POPULAR, INC. - Quarter Report: 2018 September (Form 10-Q)

 

 

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 September 30, 2018

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 every Interactive Data File required to be submitted 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 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		☐		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, 100,352,514 shares outstanding as of November 5, 2018.

 

 

 

POPULAR, INC.

INDEX

 

Part I – Financial Information		Page
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition at September  30, 2018 and December 31, 2017			5
Unaudited Consolidated Statements of Operations for the quarters and nine months ended September 30, 2018 and 2017			6
Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2018 and 2017			7
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 and 2017			8
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017			9
Notes to Unaudited Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			127
Item 3. Quantitative and Qualitative Disclosures about Market Risk			170
Item 4. Controls and Procedures			170
Part II – Other Information
Item 1. Legal Proceedings			170
Item 1A. Risk Factors			171
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			171
Item 3. Defaults Upon Senior Securities			171
Item 4. Mine Safety Disclosures			171
Item 5. Other Information			171
Item 6. Exhibits			172
Signatures

 

2

Forward-Looking Information

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including, without limitation, statements about Popular Inc.’s (the “Corporation,” “Popular,” “we,” “us,” “our”) business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include without limitation the effect of competitive and economic factors, and our reaction to those factors, 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, the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations, and the impact of Hurricanes Irma and María on the Corporation. 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.

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 private borrowers that have relationships with the government, and the possibility that these actions may result in credit losses that are higher than currently expected;

 

•

the impact of Hurricanes Irma and Maria, and the measures taken to recover from these hurricanes (including the availability of relief funds and insurance proceeds), on the economy of Puerto Rico, the U.S. Virgin Islands and the British Virgin Islands, and on our customers and our business;

 

•

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 ability to successfully integrate the auto finance business acquired from Wells Fargo & Company, as well as unexpected costs, including, without limitation, costs due to exposure to any unrecorded liabilities or issues not identified during the due diligence investigation of the business or that are not subject to indemnification or reimbursement, and risks that the business may suffer as a result of the transaction, including due to adverse effects on relationships with customers, employees and service providers;

 

•

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;

 

3

•

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.

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, including as a result of Hurricanes Irma and Maria, 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/or juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 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 or information which speak as of their respective dates.

 

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

(In thousands, except share information)		September 30, 2018				December 31, 2017
Assets:
Cash and due from banks		$	400,949			$	402,857
Money market investments:
Time deposits with other banks			4,609,061				5,255,119
Total money market investments			4,609,061				5,255,119
Trading account debt securities, at fair value:
Pledged securities with creditors’ right to repledge			600				625
Other trading securities			37,131				33,301
Debt securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			295,437				393,634
Other investment securities available-for-sale			12,752,180				9,783,289
Debt securities held-to-maturity, at amortized cost (fair value 2018 - $105,074; 2017 - $97,501)			101,238				107,019
Equity securities (realizable value 2018 -$162,741); (2017 - $168,417)			157,962				165,103
Loans held-for-sale, at lower of cost or fair value			51,742				132,395
Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC			26,661,951				24,423,427
Loans covered under loss-sharing agreements with the FDIC			—				517,274
Less – Unearned income			149,783				130,633
Allowance for loan losses			633,718				623,426
Total loans held-in-portfolio, net			25,878,450				24,186,642
FDIC loss-share asset			—				45,192
Premises and equipment, net			557,104				547,142
Other real estate not covered under loss-sharing agreements with the FDIC			133,780				169,260
Other real estate covered under loss-sharing agreements with the FDIC			—				19,595
Accrued income receivable			163,443				213,844
Mortgage servicing assets, at fair value			162,779				168,031
Other assets			1,900,850				1,991,323
Goodwill			687,536				627,294
Other intangible assets			29,186				35,672
Total assets		$	47,919,428			$	44,277,337
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	8,803,752			$	8,490,945
Interest bearing			30,845,075				26,962,563
Total deposits			39,648,827				35,453,508
Assets sold under agreements to repurchase			300,116				390,921
Other short-term borrowings			1,200				96,208
Notes payable			1,744,687				1,536,356
Other liabilities			980,249				1,696,439
Total liabilities			42,675,079				39,173,432
Commitments and contingencies (Refer to Note 22)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding			50,160				50,160
Common stock, $0.01 par value; 170,000,000 shares authorized; 104,304,529 shares issued (2017 - 104,238,159) and 100,336,341 shares outstanding (2017 - 102,068,981)			1,043				1,042
Surplus			4,281,515				4,298,503
Retained earnings			1,629,692				1,194,994
Treasury stock - at cost, 3,968,188 shares (2017 - 2,169,178)			(183,872	)			(90,142	)
Accumulated other comprehensive loss, net of tax			(534,189	)			(350,652	)
Total stockholders’ equity			5,244,349				5,103,905
Total liabilities and stockholders’ equity		$	47,919,428			$	44,277,337
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Quarters ended September 30,								Nine months ended September 30,
(In thousands, except per share information)		2018				2017				2018				2017
Interest income:
Loans		$	430,637			$	371,979			$	1,190,498			$	1,102,784
Money market investments			27,581				15,529				86,258				33,233
Investment securities			70,147				48,375				185,537				144,594
Total interest income			528,365				435,883				1,462,293				1,280,611
Interest expense:
Deposits			55,134				37,058				139,050				104,907
Short-term borrowings			1,622				1,524				5,387				3,734
Long-term debt			20,140				19,130				59,204				57,222
Total interest expense			76,896				57,712				203,641				165,863
Net interest income			451,469				378,171				1,258,652				1,114,748
Provision for loan losses - non-covered loans			54,387				157,659				183,774				249,681
Provision for loan losses - covered loans			—				3,100				1,730				4,255
Net interest income after provision for loan losses			397,082				217,412				1,073,148				860,812
Service charges on deposit accounts			38,147				39,273				111,704				119,882
Other service fees			64,316				53,481				187,794				168,824
Mortgage banking activities (Refer to Note 11)			11,269				5,239				33,408				27,349
Net gain on sale of debt securities			—				83				—				83
Other-than-temporary impairment losses on debt securities			—				—				—				(8,299	)
Net gain (loss), including impairment on equity securities			370				20				(42	)			201
Net (loss) profit on trading account debt securities			(122	)			253				(299	)			(680	)
Net loss on sale of loans, including valuation adjustments on loans held-for-sale			—				(420	)			—				(420	)
Adjustments (expense) to indemnity reserves on loans sold			(3,029	)			(6,406	)			(6,482	)			(11,302	)
FDIC loss-share (expense) income (Refer to Note 29)			—				(3,948	)			94,725				(12,680	)
Other operating income			40,070				12,799				78,519				50,078
Total non-interest income			151,021				100,374				499,327				333,036
Operating expenses:
Personnel costs			139,757				117,769				389,941				358,457
Net occupancy expenses			18,602				22,254				63,829				65,295
Equipment expenses			18,303				16,457				53,284				48,677
Other taxes			11,923				10,858				33,701				32,567
Professional fees			83,860				70,772				260,748				212,956
Communications			6,054				5,394				17,342				17,242
Business promotion			15,478				15,216				44,265				40,158
FDIC deposit insurance			8,610				6,271				22,534				18,936
Other real estate owned (OREO) expenses			7,950				11,724				21,028				41,212
Other operating expenses			52,576				38,028				111,462				92,707
Amortization of intangibles			2,324				2,345				6,973				7,034
Total operating expenses			365,437				317,088				1,025,107				935,241
Income before income tax			182,666				698				547,368				258,607
Income tax expense (benefit)			42,018				(19,966	)			35,613				48,772
Net Income		$	140,648			$	20,664			$	511,755			$	209,835
Net Income Applicable to Common Stock		$	139,718			$	19,734			$	508,963			$	207,043
Net Income per Common Share – Basic		$	1.38			$	0.19			$	5.01			$	2.03
Net Income per Common Share – Diluted		$	1.38			$	0.19			$	5.00			$	2.03

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

 

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Quarters ended, September 30,								Nine months ended, September 30,
(In thousands)		2018				2017				2018				2017
Net income		$	140,648			$	20,664			$	511,755			$	209,835
Reclassification to retained earnings due to cumulative effect of accounting change			—				—				(605	)			—
Other comprehensive (loss) income before tax:
Foreign currency translation adjustment			(605	)			(390	)			(3,968	)			(1,839	)
Amortization of net losses of pension and postretirement benefit plans			5,386				5,606				16,157				16,819
Amortization of prior service credit of pension and postretirement benefit plans			(868	)			(950	)			(2,603	)			(2,850	)
Unrealized holding (losses) gains on debt securities arising during the period			(43,781	)			9,180				(201,193	)			14,912
Other-than-temporary impairment included in net income			—				—				—				8,299
Reclassification adjustment for gains included in net income			—				(83	)			—				(83	)
Unrealized holding gains on equity securities arising during the period			—				60				—				225
Reclassification adjustment for gains included in net income			—				(20	)			—				(201	)
Unrealized net gains (losses) on cash flow hedges			341				(410	)			1,296				(1,424	)
Reclassification adjustment for net losses (gains) included in net income			147				232				(870	)			2,122
Other comprehensive (loss) income before tax			(39,380	)			13,225				(191,786	)			35,980
Income tax benefit (expense)			1,983				(1,614	)			8,249				(7,026	)
Total other comprehensive (loss) income, net of tax			(37,397	)			11,611				(183,537	)			28,954
Comprehensive income, net of tax		$	103,251			$	32,275			$	328,218			$	238,789

Tax effect allocated to each component of other comprehensive (loss) income:

 

		Quarters ended September 30,								Nine months ended, September 30,
(In thousands)		2018				2017				2018				2017
Amortization of net losses of pension and postretirement benefit plans		$	(2,101	)		$	(2,185	)		$	(6,301	)		$	(6,556	)
Amortization of prior service credit of pension and postretirement benefit plans			339				370				1,016				1,110
Unrealized holding (losses) gains on debt securities arising during the period			3,936				122				13,701				239
Other-than-temporary impairment included in net income			—				—				—				(1,559	)
Reclassification adjustment for gains included in net income			—				17				—				17
Unrealized holding gains on equity securities arising during the period			—				(12	)			—				(45	)
Reclassification adjustment for gains included in net income			—				4				—				40
Unrealized net gains (losses) on cash flow hedges			(133	)			160				(506	)			555
Reclassification adjustment for net losses (gains) included in net income			(58	)			(90	)			339				(827	)
Income tax benefit (expense)		$	1,983			$	(1,614	)		$	8,249			$	(7,026	)

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

 

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(In thousands)		Common stock				Preferred stock				Surplus				Retained earnings				Treasury stock				Accumulated other comprehensive loss				Total
Balance at December 31, 2016		$	1,040			$	50,160			$	4,255,022			$	1,220,307			$	(8,286	)		$	(320,286	)		$	5,197,957
Net income															209,835												209,835
Issuance of stock			2								5,513																5,515
Dividends declared:
Common stock															(76,620	)											(76,620	)
Preferred stock															(2,792	)											(2,792	)
Common stock purchases											4,518								(81,936	)							(77,418	)
Other comprehensive income, net of tax																							28,954				28,954
Balance at September 30, 2017		$	1,042			$	50,160			$	4,265,053			$	1,350,730			$	(90,222	)		$	(291,332	)		$	5,285,431
Balance at December 31, 2017		$	1,042			$	50,160			$	4,298,503			$	1,194,994			$	(90,142	)		$	(350,652	)		$	5,103,905
Cumulative effect of accounting change															1,935												1,935
Net income															511,755												511,755
Issuance of stock			1								2,564																2,565
Dividends declared:
Common stock															(76,200	)											(76,200	)
Preferred stock															(2,792	)											(2,792	)
Common stock purchases											(23,020	)							(104,423	)							(127,443	)
Common stock reissuance											143								2,008								2,151
Stock based compensation											3,325								8,685								12,010
Other comprehensive income, net of tax																							(183,537	)			(183,537	)
Balance at September 30, 2018		$	1,043			$	50,160			$	4,281,515			$	1,629,692			$	(183,872	)		$	(534,189	)		$	5,244,349

 

Disclosure of changes in number of shares:		September 30, 2018				September 30, 2017
Preferred Stock:
Balance at beginning and end of period			2,006,391				2,006,391
Common Stock – Issued:
Balance at beginning of period			104,238,159				104,058,684
Issuance of stock			66,370				138,840
Balance at end of period			104,304,529				104,197,524
Treasury stock			(3,968,188	)			(2,171,107	)
Common Stock – Outstanding			100,336,341				102,026,417

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

 

8

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine months ended September 30,
(In thousands)		2018				2017
Cash flows from operating activities:
Net income		$	511,755			$	209,835
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			185,504				253,936
Amortization of intangibles			6,973				7,034
Depreciation and amortization of premises and equipment			39,083				35,966
Net accretion of discounts and amortization of premiums and deferred fees			(43,533	)			(17,371	)
Share-based compensation			5,962				—
Impairment losses on long-lived assets			272				11,286
Other-than-temporary impairment on debt securities			—				8,299
Fair value adjustments on mortgage servicing rights			13,123				24,262
FDIC loss share (income) expense			(94,725	)			12,680
Adjustments (expense) to indemnity reserves on loans sold			6,482				11,302
Earnings from investments under the equity method, net of dividends or distributions			(14,772	)			(11,514	)
Deferred income tax (benefit) expense			(97,708	)			30,471
Loss (gain) on:
Disposition of premises and equipment and other productive assets			17,694				5,018
Proceeds from insurance claims			(14,411	)			—
Sale and valuation adjustments of debt securities			—				(83	)
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities			(6,734	)			(16,455	)
Sale of foreclosed assets, including write-downs			(638	)			19,228
Acquisitions of loans held-for-sale			(173,644	)			(204,813	)
Proceeds from sale of loans held-for-sale			51,131				68,326
Net originations on loans held-for-sale			(186,063	)			(283,709	)
Net decrease (increase) in:
Trading debt securities			346,455				499,714
Equity securities			(2,480	)			(613	)
Accrued income receivable			51,868				(8,297	)
Other assets			234,836				(1,882	)
Net (decrease) increase in:
Interest payable			(9,933	)			(9,299	)
Pension and other postretirement benefits obligation			3,392				(13,760	)
Other liabilities			(197,035	)			15,178
Total adjustments			121,099				434,904
Net cash provided by operating activities			632,854				644,739
Cash flows from investing activities:
Net increase (decrease) in money market investments			647,519				(2,600,853	)
Purchases of investment securities:
Available-for-sale			(6,968,920	)			(2,356,385	)
Equity			(11,304	)			(23,822	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			3,925,362				1,225,915
Held-to-maturity			7,184				6,229
Proceeds from sale of investment securities:
Available-for-sale			—				14,423
Equity			20,925				17,675
Net disbursements on loans			(15,604	)			(77,400	)
Proceeds from sale of loans			1,354				415
Acquisition of loan portfolios			(461,117	)			(448,121	)
Net payments (to) from FDIC under loss sharing agreements			(25,012	)			(11,520	)
Payments to acquire businesses, net of cash acquired			(1,830,050	)			—
Return of capital from equity method investments			2,501				8,056
Acquisition of premises and equipment			(53,144	)			(40,158	)
Proceeds from insurance claims			14,411				—
Proceeds from sale of:
Premises and equipment and other productive assets			6,991				6,982
Foreclosed assets			85,622				85,705
Net cash used in investing activities			(4,653,282	)			(4,192,859	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits			4,193,859				3,751,367
Assets sold under agreements to repurchase			(90,805	)			(105,020	)
Other short-term borrowings			(95,008	)			239,398
Payments of notes payable			(226,976	)			(89,375	)
Proceeds from issuance of notes payable			434,706				45,000
Proceeds from issuance of common stock			10,852				5,515
Dividends paid			(79,115	)			(69,162	)
Net payments for repurchase of common stock			(125,326	)			(75,662	)
Payments related to tax withholding for share-based compensation			(2,205	)			(1,756	)
Net cash provided by financing activities			4,019,982				3,700,305
Net (decrease) increase in cash and due from banks, and restricted cash			(446	)			152,185
Cash and due from banks, and restricted cash at beginning of period			412,629				374,196
Cash and due from banks, and restricted cash at the end of the period		$	412,183			$	526,381

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

 

9

Notes to Consolidated Financial

Statements (Unaudited)

 

Note 1 - Nature of operations			11
Note 2 - Basis of presentation and summary of significant accounting policies			12
Note 3 - New accounting pronouncements			13
Note 4 - Business combination			19
Note 5 - Restrictions on cash and due from banks and certain securities			21
Note 6 - Debt securities available-for-sale			22
Note 7 - Debt securities held-to-maturity			25
Note 8 - Loans			27
Note 9 - Allowance for loan losses			33
Note 10 - FDIC loss share asset and true-up payment obligation			51
Note 11 - Mortgage banking activities			53
Note 12 - Transfers of financial assets and mortgage servicing assets			54
Note 13 - Other real estate owned			58
Note 14 - Other assets			59
Note 15 - Goodwill and other intangible assets			60
Note 16 - Deposits			64
Note 17 - Borrowings			65
Note 18 - Trust preferred securities			68
Note 19 - Stockholders’ equity			70
Note 20 - Other comprehensive loss			71
Note 21 - Guarantees			73
Note 22 - Commitments and contingencies			75
Note 23 - Non-consolidated variable interest entities			82
Note 24 - Related party transactions			84
Note 25 - Fair value measurement			88
Note 26 - Fair value of financial instruments			95
Note 27 - Net income per common share			99
Note 28 - Revenue from contracts with customers			100
Note 29 - FDIC loss share expense			102
Note 30 - Pension and postretirement benefits			103
Note 31 - Stock-based compensation			105
Note 32 - Income taxes			107
Note 33 - Supplemental disclosure on the consolidated statements of cash flows			111
Note 34 - Segment reporting			112
Note 35 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities			117

 

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Note 1 – Nature of operations

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the mainland United States and 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. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida.

Prior to April 9, 2018, PB operated under the legal name of Banco Popular North America and conducted business under the assumed name of Popular Community Bank.

On August 1, 2018, Popular, Inc., through its subsidiary Popular Auto, LLC, acquired and assumed from Reliable Financial Services, Inc. and Reliable Finance Holding Co. (“Reliable”), subsidiaries of Wells Fargo & Company, certain assets and liabilities related to their auto finance business in Puerto Rico (the “Reliable Transaction” or “Transaction”). Refer to Note 4, Business combination, for further details on the Reliable Transaction.

 

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

Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2017 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 reclassifications have been made to the 2017 Consolidated Financial Statements and notes to the financial statements to conform to the 2018 presentation.

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, 2017, included in the Corporation’s 2017 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.

Business Combination

The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Reliable Transaction constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations”. The assets and liabilities, both tangible and intangible, were initially recorded at their estimated fair values. Fair values were determined based on the requirements of FASB ASC Topic 820 “Fair Value Measurements”. These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair value becomes available. Acquisition-related costs are expensed as incurred. Refer to Note 4, Business combination, for additional information of assets acquired and liabilities assumed in connection with the Transaction.

 

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Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities

The FASB issued ASU 2018-03 in February 2018, which clarifies certain aspects of the guidance in ASU 2016-01, principally related to equity securities without a readily determinable fair value.

The Corporation was not impacted by these technical corrections and improvements upon adoption of this ASU.

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 of pension and postretirement benefit plans. 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.

As a result of the adoption of this accounting pronouncement, the Corporation recognized $6.7 million during the nine months ended September 30, 2018 (September 30, 2017—$5.6 million) as components of net periodic benefit cost other than service cost in the other operating expenses caption, which would have otherwise previously been recognized as personnel cost. The presentation for prior periods has been adjusted to reflect the new classification. Effective January 1, 2018, these expenses are no longer capitalized as part of loan origination costs.

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

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

The adoption of this standard during the first quarter of 2018 did not have a material impact on the Corporation’s financial statements.

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

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

The Corporation adopted ASU 2017-01 during the first quarter of 2018. As such, the Corporation will consider this guidance in any business combinations completed after the effective date. Refer to Note 4, Business combination, for additional information on assets acquired and liabilities assumed in connection with the Reliable Transaction.

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

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

As a result of the adoption of this accounting pronouncement, the Corporation included restricted cash and restricted cash equivalents within money market investments of $11.2 million at September 30, 2018 (September 30, 2017—$8.9 million) in the Consolidated Statements of Cash Flows. In addition, the Corporation presented a reconciliation of the totals in the Consolidated Statements of Cash Flows to the related captions in the Consolidated Statements of Condition in Note 33, Supplemental disclosure on the consolidated statements of cash flows.

 

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

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

As a result of the adoption of this accounting pronouncement during the first quarter of 2018, the Corporation recorded a positive cumulative effect adjustment of $1.3 million to retained earnings to reflect the net tax benefit resulting from intra-entity sales of assets.

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

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

As a result of the adoption of this accounting pronouncement, the Corporation reclassified from investing to operating activities $0.5 million in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 as a result of electing the cumulative earnings approach for classifying distributions received from equity investees.

FASB Accounting Standards Updates (“ASUs”), Revenue from Contracts with Customers (Topic 606)

The FASB has issued a series of ASUs which, among other things, clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services, that is, the satisfaction of performance obligations, to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five-step process is defined to achieve this core principle. The new guidance also requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Corporation adopted this accounting pronouncement during the first quarter of 2018 using the modified retrospective approach. The Corporation elected the practical expedient that permits an entity to expense incremental costs of obtaining contracts, given the amortization periods were one year or less. There were no material changes in the presentation and timing of when revenues are recognized. ASC Topic 606 was applied to contracts that were not completed as of January 1, 2018. There was no impact in the evaluation of these contracts. Refer to additional disclosures on Note 28, Revenue from contracts with customers.

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

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

 

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As a result of the adoption of this accounting pronouncement during the first quarter of 2018, the Corporation aggregated $11 million previously classified as available-for-sale and as trading to those under the other investment securities caption and reclassified under the caption of equity securities. In addition, a positive cumulative effect adjustment of $0.6 million was recognized due to the reclassification of unrealized gains of equity securities available-for-sale, net of tax, from accumulated other comprehensive loss to retained earnings.

The adoption of FASB Accounting Standards Update (“ASU”) 2017-09, Compensation– Stock Compensation (Topic 718): Scope of Modification Accounting, effective during the first quarter of 2018, did not have a significant impact on the Consolidated Financial Statements.

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606

The FASB issued ASU 2018-18 in November 2018 which, among other things, provides guidance on how to assess whether certain collaborative arrangement transactions should be accounted for under Topic 606.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

The Corporation does not expect to be impacted by these amendments since it does not have collaborative arrangements.

FASB Accounting Standards Update (“ASU”) 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

The FASB issued ASU 2018-17 in October 2018, which requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.

The Corporation does not expect to be materially impacted by these amendments.

FASB Accounting Standards Update (“ASU”) 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

The FASB issued ASU 2018-16 in October 2018 which permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to other permissible U.S. benchmark rates.

The amendments in this ASU are required to be adopted concurrently with the amendments in ASU 2017-12, which are effective in the first quarter of 2019. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption.

The Corporation will consider this guidance for qualifying new hedging relationships entered into on or after the effective date.

FASB Accounting Standards Update (“ASU”) 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

The FASB issued ASU 2018-15 in August 2018 which, among other things, aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and clarifies the term over which such capitalized implementation costs should be amortized.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

The Corporation does not expect to be materially impacted by these amendments.

 

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FASB Accounting Standards Update (“ASU”) 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans

The FASB issued ASU 2018-14 in August 2018, which modifies the disclosure requirements for employers that sponsor defined benefit pension or postretirement plans. The most significant changes include the removal of the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. In addition, certain disclosure requirements were added which include, but are not limited to, an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The amendments in this ASU are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented.

Upon adoption of this standard, the Corporation will be impacted principally by the simplified disclosures on defined benefit plans.

FASB Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

The FASB issued ASU 2018-13 in August 2018, which modifies the disclosure requirements on fair value measurements. The most significant changes include, among other things, the removal of the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. In addition, certain disclosure requirements were added, which include but are not limited to, how the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements was calculated.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

Upon adoption of this standard, the Corporation will be impacted principally by the simplified disclosures on fair value measurements.

FASB Accounting Standards Update (“ASU”) 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

The FASB issued ASU 2018-12 in August 2018, which makes targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a significant impact on its Consolidated Financial Statements.

FASB Accounting Standards Update (“ASU”) 2018-11, Leases (Topic 842): Targeted Improvements

The FASB issued ASU 2018-11 in July 2018, which provides entities with an additional and optional transition method that allows entities to apply the transition provisions of the new leases standard at the adoption date, instead of at the earliest comparative period presented. If elected, comparative periods will continue to be presented in accordance with ASC Topic 840. Also, the amendments provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components, subject to certain circumstances.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Corporation will elect this optional transition method to initially apply the new leases standard as of January 1, 2019. On the other hand, the Corporation does not expect to elect the practical expedient provided to lessors.

 

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FASB Accounting Standards Update (“ASU”) 2018-10, Codification Improvements to Topic 842, Leases

The FASB issued ASU 2018-10 in July 2018, which makes various technical corrections to clarify how to apply certain aspects of the new leases standard such as lease reassessment of lease classification, variable lease payments that depend on an index or a rate, lease term and purchase option, certain transition adjustments, among others.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Corporation does not expect to be materially impacted by these Codification improvements.

FASB Accounting Standards Update (“ASU”) 2018-09, Codification Improvements

The FASB issued ASU 2018-09 in July 2018, which makes various codification improvements in the areas of excess tax benefits on share-based compensation awards, income tax accounting for business combinations, derivatives offsetting, liability or equity-classified financial instruments, among others.

The amendments in this ASU are effective immediately, except for amendments that require transition guidance, which are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018; and amendments to guidance not yet effective which are effective on the same date as the original Updates.

The Corporation does not expect to be materially impacted by these Codification improvements.

FASB Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

The FASB issued ASU 2018-07 in June 2018, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, although differences remain in the accounting for attribution and a contractual term election for valuing nonemployee equity share options.

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

The Corporation does not expect to be impacted by these amendments since it does not enter into share-based payment transactions for acquiring goods and services from nonemployees.

FASB Accounting Standards Update (“ASU”) 2018-06, Codification Improvements to Topic 942, Financial Services – Depository and Lending

The FASB issued ASU 2018-06 in May 2018, which removes outdated guidance related to the Comptroller of the Currency’s Banking Circular 202, “Accounting for Net Deferred Taxes” in ASC Topic 942.

The amendments in this ASU were effective upon issuance of the Update. The Corporation was not impacted by this Codification improvement.

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

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

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

 

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The ASU is expected to impact the Corporation’s Consolidated Financial Statements since the Corporation has operating and land lease arrangements for which it is the lessee. The Corporation expects to recognize lease liabilities of approximately $0.2 billion, with a corresponding recognition of ROU assets on its operating leases.

For other recently issued Accounting Standards Updates not yet effective, refer to Note 4 to the Consolidated Financial Statements included in the 2017 Form 10-K.

 

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Note 4 – Business combination

On August 1, 2018, Popular Auto, LLC (“Popular Auto”), Banco Popular de Puerto Rico’s auto finance subsidiary, completed the acquisition of certain assets and the assumption of certain liabilities related to Wells Fargo & Company’s (“Wells Fargo”) auto finance business in Puerto Rico (“Reliable”). Popular Auto acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. Reliable will continue operating as a Division of Popular Auto in parallel with Popular Auto’s existing operations for a period after closing to provide continuity of service to Reliable customers while allowing Popular to assess best practices before completing the integration of the two operations.

Wells Fargo retained approximately $398 million in retail auto loans and has separately entered into a loan servicing agreement with Popular Auto with respect to such loans.

Popular entered into the Transaction as part of its growth strategy to increase its market share in the auto finance business in Puerto Rico.

The following table presents the fair values of the consideration and major classes of identifiable assets acquired and liabilities assumed by the Corporation as of August 1, 2018.

 

(In thousands)		Book value prior to purchase accounting adjustments				Fair value adjustments				As recorded by Popular, Inc.
Cash consideration		$	1,843,256			$	—			$	1,843,256
Assets:
Loans			1,912,866				(126,908	)[1]			1,785,958
Premises and equipment			1,246				—				1,246
Accrued income receivable			1,466				—				1,466
Other assets			5,020				—				5,020
Trademark			—				488				488
Total assets		$	1,920,598			$	(126,420	)		$	1,794,178
Liabilities:
Other liabilities		$	11,164			$	—			$	11,164
Total liabilities		$	11,164			$	—			$	11,164
Net assets acquired		$	1,909,434			$	(126,420	)		$	1,783,014
Goodwill on acquisition										$	60,242

[1] The fair value discount is comprised of $118 million related to the retail auto loans portfolio and $9 million related to the commercial loans portfolio.

The fair values initially assigned to the assets acquired and liabilities assumed are preliminary and are subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Because of the short time period between the August 1, 2018 closing of the transaction and the September 30, 2018 reporting date, the Corporation continues to analyze its estimates of fair value on loans acquired. As the Corporation finalizes its analyses, there may be adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease.

Following is a description of the methods used to determine the fair values of significant assets acquired on the Reliable Transaction:

Loans

Retail Auto Loans

Fair values for retail auto loans were based on a discounted cash flow methodology. Aggregation into pools considered characteristics such as payment terms, remaining terms, and credit quality. Principal and interest projections considered prepayment rates and credit loss expectations. The discount rates were developed based on the relative risk of the cash flows as of the valuation date, taking into account the expected life of the loans. Retail auto loans were accounted for under ASC Subtopic 310-20. As of August 1, 2018, contractual cash flows amounted to $1.8 billion, from which $112 million are not expected to be collected.

 

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Commercial Loans

Fair values for commercial loans were based on a probability of default/loss given default (“PD/LGD”) methodology. The PD was determined based on characteristics such as payment terms, remaining terms, and credit quality. Commercial loans were accounted for under ASC Subtopic 310-20. As of August 1, 2018, contractual cash flows amounted to $348 million, from which $8 million are not expected to be collected.

Goodwill

The amount of goodwill is the residual difference between the consideration transferred to Wells Fargo and the fair value of the assets acquired, net of the liabilities assumed. The goodwill is deductible for income tax purposes.

Trademark

The fair value of the Reliable trademark was calculated using the relief-from-royalty method. The Reliable trademark is subject to amortization, since Popular intends to use the trademark for a limited period of time.

The operating results of the Corporation for the quarter ended September 30, 2018 include the operating results produced by the acquired assets and liabilities assumed for the period of August 1, 2018 to September 30, 2018. This includes approximately $35.7 million in gross revenues, including $13.4 million in accretion of the fair value discount, and approximately $8.6 million in operating expenses, including $3.8 million of transaction-related expenses. The Corporation believes that given the amount of assets and liabilities assumed and the size of the operations acquired in relation to Popular’s operations, the historical results of Reliable are not significant to Popular’s results, and thus no pro forma information is presented.

 

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Note 5 – Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and PB, 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 $1.5 billion at September 30, 2018 (December 31, 2017—$1.4 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At September 30, 2018, the Corporation held $47 million in restricted assets in the form of funds deposited in money market accounts, debt securities available for sale and equity securities (December 31, 2017—$41 million). The restricted assets held in debt securities available for sale and equity securities consist primarily of assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

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Note 6 – Debt 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 debt securities available-for-sale at September 30, 2018 and December 31, 2017.

 

		At September 30, 2018
(In thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value				Weighted average yield
U.S. Treasury securities
Within 1 year		$	3,305,842			$	16			$	6,510			$	3,299,348				1.75	%
After 1 to 5 years			4,348,322				—				76,258				4,272,064				2.22
After 5 to 10 years			295,352				9				4,811				290,550				2.64
Total U.S. Treasury securities			7,949,516				25				87,579				7,861,962				2.04
Obligations of U.S. Government sponsored entities
Within 1 year			220,063				1				1,081				218,983				1.46
After 1 to 5 years			188,811				4				4,004				184,811				1.45
Total obligations of U.S. Government sponsored entities			408,874				5				5,085				403,794				1.45
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years			6,861				—				182				6,679				1.33
Total obligations of Puerto Rico, States and political subdivisions			6,861				—				182				6,679				1.33
Collateralized mortgage obligations—federal agencies
After 1 to 5 years			906				—				8				898				1.92
After 5 to 10 years			115,854				—				6,397				109,457				1.67
After 10 years			681,359				1,208				34,310				648,257				2.10
Total collateralized mortgage obligations—federal agencies			798,119				1,208				40,715				758,612				2.03
Mortgage-backed securities
Within 1 year			879				11				—				890				4.46
After 1 to 5 years			4,748				23				148				4,623				2.31
After 5 to 10 years			351,597				949				11,726				340,820				2.21
After 10 years			3,834,855				9,383				174,558				3,669,680				2.43
Total mortgage-backed securities			4,192,079				10,366				186,432				4,016,013				2.41
Other
After 5 to 10 years			556				1				—				557				3.62
Total other			556				1				—				557				3.62
Total debt securities available-for-sale[1]		$	13,356,005			$	11,605			$	319,993			$	13,047,617				2.14	%

 

[1]	Includes $8.5 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 $7.6 billion serve as collateral for public funds.

 

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		At December 31, 2017
(In thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value				Weighted average yield
U.S. Treasury securities
Within 1 year		$	1,112,791			$	8			$	2,101			$	1,110,698				1.06	%
After 1 to 5 years			2,550,116				—				26,319				2,523,797				1.55
After 5 to 10 years			293,579				281				191				293,669				2.24
Total U.S. Treasury securities			3,956,486				289				28,611				3,928,164				1.46
Obligations of U.S. Government sponsored entities
Within 1 year			276,304				21				818				275,507				1.26
After 1 to 5 years			336,922				22				3,518				333,426				1.48
Total obligations of U.S. Government sponsored entities			613,226				43				4,336				608,933				1.38
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years			6,668				—				59				6,609				2.30
Total obligations of Puerto Rico, States and political subdivisions			6,668				—				59				6,609				2.30
Collateralized mortgage obligations - federal agencies
Within 1 year			40				—				—				40				2.60
After 1 to 5 years			16,972				173				75				17,070				2.90
After 5 to 10 years			36,186				57				526				35,717				2.31
After 10 years			914,568				2,789				26,431				890,926				2.01
Total collateralized mortgage obligations - federal agencies			967,766				3,019				27,032				943,753				2.03
Mortgage-backed securities
Within 1 year			484				8				—				492				4.23
After 1 to 5 years			14,599				206				211				14,594				3.50
After 5 to 10 years			339,161				2,390				3,765				337,786				2.21
After 10 years			4,385,368				19,493				69,071				4,335,790				2.46
Total mortgage-backed securities			4,739,612				22,097				73,047				4,688,662				2.44
Other
After 5 to 10 years			789				13				—				802				3.62
Total other			789				13				—				802				3.62
Total debt securities available-for-sale[1]		$	10,284,547			$	25,461			$	133,085			$	10,176,923				1.96	%

 

[1]	Includes $6.6 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $5.6 billion serve as collateral for public funds.

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 based on 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.

There were no securities sold during the nine months ended September 30, 2018. During the nine months ended September 30, 2017, the Corporation sold obligations from the Puerto Rico government and its political subdivisions with a realized gain of $83 thousand. The proceeds from these sales were $14.4 million.

The following tables present the Corporation’s fair value and gross unrealized losses of debt securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017.

 

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