thousands)

  BPPR     BPNA     Popular,
Inc.
    As a % of
loans HIP by
category [4]
    BPPR     BPNA     Popular,
Inc.
    As a % of
loans HIP by
category [4]
 

Commercial

  $ 175,477     $ 3,764     $ 179,241       1.7   $ 159,655     $ 3,693     $ 163,348       1.5

Legacy[1]

    —         3,335       3,335       8.2       —         3,337       3,337       7.4  

Leasing

    2,444       —         2,444       0.3       3,062       —         3,062       0.4  

Mortgage

    319,450       11,889       331,339       5.0       318,194       11,713       329,907       4.9  

Consumer

    51,014       8,240       59,254       1.6       51,597       6,664       58,261       1.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans held-in- portfolio, excluding covered loans

    548,385       27,228       575,613       2.5     532,508       25,407       557,915       2.5

Non-performing loans held-for-sale [2]

    —         —         —           —         —         —      

Other real estate owned (“OREO”), excluding covered OREO

    183,582       2,254       185,836         177,412       3,033       180,445    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total non-performing assets, excluding covered assets

  $ 731,967     $ 29,482     $ 761,449       $ 709,920     $ 28,440     $ 738,360    

Covered loans and OREO [3]

    33,866       —         33,866         36,044       —         36,044    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total non-performing assets

  $ 765,833     $ 29,482     $ 795,315       $ 745,964     $ 28,440     $ 774,404    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Accruing loans past due 90 days or more[5] [6]

  $ 408,346     $ —       $ 408,346       $ 426,652     $ —       $ 426,652    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Ratios excluding covered loans:[7]

               

Non-performing loans held-in- portfolio to loans held-in-portfolio

    3.23       0.47       2.53       3.10       0.45       2.45  

Allowance for loan losses to loans held-in-portfolio

    2.75       0.87       2.27         2.73       0.75       2.24    

Allowance for loan losses to non-performing loans, excluding held-for-sale

    85.07       184.40       89.77         87.88       166.56       91.47    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Ratios including covered loans:

               

Non-performing assets to total assets

    2.46       0.32       1.98       2.51       0.32       2.00  

Non-performing loans held-in- portfolio to loans held-in-portfolio

    3.15       0.47       2.49         3.02       0.45       2.41    

Allowance for loan losses to loans held-in-portfolio

    2.82       0.87       2.34         2.81       0.75       2.32    

Allowance for loan losses to non-performing loans, excluding held-for-sale

    89.49       184.40       93.95         92.90       166.56       96.23    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

HIP = “held-in-portfolio”

 

[1] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment.
[2] There were no non-performing loans held-for-sale s as of March 31, 2017 and December 31, 2016.
[3] The amount consists of $4 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $30 million in covered OREO as of March 31, 2017 (December 31, 2016 - $4 million and $32 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] Loans held-in-portfolio used in the computation exclude $552 million in covered loans at March 31, 2017 (December 31, 2016 - $573 million).
[5] The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $254 million at March 31, 2017 (December 31, 2016 - $282 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.
[6] 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 $173 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2017 (December 31, 2016 - $181 million). Furthermore, the Corporation has approximately $59 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, 2016 - $68 million).
[7] These asset quality ratios have been adjusted to remove the impact of covered loans and covered foreclosed property. 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.

 

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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, of which $2.0 billion was secured with owner occupied properties at March 31, 2017 and December 31, 2016. CRE non-performing loans, excluding covered loans, amounted to $131 million at March 31, 2017, compared with $130 million at December 31, 2016. The CRE non-performing loans ratios for the BPPR and BPNA segments were 2.93% and 0.09%, respectively, at March 31, 2017, compared with 2.83% and 0.07%, respectively, at December 31, 2016.

For the quarter ended March 31, 2017, total non-performing loan inflows, excluding consumer loans, decreased by $2 million, or 2%, when compared to the inflows for the same quarter in 2016. Inflows of non-performing loans held-in-portfolio at the BPPR segment increased by $15 million, or 15%, compared to the inflows for the first quarter of 2016, mostly related to higher commercial and mortgage inflows by $12 million and $3 million, respectively. Inflows of non-performing loans held-in-portfolio at the BPNA segment decreased by $17 million, or 74%, from the same quarter in 2016, mostly driven by lower commercial inflows of $14 million.

 

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Table 21 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

 

     For the quarter ended March 31, 2017  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance

   $ 477,849      $ 18,743      $ 496,592  

Plus:

        

New non-performing loans

     115,749        6,108        121,857  

Advances on existing non-performing loans

     —          47        47  

Less:

        

Non-performing loans transferred to OREO

     (14,766      (46      (14,812

Non-performing loans charged-off

     (14,581      (117      (14,698

Loans returned to accrual status / loan collections

     (69,324      (5,747      (75,071
  

 

 

    

 

 

    

 

 

 

Ending balance NPLs

   $ 494,927      $ 18,988      $ 513,915  
  

 

 

    

 

 

    

 

 

 

Table 22 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

 

     For the quarter ended March 31, 2016  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance

   $ 519,385      $ 21,101      $ 540,486  

Plus:

        

New non-performing loans

     100,543        23,259        123,802  

Advances on existing non-performing loans

     —          3        3  

Less:

        

Non-performing loans transferred to OREO

     (10,633      —          (10,633

Non-performing loans charged-off

     (15,948      (657      (16,605

Loans returned to accrual status / loan collections

     (84,600      (11,928      (96,528
  

 

 

    

 

 

    

 

 

 

Ending balance NPLs

   $ 508,747      $ 31,778      $ 540,525  
  

 

 

    

 

 

    

 

 

 

Table 23 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2017  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance - NPLs

   $ 159,655      $ 3,693      $ 163,348  

Plus:

        

New non-performing loans

     33,600        1,355        34,955  

Less:

        

Non-performing loans transferred to OREO

     (3,510      —          (3,510

Non-performing loans charged-off

     (5,153      (46      (5,199

Loans returned to accrual status / loan collections

     (9,115      (1,238      (10,353
  

 

 

    

 

 

    

 

 

 

Ending balance - NPLs

   $ 175,477      $ 3,764      $ 179,241  
  

 

 

    

 

 

    

 

 

 

 

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Table 24 - Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance - NPLs

   $ 177,902      $ 3,914      $ 181,816  

Plus:

        

New non-performing loans

     21,657        15,064        36,721  

Advances on existing non-performing loans

     —          1        1  

Less:

        

Non-performing loans transferred to OREO

     (1,103      —          (1,103

Non-performing loans charged-off

     (4,949      (381      (5,330

Loans returned to accrual status / loan collections

     (10,868      (3,606      (14,474
  

 

 

    

 

 

    

 

 

 

Ending balance - NPLs

   $ 182,639      $ 14,992      $ 197,631  
  

 

 

    

 

 

    

 

 

 

Table 25 - Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016(1)  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance - NPLs

   $ 3,550      $ —        $ 3,550  

Plus:

        

New non-performing loans

     207        671        878  

Less:

        

Non-performing loans transferred to OREO

     (304      —          (304

Non-performing loans charged-off

     (110      —          (110

Loans returned to accrual status / loan collections

     (73      —          (73
  

 

 

    

 

 

    

 

 

 

Ending balance - NPLs

   $ 3,270      $ 671      $ 3,941  
  

 

 

    

 

 

    

 

 

 

 

(1) There were no non-performing construction loans at March 31, 2017.

Table 26 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2017  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance - NPLs

   $ 318,194      $ 11,713      $ 329,907  

Plus:

        

New non-performing loans

     82,149        4,753        86,902  

Less:

        

Non-performing loans transferred to OREO

     (11,256      (46      (11,302

Non-performing loans charged-off

     (9,428      (69      (9,497

Loans returned to accrual status / loan collections

     (60,209      (4,462      (64,671
  

 

 

    

 

 

    

 

 

 

Ending balance - NPLs

   $ 319,450      $ 11,889      $ 331,339  
  

 

 

    

 

 

    

 

 

 

 

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Table 27 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance - NPLs

   $ 337,933      $ 13,538      $ 351,471  

Plus:

        

New non-performing loans

     78,679        6,920        85,599  

Less:

        

Non-performing loans transferred to OREO

     (9,226      —          (9,226

Non-performing loans charged-off

     (10,889      (276      (11,165

Loans returned to accrual status / loan collections

     (73,659      (8,113      (81,772
  

 

 

    

 

 

    

 

 

 

Ending balance - NPLs

   $ 322,838      $ 12,069      $ 334,907  
  

 

 

    

 

 

    

 

 

 

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.

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 Note 2 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in the 2016 Form 10-K for a description of the Corporation’s allowance for loans losses methodology.

 

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Refer to the following table for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the quarters ended March 31, 2017 and 2016.

Table 28 - Allowance for Loan Losses and Selected Loan Losses Statistics - Quarterly Activity

 

     Quarters ended March 31,  
     2017      2017     2017      2016      2016     2016  

(Dollars in thousands)

   Non-covered
loans
     Covered
loans
    Total      Non-covered
loans
     Covered
loans
    Total  

Balance at beginning of period

   $ 510,301      $ 30,350     $ 540,651      $ 502,935      $ 34,176     $ 537,111  

Provision (reversal) for loan losses

     42,057        (1,359     40,698        47,940        (3,105     44,835  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     552,358        28,991       581,349        550,875        31,071       581,946  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Charged-offs:

               

BPPR

               

Commercial

     11,071        —         11,071        8,968        —         8,968  

Construction

     3,587        —         3,587        544        —         544  

Leases

     1,341        —         1,341        2,127        —         2,127  

Mortgage

     14,983        1,231       16,214        15,972        1,221       17,193  

Consumer

     21,812        93       21,905        27,379        33       27,412  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total BPPR charged-offs

     52,794        1,324       54,118        54,990        1,254       56,244  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

BPNA

               

Commercial

     70        —         70        495        —         495  

Legacy[1]

     41        —         41        109        —         109  

Mortgage

     106        —         106        441        —         441  

Consumer

     4,733        —         4,733        2,648        —         2,648  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total BPNA charged-offs

     4,950        —         4,950        3,693        —         3,693  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Popular, Inc.

               

Commercial

     11,141        —         11,141        9,463        —         9,463  

Construction

     3,587        —         3,587        544        —         544  

Leases

     1,341        —         1,341        2,127        —         2,127  

Legacy

     41        —         41        109        —         109  

Mortgage

     15,089        1,231       16,320        16,413        1,221       17,634  

Consumer

     26,545        93       26,638        30,027        33       30,060  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total charge-offs

     57,744        1,324       59,068        58,683        1,254       59,937  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Recoveries:

               

BPPR

               

Commercial

     8,433        —         8,433        6,264        —         6,264  

Construction

     3,731        —         3,731        233        —         233  

Leases

     528        —         528        489        —         489  

Mortgage

     1,428        103       1,531        1,276        225       1,501  

Consumer

     5,729        1       5,730        6,081        3       6,084  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total BPPR recoveries

     19,849        104       19,953        14,343        228       14,571  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

BPNA

               

Commercial

     533        —         533        290        —         290  

Legacy[1]

     529        —         529        356        —         356  

Mortgage

     210        —         210        211        —         211  

Consumer

     990        —         990        1,035        —         1,035  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total BPNA recoveries

     2,262        —         2,262        1,892        —         1,892  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Popular, Inc.

               

Commercial

     8,966        —         8,966        6,554        —         6,554  

Construction

     3,731        —         3,731        233        —         233  

Leases

     528        —         528        489        —         489  

Legacy

     529        —         529        356        —         356  

Mortgage

     1,638        103       1,741        1,487        225       1,712  

Consumer

     6,719        1       6,720        7,116        3       7,119  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total recoveries

     22,111        104       22,215        16,235        228       16,463  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Net loans charged-offs (recovered):

              

BPPR

              

Commercial

     2,638       —          2,638       2,704       —          2,704  

Construction

     (144     —          (144     311       —          311  

Leases

     813       —          813       1,638       —          1,638  

Mortgage

     13,555       1,128        14,683       14,696       996        15,692  

Consumer

     16,083       92        16,175       21,298       30        21,328  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total BPPR net loans charged-offs (recovered)

     32,945       1,220        34,165       40,647       1,026        41,673  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

BPNA

              

Commercial

     (463     —          (463     205       —          205  

Legacy[1]

     (488     —          (488     (247     —          (247

Mortgage

     (104     —          (104     230       —          230  

Consumer

     3,743       —          3,743       1,613       —          1,613  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total BPNA net loans charged-offs (recovered)

     2,688       —          2,688       1,801       —          1,801  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Popular, Inc.

              

Commercial

     2,175       —          2,175       2,909       —          2,909  

Construction

     (144     —          (144     311       —          311  

Leases

     813       —          813       1,638       —          1,638  

Legacy

     (488     —          (488     (247     —          (247

Mortgage

     13,451       1,128        14,579       14,926       996        15,922  

Consumer

     19,826       92        19,918       22,911       30        22,941  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total net loans charged-offs (recovered)

     35,633       1,220        36,853       42,448       1,026        43,474  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 516,725     $ 27,771      $ 544,496     $ 508,427     $ 30,045      $ 538,472  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Specific ALLL

   $ 118,072     $ —        $ 118,072     $ 124,037     $ —        $ 124,037  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

General ALLL

   $ 398,653     $ 27,771      $ 426,424     $ 384,390     $ 30,045      $ 414,435  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ratios:

              

Annualized net charge-offs to average loans held-in-portfolio

     0.63        0.63     0.76        0.76

Provision for loan losses to net charge-offs

     1.18        1.10     1.13        1.03

 

[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.

The following table presents annualized net charge-offs to average loans held-in-portfolio (“HIP”) for the non-covered portfolio by loan category for the quarters ended March 31, 2017 and 2016.

 

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Table 29 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio (Non-Covered Loans)

 

     Quarter ended March 31, 2017     Quarter ended March 31, 2016  
     BPPR     BPNA     Popular, Inc.     BPPR     BPNA     Popular, Inc.  

Commercial

     0.15     (0.05 )%      0.08     0.15     0.03     0.11

Construction

     (0.65     —         (0.07     1.13       —         0.18  

Leases

     0.46       —         0.46       1.04       —         1.04  

Legacy

     —         (4.48     (4.48     —         (1.57     (1.57

Mortgage

     0.93       (0.05     0.81       0.98       0.10       0.87  

Consumer

     1.99       3.11       2.13       2.57       1.28       2.40  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total annualized net charge-offs to average loans held-in-portfolio

     0.77     0.19     0.63     0.93     0.15     0.76
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs, excluding covered loans, for the quarter ended March 31, 2017, decreased by $6.8 million, when compared to the quarter ended March 31, 2016.

 

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Table 30 - Composition of ALLL

 

March 31, 2017

 

(Dollars in thousands)

   Commercial     Construction     Legacy [2]     Leasing     Mortgage     Consumer     Total[3]  

Specific ALLL

   $ 51,276     $ —       $ —       $ 522     $ 43,264     $ 23,010     $ 118,072  

Impaired loans [1]

   $ 348,823     $ —       $ —       $ 1,803     $ 510,568     $ 109,016     $ 970,210  

Specific ALLL to impaired loans [1]

     14.70     —       —       28.95     8.47     21.11     12.17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 157,408     $ 9,997     $ 1,166     $ 7,375     $ 105,955     $ 116,752     $ 398,653  

Loans held-in-portfolio, excluding impaired loans [1]

   $ 10,462,877     $ 831,305     $ 40,688     $ 717,840     $ 6,117,419     $ 3,594,382     $ 21,764,511  

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

     1.50     1.20     2.87     1.03     1.73     3.25     1.83
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

   $ 208,684     $ 9,997     $ 1,166     $ 7,897     $ 149,219     $ 139,762     $ 516,725  

Total non-covered loans held-in-portfolio [1]

   $ 10,811,700     $ 831,305     $ 40,688     $ 719,643     $ 6,627,987     $ 3,703,398     $ 22,734,721  

ALLL to loans held-in-portfolio [1]

     1.93     1.20     2.87     1.10     2.25     3.77     2.27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[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 March 31, 2017, the general allowance on the covered loans amounted to $27.8 million.

Table 31 - 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.

Non-covered loans portfolio

At March 31, 2017, the allowance for loan losses, increased by $6 million when compared with December 31, 2016, mostly driven by higher reserves for the U.S. taxi medallion portfolio.

At March 31, 2017, the allowance for loan losses at the BPPR segment remained relatively flat at $467 million, or 2.75% of non-covered loans held-in-portfolio, compared with $468 million, or 2.73% of non-covered loans held-in-portfolio, at December 31, 2016.

 

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The ratio of the allowance to non-performing loans held-in-portfolio was 85.07% at March 31, 2017, compared with 87.88% at December 31, 2016.

The allowance for loan losses at the BPNA segment increased to $50 million, or 0.87% of loans held-in-portfolio, compared with $42 million, or 0.75% of loans held-in-portfolio, at December 31, 2016, mainly driven by higher reserves for the U.S. taxi medallion portfolio. Credit trends for the BPNA segment continued strong with minimal non-performing loans and net charge-offs. The ratio of the allowance to non-performing loans held-in-portfolio at the BPNA segment was 184.40% at March 31, 2017, compared with 166.56% at December 31, 2016.

Covered loans portfolio

The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $28 million at March 31, 2017, compared to $30 million at December 31, 2016. 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 $1.3 billion at March 31, 2017, increasing by $9 million, or 0.7%, from December 31, 2016. TDRs in accruing status increased by $9 million from December 31, 2016, due to sustained borrower performance, while non-accruing TDRs decreased slightly by $293 thousand.

Refer to Note 8 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 March 31, 2017 and December 31, 2016.

 

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Table 32 - Non-Covered Impaired Loans with Appraisals Dated 1 year or Older

 

March 31, 2017

 
     Total Impaired Loans – Held-in-portfolio  (HIP)         

(In thousands)

   Loan Count      Outstanding Principal
Balance
     Impaired Loans with
Appraisals Over One-
Year Old [1]
 

Commercial

     116      $ 292,609        22

 

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

 

December 31, 2016

 
     Total Impaired Loans – Held-in-portfolio  (HIP)         

(In thousands)

   Loan 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.

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in the Corporation’s 2016 Form 10-K.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II - Other Information

 

Item 1. Legal Proceedings

For a discussion of Legal Proceedings, see Note 21, “Commitments and Contingencies, to the Consolidated Financial Statements.

 

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Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I - Item 1A -Risk Factors” in our 2016 Form 10-K. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part I - Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors in our 2016 Form 10-K.

There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporation’s 2016 Form 10-K.

The risks described in our 2016 Form 10-K and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

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

Issuer Purchases of Equity Securities

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The Corporation has to date used shares purchased in the market to make grants under the Plan. During the quarter ended March 31, 2017, the Corporation purchased 64,479 shares in the market to make grants under the Plan. As of March 31, 2017 the maximum number of shares of common stock that may have been granted under this plan was 3,500,000.

On January 23, 2017, the Corporation’s Board of Directors approved a common stock repurchase plan of up to $75 million. During the quarter ended March 31, 2017 the Corporation completed a $75 million privately negotiated accelerated share repurchase transaction. As part of this transaction, the Corporation received 1,847,372 shares at an average repurchase price of $40.60. Such shares are held as treasury stock.

The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2017:

Issuer Purchases of Equity Securities

 

Not in thousands

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
     Approximate Dollar Value of Shares
that May Yet be Purchased Under
the Plans or Programs
 

January 1- January 31

     —          —          —        $ 75,000,000  

February 1- February 28 [1] [2]

     1,417,354      $ 40.78        1,352,875        15,000,000  

March 1- March 31 [2]

     494,497        40.60        494,497        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total March 31, 2017

     1,911,851      $ 40.73        1,847,372        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  [1] As described above, during March 2017, the Corporation purchased 64,479 shares in the market to make grants under the Popular, Inc. 2004 Omnibus Incentive Plan.
  [2] As described above, during the quarter ended March 31, 2017, the Corporation completed a $75 million accelerated share repurchase transaction, in which it received 1,352,875 shares in February 2017 and 494,497 shares in March 2017, upon settlement.
Item 3. Defaults upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

No.

  

Exhibit Description

  10.1    Form of 2017 Long-Term Incentive Equity Incentive Award and Agreement(1)
  12.1    Computation of the ratios of earnings to fixed charges and preferred stock dividends(1)
  31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
  31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
101.INS    XBRL Instance Document(1)
101.SCH    XBRL Taxonomy Extension Schema Document(1)
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document(1)
101.LAB    XBRL Taxonomy Extension Label Linkbase Document(1)
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document(1)

 

(1) Included herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    POPULAR, INC.
    (Registrant)
Date: May 10, 2017     By:  

/s/ Carlos J. Vázquez

    Carlos J. Vázquez
    Executive Vice President &
    Chief Financial Officer
Date: May 10, 2017     By:  

/s/ Jorge J. García

    Jorge J. García
    Senior Vice President & Corporate Comptroller

 

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