Edgar Filing: POPULAR INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2016

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. x 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). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x 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, 103,738,891 shares outstanding as of August 3, 2016.

POPULAR, INC.

INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at June 30, 2016 and December 31, 2015		5

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2016 and 2015		6

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2016 and 2015		7

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015		8

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015		9

Notes to Unaudited Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		135

Item 3. Quantitative and Qualitative Disclosures about Market Risk		196

Item 4. Controls and Procedures		196

Part II – Other Information

Item 1. Legal Proceedings		197

Item 1A. Risk Factors		197

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		197

Item 3. Defaults Upon Senior Securities		198

Item 4. Mine Safety Disclosures		198

Item 5. Other information		198

Item 6. Exhibits		199

Signatures		200

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;

•

changes in interest rates, as well as the magnitude of such changes;

•

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

•

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

•

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“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 impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government, on the economy and our business, and the ability of the Government to manage this crisis in an orderly manner;

•

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

•

risks related to the Doral Transaction, including (a) our ability to maintain customer relationships and (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following:

•

negative economic conditions that adversely affect 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;

•

risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver;

•

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

•

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

•

liabilities resulting from litigation and regulatory investigations;

•

changes in accounting standards, rules and interpretations;

•

our ability to grow our core businesses;

•

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

•

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

Moreover, the outcome of legal 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, 2015 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.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


(In thousands, except share information)	June 30, 2016			December 31, 2015
Assets:
Cash and due from banks	$	365,308		$	363,674

Money market investments:
Securities purchased under agreements to resell		86,328			96,338
Time deposits with other banks		2,699,172			2,083,754

Total money market investments		2,785,500			2,180,092

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		11,088			19,506
Other trading securities		61,442			52,153
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		863,594			739,045
Other investment securities available-for-sale		6,379,082			5,323,947
Investment securities held-to-maturity, at amortized cost (fair value 2016 - $81,469; 2015 - $82,889)		99,525			100,903
Other investment securities, at lower of cost or realizable value (realizable value 2016 - $171,569; 2015 - $175,291)		168,563			172,248
Loans held-for-sale, at lower of cost or fair value		122,338			137,000

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		22,655,877			22,453,813
Loans covered under loss-sharing agreements with the FDIC		607,170			646,115
Less – Unearned income		115,216			107,698
Allowance for loan losses		548,720			537,111

Total loans held-in-portfolio, net		22,599,111			22,455,119

FDIC loss-share asset		214,029			310,221
Premises and equipment, net		535,865			502,611
Other real estate not covered under loss-sharing agreements with the FDIC		177,025			155,231
Other real estate covered under loss-sharing agreements with the FDIC		37,984			36,685
Accrued income receivable		120,979			124,234
Mortgage servicing assets, at fair value		203,577			211,405
Other assets		2,179,060			2,193,162
Goodwill		631,095			626,388
Other intangible assets		50,983			58,109

Total assets	$	37,606,148		$	35,761,733

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	6,531,108		$	6,401,515
Interest bearing		22,206,748			20,808,208

Total deposits		28,737,856			27,209,723

Federal funds purchased and assets sold under agreements to repurchase		821,604			762,145
Other short-term borrowings		31,200			1,200
Notes payable		1,575,948			1,662,508
Other liabilities		1,077,894			1,019,018
Liabilities from discontinued operations (Refer to Note 4)		1,815			1,815

Total liabilities		32,246,317			30,656,409

Commitments and contingencies (Refer to Note 23)
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;
103,952,715 shares issued (2015 - 103,816,185) and 103,703,041 shares outstanding (2015 - 103,618,976)		1,039			1,038
Surplus		4,232,835			4,229,156
Retained earnings		1,228,979			1,087,957
Treasury stock - at cost, 249,674 shares (2015 - 197,209)		(7,570	)		(6,101	)
Accumulated other comprehensive loss, net of tax		(145,612	)		(256,886	)

Total stockholders’ equity		5,359,831			5,105,324

Total liabilities and stockholders’ equity	$	37,606,148		$	35,761,733

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2016			2015			2016			2015
Interest income:
Loans	$	369,721		$	374,133		$	732,918		$	729,764
Money market investments		3,889			1,845			6,752			3,291
Investment securities		36,725			31,297			72,996			61,598
Trading account securities		1,875			3,026			3,564			5,722

Total interest income		412,210			410,301			816,230			800,375

Interest expense:
Deposits		30,599			26,258			60,473			52,122
Short-term borrowings		2,058			1,863			3,919			3,597
Long-term debt		19,002			19,627			38,875			38,908

Total interest expense		51,659			47,748			103,267			94,627

Net interest income		360,551			362,553			712,963			705,748
Provision for loan losses - non-covered loans		39,668			60,468			87,608			90,179
Provision (reversal) for loan losses - covered loans		804			15,766			(2,301	)		26,090

Net interest income after provision for loan losses		320,079			286,319			627,656			589,479

Service charges on deposit accounts		40,296			40,138			80,158			79,155
Other service fees (Refer to Note 29)		56,945			59,421			110,327			113,047
Mortgage banking activities (Refer to Note 12)		16,227			21,325			26,778			34,177
Net gain on sale of investment securities		1,583			5			1,583			5
Other-than-temporary impairment losses on investment securities		(209	)		(14,445	)		(209	)		(14,445	)
Trading account profit (loss)		1,117			(3,108	)		955			(2,694	)
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		—			681			(304	)		602
Adjustments (expense) to indemnity reserves on loans sold		(5,746	)		419			(9,844	)		(4,107	)
FDIC loss-share (expense) income (Refer to Note 30)		(12,576	)		19,075			(15,722	)		23,214
Other operating income		12,866			17,248			28,411			27,040

Total non-interest income		110,503			140,759			222,133			255,994

Operating expenses:
Personnel costs		116,708			120,977			243,799			237,435
Net occupancy expenses		21,714			23,286			42,144			44,995
Equipment expenses		15,261			15,925			29,809			29,336
Other taxes		10,170			11,113			20,365			19,687
Professional fees		80,625			78,449			156,084			153,977
Communications		6,012			6,153			12,332			12,329
Business promotion		13,705			13,776			24,815			24,589
FDIC deposit insurance		5,362			8,542			12,732			14,940
Other real estate owned (OREO) expenses		12,980			44,816			22,121			67,885
Other operating expenses		23,515			31,082			40,680			48,430
Amortization of intangibles		3,097			2,881			6,211			4,985
Restructuring costs (Refer to Note 4)		—			6,174			—			16,927

Total operating expenses		309,149			363,174			611,092			675,515

Income from continuing operations before income tax		121,433			63,904			238,697			169,958
Income tax expense (benefit)		32,446			(533,533	)		64,711			(500,964	)

Income from continuing operations		88,987			597,437			173,986			670,922
Income from discontinued operations, net of tax (Refer to Note 4)		—			15			—			1,356

Net Income	$	88,987		$	597,452		$	173,986		$	672,278

Net Income Applicable to Common Stock	$	88,056		$	596,521		$	172,124		$	670,417

Net Income per Common Share – Basic
Net income from continuing operations	$	0.85		$	5.80		$	1.67		$	6.51
Net income from discontinued operations		—			—			—			0.01

Net Income per Common Share – Basic	$	0.85		$	5.80		$	1.67		$	6.52

Net Income per Common Share – Diluted
Net income from continuing operations	$	0.85		$	5.79		$	1.67		$	6.49
Net income from discontinued operations		—			—			—			0.01

Net Income per Common Share – Diluted	$	0.85		$	5.79		$	1.67		$	6.50

Dividends Declared per Common Share	$	0.15		$	—		$	0.30		$	—

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarters ended,						Six months ended,
	June 30,						June 30,
(In thousands)	2016			2015			2016			2015
Net income	$	88,987		$	597,452		$	173,986		$	672,278

Other comprehensive income (loss) before tax:
Foreign currency translation adjustment		(1,435	)		(1,092	)		(2,140	)		(1,673	)
Amortization of net losses of pension and postretirement benefit plans		5,487			5,025			10,973			10,050
Amortization of prior service cost of pension and postretirement benefit plans		(950	)		(950	)		(1,900	)		(1,900	)
Unrealized holding gains (losses) on investments arising during the period		38,092			(41,191	)		114,328			(5,849	)
Other-than-temporary impairment included in net income		209			14,445			209			14,445
Reclassification adjustment for gains included in net income		—			(5	)		—			(5	)
Unrealized net (losses) gains on cash flow hedges		(1,539	)		1,004			(3,539	)		(1,530	)
Reclassification adjustment for net losses included in net income		1,271			951			2,816			2,309

Other comprehensive income (loss) before tax		41,135			(21,813	)		120,747			15,847
Income tax expense		(4,997	)		(2,818	)		(9,473	)		(5,006	)

Total other comprehensive income (loss) , net of tax		36,138			(24,631	)		111,274			10,841

Comprehensive income, net of tax	$	125,125		$	572,821		$	285,260		$	683,119


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

	Quarters ended						Six months ended,
	June 30,						June 30,
(In thousands)	2016			2015			2016			2015
Amortization of net losses of pension and postretirement benefit plans	$	(2,140	)	$	(1,960	)	$	(4,280	)	$	(3,920	)
Amortization of prior service cost of pension and postretirement benefit plans		370			371			740			742
Unrealized holding gains (losses) on investments arising during the period		(3,289	)		2,019			(6,174	)		962
Other-than-temporary impairment included in net income		(42	)		(2,486	)		(42	)		(2,486	)
Reclassification adjustment for gains included in net income		—			1			—			1
Unrealized net (losses) gains on cash flow hedges		600			(392	)		1,381			597
Reclassification adjustment for net losses included in net income		(496	)		(371	)		(1,098	)		(902	)

Income tax expense	$	(4,997	)	$	(2,818	)	$	(9,473	)	$	(5,006	)

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

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, 2014	$	1,036	$	50,160	$	4,196,458		$	253,717		$	(4,117	)	$	(229,872	)	$	4,267,382
Net income									672,278									672,278
Issuance of stock		1				2,536												2,537
Tax windfall benefit on vesting of restricted stock						171												171
Dividends declared:
Preferred stock									(1,861	)								(1,861	)
Common stock purchases												(1,741	)					(1,741	)
Common stock reissuance												46						46
Other comprehensive income, net of tax															10,841			10,841

Balance at June 30, 2015	$	1,037	$	50,160	$	4,199,165		$	924,134		$	(5,812	)	$	(219,031	)	$	4,949,653

Balance at December 31, 2015	$	1,038	$	50,160	$	4,229,156		$	1,087,957		$	(6,101	)	$	(256,886	)	$	5,105,324
Net income									173,986									173,986
Issuance of stock		1				3,708												3,709
Tax shortfall expense on vesting of restricted stock						(29	)											(29	)
Dividends declared:
Common stock									(31,102	)								(31,102	)
Preferred stock									(1,862	)								(1,862	)
Common stock purchases												(1,476	)					(1,476	)
Common stock reissuance												7						7
Other comprehensive income, net of tax															111,274			111,274

Balance at June 30, 2016	$	1,039	$	50,160	$	4,232,835		$	1,228,979		$	(7,570	)	$	(145,612	)	$	5,359,831


														June 30,			June 30,
Disclosure of changes in number of shares:														2016			2015
Preferred Stock:
Balance at beginning and end of period															2,006,391			2,006,391

Common Stock – Issued:
Balance at beginning of period															103,816,185			103,614,553
Issuance of stock															136,530			76,206

Balance at end of the period															103,952,715			103,690,759
Treasury stock															(249,674	)		(187,745	)

Common Stock – Outstanding															103,703,041			103,503,014

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
(In thousands)	2016			2015
Cash flows from operating activities:
Net income	$	173,986		$	672,278

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		85,307			116,269
Amortization of intangibles		6,211			4,985
Depreciation and amortization of premises and equipment		23,141			23,949
Net accretion of discounts and amortization of premiums and deferred fees		(24,724	)		(42,167	)
Other-than-temporary impairment on investment securities		209			14,445
Fair value adjustments on mortgage servicing rights		12,817			6,846
FDIC loss share expense (income)		15,722			(23,214	)
Adjustments (expense) to indemnity reserves on loans sold		9,844			4,107
Earnings from investments under the equity method		(13,681	)		(9,806	)
Deferred income tax expense (benefit)		49,316			(511,128	)
Loss (gain) on:
Disposition of premises and equipment and other productive assets		2,424			(1,429	)
Sale and valuation adjustments of investment securities		(1,583	)		(5	)
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		(15,577	)		(15,034	)
Sale of foreclosed assets, including write-downs		9,571			54,711
Acquisitions of loans held-for-sale		(148,725	)		(249,059	)
Proceeds from sale of loans held-for-sale		43,110			51,062
Net originations on loans held-for-sale		(247,287	)		(379,264	)
Net decrease (increase) in:
Trading securities		393,178			481,271
Accrued income receivable		3,255			(656	)
Other assets		(21,351	)		33,552
Net (decrease) increase in:
Interest payable		(1,208	)		475
Pension and other postretirement benefits obligation		2,300			1,641
Other liabilities		6,310			(41,438	)

Total adjustments		188,579			(479,887	)

Net cash provided by operating activities		362,565			192,391

Cash flows from investing activities:
Net increase in money market investments		(605,407	)		(1,432,552	)
Purchases of investment securities:
Available-for-sale		(1,682,199	)		(985,427	)
Held-to-maturity		—			(250	)
Other		(70,302	)		(12,805	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		632,284			867,168
Held-to-maturity		2,209			2,389
Other		47,859			31,592
Proceeds from sale of investment securities:
Available-for-sale		—			70,005
Other		27,710			8,399
Net (disbursements) repayments on loans		(61,199	)		374,224
Proceeds from sale of loans		95,940			27,780
Acquisition of loan portfolios		(308,949	)		(140,671	)
Net payments from FDIC under loss sharing agreements		88,588			164,423
Net cash received and acquired from business combination		—			738,296
Acquisition of servicing advances		—			(3,897	)
Cash paid related to business acquisition		—			(17,250	)
Return of capital from equity method investments		324			—
Mortgage servicing rights purchased		—			(2,400	)
Acquisition of premises and equipment		(60,744	)		(30,817	)
Proceeds from sale of:
Premises and equipment and other productive assets		2,839			7,901
Foreclosed assets		28,895			98,287

Net cash used in investing activities		(1,862,152	)		(235,605	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		1,530,091			745,787
Federal funds purchased and assets sold under agreements to repurchase		59,460			(150,413	)
Other short-term borrowings		30,000			(48,215	)
Payments of notes payable		(216,501	)		(430,003	)
Proceeds from issuance of notes payable		128,883			103,231
Proceeds from issuance of common stock		3,710			2,536
Dividends paid		(32,953	)		(1,861	)
Net payments for repurchase of common stock		(1,469	)		(1,695	)

Net cash provided by financing activities		1,501,221			219,367

Net increase in cash and due from banks		1,634			176,153
Cash and due from banks at beginning of period		363,674			381,095

Cash and due from banks at the end of the period	$	365,308		$	557,248

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

During the six months ended June 30, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the six months ended June 30, 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

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 -	Discontinued operations and restructuring plan	16
Note 5 -	Business combination	17
Note 6 -	Restrictions on cash and due from banks and certain securities	19
Note 7 -	Investment securities available-for-sale	20
Note 8 -	Investment securities held-to-maturity	24
Note 9 -	Loans	26
Note 10 -	Allowance for loan losses	36
Note 11 -	FDIC loss share asset and true-up payment obligation	60
Note 12 -	Mortgage banking activities	62
Note 13 -	Transfers of financial assets and mortgage servicing assets	63
Note 14 -	Other real estate owned	67
Note 15 -	Other assets	68
Note 16 -	Goodwill and other intangible assets	69
Note 17 -	Deposits	71
Note 18 -	Borrowings	72
Note 19 -	Offsetting of financial assets and liabilities	74
Note 20 -	Stockholders’ equity	76
Note 21 -	Other comprehensive loss	77
Note 22 -	Guarantees	79
Note 23 -	Commitments and contingencies	81
Note 24 -	Non-consolidated variable interest entities	88
Note 25 -	Related party transactions	92
Note 26 -	Fair value measurement	96
Note 27 -	Fair value of financial instruments	103
Note 28 -	Net income per common share	110
Note 29 -	Other service fees	111
Note 30 -	FDIC loss share (expense) income	112
Note 31 -	Pension and postretirement benefits	113
Note 32 -	Stock-based compensation	114
Note 33 -	Income taxes	117
Note 34 -	Supplemental disclosure on the consolidated statements of cash flows	120
Note 35 -	Segment reporting	121
Note 36 -	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	126

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. Refer to Note 4 for discussion of the sales of the California, Illinois and Central Florida regional operations during 2014. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments.

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

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, 2015 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 2015 consolidated financial statements and notes to the financial statements to conform with the 2016 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, 2015, included in the Corporation’s 2015 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.

Note 3 – New accounting pronouncements

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The FASB issued ASU 2016-13 in June 2016, which replaces the incurred loss model with a current expected credit loss (“CECL”) model. The CECL model applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet exposures. Under current U.S. GAAP, an entity reflects credit losses on financial assets measured on an amortized cost basis only when losses are probable or have been incurred, generally considering only past events and current conditions in making these determinations. ASU 2016-13 prospectively replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. ASU 2016-13 also revises the approach to recognizing credit losses for available-for-sale securities by replacing the direct write-down approach with the allowance approach and limiting the allowance to the amount at which the security’s fair value is less than the amortized cost. In addition, ASU 2016-13 provides that the initial allowance for credit losses on purchased credit impaired financial assets will be recorded as an increase to the purchase price, with subsequent changes to the allowance recorded as a credit loss expense.

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

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

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

FASB Accounting Standards Update (“ASU”) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

The FASB issued ASU 2016-12 in May 2016. The amendments in this update, among other things, clarify the objective of the collectability criterion, provide guidance on noncash and variable consideration, provide a practical expedient for contract modifications at transition, and clarify the meaning of a completed contract for purposes of transition.

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

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

FASB Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

The FASB issued ASU 2016-10 in April 2016 which clarifies two aspects of Topic 606, in particular, the identification of performance obligations. Among other things, an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. In addition, in determining whether promises to transfer goods or services are separately identifiable, an entity should determine whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.

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

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

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

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

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

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

FASB Accounting Standards Update (“ASU”) 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

The FASB issued ASU 2016-08 in March 2016, which amends the implementation guidance in ASU 2014-09 by clarifying, among other things, that an entity should determine the nature of the goods or services provided to the customer and whether it controls each specified good or service before it is transferred to the customer, that an entity can be a principal for some goods or services and an agent for others with the same contract, and that an entity is a principal if it controls the goods or services before transferring them to the customer.

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

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

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

The FASB issued ASU 2016-07 in March 2016, which eliminates the requirement to retroactively adopt the equity method of accounting. Therefore, as of the date the investment becomes qualified for equity method accounting, an entity should add the cost of acquiring the additional interest in the investee to the current basis of its previously held interest. For available-for-sale securities, an entity should recognize through earnings the unrealized holding gains/losses in accumulated other comprehensive income/loss as of that date.

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

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

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

The FASB issued ASU 2016-06 in March 2016, which clarifies that in assessing whether an embedded contingent put or call option is not clearly and closely related to the debt instrument, which is part of the assessment made to determine whether an embedded

derivative must be bifurcated from the host contract, an entity is required to perform only the four step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable. It does not have to separately assess whether the event that triggers its ability to exercise the contingent option itself is indexed only to interest rates and credit risk.

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

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

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

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

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

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

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the consolidated financial statements included in the 2015 Form 10-K.

Note 4 – Discontinued operations and restructuring plan

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

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

As of June 30, 2016 and December 31, 2015, there were no assets held within the discontinued operations and liabilities within discontinued operations amounted to approximately $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale.

There were no activities from the discontinued operations during the six month period ended June 30, 2016. Net income from the discontinued operations amounted to $1.4 million for the six months ended June 30, 2015.

Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which has been completed by December 31, 2015, for which the Corporation incurred restructuring charges of $45.1 million. During the six month period ended June 30, 2015, the Corporation incurred $16.9 million in restructuring costs, mostly comprised of $12.2 million in personnel costs.

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


	Six months ended June 30,
(In thousands)	2016			2015
Beginning balance	$	620		$	13,536
Charges expensed during the period		—			8,312
Payments made during the period		(367	)		(18,759	)

Ending balance	$	253		$	3,089

Note 5 – Business combination

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

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


(In thousands)	Book value prior to purchase accounting adjustments		Fair value adjustments			Additional consideration^[1]		As recorded by Popular, Inc.
Assets:
Cash and due from banks	$	339,633	$	—		$	—	$	339,633
Investment in available-for-sale securities		172,706		—			—		172,706
Investments in FHLB stock		30,785		—			—		30,785
Loans		1,679,792		(165,925	)		—		1,513,867
Accrued income receivable		7,808		—			—		7,808
Receivable from the FDIC		—		—			480,137		480,137
Core deposit intangible		23,572		(10,762	)		—		12,810
Other assets		67,676		7,569			—		75,245

Total assets	$	2,321,972	$	(169,118	)	$	480,137	$	2,632,991

Liabilities:
Deposits	$	2,193,404	$	9,987		$	—	$	2,203,391
Advances from the Federal Home Loan Bank		542,000		5,187			—		547,187
Other liabilities		50,728		(511	)		—		50,217

Total liabilities	$	2,786,132	$	14,663		$	—	$	2,800,795

Excess of liabilities assumed over assets acquired	$	464,160
Aggregate fair value adjustments			$	(183,781	)

Additional consideration						$	480,137

Goodwill on acquisition								$	167,804

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

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

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

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

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


(In thousands)	February 27, 2015 As recasted^[a]		February 27, 2015 As previously reported^[b]		Change
Assets:
Loans	$	1,513,867	$	1,665,756	$	(151,889	)
Goodwill		167,804		41,633		126,171
Core deposit intangible		12,810		23,572		(10,762	)
Receivable from the FDIC		480,137		441,721		38,416
Other assets		626,177		626,177		—

Total assets	$	2,800,795	$	2,798,859	$	1,936

Liabilities:
Deposits	$	2,203,391	$	2,201,455	$	1,936
Advances from the Federal Home Loan Bank		547,187		547,187		—
Other liabilities		50,217		50,217		—

Total liabilities	$	2,800,795	$	2,798,859	$	1,936

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

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

The impact in the results of operations for the quarter and the six months ended June 30, 2015 as a result of the recasting was an increase in net income of approximately $2.7 million and $3.4 million, respectively, as detailed in the following table:


	Quarter ended June 30, 2015							Six months ended June 30, 2015
(In thousands)	As recasted		As reported		Difference			As recasted		As reported		Difference
Net Interest Income	$	29,629	$	27,164	$	2,465		$	39,935	$	36,932	$	3,003
Non-Interest Income		7,210		7,210		—			11,472		11,472		—
Operating Expenses		26,506		26,775		(269	)		40,903		41,262		(359	)

Income Before Taxes	$	10,333	$	7,599	$	2,734		$	10,504	$	7,142	$	3,362

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

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $ 1.1 billion at June 30, 2016 (December 31, 2015 - $ 1.1 billion). Cash and due from banks, as well as other highly liquid securities, are used to cover the required average reserve balances.

At June 30, 2016, the Corporation held $23 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2015 - $44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

Note 7 – 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 June 30, 2016 and December 31, 2015.


	At June 30, 2016
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	45,014	$	90	$	—	$	45,104		0.72	%
After 1 to 5 years		1,557,118		12,141		—		1,569,259		1.05
After 5 to 10 years		9,942		471		—		10,413		1.99

Total U.S. Treasury securities		1,612,074		12,702		—		1,624,776		1.05

Obligations of U.S. Government sponsored entities
Within 1 year		50,045		150		—		50,195		0.90
After 1 to 5 years		716,459		7,026		90		723,395		1.36
After 5 to 10 years		250		1		—		251		5.64

Total obligations of U.S. Government sponsored entities		766,754		7,177		90		773,841		1.33

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		7,150		17		—		7,167		4.27
After 5 to 10 years		5,915		1		1,562		4,354		4.02
After 10 years		18,614		1		4,501		14,114		6.99

Total obligations of Puerto Rico, States and political subdivisions		31,679		19		6,063		25,635		5.82

Collateralized mortgage obligations - federal agencies
Within 1 year		159		—		—		159		0.97
After 1 to 5 years		19,667		972		—		20,639		2.86
After 5 to 10 years		36,988		771		—		37,759		2.86
After 10 years		1,369,388		17,599		6,823		1,380,164		1.98

Total collateralized mortgage obligations - federal agencies		1,426,202		19,342		6,823		1,438,721		2.01

Mortgage-backed securities
Within 1 year		18		—		—		18		4.72
After 1 to 5 years		19,790		872		9		20,653		4.50
After 5 to 10 years		268,493		7,414		184		275,723		2.41
After 10 years		3,002,023		69,496		670		3,070,849		2.63

Total mortgage-backed securities		3,290,324		77,782		863		3,367,243		2.63

Equity securities (without contractual maturity)		1,351		1,169		—		2,520		7.86

Other
After 1 to 5 years		8,725		35		—		8,760		1.73
After 5 to 10 years		1,136		44		—		1,180		3.62

Total other		9,861		79		—		9,940		1.95

Total investment securities available-for-sale^[1]	$	7,138,245	$	118,270	$	13,839	$	7,242,676		2.02	%

[1]	Includes $3.6 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 $2.9 billion serve as collateral for public funds.


	At December 31, 2015
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	24,861	$	335	$	—	$	25,196		4.31	%
After 1 to 5 years		1,149,807		365		1,999		1,148,173		1.03
After 5 to 10 years		9,937		22		—		9,959		1.99

Total U.S. Treasury securities		1,184,605		722		1,999		1,183,328		1.11

Obligations of U.S. Government sponsored entities
After 1 to 5 years		919,819		1,337		4,808		916,348		1.33
After 5 to 10 years		250		1		—		251		5.64
After 10 years		23,000		42		—		23,042		3.22

Total obligations of U.S. Government sponsored entities		943,069		1,380		4,808		939,641		1.38

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		7,227		—		199		7,028		3.94
After 5 to 10 years		5,925		—		2,200		3,725		4.02
After 10 years		18,585		—		6,979		11,606		6.99

Total obligations of Puerto Rico, States and political subdivisions		31,737		—		9,378		22,359		5.74

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		21,446		594		37		22,003		2.81
After 5 to 10 years		44,585		733		—		45,318		2.85
After 10 years		1,518,662		8,137		33,283		1,493,516		1.99

Total collateralized mortgage obligations - federal agencies		1,584,693		9,464		33,320		1,560,837		2.02

Mortgage-backed securities
After 1 to 5 years		22,015		987		8		22,994		4.65
After 5 to 10 years		256,097		4,866		1,197		259,766		2.51
After 10 years		2,039,217		34,839		12,620		2,061,436		2.83

Total mortgage-backed securities		2,317,329		40,692		13,825		2,344,196		2.81

Equity securities (without contractual maturity)		1,350		1,053		5		2,398		7.92

Other
After 1 to 5 years		8,911		—		28		8,883		1.71
After 5 to 10 years		1,311		39		—		1,350		3.62

Total other		10,222		39		28		10,233		1.95

Total investment securities available-for-sale^[1]	$	6,073,005	$	53,350	$	63,363	$	6,062,992		2.07	%

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

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

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

There were no securities sold during the quarter and six months ended June 30, 2016. During the six months ended June 30, 2015, the Corporation sold U.S. agency securities with a carrying amount of $70 million at the BPPR segment, resulting in a realized gain of $5 thousand.

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 June 30, 2016 and December 31, 2015.


	At June 30, 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 U.S. Government sponsored entities	$	24,110	$	63	$	1,301	$	27	$	25,411	$	90
Obligations of Puerto Rico, States and political subdivisions		—		—		16,501		6,063		16,501		6,063
Collateralized mortgage obligations - federal agencies		—		—		405,082		6,823		405,082		6,823
Mortgage-backed securities		114,735		829		9,662		34		124,397		863

Total investment securities available-for-sale in an unrealized loss position	$	138,845	$	892	$	432,546	$	12,947	$	571,391	$	13,839


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

Total investment securities available-for-sale in an unrealized loss position	$	2,962,984	$	21,762	$	1,037,791	$	41,601	$	4,000,775	$	63,363

As of June 30, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $14 million, driven by U.S. Agency collateralized mortgage obligations and Obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all U.S. Agencies’ securities, management considers the U.S. Agency guarantee. The portfolio of obligations of the Puerto Rico Government is mostly comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers.

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.

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

In the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015 these securities were rated Caa2 and CCC- by Moody’s and S&P, respectively.

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.


	June 30, 2016				December 31, 2015
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	2,820,595	$	2,863,151	$	2,649,860	$	2,633,899
FHLB		286,449		289,572		340,119		338,700
Freddie Mac		1,377,651		1,390,990		1,088,691		1,079,956

Note 8 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at June 30, 2016 and December 31, 2015.


	At June 30, 2016
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	3,050	$	—	$	227	$	2,823		5.91	%
After 1 to 5 years		14,270		—		5,757		8,513		6.00
After 5 to 10 years		18,930		—		7,561		11,369		6.17
After 10 years		61,194		3,325		7,805		56,714		1.97

Total obligations of Puerto Rico, States and political subdivisions		97,444		3,325		21,350		79,419		3.50

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		81		4		—		85		5.45

Total collateralized mortgage obligations - federal agencies		81		4		—		85		5.45

Other
After 1 to 5 years		2,000		—		35		1,965		1.81

Total other		2,000		—		35		1,965		1.81

Total investment securities held-to-maturity^[1]	$	99,525	$	3,329	$	21,385	$	81,469		3.47	%

[1]	Includes $97.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.


	At December 31, 2015
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	2,920	$	—	$	291	$	2,629		5.90	%
After 1 to 5 years		13,655		—		5,015		8,640		5.98
After 5 to 10 years		20,020		—		8,020		12,000		6.14
After 10 years		62,222		3,604		8,280		57,546		2.08

Total obligations of Puerto Rico, States and political subdivisions		98,817		3,604		21,606		80,815		3.55

Collateralized mortgage obligations - federal agencies
After 5 to 10 years		86		5		—		91		5.45

Total collateralized mortgage obligations - federal agencies		86		5		—		91		5.45

Other
After 1 to 5 years		2,000		—		17		1,983		1.81

Total other		2,000		—		17		1,983		1.81

Total investment securities held-to-maturity^[1]	$	100,903	$	3,609	$	21,623	$	82,889		3.52	%

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

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

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 June 30, 2016 and December 31, 2015.


	At June 30, 2016
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	32,650	$	21,350	$	32,650	$	21,350
Other		720		30		995		5		1,715		35

Total investment securities held-to-maturity in an unrealized loss position	$	720	$	30	$	33,645	$	21,355	$	34,365	$	21,385


	At December 31, 2015
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	33,334	$	21,606	$	33,334	$	21,606
Other		1,483		17		—		—		1,483		17

Total investment securities held-to-maturity in an unrealized loss position	$	1,483	$	17	$	33,334	$	21,606	$	34,817	$	21,623

As indicated in Note 7 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at June 30, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $55 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which it 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 June 30, 2016. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

Note 9 – 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 11.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 2 - Summary of significant accounting policies, of the 2015 Form 10-K.

During the quarter and six months ended June 30, 2016, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $118 million and $240 million, respectively; consumer loans of $58 million and $164 million, respectively; and commercial loans amounting to $51 million during the six months ended June 30, 2016. Excluding the impact of the Doral Bank Transaction, during the quarter and six months ended June 30, 2015, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $213 million and $382 million, respectively.

Excluding the bulk sale of Westernbank loans with a carrying value of approximately $100 million, the Corporation sold commercial and construction loans with a carrying value of approximately $1 million during the six months ended June 30, 2016 (during the quarter and six months ended June 30, 2015 - $8 million and $9 million). The Corporation sold approximately $19 million and $40 million of residential mortgage loans (on a whole loan basis) during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $25 million and $65 million, respectively). Also, the Corporation securitized approximately $ 170 million and $ 304 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 243 million and $ 400 million, respectively). Furthermore, the Corporation securitized approximately $ 43 million and $ 79 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and six months ended June 30, 2016, respectively (June 30, 2015 - $ 70 million and $ 117 million, respectively).

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 June 30, 2016 and December 31, 2015, including loans previously covered by the commercial FDIC loss sharing agreements.


June 30, 2016
Puerto Rico
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	359	$	63	$	1,004	$	1,426	$	174,085	$	175,511
Commercial real estate non-owner occupied		98,373		6,624		57,017		162,014		2,436,617		2,598,631
Commercial real estate owner occupied		9,570		4,969		122,337		136,876		1,679,956		1,816,832
Commercial and industrial		8,286		2,348		34,944		45,578		2,580,500		2,626,078
Construction		—		—		4,848		4,848		98,794		103,642
Mortgage		292,558		159,972		802,407		1,254,937		4,765,625		6,020,562
Leasing		6,611		1,034		3,019		10,664		653,430		664,094
Consumer:
Credit cards		11,024		8,109		17,225		36,358		1,078,082		1,114,440
Home equity lines of credit		49		206		293		548		8,945		9,493
Personal		13,660		7,510		20,349		41,519		1,146,847		1,188,366
Auto		32,909		6,925		11,117		50,951		778,906		829,857
Other		512		255		18,158		18,925		160,601		179,526

Total	$	473,911	$	198,015	$	1,092,718	$	1,764,644	$	15,562,388	$	17,327,032


June 30, 2016
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	—	$	—	$	375	$	375	$	888,457	$	888,832
Commercial real estate non-owner occupied		251		375		317		943		1,092,910		1,093,853
Commercial real estate owner occupied		2,072		97		746		2,915		279,637		282,552
Commercial and industrial		1,800		7,786		80,312		89,898		787,628		877,526
Construction		—		—		100		100		613,590		613,690
Mortgage		1,381		5,009		14,390		20,780		822,776		843,556
Legacy		623		176		3,839		4,638		45,071		49,709
Consumer:
Credit cards		19		83		535		637		—		637
Home equity lines of credit		2,684		674		3,861		7,219		272,232		279,451
Personal		1,299		1,098		1,351		3,748		279,788		283,536
Auto		—		—		—		—		15		15
Other		4		—		—		4		268		272

Total	$	10,133	$	15,298	$	105,826	$	131,257	$	5,082,372	$	5,213,629


June 30, 2016
Popular, Inc.
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.^[1] [2]
Commercial multi-family	$	359	$	63	$	1,379	$	1,801	$	1,062,542	$	1,064,343
Commercial real estate non-owner occupied		98,624		6,999		57,334		162,957		3,529,527		3,692,484
Commercial real estate owner occupied		11,642		5,066		123,083		139,791		1,959,593		2,099,384
Commercial and industrial		10,086		10,134		115,256		135,476		3,368,128		3,503,604
Construction		—		—		4,948		4,948		712,384		717,332
Mortgage		293,939		164,981		816,797		1,275,717		5,588,401		6,864,118
Leasing		6,611		1,034		3,019		10,664		653,430		664,094
Legacy^[3]		623		176		3,839		4,638		45,071		49,709
Consumer:
Credit cards		11,043		8,192		17,760		36,995		1,078,082		1,115,077
Home equity lines of credit		2,733		880		4,154		7,767		281,177		288,944
Personal		14,959		8,608		21,700		45,267		1,426,635		1,471,902
Auto		32,909		6,925		11,117		50,951		778,921		829,872
Other		516		255		18,158		18,929		160,869		179,798

Total	$	484,044	$	213,313	$	1,198,544	$	1,895,901	$	20,644,760	$	22,540,661

[1]	Non-covered loans held-in-portfolio are net of $115 million in unearned income and exclude $122 million in loans held-for-sale.

[2]

Includes $7.6 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.7 billion were pledged at the FHLB as collateral for borrowings, $2.4 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.

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


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

Total	$	600,029	$	214,037	$	1,217,145	$	2,031,211	$	15,539,399	$	17,570,610


December 31, 2015
U.S. mainland
	Past due								Current		Loans HIP U.S. mainland
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	33	$	253	$	—	$	286	$	693,647	$	693,933
Commercial real estate non-owner occupied		160		—		253		413		962,610		963,023
Commercial real estate owner occupied		1,490		429		221		2,140		200,204		202,344
Commercial and industrial		13,647		1,526		75,575		90,748		780,896		871,644
Construction		—		—		—		—		580,158		580,158
Mortgage		18,957		3,424		13,538		35,919		872,671		908,590
Legacy		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		327		134		437		898		13,037		13,935
Home equity lines of credit		3,149		1,114		4,176		8,439		296,045		304,484
Personal		1,836		690		1,240		3,766		168,860		172,626
Auto		—		—		6		6		22		28
Other		—		10		5		15		289		304

Total	$	40,759	$	8,242	$	99,100	$	148,101	$	4,627,404	$	4,775,505


December 31, 2015
Popular, Inc.
	Past due								Current		Non-covered loans HIP Popular, Inc.^[1] [2]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non-covered loans HIP Popular, Inc.^[1] [2]
Commercial multi-family	$	492	$	470	$	1,316	$	2,278	$	823,801	$	826,079
Commercial real estate non-owner occupied		166,892		12,520		85,235		264,647		3,367,468		3,632,115
Commercial real estate owner occupied		15,735		6,053		138,999		160,787		1,950,801		2,111,588
Commercial and industrial		19,657		7,585		114,039		141,281		3,388,100		3,529,381
Construction		238		253		13,738		14,229		666,877		681,106
Mortgage		363,815		165,765		877,407		1,406,987		5,629,094		7,036,081
Leasing		7,844		1,630		3,009		12,483		615,167		627,650
Legacy^[3]		1,160		662		3,649		5,471		58,965		64,436
Consumer:
Credit cards		11,405		9,548		19,535		40,488		1,101,792		1,142,280
Home equity lines of credit		3,335		1,406		4,570		9,311		305,861		315,172
Personal		15,592		8,579		23,865		48,036		1,327,425		1,375,461
Auto		33,554		7,500		11,646		52,700		763,278		815,978
Other		1,069		308		19,237		20,614		168,174		188,788

Total	$	640,788	$	222,279	$	1,316,245	$	2,179,312	$	20,166,803	$	22,346,115

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

[2]

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

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

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at June 30, 2016 and December 31, 2015. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.


At June 30, 2016
	Puerto Rico				U.S. mainland				Popular, Inc.
(In thousands)	Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]		Non-accrual loans		Accruing loans past-due 90 days or more [1]
Commercial multi-family	$	1,004	$	—	$	375	$	—	$	1,379	$	—
Commercial real estate non-owner occupied		25,348		—		317		—		25,665		—
Commercial real estate owner occupied		111,713		—		746		—		112,459		—
Commercial and industrial		34,519		270		1,593		—		36,112		270
Construction		2,423		—		100		—		2,523		—
Mortgage^[3]		323,658		394,936		14,390		—		338,048		394,936
Leasing		3,019		—		—		—		3,019		—
Legacy		—		—		3,839		—		3,839		—
Consumer:
Credit cards		—		17,225		535		—		535		17,225
Home equity lines of credit		—		293		3,861		—		3,861		293
Personal		20,271		13		1,351		—		21,622		13
Auto		11,117		—		—		—		11,117		—
Other		17,560		582		—		—		17,560		582

Total^[2]	$	550,632	$	413,319	$	27,107	$	—	$	577,739	$	413,319

[1]

Non-covered loans of $207 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 $ 40 million in non-performing loans held-for-sale.

[3]

It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $149 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2016. Furthermore, the Corporation has approximately $63 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.


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

Total^[2]	$	574,834	$	446,725	$	26,965	$	—	$	601,799	$	446,725

[1]

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

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

[3]

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

The following table provides a breakdown of loans held-for-sale (“LHFS”) at June 30, 2016 and December 31, 2015 by main categories.


(In thousands)	June 30, 2016		December 31, 2015
Commercial	$	39,544	$	45,074
Construction		—		95
Mortgage		82,794		91,831

Total loans held-for-sale	$	122,338	$	137,000

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at June 30, 2016 and December 31, 2015 by main categories.


(In thousands)	June 30, 2016		December 31, 2015
Commercial	$	39,544	$	45,074
Construction		—		95

Total	$	39,544	$	45,169

The following table presents loans acquired as part of the Doral Bank Transaction accounted for under ASC subtopic 310-20 as of the February 27, 2015 acquisition date:


(In thousands)
Fair value of loans accounted under ASC Subtopic 310-20	$	1,178,543

Gross contractual amounts receivable (principal and interest)	$	1,666,695

Estimate of contractual cash flows not expected to be collected	$	34,646

Covered loans

The following tables present the composition of loans by past due status at June 30, 2016 and December 31, 2015 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.


June 30, 2016
	Past due								Current		Covered loans HIP [1]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP [1]
Mortgage	$	30,197	$	15,806	$	74,541	$	120,544	$	468,712	$	589,256
Consumer		905		396		1,680		2,981		14,933		17,914

Total covered loans	$	31,102	$	16,202	$	76,221	$	123,525	$	483,645	$	607,170

[1]	Includes $361 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.


December 31, 2015
	Past due								Current		Covered loans HIP [1]
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP [1]
Mortgage	$	31,413	$	16,593	$	83,132	$	131,138	$	495,964	$	627,102
Consumer		1,246		444		1,283		2,973		16,040		19,013

Total covered loans	$	32,659	$	17,037	$	84,415	$	134,111	$	512,004	$	646,115

[1]	Includes $386 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at June 30, 2016 and December 31, 2015.


	June 30, 2016				December 31, 2015
(In thousands)	Non-accrual loans		Accruing loans past due 90 days or more		Non-accrual loans		Accruing loans past due 90 days or more
Mortgage	$	3,335	$	—	$	3,790	$	—
Consumer		147		—		97		—

Total^[1]	$	3,482	$	—	$	3,887	$	—

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

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $10 million at June 30, 2016 (December 31, 2015 - $10 million).

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

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

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

The carrying amount of the Westernbank loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.


	June 30, 2016 [1]									December 31, 2015 [1]
	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	$	1,028,516		$	14,844		$	1,043,360		$	1,114,368		$	35,393		$	1,149,761
Commercial and industrial		80,040			—			80,040			84,765			519			85,284
Construction		4,723			1,723			6,446			8,943			6,027			14,970
Mortgage		621,229			27,181			648,410			667,023			33,090			700,113
Consumer		20,105			1,582			21,687			23,047			1,326			24,373

Carrying amount		1,754,613			45,330			1,799,943			1,898,146			76,355			1,974,501
Allowance for loan losses		(57,895	)		(9,100	)		(66,995	)		(59,753	)		(3,810	)		(63,563	)

Carrying amount, net of allowance	$	1,696,718		$	36,230		$	1,732,948		$	1,838,393		$	72,545		$	1,910,938

[1]	The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $597 million as of June 30, 2016 and $636 million as of December 31, 2015.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.2 billion at June 30, 2016 (December 31, 2015 - $2.4 billion). At June 30, 2016, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and six months ended June 30, 2016 and 2015, were as follows:


	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the quarters ended
	June 30, 2016						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,118,276		$	10,532		$	1,128,808		$	1,254,249		$	4,699		$	1,258,948
Accretion		(45,137	)		(3,339	)		(48,476	)		(50,228	)		(3,766	)		(53,994	)
Change in expected cash flows		(11,168	)		2,516			(8,652	)		35,755			5,215			40,970

Ending balance	$	1,061,971		$	9,709		$	1,071,680		$	1,239,776		$	6,148		$	1,245,924


	Activity in the accretable yield
	Westernbank loans ASC 310-30
	For the six months ended
	June 30, 2016						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,105,732		$	6,726		$	1,112,458		$	1,265,752		$	5,585		$	1,271,337
Accretion		(87,137	)		(4,872	)		(92,009	)		(104,004	)		(5,687	)		(109,691	)
Change in expected cash flows		43,376			7,855			51,231			78,028			6,250			84,278

Ending balance	$	1,061,971		$	9,709		$	1,071,680		$	1,239,776		$	6,148		$	1,245,924


	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the quarters ended
	June 30, 2016 [1]						Total			June 30, 2015						Total
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,865,940		$	69,501		$	1,935,441		$	2,211,781		$	155,315		$	2,367,096
Accretion		45,137			3,339			48,476			50,228			3,766			53,994
Collections/loan sales/charge-offs^[2]		(156,464	)		(27,510	)		(183,974	)		(239,516	)		(44,496	)		(284,012	)

Ending balance	$	1,754,613		$	45,330		$	1,799,943		$	2,022,493		$	114,585		$	2,137,078
Allowance for loan losses
ASC 310-30 Westernbank loans		(57,895	)		(9,100	)		(66,995	)		(42,503	)		(4,546	)		(47,049	)

Ending balance, net of ALLL	$	1,696,718		$	36,230		$	1,732,948		$	1,979,990		$	110,039		$	2,090,029

[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 $ 597 million as of June 30, 2016.

[2]	For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.


	Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30
	For the six months ended
	June 30, 2016 [1]									June 30, 2015
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	1,898,146		$	76,355		$	1,974,501		$	2,272,142		$	172,030		$	2,444,172
Accretion		87,137			4,872			92,009			104,004			5,687			109,691
Collections/loan sales/charge-offs^[2]		(230,670	)		(35,897	)		(266,567	)		(353,653	)		(63,132	)		(416,785	)

Ending balance	$	1,754,613		$	45,330		$	1,799,943		$	2,022,493		$	114,585		$	2,137,078
Allowance for loan losses
ASC 310-30 Westernbank loans		(57,895	)		(9,100	)		(66,995	)		(42,503	)		(4,546	)		(47,049	)

Ending balance, net of ALLL	$	1,696,718		$	36,230		$	1,732,948		$	1,979,990		$	110,039		$	2,090,029

[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 $597 million as of June 30, 2016.

[2]	For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 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 $710 million at June 30, 2016 (December 31, 2015 - $710 million). At June 30, 2016, none of the other acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and six months ended June 30, 2016 and 2015 were as follows:


Activity in the accretable yield - other acquired loans ASC 310-30
	For the quarter ended			For the quarter ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	267,768		$	158,424
Additions		4,171			5,406
Accretion		(8,730	)		(4,633	)
Change in expected cash flows		9,400			2,962

Ending balance	$	272,609		$	162,159


Activity in the accretable yield - other acquired loans ASC 310-30
	For the six months ended			For the six months ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	221,128		$	116,304
Additions		8,511			56,068
Accretion		(17,285	)		(7,856	)
Change in expected cash flows		60,255			(2,357	)

Ending balance	$	272,609		$	162,159


Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the quarter ended			For the quarter ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	562,723			363,097
Additions		8,354			17,089
Accretion		8,730			4,633
Collections and charge-offs		(17,062	)		(16,532	)

Ending balance	$	562,745		$	368,287
Allowance for loan losses ASC 310-30 other acquired loans		(16,059	)		(16,842	)

Ending balance, net of ALLL	$	546,686		$	351,445


Carrying amount of other acquired loans accounted for pursuant to ASC 310-30
	For the six months ended			For the six months ended
(In thousands)	June 30, 2016			June 30, 2015
Beginning balance	$	564,050		$	212,763
Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)		(4,707	)		—
Additions		18,405			174,180
Accretion		17,285			7,856
Collections and charge-offs		(32,288	)		(26,512	)

Ending balance	$	562,745		$	368,287
Allowance for loan losses ASC 310-30 other acquired loans		(16,059	)		(16,842	)

Ending balance, net of ALLL	$	546,686		$	351,445

The following table presents loans acquired as part of the Doral Bank Transaction accounted for pursuant to ASC Subtopic 310-30 at the February 27, 2015 acquisition date.


(In thousands)
Contractually-required principal and interest	$	560,833
Non-accretable difference		112,153

Cash flows expected to be collected		448,680
Accretable yield		113,977

Fair value of loans accounted for under ASC Subtopic 310-30	$	334,703

Note 10 – 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 June 30, 2016, 51% (June 30, 2015 - 32%) 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 other consumer, mortgage, commercial and industrial and commercial multi-family loan portfolios for 2016, and in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2015.

For the period ended June 30, 2016, 1% (June 30, 2015 - 19%) of the ALLL for BPNA segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the consumer loan portfolio for 2016 and in the commercial and industrial loan portfolio for 2015.

•

Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

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 and six months ended June 30, 2016 and 2015.


For the quarter ended June 30, 2016
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	197,590		$	4,237		$	124,500		$	11,035		$	135,785		$	473,147
Provision (reversal of provision)		3,515			(4,772	)		25,688			(507	)		14,427			38,351
Charge-offs		(24,489	)		(1,531	)		(13,950	)		(879	)		(26,011	)		(66,860	)
Recoveries		18,842			4,757			486			445			6,108			30,638
Net recoveries (write-downs)		4,369			914			—			—			162			5,445

Ending balance	$	199,827		$	3,605		$	136,724		$	10,094		$	130,471		$	480,721

Specific ALLL	$	53,350		$	116		$	42,106		$	548		$	24,167		$	120,287

General ALLL	$	146,477		$	3,489		$	94,618		$	9,546		$	106,304		$	360,434

Loans held-in-portfolio:
Impaired non-covered loans	$	335,881		$	1,036		$	476,161		$	2,110		$	109,130		$	924,318
Non-covered loans held-in-portfolio excluding impaired loans		6,881,171			102,606			5,544,401			661,984			3,212,552			16,402,714

Total non-covered loans held-in-portfolio	$	7,217,052		$	103,642		$	6,020,562		$	664,094		$	3,321,682		$	17,327,032


For the quarter ended June 30, 2016
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	29,822		$	—		$	223		$	30,045
Provision (reversal of provision)		—			—			828			—			(24	)		804
Charge-offs		—			—			(884	)		—			427			(457	)
Recoveries		—			—			185			—			4			189

Ending balance	$	—		$	—		$	29,951		$	—		$	630		$	30,581

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	29,951		$	—		$	630		$	30,581

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			589,256			—			17,914			607,170

Total covered loans held-in-portfolio	$	—		$	—		$	589,256		$	—		$	17,914		$	607,170


For the quarter ended June 30, 2016
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	9,587		$	4,739		$	5,099		$	2,484		$	13,371		$	35,280
Provision (reversal of provision)		(998	)		2,721			(321	)		(1,525	)		1,440			1,317
Charge-offs		(390	)		—			(132	)		(134	)		(2,662	)		(3,318	)
Recoveries		1,655			—			116			1,027			1,341			4,139

Ending balance	$	9,854		$	7,460		$	4,762		$	1,852		$	13,490		$	37,418

Specific ALLL	$	—		$	—		$	1,803		$	—		$	731		$	2,534

General ALLL	$	9,854		$	7,460		$	2,959		$	1,852		$	12,759		$	34,884

Loans held-in-portfolio:
Impaired loans	$	—		$	—		$	8,564		$	—		$	2,480		$	11,044
Loans held-in-portfolio excluding impaired loans		3,142,763			613,690			834,992			49,709			561,431			5,202,585

Total loans held-in-portfolio	$	3,142,763		$	613,690		$	843,556		$	49,709		$	563,911		$	5,213,629


For the quarter ended June 30, 2016
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	207,177		$	8,976		$	159,421		$	2,484		$	11,035		$	149,379		$	538,472
Provision (reversal of provision)		2,517			(2,051	)		26,195			(1,525	)		(507	)		15,843			40,472
Charge-offs		(24,879	)		(1,531	)		(14,966	)		(134	)		(879	)		(28,246	)		(70,635	)
Recoveries		20,497			4,757			787			1,027			445			7,453			34,966
Net recoveries (write-downs)		4,369			914			—			—			—			162			5,445

Ending balance	$	209,681		$	11,065		$	171,437		$	1,852		$	10,094		$	144,591		$	548,720

Specific ALLL	$	53,350		$	116		$	43,909		$	—		$	548		$	24,898		$	122,821

General ALLL	$	156,331		$	10,949		$	127,528		$	1,852		$	9,546		$	119,693		$	425,899

Loans held-in-portfolio:
Impaired loans	$	335,881		$	1,036		$	484,725		$	—		$	2,110		$	111,610		$	935,362
Loans held-in-portfolio excluding impaired loans		10,023,934			716,296			6,968,649			49,709			661,984			3,791,897			22,212,469

Total loans held-in-portfolio	$	10,359,815		$	717,332		$	7,453,374		$	49,709		$	664,094		$	3,903,507		$	23,147,831


For the six months ended June 30, 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)		16,884			(5,181	)		36,557			1,173			32,789			82,222
Charge-offs		(33,457	)		(2,075	)		(29,922	)		(3,006	)		(53,390	)		(121,850	)
Recoveries		25,106			4,990			1,762			934			12,189			44,981
Net recoveries (write-downs)		4,369			914			—			—			162			5,445

Ending balance	$	199,827		$	3,605		$	136,724		$	10,094		$	130,471		$	480,721

Specific ALLL	$	53,350		$	116		$	42,106		$	548		$	24,167		$	120,287

General ALLL	$	146,477		$	3,489		$	94,618		$	9,546		$	106,304		$	360,434

Loans held-in-portfolio:
Impaired non-covered loans	$	335,881		$	1,036		$	476,161		$	2,110		$	109,130		$	924,318
Non-covered loans held-in-portfolio excluding impaired loans		6,881,171			102,606			5,544,401			661,984			3,212,552			16,402,714

Total non-covered loans held-in-portfolio	$	7,217,052		$	103,642		$	6,020,562		$	664,094		$	3,321,682		$	17,327,032


For the six months ended June 30, 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)		—			—			(2,321	)		—			20			(2,301	)
Charge-offs		—			—			(2,105	)		—			394			(1,711	)
Recoveries		—			—			410			—			7			417

Ending balance	$	—		$	—		$	29,951		$	—		$	630		$	30,581

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	29,951		$	—		$	630		$	30,581

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		—			—			589,256			—			17,914			607,170

Total covered loans held-in-portfolio	$	—		$	—		$	589,256		$	—		$	17,914		$	607,170


For the six months ended June 30, 2016
U.S. Mainland - Continuing Operations
(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)		(1,114	)		3,548		23			(1,975	)		4,904			5,386
Charge-offs		(885	)		—		(573	)		(243	)		(5,310	)		(7,011	)
Recoveries		1,945			—		327			1,383			2,376			6,031

Ending balance	$	9,854		$	7,460	$	4,762		$	1,852		$	13,490		$	37,418

Specific ALLL	$	—		$	—	$	1,803		$	—		$	731		$	2,534

General ALLL	$	9,854		$	7,460	$	2,959		$	1,852		$	12,759		$	34,884

Loans held-in-portfolio:
Impaired loans	$	—		$	—	$	8,564		$	—		$	2,480		$	11,044
Loans held-in-portfolio excluding impaired loans		3,142,763			613,690		834,992			49,709			561,431			5,202,585

Total loans held-in-portfolio	$	3,142,763		$	613,690	$	843,556		$	49,709		$	563,911		$	5,213,629


For the six months ended June 30, 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)		15,770			(1,633	)		34,259			(1,975	)		1,173			37,713			85,307
Charge-offs		(34,342	)		(2,075	)		(32,600	)		(243	)		(3,006	)		(58,306	)		(130,572	)
Recoveries		27,051			4,990			2,499			1,383			934			14,572			51,429
Net recoveries (write-downs)		4,369			914			—			—			—			162			5,445

Ending balance	$	209,681		$	11,065		$	171,437		$	1,852		$	10,094		$	144,591		$	548,720

Specific ALLL	$	53,350		$	116		$	43,909		$	—		$	548		$	24,898		$	122,821

General ALLL	$	156,331		$	10,949		$	127,528		$	1,852		$	9,546		$	119,693		$	425,899

Loans held-in-portfolio:
Impaired loans	$	335,881		$	1,036		$	484,725		$	—		$	2,110		$	111,610		$	935,362
Loans held-in-portfolio excluding impaired loans		10,023,934			716,296			6,968,649			49,709			661,984			3,791,897			22,212,469

Total loans held-in-portfolio	$	10,359,815		$	717,332		$	7,453,374		$	49,709		$	664,094		$	3,903,507		$	23,147,831


For the quarter ended June 30, 2015
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	195,466		$	1,595		$	126,579		$	7,208		$	153,428		$	484,276
Provision (reversal of provision)		50,231			5,260			9,755			2,925			(7,642	)		60,529
Charge-offs		(23,323	)		(2,194	)		(11,361	)		(1,693	)		(24,182	)		(62,753	)
Recoveries		6,264			473			622			720			9,528			17,607
Net write-down related to loans transferred to held-for-sale		(29,996	)		—			—			—			—			(29,996	)
Allowance transferred from covered loans		8,453			1,424			582			—			2,578			13,037

Ending balance	$	207,095		$	6,558		$	126,177		$	9,160		$	133,710		$	482,700

Specific ALLL	$	68,456		$	725		$	43,749		$	607		$	24,615		$	138,152

General ALLL	$	138,639		$	5,833		$	82,428		$	8,553		$	109,095		$	344,548

Loans held-in-portfolio:
Impaired non-covered loans	$	337,577		$	3,627		$	450,789		$	2,554		$	112,733		$	907,280
Non-covered loans held-in-portfolio excluding impaired loans		7,231,433			109,819			5,793,594			590,262			3,282,292			17,007,400

Total non-covered loans held-in-portfolio	$	7,569,010		$	113,446		$	6,244,383		$	592,816		$	3,395,025		$	17,914,680


For the quarter ended June 30, 2015
Puerto Rico - Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	21,267		$	7,707		$	40,469		$	—		$	3,030		$	72,473
Provision (reversal of provision)		8,120			8,874			(1,734	)		—			506			15,766
Charge-offs		(23,697	)		(16,040	)		(520	)		—			(767	)		(41,024	)
Recoveries		3,864			1,425			342			—			88			5,719
Net recovery (write-down) related to loans transferred to held-for-sale		(1,101	)		(542	)		(160	)		—			(20	)		(1,823	)
Allowance transferred to non-covered loans		(8,453	)		(1,424	)		(582	)		—			(2,578	)		(13,037	)

Ending balance	$	—		$	—		$	37,815		$	—		$	259		$	38,074

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	37,815		$	—		$	259		$	38,074

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		3			—			671,074			—			18,573			689,650

Total covered loans held-in-portfolio	$	3		$	—		$	671,074		$	—		$	18,573		$	689,650


For the quarter ended June 30, 2015
U.S. Mainland - Continuing Operations
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	10,426		$	1,849		$	2,262		$	2,962		$	14,449		$	31,948
Provision (reversal of provision)		(2,680	)		580			2,236			383			(580	)		(61	)
Charge-offs		(432	)		—			(340	)		(480	)		(2,974	)		(4,226	)
Recoveries		1,311			—			164			450			1,005			2,930
Net recovery (write-down) related to loans transferred to held-for-sale		—			—			(552	)		—			—			(552	)

Ending balance	$	8,625		$	2,429		$	3,770		$	3,315		$	11,900		$	30,039

Specific ALLL	$	—		$	—		$	413		$	34		$	412		$	859

General ALLL	$	8,625		$	2,429		$	3,357		$	3,281		$	11,488		$	29,180

Loans held-in-portfolio:
Impaired loans	$	—		$	—		$	5,045		$	1,357		$	2,144		$	8,546
Loans held-in-portfolio excluding impaired loans		2,435,706			582,564			976,395			71,145			446,109			4,511,919

Total loans held-in-portfolio	$	2,435,706		$	582,564		$	981,440		$	72,502		$	448,253		$	4,520,465


For the quarter ended June 30, 2015
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	227,159		$	11,151		$	169,310		$	2,962		$	7,208		$	170,907		$	588,697
Provision (reversal of provision)		55,671			14,714			10,257			383			2,925			(7,716	)		76,234
Charge-offs		(47,452	)		(18,234	)		(12,221	)		(480	)		(1,693	)		(27,923	)		(108,003	)
Recoveries		11,439			1,898			1,128			450			720			10,621			26,256
Net recovery (write-down) related to loans transferred to held-for-sale		(31,097	)		(542	)		(712	)		—			—			(20	)		(32,371	)

Ending balance	$	215,720		$	8,987		$	167,762		$	3,315		$	9,160		$	145,869		$	550,813

Specific ALLL	$	68,456		$	725		$	44,162		$	34		$	607		$	25,027		$	139,011

General ALLL	$	147,264		$	8,262		$	123,600		$	3,281		$	8,553		$	120,842		$	411,802

Loans held-in-portfolio:
Impaired loans	$	337,577		$	3,627		$	455,834		$	1,357		$	2,554		$	114,877		$	915,826
Loans held-in-portfolio excluding impaired loans		9,667,142			692,383			7,441,063			71,145			590,262			3,746,974			22,208,969

Total loans held-in-portfolio	$	10,004,719		$	696,010		$	7,896,897		$	72,502		$	592,816		$	3,861,851		$	23,124,795


For the six months ended June 30, 2015
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	201,589		$	5,483		$	120,860		$	7,131		$	154,072		$	489,135
Provision (reversal of provision)		48,910			(1,553	)		25,947			3,771			15,367			92,442
Charge-offs		(32,895	)		(2,194	)		(22,334	)		(2,930	)		(53,881	)		(114,234	)
Recoveries		11,034			3,398			1,122			1,188			15,574			32,316
Net write-downs related to transferred to held-for-sale		(29,996	)		—			—			—			—			(29,996	)
Allowance transferred from covered loans		8,453			1,424			582			—			2,578			13,037

Ending balance	$	207,095		$	6,558		$	126,177		$	9,160		$	133,710		$	482,700

Specific ALLL	$	68,456		$	725		$	43,749		$	607		$	24,615		$	138,152

General ALLL	$	138,639		$	5,833		$	82,428		$	8,553		$	109,095		$	344,548

Loans held-in-portfolio:
Impaired non-covered loans	$	337,577		$	3,627		$	450,789		$	2,554		$	112,733		$	907,280
Non-covered loans held-in-portfolio excluding impaired loans		7,231,433			109,819			5,793,594			590,262			3,282,292			17,007,400

Total non-covered loans held-in-portfolio	$	7,569,010		$	113,446		$	6,244,383		$	592,816		$	3,395,025		$	17,914,680


For the six months ended June 30, 2015
Puerto Rico - Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	30,871		$	7,202		$	40,948		$	—		$	3,052		$	82,073
Provision (reversal of provision)		10,115			15,150			1,068			—			(243	)		26,090
Charge-offs		(37,936	)		(25,086	)		(3,906	)		—			(767	)		(67,695	)
Recoveries		6,504			4,700			447			—			815			12,466
Net write-down related to loans transferred to held-for-sale		(1,101	)		(542	)		(160	)		—			(20	)		(1,823	)
Allowance transferred to non-covered loans		(8,453	)		(1,424	)		(582	)		—			(2,578	)		(13,037	)

Ending balance	$	—		$	—		$	37,815		$	—		$	259		$	38,074

Specific ALLL	$	—		$	—		$	—		$	—		$	—		$	—

General ALLL	$	—		$	—		$	37,815		$	—		$	259		$	38,074

Loans held-in-portfolio:
Impaired covered loans	$	—		$	—		$	—		$	—		$	—		$	—
Covered loans held-in-portfolio excluding impaired loans		3			—			671,074			—			18,573			689,650

Total covered loans held-in-portfolio	$	3		$	—		$	671,074		$	—		$	18,573		$	689,650


For the six months ended June 30, 2015
U.S. Mainland - Continuing Operations
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	9,648		$	1,187		$	2,462		$	2,944		$	14,343		$	30,584
Provision (reversal of provision)		(2,381	)		1,242			(3,891	)		(1,427	)		4,194			(2,263	)
Charge-offs		(882	)		—			(561	)		(954	)		(5,492	)		(7,889	)
Recoveries		2,240			—			231			2,752			2,256			7,479
Net (write-down) recovery related to loans transferred to held-for-sale		—			—			5,529			—			(3,401	)		2,128

Ending balance	$	8,625		$	2,429		$	3,770		$	3,315		$	11,900		$	30,039

Specific ALLL	$	—		$	—		$	413		$	34		$	412		$	859

General ALLL	$	8,625		$	2,429		$	3,357		$	3,281		$	11,488		$	29,180

Loans held-in-portfolio:
Impaired loans	$	—		$	—		$	5,045		$	1,357		$	2,144		$	8,546
Loans held-in-portfolio excluding impaired loans		2,435,706			582,564			976,395			71,145			446,109			4,511,919

Total loans held-in-portfolio	$	2,435,706		$	582,564		$	981,440		$	72,502		$	448,253		$	4,520,465


For the six months ended June 30, 2015
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	242,108		$	13,872		$	164,270		$	2,944		$	7,131		$	171,467		$	601,792
Provision (reversal of provision)		56,644			14,839			23,124			(1,427	)		3,771			19,318			116,269
Charge-offs		(71,713	)		(27,280	)		(26,801	)		(954	)		(2,930	)		(60,140	)		(189,818	)
Recoveries		19,778			8,098			1,800			2,752			1,188			18,645			52,261
Net write-down related to loans transferred to held-for-sale		(31,097	)		(542	)		5,369			—			—			(3,421	)		(29,691	)

Ending balance	$	215,720		$	8,987		$	167,762		$	3,315		$	9,160		$	145,869		$	550,813

Specific ALLL	$	68,456		$	725		$	44,162		$	34		$	607		$	25,027		$	139,011

General ALLL	$	147,264		$	8,262		$	123,600		$	3,281		$	8,553		$	120,842		$	411,802

Loans held-in-portfolio:
Impaired loans	$	337,577		$	3,627		$	455,834		$	1,357		$	2,554		$	114,877		$	915,826
Loans held-in-portfolio excluding impaired loans		9,667,142			692,383			7,441,063			71,145			590,262			3,746,974			22,208,969

Total loans held-in-portfolio	$	10,004,719		$	696,010		$	7,896,897		$	72,502		$	592,816		$	3,861,851		$	23,124,795

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
	For the quarters ended						For the six months ended
(In thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Balance at beginning of period	$	62,967		$	68,386		$	63,563		$	78,846
Provision (reversal of provision)		(5,861	)		12,269			(4,070	)		20,870
Net recoveries (charge-offs)		9,889			(33,606	)		7,502			(52,667	)

Balance at end of period	$	66,995		$	47,049		$	66,995		$	47,049

Impaired loans

The following tables present loans individually evaluated for impairment at June 30, 2016 and December 31, 2015.


June 30, 2016
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial real estate non-owner occupied	$	143,454	$	147,109	$	37,312	$	15,024	$	29,354	$	158,478	$	176,463	$	37,312
Commercial real estate owner occupied		82,242		103,397		10,315		38,317		61,639		120,559		165,036		10,315
Commercial and industrial		38,738		40,042		5,723		18,106		21,756		56,844		61,798		5,723
Construction		1,036		4,495		116		—		—		1,036		4,495		116
Mortgage		419,474		462,461		42,106		56,687		66,846		476,161		529,307		42,106
Leasing		2,110		2,110		548		—		—		2,110		2,110		548
Consumer:
Credit cards		38,377		38,377		6,045		—		—		38,377		38,377		6,045
Personal		67,449		67,449		17,455		—		—		67,449		67,449		17,455
Auto		2,879		2,879		597		—		—		2,879		2,879		597
Other		425		425		70		—		—		425		425		70

Total Puerto Rico	$	796,184	$	868,744	$	120,287	$	128,134	$	179,595	$	924,318	$	1,048,339	$	120,287


June 30, 2016
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Mortgage	$	5,067	$	5,993	$	1,803	$	3,497	$	4,492	$	8,564	$	10,485	$	1,803
Consumer:
HELOCs		1,174		1,195		501		713		713		1,887		1,908		501
Personal		593		593		230		—		—		593		593		230

Total U.S. mainland	$	6,834	$	7,781	$	2,534	$	4,210	$	5,205	$	11,044	$	12,986	$	2,534


June 30, 2016
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial real estate non-owner occupied	$	143,454	$	147,109	$	37,312	$	15,024	$	29,354	$	158,478	$	176,463	$	37,312
Commercial real estate owner occupied		82,242		103,397		10,315		38,317		61,639		120,559		165,036		10,315
Commercial and industrial		38,738		40,042		5,723		18,106		21,756		56,844		61,798		5,723
Construction		1,036		4,495		116		—		—		1,036		4,495		116
Mortgage		424,541		468,454		43,909		60,184		71,338		484,725		539,792		43,909
Leasing		2,110		2,110		548		—		—		2,110		2,110		548
Consumer:
Credit Cards		38,377		38,377		6,045		—		—		38,377		38,377		6,045
HELOCs		1,174		1,195		501		713		713		1,887		1,908		501
Personal		68,042		68,042		17,685		—		—		68,042		68,042		17,685
Auto		2,879		2,879		597		—		—		2,879		2,879		597
Other		425		425		70		—		—		425		425		70

Total Popular, Inc.	$	803,018	$	876,525	$	122,821	$	132,344	$	184,800	$	935,362	$	1,061,325	$	122,821


December 31, 2015
Puerto Rico
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial real estate non-owner occupied	$	102,199	$	106,466	$	30,980	$	13,779	$	23,896	$	115,978	$	130,362	$	30,980
Commercial real estate owner occupied		118,253		137,193		12,564		38,955		63,383		157,208		200,576		12,564
Commercial and industrial		42,043		43,629		5,699		21,904		32,922		63,947		76,551		5,699
Construction		2,481		7,878		264		—		—		2,481		7,878		264
Mortgage		424,885		468,240		42,965		40,232		45,881		465,117		514,121		42,965
Leasing		2,404		2,404		573		—		—		2,404		2,404		573
Consumer:
Credit cards		38,734		38,734		6,675		—		—		38,734		38,734		6,675
Personal		68,509		68,509		16,365		—		—		68,509		68,509		16,365
Auto		1,893		1,893		338		—		—		1,893		1,893		338
Other		524		525		100		—		—		524		525		100

Total Puerto Rico	$	801,925	$	875,471	$	116,523	$	114,870	$	166,082	$	916,795	$	1,041,553	$	116,523


December 31, 2015
U.S. mainland
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Mortgage	$	4,143	$	5,018	$	1,064	$	2,672	$	3,574	$	6,815	$	8,592	$	1,064
Consumer:
HELOCs		778		796		259		783		783		1,561		1,579		259
Personal		534		534		226		81		81		615		615		226

Total U.S. mainland	$	5,455	$	6,348	$	1,549	$	3,536	$	4,438	$	8,991	$	10,786	$	1,549


December 31, 2015
Popular, Inc.
	Impaired Loans – With an						Impaired Loans
	Allowance						With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial real estate non-owner occupied	$	102,199	$	106,466	$	30,980	$	13,779	$	23,896	$	115,978	$	130,362	$	30,980
Commercial real estate owner occupied		118,253		137,193		12,564		38,955		63,383		157,208		200,576		12,564
Commercial and industrial		42,043		43,629		5,699		21,904		32,922		63,947		76,551		5,699
Construction		2,481		7,878		264		—		—		2,481		7,878		264
Mortgage		429,028		473,258		44,029		42,904		49,455		471,932		522,713		44,029
Leasing		2,404		2,404		573		—		—		2,404		2,404		573
Consumer:
Credit Cards		38,734		38,734		6,675		—		—		38,734		38,734		6,675
HELOCs		778		796		259		783		783		1,561		1,579		259
Personal		69,043		69,043		16,591		81		81		69,124		69,124		16,591
Auto		1,893		1,893		338		—		—		1,893		1,893		338
Other		524		525		100		—		—		524		525		100

Total Popular, Inc.	$	807,380	$	881,819	$	118,072	$	118,406	$	170,520	$	925,786	$	1,052,339	$	118,072

The following tables present the average recorded investment and interest income recognized on impaired loans for the quarter and six months ended June 30, 2016 and 2015.


For the quarter ended June 30, 2016
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial real estate non-owner occupied	$	139,910	$	1,362	$	—	$	—	$	139,910	$	1,362
Commercial real estate owner occupied		139,722		1,316		—		—		139,722		1,316
Commercial and industrial		57,799		491		—		—		57,799		491
Construction		1,528		14		—		—		1,528		14
Mortgage		473,672		3,385		8,237		64,913		481,909		68,298
Leasing		2,251		—		—		—		2,251		—
Consumer:
Credit cards		38,078		—		—		—		38,078		—
Helocs		—		—		1,762		—		1,762		—
Personal		67,642		—		602		—		68,244		—
Auto		3,371		—		—		—		3,371		—
Other		435		—		—		—		435		—

Total Popular, Inc.	$	924,408	$	6,568	$	10,601	$	64,913	$	935,009	$	71,481


For the quarter ended June 30, 2015
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial multi-family	$	325	$	—	$	—	$	—	$	325	$	—
Commercial real estate non-owner occupied		118,663		1,307		—		—		118,663		1,307
Commercial real estate owner occupied		123,656		1,211		—		—		123,656		1,211
Commercial and industrial		134,834		2,369		—		—		134,834		2,369
Construction		6,733		—		—		—		6,733		—
Mortgage		448,148		4,112		5,076		16		453,224		4,128
Legacy		—		—		679		—		679		—
Leasing		2,739		—		—		—		2,739		—
Consumer:
Credit cards		40,598		—		—		—		40,598		—
Helocs		—		—		1,645		—		1,645		—
Personal		70,309		—		452		—		70,761		—
Auto		2,079		—		—		—		2,079		—
Other		590		—		—		—		590		—
Covered loans		5,365		74		—		—		5,365		74

Total Popular, Inc.	$	954,039	$	9,073	$	7,852	$	16	$	961,891	$	9,089


For the six months ended June 30, 2016
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial real estate non-owner occupied	$	131,933	$	2,591	$	—	$	—	$	131,933	$	2,591
Commercial real estate owner occupied		145,550		2,767		—		—		145,550		2,767
Commercial and industrial		59,848		1,001		—		—		59,848		1,001
Construction		1,846		35		—		—		1,846		35
Mortgage		470,820		6,773		7,763		65,243		478,583		72,016
Leasing		2,302		—		—		—		2,302		—
Consumer:
Credit cards		38,296		—		—		—		38,296		—
HELOCs		—		—		1,695		—		1,695		—
Personal		67,931		—		606		—		68,537		—
Auto		2,878		—		—		—		2,878		—
Other		465		—		—		—		465		—

Total Popular, Inc.	$	921,869	$	13,167	$	10,064	$	65,243	$	931,933	$	78,410


For the six months ended June 30, 2015
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial multi-family	$	217	$	—	$	—	$	—	$	217	$	—
Commercial real estate non-owner occupied		98,526		2,582		—		—		98,526		2,582
Commercial real estate owner occupied		125,457		2,422		—		—		125,457		2,422
Commercial and industrial		146,422		4,749		83		—		146,505		4,749
Construction		8,911		—		—		—		8,911		—
Mortgage		442,621		8,565		4,802		29		447,423		8,594
Legacy		—		—		452		—		452		—
Leasing		2,834		—		—		—		2,834		—
Consumer:
Credit cards		40,891		—		—		—		40,891		—
HELOCs		—		—		1,725		—		1,725		—
Personal		70,814		—		301		—		71,115		—
Auto		2,030		—		—		—		2,030		—
Other		568		—		29		—		597		—
Covered loans		5,879		153		—		—		5,879		153

Total Popular, Inc.	$	945,170	$	18,471	$	7,392	$	29	$	952,562	$	18,500

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.2 billion at June 30, 2016 (December 31, 2015 - $ 1.2 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $8 million related to the commercial loan portfolio at June 30, 2016 (December 31, 2015 - $11 million).

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 2015 Form 10-K.

The following tables present the non-covered and covered loans classified as TDRs according to their accruing status at June 30, 2016 and December 31, 2015.


	Popular, Inc.
	Non-Covered Loans
	June 30, 2016								December 31, 2015
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Commercial	$	167,202	$	86,784	$	253,986	$	44,667	$	166,415	$	88,117	$	254,532	$	37,355
Construction		167		868		1,035		116		221		2,259		2,480		264
Mortgage		708,140		117,475		825,615		43,909		644,013		130,483		774,496		44,029
Leases		1,532		576		2,108		548		1,791		609		2,400		573
Consumer		102,528		13,254		115,782		24,898		104,630		12,805		117,435		23,963

Total	$	979,569	$	218,957	$	1,198,526	$	114,138	$	917,070	$	234,273	$	1,151,343	$	106,184


	Popular, Inc.
	Covered Loans
	June 30, 2016								December 31, 2015
(In thousands)	Accruing		Non-Accruing		Total		Related Allowance		Accruing		Non-Accruing		Total		Related Allowance
Mortgage	$	3,121	$	2,432	$	5,553	$	—	$	3,328	$	3,268	$	6,596	$	—

Total	$	3,121	$	2,432	$	5,553	$	—	$	3,328	$	3,268	$	6,596	$	—

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters and six months ended June 30, 2016 and 2015.


	Puerto Rico
	For the quarter ended June 30, 2016								For the six months ended June 30, 2016
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		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		—		—		—		2		1		—		—
Commercial real estate owner occupied		13		4		—		—		29		5		—		—
Commercial and industrial		8		1		—		—		14		1		—		—
Mortgage		18		24		112		35		38		34		224		89
Consumer:
Credit cards		210		—		—		199		385		—		—		373
Personal		259		5		—		1		520		10		—		1
Auto		—		5		2		—		—		7		4		—
Other		11		—		—		—		21		—		—		—

Total		520		39		114		235		1,009		58		228		463


	U.S. Mainland
	For the quarter ended June 30, 2016								For the six months ended June 30, 2016
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Mortgage		—		—		7		—		—		—		18		1
Consumer:
HELOCs		—		—		1		1		—		—		2		1

Total		—		—		8		1		—		—		20		2


	Popular, Inc.
	For the quarter ended June 30, 2016								For the six months ended June 30, 2016
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		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		—		—		—		2		1		—		—
Commercial real estate owner occupied		13		4		—		—		29		5		—		—
Commercial and industrial		8		1		—		—		14		1		—		—
Mortgage		18		24		119		35		38		34		242		90
Consumer:
Credit cards		210		—		—		199		385		—		—		373
HELOCs		—		—		1		1		—		—		2		1
Personal		259		5		—		1		520		10		—		1
Auto		—		5		2		—		—		7		4		—
Other		11		—		—		—		21		—		—		—

Total		520		39		122		236		1,009		58		248		465


	Puerto Rico
	For the quarter ended June 30, 2015								For the six months ended June 30, 2015
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial multi-family		—		—		—		—		—		2		—		—
Commercial real estate non-owner occupied		3		7		—		—		5		8		—		—
Commercial real estate owner occupied		8		6		—		—		10		9		—		—
Commercial and industrial		6		6		—		—		11		11		—		—
Construction		—		—		—		—		1		—		—		—
Mortgage		16		11		83		23		29		30		181		38
Leasing		—		1		2		—		—		2		14		—
Consumer:
Credit cards		194		—		—		164		422		—		—		351
Personal		274		4		—		—		502		18		—		—
Auto		—		3		1		—		—		5		3		—
Other		11		—		—		—		22		—		—		—

Total		512		38		86		187		1,002		85		198		389


	U.S. Mainland
	For the quarter ended June 30, 2015								For the six months ended June 30, 2015
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Mortgage		—		—		2		—		—		1		10		—
Consumer:
HELOCs		—		1		—		1		—		1		—		2
Personal		—		2		—		—		—		2		—		—

Total		—		3		2		1		—		4		10		2


	Popular, Inc.
	For the quarter ended June 30, 2015								For the six months ended June 30, 2015
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other		Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial multi-family		—		—		—		—		—		2		—		—
Commercial real estate non-owner occupied		3		7		—		—		5		8		—		—
Commercial real estate owner occupied		8		6		—		—		10		9		—		—
Commercial and industrial		6		6		—		—		11		11		—		—
Construction		—		—		—		—		1		—		—		—
Mortgage		16		11		85		23		29		31		191		38
Leasing		—		1		2		—		—		2		14		—
Consumer:
Credit cards		194		—		—		164		422		—		—		351
HELOCs		—		1		—		1		—		1		—		2
Personal		274		6		—		—		502		20		—		—
Auto		—		3		1		—		—		5		3		—
Other		11		—		—		—		22		—		—		—

Total		512		41		88		188		1,002		89		208		391

The following tables present by class, quantitative information related to loans modified as TDRs during the quarters and six months ended June 30, 2016 and 2015.


Puerto Rico
For the quarter ended June 30, 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		1	$	197	$	197	$	7
Commercial real estate owner occupied		17		7,755		6,625		201
Commercial and industrial		9		1,057		1,056		(25	)
Mortgage		189		17,970		17,714		1,188
Consumer:
Credit cards		409		3,775		4,388		651
Personal		265		4,195		4,237		1,044
Auto		7		61		64		13
Other		11		32		33		5

Total		908	$	35,042	$	34,314	$	3,084


U.S. Mainland
For the quarter ended June 30, 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
Mortgage		7	$	794	$	833	$	210
Consumer:
HELOCs		2		208		251		139

Total		9	$	1,002	$	1,084	$	349


Popular, Inc.
For the quarter ended June 30, 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		1	$	197	$	197	$	7
Commercial real estate owner occupied		17		7,755		6,625		201
Commercial and industrial		9		1,057		1,056		(25	)
Mortgage		196		18,764		18,547		1,398
Consumer:
Credit cards		409		3,775		4,388		651
HELOCs		2		208		251		139
Personal		265		4,195		4,237		1,044
Auto		7		61		64		13
Other		11		32		33		5

Total		917	$	36,044	$	35,398	$	3,433


Puerto Rico
For the quarter ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial real estate non-owner occupied		10	$	48,719	$	48,868	$	10,682
Commercial real estate owner occupied		14		5,031		4,484		162
Commercial and industrial		12		6,834		6,997		439
Mortgage		133		8,284		13,146		957
Leasing		3		99		99		23
Consumer:
Credit cards		358		3,265		3,687		568
Personal		278		4,751		4,749		1,009
Auto		4		60		62		9
Other		11		27		38		5

Total		823	$	77,070	$	82,130	$	13,854


U.S. Mainland
For the quarter ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Mortgage		2	$	187	$	193	$	97
Consumer:
HELOCs		2		74		75		16
Personal		2		30		30		3

Total		6	$	291	$	298	$	116


Popular, Inc.
For the quarter ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial real estate non-owner occupied		10	$	48,719	$	48,868	$	10,682
Commercial real estate owner occupied		14		5,031		4,484		162
Commercial and industrial		12		6,834		6,997		439
Mortgage		135		8,471		13,339		1,054
Leasing		3		99		99		23
Consumer:
Credit cards		358		3,265		3,687		568
HELOCs		2		74		75		16
Personal		280		4,781		4,779		1,012
Auto		4		60		62		9
Other		11		27		38		5

Total		829	$	77,361	$	82,428	$	13,970


Puerto Rico
For the six months ended June 30, 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		3	$	6,520	$	6,504	$	4,169
Commercial real estate owner occupied		34		10,850		9,774		337
Commercial and industrial		15		3,586		3,583		(20	)
Mortgage		385		42,375		40,958		2,994
Consumer:
Credit cards		758		7,031		8,053		1,227
Personal		531		8,608		8,648		1,931
Auto		11		133		140		25
Other		21		55		57		10

Total		1,758	$	79,158	$	77,717	$	10,673


U.S. mainland
For the six months ended June 30, 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
Mortgage		19	$	1,961	$	2,063	$	633
Consumer:
HELOCs		3		355		398		216

Total		22	$	2,316	$	2,461	$	849


Popular, Inc.
For the six months ended June 30, 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		3	$	6,520	$	6,504	$	4,169
Commercial real estate owner occupied		34		10,850		9,774		337
Commercial and industrial		15		3,586		3,583		(20	)
Mortgage		404		44,336		43,021		3,627
Consumer:
Credit cards		758		7,031		8,053		1,227
HELOCs		3		355		398		216
Personal		531		8,608		8,648		1,931
Auto		11		133		140		25
Other		21		55		57		10

Total		1,780	$	81,474	$	80,178	$	11,522


Puerto Rico
For the six months ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family		2	$	551	$	551	$	2
Commercial real estate non-owner occupied		13		66,719		66,866		13,668
Commercial real estate owner occupied		19		9,790		9,036		333
Commercial and industrial		22		12,367		12,886		662
Construction		1		268		259		(166	)
Mortgage		278		24,186		29,912		2,296
Leasing		16		422		424		97
Consumer:
Credit cards		773		6,882		7,753		1,197
Personal		520		9,253		9,249		1,976
Auto		8		60		113		17
Other		22		56		67		9

Total		1,674	$	130,554	$	137,116	$	20,091


U.S. mainland
For the six months ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Mortgage		11	$	655	$	1,657	$	179
Consumer:
HELOCs		3		74		167		25
Personal		2		30		30		3

Total		16	$	759	$	1,854	$	207


Popular, Inc.
For the six months ended June 30, 2015
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family		2	$	551	$	551	$	2
Commercial real estate non-owner occupied		13		66,719		66,866		13,668
Commercial real estate owner occupied		19		9,790		9,036		333
Commercial and industrial		22		12,367		12,886		662
Construction		1		268		259		(166	)
Mortgage		289		24,841		31,569		2,475
Leasing		16		422		424		97
Consumer:
Credit cards		773		6,882		7,753		1,197
HELOCs		3		74		167		25
Personal		522		9,283		9,279		1,979
Auto		8		60		113		17
Other		22		56		67		9

Total		1,690	$	131,313	$	138,970	$	20,298

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 June 30, 2016 is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.


Puerto Rico
	Defaulted during the quarter ended June 30, 2016				Defaulted during the six months ended June 30, 2016
(Dollars in thousands)	Loan count		Recorded investment as of first default date		Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		—	$	—		2	$	327
Commercial real estate owner occupied		1		47		7		2,503
Commercial and industrial		2		27		2		27
Mortgage		55		5,501		82		8,734
Leasing		1		32		5		63
Consumer:
Credit cards		56		594		171		1,758
Personal		37		711		64		1,473
Auto		1		16		2		33

Total		153	$	6,928		335	$	14,918

During the quarter and six months ended June 30, 2016, there were no U.S. mainland TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date.


Popular, Inc.
	Defaulted during the quarter ended June 30, 2016				Defaulted during the six months ended June 30, 2016
(Dollars in thousands)	Loan count		Recorded investment as of first default date		Loan count		Recorded investment as of first default date
Commercial real estate non-owner occupied		—	$	—		2	$	327
Commercial real estate owner occupied		1		47		7		2,503
Commercial and industrial		2		27		2		27
Mortgage		55		5,501		82		8,734
Leasing		1		32		5		63
Consumer:
Credit cards		56		594		171		1,758
Personal		37		711		64		1,473
Auto		1		16		2		33

Total		153	$	6,928		335	$	14,918


Puerto Rico
	Defaulted during the quarter ended June 30, 2015				Defaulted during the six months ended June 30, 2015
(Dollars in thousands)	Loan count		Recorded investment as of first default date		Loan count		Recorded investment as of first default date
Commercial real estate owner occupied		—	$	—		1	$	291
Commercial and industrial		1		64		2		154
Construction		—		—		2		1,192
Mortgage		48		5,941		126		16,042
Leasing		4		36		5		43
Consumer:
Credit cards		138		1,225		240		2,341
Personal		31		474		50		692
Auto		—		—		4		78
Other		1		1		2		2

Total		223	$	7,741		432	$	20,835

During the quarter and six months ended June 30, 2015, there were no U.S. mainland TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date.


Popular, Inc.
	Defaulted during the quarter ended June 30, 2015				Defaulted during the six months ended June 30, 2015
(Dollars in thousands)	Loan count		Recorded investment as of first default date		Loan count		Recorded investment as of first default date
Commercial real estate owner occupied		—	$	—		1	$	291
Commercial and industrial		1		64		2		154
Construction		—		—		2		1,192
Mortgage		48		5,941		126		16,042
Leasing		4		36		5		43
Consumer:
Credit cards		138		1,225		240		2,341
Personal		31		474		50		692
Auto		—		—		4		78
Other		1		1		2		2

Total		223	$	7,741		432	$	20,835

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 June 30, 2016 and December 31, 2015.


June 30, 2016
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Sub-total		Pass/ Unrated		Total
Puerto Rico^[1]
Commercial multi-family	$	2,790	$	1,087	$	6,481	$	—	$	—	$	10,358	$	165,153	$	175,511
Commercial real estate non-owner occupied		310,305		387,592		372,370		—		—		1,070,267		1,528,364		2,598,631
Commercial real estate owner occupied		320,190		156,828		388,037		1,962		—		867,017		949,815		1,816,832
Commercial and industrial		129,988		149,177		230,046		605		40		509,856		2,116,222		2,626,078

Total Commercial		763,273		694,684		996,934		2,567		40		2,457,498		4,759,554		7,217,052
Construction		1,992		13,377		9,266		—		—		24,635		79,007		103,642
Mortgage		3,621		3,300		206,948		—		—		213,869		5,806,693		6,020,562
Leasing		—		—		2,930		—		89		3,019		661,075		664,094
Consumer:
Credit cards		—		—		17,225		—		—		17,225		1,097,215		1,114,440
HELOCs		—		—		293		—		—		293		9,200		9,493
Personal		1,118		1,332		20,891		—		—		23,341		1,165,025		1,188,366
Auto		—		—		11,048		—		70		11,118		818,739		829,857
Other		—		—		17,391		—		731		18,122		161,404		179,526

Total Consumer		1,118		1,332		66,848		—		801		70,099		3,251,583		3,321,682

Total Puerto Rico	$	770,004	$	712,693	$	1,282,926	$	2,567	$	930	$	2,769,120	$	14,557,912	$	17,327,032

U.S. mainland
Commercial multi-family	$	12,600	$	7,104	$	1,422	$	—	$	—	$	21,126	$	867,706	$	888,832
Commercial real estate non-owner occupied		34,514		198		15,428		—		—		50,140		1,043,713		1,093,853
Commercial real estate owner occupied		13,532		196		3,653		—		—		17,381		265,171		282,552
Commercial and industrial		4,423		971		150,035		—		—		155,429		722,097		877,526

Total Commercial		65,069		8,469		170,538		—		—		244,076		2,898,687		3,142,763
Construction		—		19,632		39,098		—		—		58,730		554,960		613,690
Mortgage		—		—		14,389		—		—		14,389		829,167		843,556
Legacy		1,061		679		5,318		—		—		7,058		42,651		49,709
Consumer:
Credit cards		—		—		535		—		—		535		102		637
HELOCs		—		—		1,428		—		2,433		3,861		275,590		279,451
Personal		—		—		540		—		804		1,344		282,192		283,536
Auto		—		—		—		—		—		—		15		15
Other		—		—		—		—		—		—		272		272

Total Consumer		—		—		2,503		—		3,237		5,740		558,171		563,911

Total U.S. mainland	$	66,130	$	28,780	$	231,846	$	—	$	3,237	$	329,993	$	4,883,636	$	5,213,629

Popular, Inc.
Commercial multi-family	$	15,390	$	8,191	$	7,903	$	—	$	—	$	31,484	$	1,032,859	$	1,064,343
Commercial real estate non-owner occupied		344,819		387,790		387,798		—		—		1,120,407		2,572,077		3,692,484
Commercial real estate owner occupied		333,722		157,024		391,690		1,962		—		884,398		1,214,986		2,099,384
Commercial and industrial		134,411		150,148		380,081		605		40		665,285		2,838,319		3,503,604

Total Commercial		828,342		703,153		1,167,472		2,567		40		2,701,574		7,658,241		10,359,815
Construction		1,992		33,009		48,364		—		—		83,365		633,967		717,332
Mortgage		3,621		3,300		221,337		—		—		228,258		6,635,860		6,864,118
Legacy		1,061		679		5,318		—		—		7,058		42,651		49,709
Leasing		—		—		2,930		—		89		3,019		661,075		664,094
Consumer:
Credit cards		—		—		17,760		—		—		17,760		1,097,317		1,115,077
HELOCs		—		—		1,721		—		2,433		4,154		284,790		288,944
Personal		1,118		1,332		21,431		—		804		24,685		1,447,217		1,471,902
Auto		—		—		11,048		—		70		11,118		818,754		829,872
Other		—		—		17,391		—		731		18,122		161,676		179,798

Total Consumer		1,118		1,332		69,351		—		4,038		75,839		3,809,754		3,885,593

Total Popular, Inc.	$	836,134	$	741,473	$	1,514,772	$	2,567	$	4,167	$	3,099,113	$	19,441,548	$	22,540,661

The following table presents the weighted average obligor risk rating at June 30, 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		11.15		6.12
Commercial real estate non-owner occupied		11.07		6.84
Commercial real estate owner occupied		11.28		7.06
Commercial and industrial		11.15		7.02

Total Commercial		11.17		6.95

Construction		11.26		7.49


U.S. mainland:	Substandard		Pass
Commercial multi-family		11.26		7.27
Commercial real estate non-owner occupied		11.02		6.86
Commercial real estate owner occupied		11.20		7.05
Commercial and industrial		11.53		6.10

Total Commercial		11.48		6.81

Construction		11.00		7.80

Legacy		11.15		7.85

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


December 31, 2015
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Sub-total		Pass/ Unrated		Total
Puerto Rico^[1]
Commercial multi-family	$	1,750	$	1,280	$	8,103	$	—	$	—	$	11,133	$	121,013	$	132,146
Commercial real estate non-owner occupied		319,564		423,095		399,076		—		—		1,141,735		1,527,357		2,669,092
Commercial real estate owner occupied		316,079		162,395		436,442		1,915		—		916,831		992,413		1,909,244
Commercial and industrial		187,620		146,216		256,821		690		29		591,376		2,066,361		2,657,737

Total Commercial		825,013		732,986		1,100,442		2,605		29		2,661,075		4,707,144		7,368,219
Construction		7,269		5,522		19,806		—		—		32,597		68,351		100,948
Mortgage		4,810		2,794		238,002		—		—		245,606		5,881,885		6,127,491
Leasing		—		—		3,009		—		—		3,009		624,641		627,650
Consumer:
Credit cards		—		—		19,098		—		—		19,098		1,109,247		1,128,345
HELOCs		—		—		394		—		—		394		10,294		10,688
Personal		1,606		1,448		23,116		—		—		26,170		1,176,665		1,202,835
Auto		—		—		11,609		—		30		11,639		804,311		815,950
Other		—		—		18,656		—		575		19,231		169,253		188,484

Total Consumer		1,606		1,448		72,873		—		605		76,532		3,269,770		3,346,302

Total Puerto Rico	$	838,698	$	742,750	$	1,434,132	$	2,605	$	634	$	3,018,819	$	14,551,791	$	17,570,610

U.S. mainland
Commercial multi-family	$	14,129	$	7,189	$	427	$	—	$	—	$	21,745	$	672,188	$	693,933
Commercial real estate non-owner occupied		57,450		6,741		16,646		—		—		80,837		882,186		963,023
Commercial real estate owner occupied		11,978		1,074		2,967		—		—		16,019		186,325		202,344
Commercial and industrial		10,827		5,344		131,933		—		—		148,104		723,540		871,644

Total Commercial		94,384		20,348		151,973		—		—		266,705		2,464,239		2,730,944
Construction		15,091		16,948		18,856		—		—		50,895		529,263		580,158
Mortgage		—		—		13,537		—		—		13,537		895,053		908,590
Legacy		1,823		1,973		6,134		—		—		9,930		54,506		64,436
Consumer:
Credit cards		—		—		—		—		—		—		13,935		13,935
HELOCs		—		—		1,550		—		2,626		4,176		300,308		304,484
Personal		—		—		637		—		603		1,240		171,386		172,626
Auto		—		—		—		—		—		—		28		28
Other		—		—		—		—		5		5		299		304

Total Consumer		—		—		2,187		—		3,234		5,421		485,956		491,377

Total U.S. mainland	$	111,298	$	39,269	$	192,687	$	—	$	3,234	$	346,488	$	4,429,017	$	4,775,505

Popular, Inc.
Commercial multi-family	$	15,879	$	8,469	$	8,530	$	—	$	—	$	32,878	$	793,201	$	826,079
Commercial real estate non-owner occupied		377,014		429,836		415,722		—		—		1,222,572		2,409,543		3,632,115
Commercial real estate owner occupied		328,057		163,469		439,409		1,915		—		932,850		1,178,738		2,111,588
Commercial and industrial		198,447		151,560		388,754		690		29		739,480		2,789,901		3,529,381

Total Commercial		919,397		753,334		1,252,415		2,605		29		2,927,780		7,171,383		10,099,163
Construction		22,360		22,470		38,662		—		—		83,492		597,614		681,106
Mortgage		4,810		2,794		251,539		—		—		259,143		6,776,938		7,036,081
Legacy		1,823		1,973		6,134		—		—		9,930		54,506		64,436
Leasing		—		—		3,009		—		—		3,009		624,641		627,650
Consumer:
Credit cards		—		—		19,098		—		—		19,098		1,123,182		1,142,280
HELOCs		—		—		1,944		—		2,626		4,570		310,602		315,172
Personal		1,606		1,448		23,753		—		603		27,410		1,348,051		1,375,461
Auto		—		—		11,609		—		30		11,639		804,339		815,978
Other		—		—		18,656		—		580		19,236		169,552		188,788

Total Consumer		1,606		1,448		75,060		—		3,839		81,953		3,755,726		3,837,679

Total Popular, Inc.	$	949,996	$	782,019	$	1,626,819	$	2,605	$	3,868	$	3,365,307	$	18,980,808	$	22,346,115

The following table presents the weighted average obligor risk rating at December 31, 2015 for those classifications that consider a range of rating scales.


Weighted average obligor risk rating Puerto Rico:^[1]	(Scales 11 and 12) Substandard		(Scales 1 through 8) Pass
Commercial multi-family		11.13		6.04
Commercial real estate non-owner occupied		11.09		6.67
Commercial real estate owner occupied		11.23		7.08
Commercial and industrial		11.15		7.13

Total Commercial		11.16		6.95

Construction		11.18		7.56


U.S. mainland:	Substandard		Pass
Commercial multi-family		11.00		7.15
Commercial real estate non-owner occupied		11.02		6.92
Commercial real estate owner occupied		11.07		7.23
Commercial and industrial		11.57		6.24

Total Commercial		11.50		6.81

Construction		11.00		7.79

Legacy		11.11		7.78

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

Note 11 – FDIC loss-share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss-share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss-share arrangements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The 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 80% 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 June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of period	$	219,448		$	409,844		$	310,221		$	542,454
Amortization of loss-share indemnification asset		(4,036	)		(31,065	)		(8,078	)		(58,381	)
Credit impairment losses (reversal) to be covered under loss-sharing agreements		475			7,647			(1,618	)		15,893
Reimbursable expenses		2,235			42,730			6,185			64,275
Recoveries reimbursable to the FDIC		(4,093	)		—			(4,093	)		—
Net payments from FDIC under loss-sharing agreements		—			(32,158	)		(88,588	)		(164,423	)
Other adjustments attributable to FDIC loss-sharing agreements		—			(4,051	)		—			(6,871	)

Balance at end of period	$	214,029		$	392,947		$	214,029		$	392,947

The loss-share arrangements applicable to commercial (including construction) and consumer loans expired during the quarter ended June 30, 2015 and provide for reimbursement to the FDIC through the quarter ending June 30, 2018. For the quarter ended June 30, 2016, these recoveries amounted to $4.1 million as detailed in the table above.

As of June 30, 2016, BPPR had unreimbursed loss claims related to the commercial loss-sharing arrangement amounting to $142 million, reflected in the FDIC indemnification asset as a receivable from the FDIC, which are subject to the arbitration proceedings described on Note 23, Commitments and Contingencies.

The weighted average life of the single family loan portfolio accounted for under ASC 310-30 subject to the FDIC loss-sharing agreement at June 30, 2016 is 7.80 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.

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 June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016		December 31, 2015
Carrying amount (fair value)	$	127,876	$	119,745
Undiscounted amount	$	169,396	$	168,692

The increase in the fair value of the true-up payment obligation was principally driven by a decrease in the discount rate, from 7.64% in 2015 to 7.05% in 2016 due to a decrease in the equivalent T Note.

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.

Note 12 – 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 June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Mortgage servicing fees, net of fair value adjustments:
Mortgage servicing fees	$	14,675		$	14,689		$	29,477		$	26,937
Mortgage servicing rights fair value adjustments		(4,340	)		(1,917	)		(12,817	)		(6,846	)

Total mortgage servicing fees, net of fair value adjustments		10,335			12,772			16,660			20,091

Net gain on sale of loans, including valuation on loans held-for-sale		8,474			8,022			15,584			15,302

Trading account (loss) profit:
Unrealized (losses) gains on outstanding derivative positions		(59	)		42			(139	)		59
Realized (losses) gains on closed derivative positions		(2,523	)		489			(5,327	)		(1,275	)

Total trading account (loss) profit		(2,582	)		531			(5,466	)		(1,216	)

Total mortgage banking activities	$	16,227		$	21,325		$	26,778		$	34,177

Note 13 – 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. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in accordance with the agencies’ servicing guidelines and standards. Substantially all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. 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 22 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters and six months ended June 30, 2016 and 2015 because they did not contain any credit recourse arrangements. During the quarter ended June 30, 2016, the Corporation recorded a net gain of $7.8 million (June 30, 2015 - $7.2 million) related to the residential mortgage loans securitized. During the six months ended June 30, 2016, the Corporation recorded a net gain of $14.2 million (June 30, 2015 - $13.7 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 and six months ended June 30, 2016 and 2015:


	Proceeds Obtained During the Quarter Ended June 30, 2016
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	170,115	$	—	$	170,115
Mortgage-backed securities - FNMA		—		43,078		—		43,078

Total trading account securities	$	—	$	213,193	$	—	$	213,193

Mortgage servicing rights	$	—	$	—	$	2,670	$	2,670

Total	$	—	$	213,193	$	2,670	$	215,863


	Proceeds Obtained During the Six Months Ended June 30, 2016
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	304,127	$	—	$	304,127
Mortgage-backed securities - FNMA		—		79,314		—		79,314

Total trading account securities	$	—	$	383,441	$	—	$	383,441

Mortgage servicing rights	$	—	$	—	$	4,540	$	4,540

Total	$	—	$	383,441	$	4,540	$	387,981


	Proceeds Obtained During the Quarter Ended June 30, 2015
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	243,374	$	—	$	243,374
Mortgage-backed securities - FNMA		—		70,477		—		70,477

Total trading account securities	$	—	$	313,851	$	—	$	313,851

Mortgage servicing rights	$	—	$	—	$	4,207	$	4,207

Total	$	—	$	313,851	$	4,207	$	318,058


	Proceeds Obtained During the Six Months Ended June 30, 2015
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	—	$	399,830	$	—	$	399,830
Mortgage-backed securities - FNMA		—		117,435		—		117,435

Total trading account securities	$	—	$	517,265	$	—	$	517,265

Mortgage servicing rights	$	—	$	—	$	6,769	$	6,769

Total	$	—	$	517,265	$	6,769	$	524,034

During the six months ended June 30, 2016, the Corporation retained servicing rights on whole loan sales involving approximately $34 million in principal balance outstanding (June 30, 2015 - $41 million), with realized gains of approximately $1.4 million (June 30, 2015 - gains of $1.7 million). All loan sales performed during the six months ended June 30, 2016 and 2015 were without credit recourse agreements.

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

The following table presents the changes in MSRs measured using the fair value method for the six months ended June 30, 2016 and 2015.


Residential MSRs
(In thousands)	June 30, 2016			June 30, 2015
Fair value at beginning of period	$	211,405		$	148,694
Additions		4,989			64,509
Changes due to payments on loans^[1]		(8,850	)		(8,850	)
Reduction due to loan repurchases		(734	)		(1,321	)
Changes in fair value due to changes in valuation model inputs or assumptions		(3,233	)		3,325

Fair value at end of period	$	203,577		$	206,357

[1]	Represents the change due to collection / realization of expected cash flow over time.

Additions to mortgage servicing rights for the quarter ended June 30, 2015 include those acquired as part of the Doral Bank Transaction.

Residential mortgage loans serviced for others were $20.0 billion at June 30, 2016 (December 31, 2015 - $20.6 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter and six months ended June 30, 2016 amounted to $14.7 million and $29.5 million, respectively (June 30, 2015 - $14.7 million and $26.9 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At June 30, 2016, those weighted average mortgage servicing fees were 0.29% (June 30, 2015 – 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 and six months ended June 30, 2016 and 2015 were as follows:


	Quarters ended						Six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Prepayment speed		5.7	%		6.9	%		5.5	%		7.1	%
Weighted average life		9.7 years			8.7 years			9.9 years			8.8 years
Discount rate (annual rate)		11.0	%		10.8	%		11.0	%		10.9	%

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 the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:


Originated MSRs
(In thousands)	June 30, 2016			December 31, 2015
Fair value of servicing rights	$	92,950		$	98,648
Weighted average life		7.5 years			7.3 years
Weighted average prepayment speed (annual rate)		5.4	%		6.0	%
Impact on fair value of 10% adverse change	$	(2,225	)	$	(2,488	)
Impact on fair value of 20% adverse change	$	(4,600	)	$	(5,241	)
Weighted average discount rate (annual rate)		11.5	%		11.5	%
Impact on fair value of 10% adverse change	$	(4,062	)	$	(4,083	)
Impact on fair value of 20% adverse change	$	(8,024	)	$	(8,206	)

The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:


Purchased MSRs
(In thousands)	June 30, 2016			December 31, 2015
Fair value of servicing rights	$	110,627		$	112,757
Weighted average life		6.5 years			6.2 years
Weighted average prepayment speed (annual rate)		5.9	%		6.9	%
Impact on fair value of 10% adverse change	$	(2,648	)	$	(2,871	)
Impact on fair value of 20% adverse change	$	(5,459	)	$	(6,034	)
Weighted average discount rate (annual rate)		11.0	%		11.0	%
Impact on fair value of 10% adverse change	$	(4,483	)	$	(4,211	)
Impact on fair value of 20% adverse change	$	(8,891	)	$	(8,525	)

The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

At June 30, 2016, the Corporation serviced $1.8 billion (December 31, 2015 - $1.9 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At June 30, 2016, the Corporation had recorded $156 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2015 - $140 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation. During the six months ended June 30, 2016, the Corporation repurchased approximately $ 39 million (June 30, 2015 - $60 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.

Note 14 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters and six months ended June 30, 2016 and 2015. During the second quarter of 2015, the corporation completed a bulk sale of $37 million of covered OREOs.


	For the quarter ended June 30, 2016
	Non-covered			Non-covered			Covered
	OREO			OREO			OREO
(In thousands)	Commercial/ Construction			Mortgage			Mortgage			Total
Balance at beginning of period	$	30,354		$	135,606		$	36,397		$	202,357
Write-downs in value		(561	)		(1,621	)		(366	)		(2,548	)
Additions		1,302			31,624			5,240			38,166
Sales		(6,985	)		(12,403	)		(3,307	)		(22,695	)
Other adjustments		—			(291	)		20			(271	)

Ending balance	$	24,110		$	152,915		$	37,984		$	215,009


	For the six months ended June 30, 2016
	Non-covered			Non-covered			Covered
	OREO			OREO			OREO
(In thousands)	Commercial/ Construction			Mortgage			Mortgage			.Total
Balance at beginning of period	$	32,471		$	122,760		$	36,685		$	191,916
Write-downs in value		(2,278	)		(3,630	)		(866	)		(6,774	)
Additions		3,112			55,900			9,723			68,735
Sales		(8,580	)		(20,903	)		(6,956	)		(36,439	)
Other adjustments		(615	)		(1,212	)		(602	)		(2,429	)

Ending balance	$	24,110		$	152,915		$	37,984		$	215,009


	For the quarter ended June 30, 2015
	Non-covered			Non-covered			Covered			Covered
	OREO			OREO			OREO			OREO
(In thousands)	Commercial/ Construction			Mortgage			Commercial/ Construction			Mortgage			Total
Balance at beginning of period	$	25,608		$	102,562		$	70,573		$	42,984		$	241,727
Write-downs in value		(4,162	)		(2,463	)		(10,955	)		(1,393	)		(18,973	)
Additions		2,793			18,532			5,623			8,879			35,827
Sales		(4,868	)		(14,243	)		(50,285	)		(13,806	)		(83,202	)
Other adjustments		850			50			(452	)		(68	)		380
Transfer to non-covered status^[1]		14,504			3,092			(14,504	)		(3,092	)		—

Ending balance	$	34,725		$	107,530		$	—		$	33,504		$	175,759

[1]	Represents the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared-loss arrangement with the FDIC related to loans acquired from Westernbank, on June 30, 2015.


	For the six months ended June 30, 2015
	Non-covered			Non-covered			Covered			Covered
	OREO			OREO			OREO			OREO
(In thousands)	Commercial/ Construction			Mortgage			Commercial/ Construction			Mortgage			Total
Balance at beginning of period	$	38,983		$	96,517		$	85,394		$	44,872		$	265,766
Write-downs in value		(10,049	)		(3,835	)		(20,350	)		(2,675	)		(36,909	)
Additions		4,828			39,607			9,661			14,260			68,356
Sales		(14,295	)		(27,329	)		(59,749	)		(19,628	)		(121,001	)
Other adjustments		754			(522	)		(452	)		(233	)		(453	)
Transfer to non-covered status^[1]		14,504			3,092			(14,504	)		(3,092	)		—

Ending balance	$	34,725		$	107,530		$	—		$	33,504		$	175,759

[1]	Represents the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared-loss arrangement with the FDIC related to loans acquired from Westernbank, on June 30, 2015.

Note 15 – Other assets

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


(In thousands)	June 30, 2016		December 31, 2015
Net deferred tax assets (net of valuation allowance)	$	1,243,783	$	1,302,452
Investments under the equity method		206,300		212,838
Prepaid taxes		185,021		180,969
Other prepaid expenses		79,324		79,215
Derivative assets		13,154		16,959
Trades receivable from brokers and counterparties		78,994		78,759
Principal, interest and escrow servicing advances		74,950		79,862
Guaranteed mortgage loan claims receivable		139,151		101,628
Others		158,383		140,480

Total other assets	$	2,179,060	$	2,193,162

Note 16 – Goodwill and other intangible assets

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2016 and 2015, allocated by reportable segments, were as follows (refer to Note 35 for the definition of the Corporation’s reportable segments):


2016
					Purchase
	Balance at		Goodwill on		accounting			Balance at
(In thousands)	January 1, 2016		acquisition		adjustments			June 30, 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


2015
					Purchase
	Balance at		Goodwill on		accounting			Balance at
(In thousands)	January 1, 2015		acquisition		adjustments			June 30, 2015
Banco Popular de Puerto Rico	$	250,109	$	3,899	$	(2,875	)	$	251,133
Banco Popular North America		215,567		38,735		—			254,302

Total Popular, Inc.	$	465,676	$	42,634	$	(2,875	)	$	505,435

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

The goodwill recorded during 2015 was related to the Doral Bank Transaction. The Corporation recorded purchase accounting adjustments during 2015 of $0.5 million related to the Doral Bank Transaction and of $2.4 million related to the acquisition of an insurance benefits business during 2014.

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


June 30, 2016
	Balance at				Balance at		Balance at				Balance at
	January 1,		Accumulated		January 1,		June 30,		Accumulated		June 30,
	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	$	—	$	280,221
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	$	164,411	$	631,095


December 31, 2015
(In thousands)	Balance at January 1, 2015 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2015 (net amounts)		Balance at December 31, 2015 (gross amounts)		Accumulated impairment losses		Balance at December 31, 2015 (net amounts)
Banco Popular de Puerto Rico	$	250,109	$	—	$	250,109	$	280,221	$	—	$	280,221
Banco Popular North America		379,978		164,411		215,567		510,578		164,411		346,167

Total Popular, Inc.	$	630,087	$	164,411	$	465,676	$	790,799	$	164,411	$	626,388

Other Intangible Assets

At June 30, 2016 and December 31, 2015, the Corporation had $ 6.1 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark.

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


(In thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
June 30, 2016
Core deposits	$	63,539	$	41,800	$	21,739
Other customer relationships		36,751		13,621		23,130

Total other intangible assets	$	100,290	$	55,421	$	44,869

December 31, 2015
Core deposits	$	63,539	$	38,464	$	25,075
Other customer relationships		37,665		10,745		26,920

Total other intangible assets	$	101,204	$	49,209	$	51,995

During the quarter ended June 30, 2016, the Corporation recognized $ 3.1 million in amortization expense related to other intangible assets with definite useful lives (June 30, 2015 - $ 2.9 million). During the six months ended June 30, 2016, the Corporation recognized $ 6.2 million in amortization related to other intangible assets with definite useful lives (June 30, 2015 - $ 5.0 million).

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


(In thousands)
Remaining 2016	$	5,933
Year 2017		9,378
Year 2018		9,286
Year 2019		9,042
Year 2020		4,967
Year 2021		2,157

Note 17 – Deposits

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


(In thousands)	June 30, 2016		December 31, 2015
Savings accounts	$	7,361,128	$	7,010,391
NOW, money market and other interest bearing demand deposits		6,890,874		5,632,449

Total savings, NOW, money market and other interest bearing demand deposits		14,252,002		12,642,840

Certificates of deposit:
Under $100,000		3,722,510		4,014,359
$100,000 and over		4,232,236		4,151,009

Total certificates of deposit		7,954,746		8,165,368

Total interest bearing deposits	$	22,206,748	$	20,808,208

A summary of certificates of deposit by maturity at June 30, 2016 follows:


(In thousands)
2016	$	3,004,445
2017		1,820,840
2018		962,140
2019		630,107
2020		944,251
2021 and thereafter		592,963

Total certificates of deposit	$	7,954,746

At June 30, 2016, the Corporation had brokered deposits amounting to $ 0.8 billion (December 31, 2015 - $ 1.3 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $8 million at June 30, 2016 (December 31, 2015 - $11 million).

Note 18 – Borrowings

The following table presents the composition of fed funds purchased and assets sold under agreements to repurchase at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016		December 31, 2015
Federal funds purchased	$	—	$	50,000
Assets sold under agreements to repurchase		821,604		712,145

Total federal funds purchased and assets sold under agreements to repurchase	$	821,604	$	762,145

The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with investment securities available-for-sale, other assets held-for-trading purposes or which have been obtained under agreements to resell. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of financial condition.

Repurchase agreements accounted for as secured borrowings


	June 30, 2016		December 31, 2015
(In thousands)	Repurchase liability		Repurchase liability
U.S. Treasury Securities
After 90 days	$	82,003	$	—

Total U.S. Treasury Securities		82,003		—

Obligations of U.S. government sponsored entities
Within 30 days		109,248		243,708
After 30 to 90 days		84,993		—
After 90 days		169,851		23,366

Total obligations of U.S. government sponsored entities		364,092		267,074

Mortgage-backed securities
Within 30 days		31,117		124,878
After 30 to 90 days		81,489		154,582
After 90 days		238,091		142,441

Total mortgage-backed securities		350,697		421,901

Collateralized mortgage obligations
Within 30 days		9,991		10,298
After 30 to 90 days		—		12,872
After 90 days		14,821		—

Total collateralized mortgage obligations		24,812		23,170

Total	$	821,604	$	712,145

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

The following table presents the composition of other short-term borrowings at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016		December 31, 2015
Advances with the FHLB paying interest at maturity, at fixed rate of 0.59%	$	30,000	$	—
Others		1,200		1,200

Total other short-term borrowings	$	31,200	$	1,200

Note: Refer to the Corporation’s 2015 Form 10-K for rates information at December 31, 2015.

The following table presents the composition of notes payable at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016		December 31, 2015
Advances with the FHLB with maturities ranging from 2016 through 2029 paying interest at monthly fixed rates ranging from 0.71% to 4.19 % (2015 - 0.41% to 4.19%)	$	631,029	$	747,072
Advances with the FHLB maturing on 2019 paying interest monthly at a floating rate of 0.34% over the 1 month LIBOR		13,000		—
Advances with the FHLB with maturities ranging from 2017 through 2019 paying interest quarterly at a floating rate from (0.12)% to 0.24% over the 3 month LIBOR		30,313		14,429
Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $6,254 (2015 - $7,296)		443,747		442,704
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327%, net of debt issuance costs of $490 (2015 - $505)		439,309		439,295
Others		18,550		19,008

Total notes payable	$	1,575,948	$	1,662,508

Note: Refer to the Corporation’s 2015 Form 10-K for rates information at December 31, 2015.

At June 30, 2016, the Corporation’s banking subsidiaries had credit facilities authorized with the FHLB and the Federal Reserve discount window aggregating to $4.1 billion and $1.3 billion (December 31, 2015 - $3.9 billion and $1.3 billion, respectively), which were collateralized by loans held-in-portfolio. At June 30, 2016, the Corporation used $929 million of the available credit facility with the FHLB (December 31, 2015 - $762 million), which includes $225 million used for a municipal letter of credit to secure deposits, while the borrowing capacity at the discount window remains unused.

A breakdown of borrowings by contractual maturities at June 30, 2016 is included in the table below.


(In thousands)	Fed funds purchased and assets sold under agreements to repurchase		Short-term borrowings		Notes payable		Total
Year
2016	$	692,703	$	31,200	$	37,673	$	761,576
2017		128,901		—		90,939		219,840
2018		—		—		184,407		184,407
2019		—		—		591,686		591,686
2020		—		—		112,456		112,456
Later years		—		—		558,787		558,787

Total borrowings	$	821,604	$	31,200	$	1,575,948	$	2,428,752

Note 19 – 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 June 30, 2016 and December 31, 2015.


As of June 30, 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	$	13,154	$	—	$	13,154	$	286	$	—	$	—	$	12,868
Reverse repurchase agreements		86,328		—		86,328		—		86,328		—		—

Total	$	99,482	$	—	$	99,482	$	286	$	86,328	$	—	$	12,868


As of June 30, 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 Pledged		Net Amount
Derivatives	$	11,879	$	—	$	11,879	$	286	$	2,351	$	—	$	9,242
Repurchase agreements		821,604		—		821,604		—		821,604		—		—

Total	$	833,483	$	—	$	833,483	$	286	$	823,955	$	—	$	9,242


As of December 31, 2015
							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	$	16,959	$	—	$	16,959	$	114	$	—	$	—	$	16,845
Reverse repurchase agreements		96,338		—		96,338		—		96,338		—		—

Total	$	113,297	$	—	$	113,297	$	114	$	96,338	$	—	$	16,845


As of December 31, 2015
							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	$	14,343	$	—	$	14,343	$	114	$	4,050	$	—	$	10,179
Repurchase agreements		712,145		—		712,145		—		712,145		—		—

Total	$	726,488	$	—	$	726,488	$	114	$	716,195	$	—	$	10,179

The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Corporation’s Repurchase Agreements and Reverse Repurchase Agreements have a right of set-off with the respective counterparty under the supplemental terms of the Master Repurchase Agreements. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them.

Note 20 – Stockholders’ equity

During the six months ended June 30, 2016, the Corporation declared quarterly dividends on its common stock of $0.15 per share, for a total of $ 31.1 million. The quarterly dividend declared to shareholders of record as of the close of business on June 10, 2016, which amounted to $15.6 million, was paid on July 1, 2016.

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 $495 million at June 30, 2016 (December 31, 2015 - $495 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters and six months ended June 30, 2016 and June 30, 2015.

Note 21 – Other comprehensive loss

The following table presents changes in accumulated other comprehensive loss by component for the quarters and six months ended June 30, 2016 and 2015.


	Changes in Accumulated Other Comprehensive Loss by Component [1]
		Quarters ended						Six months ended
		June 30,						June 30,
(In thousands)		2016			2015			2016			2015
Foreign currency translation	Beginning Balance	$	(36,635	)	$	(33,413	)	$	(35,930	)	$	(32,832	)

	Other comprehensive loss before reclassifications		(1,435	)		(1,092	)		(2,140	)		(1,673	)

	Net change		(1,435	)		(1,092	)		(2,140	)		(1,673	)

	Ending balance	$	(38,070	)	$	(34,505	)	$	(38,070	)	$	(34,505	)

Adjustment of pension and postretirement benefit plans	Beginning Balance	$	(208,510	)	$	(202,701	)	$	(211,276	)	$	(205,187	)

	Amounts reclassified from accumulated other comprehensive loss for amortization of net losses		3,347			3,065			6,693			6,130
	Amounts reclassified from accumulated other comprehensive loss for amortization of prior service cost		(580	)		(579	)		(1,160	)		(1,158	)

	Net change		2,767			2,486			5,533			4,972

	Ending balance	$	(205,743	)	$	(200,215	)	$	(205,743	)	$	(200,215	)

Unrealized holding gains (losses) on investments	Beginning Balance	$	63,791		$	42,750		$	(9,560	)	$	8,465

	Other comprehensive income (loss) before reclassifications		34,803			(39,172	)		108,154			(4,887	)
	Other-than-temporary impairment amount reclassified from accumulated other comprehensive income		167			11,959			167			11,959
	Amounts reclassified from accumulated other comprehensive income for gains on securities		—			(4	)		—			(4	)

	Net change		34,970			(27,217	)		108,321			7,068

	Ending balance	$	98,761		$	15,533		$	98,761		$	15,533

Unrealized net (losses) gains on cash flow hedges	Beginning Balance	$	(396	)	$	(1,036	)	$	(120	)	$	(318	)

	Other comprehensive (loss) income before reclassifications		(939	)		612			(2,158	)		(933	)
	Amounts reclassified from accumulated other comprehensive (loss) income		775			580			1,718			1,407

	Net change		(164	)		1,192			(440	)		474

	Ending balance	$	(560	)	$	156		$	(560	)	$	156

	Total	$	(145,612	)	$	(219,031	)	$	(145,612	)	$	(219,031	)

[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 and six months ended June 30, 2016 and 2015.


	Reclassifications Out of Accumulated Other Comprehensive Loss
		Quarters ended						Six months ended
	Affected Line Item in the	June 30,						June 30,
(In thousands)	Consolidated Statements of Operations	2016			2015			2016			2015
Adjustment of pension and postretirement benefit plans
Amortization of net losses	Personnel costs	$	(5,487	)	$	(5,025	)	$	(10,973	)	$	(10,050	)
Amortization of prior service cost	Personnel costs		950			950			1,900			1,900

	Total before tax		(4,537	)		(4,075	)		(9,073	)		(8,150	)

	Income tax benefit		1,770			1,589			3,540			3,178

	Total net of tax	$	(2,767	)	$	(2,486	)	$	(5,533	)	$	(4,972	)

Unrealized holding gains (losses) on investments
Other-than-temporary impairment	Other-than-temporary impairment losses on available-for-sale debt securities	$	(209	)	$	(14,445	)	$	(209	)	$	(14,445	)
Realized gains on sale of securities	Net gain and valuation adjustments on investment securities		—			5			—			5

	Total before tax		(209	)		(14,440	)		(209	)		(14,440	)

	Income tax benefit		42			2,485			42			2,485

	Total net of tax	$	(167	)	$	(11,955	)	$	(167	)	$	(11,955	)

Unrealized net (losses) gains on cash flow hedges
Forward contracts	Mortgage banking activities	$	(1,271	)	$	(951	)	$	(2,816	)	$	(2,309	)

	Total before tax		(1,271	)		(951	)		(2,816	)		(2,309	)

	Income tax benefit		496			371			1,098			902

	Total net of tax	$	(775	)	$	(580	)	$	(1,718	)	$	(1,407	)

	Total reclassification adjustments, net of tax	$	(3,709	)	$	(15,021	)	$	(7,418	)	$	(18,334	)

Note 22 – Guarantees

At June 30, 2016, the Corporation recorded a liability of $0.6 million (December 31, 2015 - $0.5 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. 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 June 30, 2016, the Corporation serviced $ 1.8 billion (December 31, 2015 - $ 1.9 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter and six months ended June 30, 2016, the Corporation repurchased approximately $ 10 million and $ 23 million, respectively, of unpaid principal balance in mortgage loans subject to the credit recourse provisions (June 30, 2015 - $ 14 million and $ 30 million, respectively). 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 June 30, 2016, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 57 million (December 31, 2015 - $ 59 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 and six month periods ended June 30, 2016 and 2015.


	Quarters ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Balance as of beginning of period	$	57,994		$	59,385		$	58,663		$	59,438
Provision for recourse liability		3,607			4,368			7,527			10,868
Net charge-offs		(4,670	)		(6,164	)		(9,259	)		(12,717	)

Balance as of end of period	$	56,931		$	57,589		$	56,931		$	57,589

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. To the extend 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 six months period ended June 30, 2016, BPPR did not repurchase loans under representation and warranty arrangements. Repurchases during the six months ended June 30, 2015 were minimal. 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 and six months ended June 30, 2016 and 2015.


	Quarters ended June 30,					Six months ended June 30,
(In thousands)	2016		2015			2016			2015
Balance as of beginning of period	$	8,002	$	14,044		$	8,087		$	15,959
Provision (reversal) for representation and warranties		2,695		(5,707	)		2,801			(7,608	)
Net recoveries (charge-offs)		5		(25	)		(186	)		(39	)
Settlements paid		—		(2,250	)		—			(2,250	)

Balance as of end of period	$	10,702	$	6,062		$	10,702		$	6,062

In addition, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009, which amounted to $ 4 million at June 30, 2016 (December 31, 2015 - $ 4 million). E-LOAN is no longer originating and selling loans.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At June 30, 2016, the Corporation serviced $20.0 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2015 - $20.6 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At June 30, 2016, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $75 million, including advances on the portfolio acquired from Doral Bank (December 31, 2015 - $80 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 149 million at June 30, 2016 (December 31, 2015 - $ 149 million). In addition, at June 30, 2016 and December 31, 2015, PIHC fully and unconditionally guaranteed on a subordinated basis $ 427 million and $ 427 million, respectively, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement.

Note 23 – Commitments and contingencies

Off-balance sheet risk

The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of financial condition.

Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows:


(In thousands)	June 30, 2016		December 31, 2015
Commitments to extend credit:
Credit card lines	$	4,572,786	$	4,552,331
Commercial and construction lines of credit		2,490,300		2,619,092
Other consumer unused credit commitments		259,613		262,685
Commercial letters of credit		1,709		2,040
Standby letters of credit		34,821		49,670
Commitments to originate or fund mortgage loans		24,941		21,311

At June 30, 2016 and December 31, 2015, the Corporation maintained a reserve of approximately $9 million and $10 million, respectively, for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.

Other commitments

At June 30, 2016 and December 31, 2015, the Corporation also maintained other non-credit commitments for approximately $372 thousand and $9 million, respectively, primarily for the acquisition of other investments.

Business concentration

Since the Corporation’s business activities are currently concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 35 to the consolidated financial statements.

Since February 2014, the three principal rating agencies (Moody’s, S&P and Fitch) have lowered their ratings on the General Obligation bonds of the Commonwealth and the bonds of several other Commonwealth instrumentalities to non-investment grade ratings. In connection with their rating actions, the rating agencies noted various factors, including high levels of public debt, the lack of a clear economic growth catalyst, recurring fiscal budget deficits, the financial condition of the public sector employee pension plans and, more recently, liquidity concerns regarding the Commonwealth and the GDB and their ability to access the capital markets. Currently, the Commonwealth’s general obligation ratings are as follows: S&P, ‘CC’, Moody’s, ‘Caa3’, and Fitch, ‘CC’.

independence from the central Government and many receive appropriations or other payments from it. At June 30, 2016, BPPR is a lender in a syndicated credit facility to PREPA and its exposure was of $39.5 million. The facility is classified as held-for-sale as BPPR has the ability and intent to sell the loan. The remaining $ 520 million outstanding represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment ($ 502 million at December 31, 2015). These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. These loans have seniority to the payment of operating cost and expenses of the municipality. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these loans and securities, resulting in losses to us. The 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 1 to 5 years	$	851	$	—	$	851	$	851
After 5 to 10 years		3,480		—		3,480		3,480
After 10 years		15,265		—		15,265		15,265

Total Central Government		19,596		—		19,596		19,596

Government Development Bank (GDB)
Within 1 year		3		—		3		3
After 1 to 5 years		1,675		—		1,675		1,675
After 5 to 10 years		48		—		48		48

Total Government Development Bank (GDB)		1,726		—		1,726		1,726

Public Corporations:
Puerto Rico Aqueduct and Sewer Authority
Within 1 year		—		—		—		27,186
After 10 years		480		—		480		480

Total Puerto Rico Aqueduct and Sewer Authority		480		—		480		27,666

Puerto Rico Electric Power Authority
Within 1 year		—		39,544		39,544		39,544
After 10 years		23		—		23		23

Total Puerto Rico Electric Power Authority		23		39,544		39,567		39,567

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		3,050		23,747		26,797		26,797
After 1 to 5 years		14,270		130,935		145,205		145,205
After 5 to 10 years		18,930		146,762		165,692		165,692
After 10 years		18,690		163,756		182,446		182,446

Total Municipalities		54,940		465,200		520,140		520,140

Total Direct Government Exposure	$	76,769	$	504,744	$	581,513	$	608,699

In addition, at June 30, 2016, the Corporation had $418 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $334 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2015 - $316 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Under recently enacted legislation, the Governor is authorized to impose a temporary moratorium on the financial obligations of Puerto Housing Finance Authority. Also, the Corporation had $51 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMO’s, and $33 million of commercial real estate notes ($50 million and $28 million at December 31, 2015, respectively).

Other contingencies

As indicated in Note 11 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 $ 128 million at June 30, 2016 (December 31, 2015 - $ 120 million). For additional information refer to Note 11.

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.

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 $37.6 million as of June 30, 2016. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, management believes that the amount it has already accrued is adequate and any incremental liability arising from the Corporation’s legal proceedings will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation’s consolidated financial position in a particular period.

Set forth below are descriptions of the Corporation’s material legal proceedings.

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, additionally, that the overdraft rates and fees assessed by PCB violate New York’s usury laws. The complaint seeks unspecified damages, including punitive damages, interest, disbursements, and attorneys’ fees and costs.

PCB removed the case to federal court (SDNY) and plaintiffs subsequently filed a motion to remand the action to state court, which the Court granted on August 6, 2013. 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 the partial denial of PCB’s motion to dismiss. Plaintiffs are to file a motion requesting class certification by August 19, 2016. Discovery is ongoing.

BPPR has been named a defendant in a putative class action complaint captioned Neysha Quiles et al. v. Banco Popular de Puerto Rico et al., filed in December 2013 in the United States District Court for the District of Puerto Rico (USDC-PR). Plaintiffs essentially allege that they and others, who have been employed by the Defendants as “bank tellers” and other similarly titled positions, have been paid only for scheduled work time, rather than time actually worked. The complaint seeks to maintain a collective action under the Fair Labor Standards Act (“FLSA”) on behalf of all individuals formerly or currently employed by BPPR in Puerto Rico and the Virgin Islands as hourly paid, non-exempt, bank tellers or other similarly titled positions at any time during the past three years. Specifically, the complaint alleges that BPPR violated FLSA by willfully failing to pay overtime premiums. Similar claims were brought under Puerto Rico law. On January 31, 2014, the Popular defendants filed an answer to the complaint. On January 9, 2015, plaintiffs submitted a motion for conditional class certification, which BPPR opposed. On February 18, 2015, the Court entered an order whereby it granted plaintiffs’ request for conditional certification of the FLSA action. Following the Court’s order, plaintiffs sent out notices to all purported class members with instructions for opting into the class. Approximately sixty potential class members opted into the class prior to the expiration of the opt-in period. On June 25, 2015, the Court denied with prejudice plaintiffs’ motion for class certification under Rule 23 of the Federal Rules of Civil Procedure. On October 20, 2015, the parties reached an agreement in principle to resolve the referenced action for an immaterial amount, subject to their reaching an agreement on the payment of reasonable attorneys’ fees. The parties submitted briefing to the Court on this issue and are currently awaiting the Court’s final determination.

BPPR and Popular Securities have also been named defendants in a putative class action complaint captioned Nora Fernandez, et al. v. UBS, et al., filed in the United States District Court for the Southern District of New York (SDNY) on May 5, 2014 on behalf of investors in 23 Puerto Rico closed-end investment companies. UBS Financial Services Incorporated of Puerto Rico, another named defendant, is the sponsor and co-sponsor of all 23 funds, while BPPR was co-sponsor, together with UBS, of nine (9) of those funds. Plaintiffs allege breach of fiduciary duty and breach of contract against Popular Securities, aiding and abetting breach of fiduciary duty against BPPR, and similar claims against the UBS entities. The complaint seeks unspecified damages, including disgorgement of fees and attorneys’ fees. On May 30, 2014, plaintiffs voluntarily dismissed their class action in the SDNY and on that same date, they filed a virtually identical complaint in the USDC-PR and requested that the case be consolidated with the matter of In re: UBS Financial Services Securities Litigation, a class action currently pending before the USDC-PR in which neither BPPR nor Popular Securities are parties. The UBS defendants filed an opposition to the consolidation request and moved to transfer the case back to the SDNY on the ground that the relevant agreements between the parties contain a choice of forum clause, with New York as the selected forum. The Popular defendants joined the opposition and motion filed by UBS. By order dated January 30, 2015, the court denied the plaintiffs’ motion to consolidate. By order dated March 30, 2015, the court granted defendants’ motion to transfer. On May 8, 2015, plaintiffs filed an amended complaint in the SDNY containing virtually identical allegations with respect to Popular Securities and BPPR. Defendants filed motions to dismiss the amended complaint on June 18, 2015. Those motions are pending the Court’s determination.

BPPR was named a defendant in a putative class action complaint titled In re 2014 RadioShack ERISA Litigation, filed in U.S. District Court for the Northern District of Texas. The complaint alleges that certain employees of RadioShack incurred losses in their 401(k) plans because various fiduciaries elected to retain RadioShack’s company stock in the portfolio of potential investment options. The complaint further asserts that once RadioShack’s financial situation began to deteriorate in 2011, the fiduciaries of the RadioShack 401(k) Plan and the RadioShack Puerto Rico 1165(e) Plan (collectively, “the Plans”) should have removed RadioShack company stock from the portfolio of potential investment options.

Popular was a directed trustee, and therefore a fiduciary, of the RadioShack Puerto Rico 1165(e) Plan (“PR Plan”). Even though the PR Plan directed BPPR to retain RadioShack company stock within the portfolio of investment options, the complaint alleges that a

trustee’s duty of prudence requires it to disregard plan documents or directives that it knows or reasonably should know would lead to an imprudent result or would otherwise harm plan participants or beneficiaries. It further alleges that BPPR breached its fiduciary duties by (i) failing to take any meaningful steps to protect plan participants from losses that it knew would occur; (ii) failing to divest the PR Plan of company stock; and (iii) participating in the decisions of another trustee (Wells Fargo) to protect the Plans from inevitable losses.

On November 23, 2015, the parties attended a mediation session, as a result of which the parties agreed to settle this matter for an immaterial amount, with BPPR contributing approximately $45,000. On February 22, 2016, the RadioShack defendants submitted an opposition to the bar provisions of BPPR’s proposed settlement whereby they conditioned such settlement to BPPR’s agreement to a proportional methodology to any subsequent settlement. Under this scenario, BPPR could have remained potentially liable for an additional proportional amount, should plaintiffs appeal the dismissal of their claim and win on appeal. On July 18, 2016, the court held a settlement fairness hearing whereby it accepted the parties’ settlement agreement in all relevant respects concluding this matter with respect to BPPR.

Other Matters

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 58 arbitration proceedings with aggregate claimed damages of approximately $140 million, including one arbitration with claimed damages of $78 million in which one other Puerto Rico broker-dealer is a co-defendant. The proceedings are in their early stages and 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.

As mortgage lenders, 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 and the Special Inspector General for the Troubled Asset Relief Program mainly concerning mortgages and real estate appraisals in Puerto Rico. The Corporation is cooperating with these requests.

Other Significant Proceedings

As described under “Note 11 – 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 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 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 provides for loss sharing by the FDIC through the quarter ending June 30, 2015 and for reimbursement to the FDIC for recoveries through the quarter ending June 30, 2018.

For the quarters ended June 30, 2010 through March 31, 2012, BPPR received reimbursement for loss-share claims submitted to the FDIC, including charge-offs for certain commercial late stage real-estate-collateral-dependent loans and OREO calculated in accordance with BPPR’s charge-off policy for non-covered assets. When BPPR submitted its shared-loss claim in connection with the June 30, 2012 quarter, however, the FDIC refused to reimburse BPPR for a portion of the claim because of a difference related to the methodology for the computation of charge-offs for certain commercial late stage real-estate-collateral-dependent loans and OREO. In accordance with the terms of the commercial loss share agreement, BPPR applied a methodology for charge-offs for late stage real-estate-collateral-dependent loans that conforms to its regulatory supervisory criteria and is calculated in accordance with BPPR’s charge-off policy for non-covered assets. The FDIC stated that it believed that BPPR should use a different methodology for those charge-offs. Notwithstanding the FDIC’s refusal to reimburse BPPR for certain shared-loss claims, BPPR had continued to calculate shared-loss claims for quarters subsequent to June 30, 2012 in accordance with its charge-off policy for non-covered assets.

BPPR’s loss share agreements with the FDIC specify that disputes can be submitted to arbitration before a review board under the commercial arbitration rules of the American Arbitration Association. On July 31, 2013, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board determine certain matters relating to the loss-share claims under its commercial loss share agreement with the FDIC, including that the review board award BPPR the amounts owed under its unpaid quarterly certificates. The statement of claim also included requests for reimbursement of certain valuation adjustments for discounts to appraised values, costs to sell troubled assets and other items. The review board was comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators.

On October 17, 2014, BPPR and the FDIC settled all claims and counterclaims that had been submitted to the review board. The settlement provides for an agreed valuation methodology for reimbursement of charge-offs for late stage real-estate-collateral-dependent loans and resulting OREO. BPPR applied this valuation methodology to charge-offs claimed on late stage real-estate-collateral-dependent loans and resulting OREO during the remaining term of the commercial loss-sharing agreement which expired on June 30, 2015.

On November 25, 2014, the FDIC notified BPPR that it (a) would not reimburse BPPR under the commercial loss share agreement for a $66.6 million loss claim on eight related real estate loans that BPPR restructured and consolidated (collectively, the “Disputed Asset”), and (b) would no longer treat the Disputed Asset as a “Shared-Loss Asset” under the commercial loss share agreement. The FDIC alleged that BPPR’s restructure and modification of the underlying loans did not constitute a “Permitted Amendment” under the commercial loss share agreement, thereby causing the bank to breach Article III of the commercial loss share agreement. BPPR disagrees with the FDIC’s determinations relating to the Disputed Asset, and accordingly, on December 19, 2014, delivered to the FDIC a notice of dispute under the commercial loss share agreement.

On March 19, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board determine BPPR and the FDIC’s disputes concerning the Disputed Asset. The statement of claim requests a declaration that the Disputed Asset is a “Shared-Loss Asset” under the commercial loss share agreement, a declaration that the restructuring is a “Permitted Amendment” under the commercial loss share agreement, and an order that the FDIC reimburse the bank for approximately $53.3 million for the Charge-Off of the Disputed Asset, plus interest at the applicable rate. On April 1, 2015, the FDIC notified BPPR that it was clawing back approximately $1.7 million in reimbursable expenses relating to the Disputed Asset that the FDIC had previously paid to BPPR. Thus, on April 13, 2015, BPPR notified the American Arbitration Association and the FDIC of an increase in the amount of its damages by approximately $1.7 million. The review board in the arbitration concerning the Disputed Asset is comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. The arbitration hearing has been scheduled for August 2016.

In addition, in November and December 2014, BPPR proposed separate portfolio sales of Shared-Loss Assets to the FDIC. The FDIC refused to consent to either sale, stating that those sales did not represent best efforts to maximize collections on Shared-Loss Assets under the commercial loss share agreement. In March 2015, BPPR proposed a third portfolio sale to the FDIC, and in May 2015, BPPR proposed a fourth portfolio sale to the FDIC.

BPPR disagrees with the FDIC’s characterization of the November and December 2014 portfolio sale proposals and with the FDIC’s interpretation of the commercial loss share agreement provision governing portfolio sales. Accordingly, on March 13, 2015, BPPR delivered to the FDIC a notice of dispute under the commercial loss share agreement. On June 8, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board resolve the disputes concerning those proposed portfolio sales. On June 15, 2015, BPPR amended its statement of claim to include a claim for the FDIC-R’s refusal to timely concur in the third sale proposed in March 2015. On June 29, 2015, the FDIC informed BPPR that it would reimburse the bank for losses arising from the primary portfolio of the third proposed sale, but only subject to conditions to which BPPR objected. The FDIC also informed BPPR that it would not concur in the sale of the remainder (the “secondary portfolio”) of the third proposed sale or in the fourth proposed sale. On September 4, 2015, BPPR filed a second amended statement of claim concerning the FDIC’s refusal to concur in the third and fourth portfolio sales as proposed by BPPR.

On November 25, 2015, BPPR completed the sale of the loans in the primary portfolio of the third proposed sale, and subsequently submitted a claim for reimbursement for a portion of its losses arising from that sale, which the FDIC partially reimbursed on July 18, 2016. On June 30, 2016, BPPR completed the sales of the remaining loans included in the proposed portfolio sales.

In connection with the arbitration concerning the proposed portfolio sales, BPPR is seeking damages in the amount of $88.5 million plus interest. The FDIC has filed a counterclaim for recoveries allegedly lost on six loans included in the third proposed sale and on the loans and related assets included in the subsequent sales. The review board in the arbitration concerning the proposed portfolio sales is comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. The arbitration hearing is scheduled to be held in the fall of 2016. The FDIC’s counterclaim will be adjudicated by the review board after it issues an award on the other issues in the portfolio sales arbitration.

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 the $6.9 million in losses claimed under the denied claims. In support of its denial, the FDIC alleged that BPPR did not comply with its obligation 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 disagrees 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 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. The review board in the arbitration concerning the proposed portfolio sales is comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator to be selected by agreement of those arbitrators. The arbitration hearing has not yet been scheduled.

The commercial shared-loss arrangement described above expired on June 30, 2015, when the three year recovery period commenced. As of June 30, 2016, BPPR had unreimbursed loss claims related to this arrangement amounting to approximately $142 million, reflected in the FDIC indemnification asset as a receivable from the FDIC, which are subject to the arbitration proceedings described above. Until these disputes are finally resolved, the terms of the commercial loss share agreement will remain in effect with respect to any such items under dispute. No assurance can be given that we will receive reimbursement from the FDIC with respect to the foregoing items, which could require us to make a material adjustment to 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.

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 June 30, 2016, the carrying value of covered loans approximated $607 million, mainly comprised of single-family residential mortgage loans. To the extent that estimated losses on covered loans are not realized before the expiration of the applicable loss sharing agreement, such losses would not be subject to reimbursement from the FDIC and, accordingly, would require us to make a material adjustment in the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken.

Note 24 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision-making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary. Furthermore, the Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt.

Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE.

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 trusts and guaranteed mortgage securitization transactions 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 June 30, 2016.

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 26 to the consolidated financial statements for additional information on the debt securities outstanding at June 30, 2016 and December 31, 2015, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation may retain 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. Pursuant to ASC Subtopic 810-10, the servicing fees that the Corporation receives for its servicing role are considered variable interests in the VIEs since the servicing fees are subordinated to the principal and interest that first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies.

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 with non-consolidated VIEs at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016		December 31, 2015
Assets
Servicing assets:
Mortgage servicing rights	$	160,384	$	163,224

Total servicing assets	$	160,384	$	163,224

Other assets:
Servicing advances	$	21,753	$	24,431

Total other assets	$	21,753	$	24,431

Total assets	$	182,137	$	187,655

Maximum exposure to loss	$	182,137	$	187,655

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $12.6 billion at June 30, 2016 (December 31, 2015 - $12.8 billion).

Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at June 30, 2016 and December 31, 2015, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

In September of 2011, BPPR sold construction and commercial real estate loans with a fair value of $148 million, and most of which were non-performing, to a newly created joint venture, PRLP 2011 Holdings, LLC. The joint venture was 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 venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to the joint venture for the acquisition of the loans in an amount equal to the sum of 57% of the purchase price of the loans, or $84 million, and $2 million of closing costs, for a total acquisition loan of $86 million (the “acquisition loan”). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $68.5 million 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 to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in September 2011, BPPR received $ 48 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture.

BPPR accounted for this transaction as a true sale pursuant to ASC Subtopic 860-10 and thus recognized the cash received, its equity investment in the joint venture, and the acquisition loan provided to the joint venture and derecognized the loans sold.

The Corporation has determined that PRLP 2011 Holdings, LLC is a VIE 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 venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture.

The Corporation holds variable interests in this VIE in the form of the 24.9% equity interest (the “Investment in PRLP 2011 Holdings, LLC”) and the financing provided to the joint venture. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.

parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the joint venture, for a total net equity of $63 million. Accordingly, the 24.9% equity interest held by the Corporation was valued at $16 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs.

The following table presents the carrying amount and classification of the assets and liabilities related to the Corporation’s variable interests in the non-consolidated VIE, PRLP 2011 Holdings, LLC, and its maximum exposure to loss at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016			December 31, 2015
Assets
Loans held-in-portfolio:
Advances under the working capital line	$	—		$	579
Advances under the advance facility		—			401

Total loans held-in-portfolio	$	—		$	980

Accrued interest receivable	$	—		$	10
Other assets:
Investment in PRLP 2011 Holdings LLC	$	9,076		$	13,069

Total assets	$	9,076		$	14,059

Deposits	$	(2,806	)	$	(18,808	)

Total liabilities	$	(2,806	)	$	(18,808	)

Total net assets (liabilities)	$	6,270		$	(4,749	)

Maximum exposure to loss	$	6,270		$	—

The Corporation determined that the maximum exposure to loss under a worst case scenario at June 30, 2016 would be not recovering the equity interest held by the Corporation, net of the deposits.

On March 25, 2013, BPPR completed a sale of assets with a book value of $509.0 million, of which $500.6 million were in non-performing status, comprised of commercial and construction loans, and commercial and single family real estate owned, with a combined unpaid principal balance on loans and appraised value of other real estate owned of approximately $987.0 million to a newly created joint venture, PR Asset Portfolio 2013-1. The joint venture was 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 venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to the joint venture for the acquisition of the assets in an amount equal to the sum of 57% of the purchase price of the assets, and closing costs, for a total acquisition loan of $182.4 million (the “acquisition loan”). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $35.0 million to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $30.0 million to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in March 2013, BPPR received $92.3 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture.

The Corporation has determined that PR Asset Portfolio 2013-1 International, LLC is a VIE but the Corporation is not the primary beneficiary. All decisions are made by 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 venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture. Also, the Manager delegates the day-to-day management and servicing of the loans to PR Asset Portfolio Servicing International, LLC, an affiliate of CPG.

The initial fair value of the Corporation’s equity interest in the joint venture was determined based on the fair value of the loans and real estate owned transferred to the joint venture of $306 million which represented the purchase price of the loans agreed by the parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the joint venture, for a total net equity of $124 million. Accordingly, the 24.9% equity interest held by the Corporation was valued at $31 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs.

The Corporation holds variable interests in this VIE in the form of the 24.9% equity interest (the “Investment in PR Asset Portfolio 2013-1 International, LLC”) and the financing provided to the joint venture. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.

The following table presents the carrying amount and classification of the assets and liabilities related to the Corporation’s variable interests in the non-consolidated VIE, PR Asset Portfolio 2013-1 International, LLC, and its maximum exposure to loss at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016			December 31, 2015
Assets
Loans held-in-portfolio:
Acquisition loan	$	—		$	35,121
Advances under the working capital line		794			885
Advances under the advance facility		24,649			22,296

Total loans held-in-portfolio	$	25,443		$	58,302

Accrued interest receivable	$	82		$	169
Other assets:
Investment in PR Asset Portfolio 2013-1 International, LLC	$	24,771		$	25,094

Total assets	$	50,296		$	83,565

Deposits	$	(10,558	)	$	(11,772	)

Total liabilities	$	(10,558	)	$	(11,772	)

Total net assets	$	39,738		$	71,793

Maximum exposure to loss	$	39,738		$	71,793

The Corporation determined that the maximum exposure to loss under a worst case scenario at June 30, 2016 would be not recovering the carrying amount of the advances on the advance facility, the working capital line, and the equity interest held by the Corporation, net of the deposits.

Note 25 – 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 June 30, 2016, the Corporation’s stake in EVERTEC was 15.74%.The Corporation continues to have significant influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.

On May 26, 2016, EVERTEC, Inc. filed its Annual Report on Form 10-K for the year ended December 31, 2015, which included restated audited results for the years ended December 31, 2014 and 2013, correcting certain errors involved with the accounting for tax positions taken by EVERTEC in the 2010 tax year and other miscellaneous accounting adjustments. The Corporation’s proportionate share of the cumulative impact of EVERTEC’s restatement and other corrective adjustments to its financial statements was approximately $2.2 million and is reflected as part of other non-interest income.

The Corporation received $ 2.3 million in dividend distributions during the six months ended June 30, 2016 from its investments in EVERTEC’s holding company (June 30, 2015 - $ 2.3 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)	June 30, 2016		December 31, 2015
Equity investment in EVERTEC	$	35,073	$	33,590

The Corporation had the following financial condition balances outstanding with EVERTEC at June 30, 2016 and December 31, 2015. Items that represent liabilities to the Corporation are presented with parenthesis.


(In thousands)	June 30, 2016			December 31, 2015
Accounts receivable (Other assets)	$	2,909		$	3,148
Deposits		(15,660	)		(23,973	)
Accounts payable (Other liabilities)		(17,308	)		(16,192	)

Net total	$	(30,059	)	$	(37,017	)

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of EVERTEC’s income (loss) and changes in stockholders’ equity for the quarters and six months ended June 30, 2016 and 2015.


	Quarter ended			Six months ended
(In thousands)	June 30, 2016			June 30, 2016
Share of income from the investment in EVERTEC	$	3,185		$	6,199
Share of other changes in EVERTEC’s stockholders’ equity		(1,537	)		(1,325	)

Share of EVERTEC’s changes in equity recognized in income	$	1,648		$	4,874


	Quarter ended		Six months ended
(In thousands)	June 30, 2015		June 30, 2015
Share of income from the investment in EVERTEC	$	3,046	$	5,915
Share of other changes in EVERTEC’s stockholders’ equity		214		565

Share of EVERTEC’s changes in equity recognized in income	$	3,260	$	6,480

The following tables present the transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarters and six months ended June 30, 2016 and 2015. Items that represent expenses to the Corporation are presented with parenthesis.


	Quarter ended			Six months ended
(In thousands)	June 30, 2016			June 30, 2016			Category
Interest expense on deposits	$	(17	)	$	(36	)		Interest expense
ATH and credit cards interchange income from services to EVERTEC		7,497			14,415			Other service fees
Rental income charged to EVERTEC		1,736			3,472			Net occupancy
Processing fees on services provided by EVERTEC		(43,262	)		(86,778	)		Professional fees
Other services provided to EVERTEC		258			514			Other operating expenses

Total	$	(33,788	)	$	(68,413	)


	Quarter ended			Six months ended
(In thousands)	June 30, 2015			June 30, 2015			Category
Interest expense on deposits	$	(15	)	$	(26	)		Interest expense
ATH and credit cards interchange income from services to EVERTEC		7,166			13,653			Other service fees
Rental income charged to EVERTEC		1,723			3,447			Net occupancy
Processing fees on services provided by EVERTEC		(41,946	)		(81,450	)		Professional fees
Other services provided to EVERTEC		384			708			Other operating expenses

Total	$	(32,688	)	$	(63,668	)

EVERTEC had a letter of credit issued by BPPR, for the amount of $ 4.2 million at December 31, 2015, which expired on February 10, 2016.

PRLP 2011 Holdings LLC

As indicated in Note 24 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)	June 30, 2016		December 31, 2015
Equity investment in PRLP 2011 Holdings, LLC	$	9,076	$	13,069

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016			December 31, 2015
Loans	$	—		$	980
Accrued interest receivable		—			10
Deposits (non-interest bearing)		(2,806	)		(18,808	)

Net total	$	(2,806	)	$	(17,818	)

The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PRLP 2011 Holdings, LLC for the quarters and six months ended June 30, 2016 and 2015.


	Quarter ended			Six months ended
(In thousands)	June 30, 2016			June 30, 2016
Share of loss from the equity investment in PRLP 2011 Holdings, LLC	$	(52	)	$	(594	)

	Quarter ended			Six months ended
(In thousands)	June 30, 2015			June 30, 2015
Share of loss from the equity investment in PRLP 2011 Holdings, LLC	$	(2,863	)	$	(1,830	)

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 and six months ended June 30, 2016 and 2015.


	Quarter ended		Six months ended
(In thousands)	June 30, 2016		June 30, 2016		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	—	$	11	Interest income


	Quarter ended		Six months ended
(In thousands)	June 30, 2015		June 30, 2015		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	51	$	113	Interest income

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 24 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)	June 30, 2016		December 31, 2015
Equity investment in PR Asset Portfolio 2013-1 International, LLC	$	24,771	$	25,094

The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at June 30, 2016 and December 31, 2015.


(In thousands)	June 30, 2016			December 31, 2015
Loans	$	25,443		$	58,302
Accrued interest receivable		82			169
Deposits		(10,558	)		(11,772	)

Net total	$	14,967		$	46,699

The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PR Asset Portfolio 2013-1 International, LLC for the quarters and six months ended June 30, 2016 and 2015.


	Quarter ended			Six months ended
(In thousands)	June 30, 2016			June 30, 2016
Share of income (loss) from the equity investment in PR Asset Portfolio 2013-1 International, LLC	$	199		$	(323	)

	Quarter ended			Six months ended
(In thousands)	June 30, 2015			June 30, 2015
Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC	$	(133	)	$	(4,468	)

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 and six months ended June 30, 2016 and 2015.


	Quarter ended			Six months ended
(In thousands)	June 30, 2016			June 30, 2016			Category
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC	$	289		$	734			Interest income
Interest expense on deposits		(1	)		(2	)		Interest expense

Total	$	288		$	732


	Quarter ended			Six months ended
(In thousands)	June 30, 2015			June 30, 2015			Category
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC	$	747		$	1,613			Interest income
Servicing fee paid by PR Asset Portfolio 2013-1 International, LLC		(1	)		(1	)		Other service fees

Total	$	746		$	1,612

Note 26 – 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 2015 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.

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 June 30, 2016 and December 31, 2015:


At June 30, 2016
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	1,624,776		$	—		$	1,624,776
Obligations of U.S. Government sponsored entities		—		773,841			—			773,841
Obligations of Puerto Rico, States and political subdivisions		—		25,635			—			25,635
Collateralized mortgage obligations - federal agencies		—		1,438,721			—			1,438,721
Mortgage-backed securities		—		3,365,845			1,398			3,367,243
Equity securities		399		2,121			—			2,520
Other		—		9,940			—			9,940

Total investment securities available-for-sale	$	399	$	7,240,879		$	1,398		$	7,242,676

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	4,815		$	—		$	4,815
Collateralized mortgage obligations		—		—			1,399			1,399
Mortgage-backed securities - federal agencies		—		47,006			5,364			52,370
Other		—		13,306			640			13,946

Total trading account securities	$	—	$	65,127		$	7,403		$	72,530

Mortgage servicing rights	$	—	$	—		$	203,577		$	203,577
Derivatives		—		13,154			—			13,154

Total assets measured at fair value on a recurring basis	$	399	$	7,319,160		$	212,378		$	7,531,937

Liabilities
Derivatives	$	—	$	(11,879	)	$	—		$	(11,879	)
Contingent consideration		—		—			(128,511	)		(128,511	)

Total liabilities measured at fair value on a recurring basis	$	—	$	(11,879	)	$	(128,511	)	$	(140,390	)


At December 31, 2015
(In thousands)	Level 1		Level 2			Level 3			Total
RECURRING FAIR VALUE MEASUREMENTS
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	1,183,328		$	—		$	1,183,328
Obligations of U.S. Government sponsored entities		—		939,641			—			939,641
Obligations of Puerto Rico, States and political subdivisions		—		22,359			—			22,359
Collateralized mortgage obligations - federal agencies		—		1,560,837			—			1,560,837
Mortgage-backed securities		—		2,342,762			1,434			2,344,196
Equity securities		276		2,122			—			2,398
Other		—		10,233			—			10,233

Total investment securities available-for-sale	$	276	$	6,061,282		$	1,434		$	6,062,992

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	4,590		$	—		$	4,590
Collateralized mortgage obligations		—		223			1,831			2,054
Mortgage-backed securities - federal agencies		—		44,701			6,454			51,155
Other		—		13,173			687			13,860

Total trading account securities	$	—	$	62,687		$	8,972		$	71,659

Mortgage servicing rights	$	—	$	—		$	211,405		$	211,405
Derivatives		—		16,959			—			16,959

Total assets measured at fair value on a recurring basis	$	276	$	6,140,928		$	221,811		$	6,363,015

Liabilities
Derivatives	$	—	$	(14,343	)	$	—		$	(14,343	)
Contingent consideration		—		—			(120,380	)		(120,380	)

Total liabilities measured at fair value on a recurring basis	$	—	$	(14,343	)	$	(120,380	)	$	(134,723	)

The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement was recorded during the six months ended June 30, 2016 and 2015 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.


Six months ended June 30, 2016
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans^[1]	$	—	$	—	$	30,221	$	30,221	$	(18,844	)
Other real estate owned^[2]		—		—		31,803		31,803		(6,197	)
Other foreclosed assets^[2]		—		—		55		55		(2	)

Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	62,079	$	62,079	$	(25,043	)

[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.


Six months ended June 30, 2015
(In thousands)	Level 1		Level 2		Level 3		Total
NONRECURRING FAIR VALUE MEASUREMENTS
Assets										Write-downs
Loans^[1]	$	—	$	—	$	156,607	$	156,607	$	(80,643	)
Loans held-for-sale^[2]		—		—		214		214		(35	)
Other real estate owned^[3]		—		438		46,954		47,392		(36,909	)
Other foreclosed assets^[3]		—		—		73		73		(799	)

Total assets measured at fair value on a nonrecurring basis	$	—	$	438	$	203,848	$	204,286	$	(118,386	)

[1]

[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 and six months ended June 30, 2016 and 2015.


Quarter ended June 30, 2016
	MBS									Other
	classified			CMOs						securities
	as investment			classified			MBS			classified
	securities			as trading			classified as			as trading			Mortgage
	available-			account			trading account			account			servicing			Total			Contingent			Total
(In thousands)	for-sale			securities			securities			securities			rights			assets			consideration			liabilities
Balance at March 31, 2016	$	1,422		$	1,783		$	5,397		$	663		$	205,051		$	214,316		$	(120,823	)	$	(120,823	)
Gains (losses) included in earnings		—			(7	)		28			(23	)		(4,340	)		(4,342	)		(7,688	)		(7,688	)
Gains (losses) included in OCI		1			—			—			—			—			1			—			—
Additions		—			35			610			—			2,866			3,511			—			—
Sales		—			(202	)		(596	)		—			—			(798	)		—			—
Settlements		(25	)		(210	)		(75	)		—			—			(310	)		—			—

Balance at June 30, 2016	$	1,398		$	1,399		$	5,364		$	640		$	203,577		$	212,378		$	(128,511	)	$	(128,511	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2016	$	—		$	(3	)	$	15		$	10		$	632		$	654		$	(7,688	)	$	(7,688	)


Six months ended June 30, 2016
	MBS									Other
	classified			CMOs						securities
	as investment			classified			MBS			classified
	securities			as trading			classified as			as trading			Mortgage
	available-			account			trading account			account			servicing			Total			Contingent			Total
(In thousands)	for-sale			securities			securities			securities			rights			assets			consideration			liabilities
Balance at January 1, 2016	$	1,434		$	1,831		$	6,454		$	687		$	211,405		$	221,811		$	(120,380	)	$	(120,380	)
Gains (losses) included in earnings		(2	)		(13	)		117			(47	)		(12,817	)		(12,762	)		(8,131	)		(8,131	)
Gains (losses) included in OCI		16			—			—			—			—			16			—			—
Additions		—			209			948			—			4,989			6,146			—			—
Sales		—			(308	)		(1,716	)		—			—			(2,024	)		—			—
Settlements		(50	)		(320	)		(439	)		—			—			(809	)		—			—

Balance at June 30, 2016	$	1,398		$	1,399		$	5,364		$	640		$	203,577		$	212,378		$	(128,511	)	$	(128,511	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2016	$	—		$	(6	)	$	101		$	21		$	(3,233	)	$	(3,117	)	$	(8,131	)	$	(8,131	)


Quarter ended June 30, 2015
	MBS								Other
	classified		CMOs						securities
	as investment		classified			MBS			classified
	securities		as trading			classified as			as trading		Mortgage
	available-		account			trading account			account		servicing			Total			Contingent			Total
(In thousands)	for-sale		securities			securities			securities		rights			assets			consideration			liabilities
Balance at March 31, 2015	$	1,435	$	1,242		$	6,221		$	1,544	$	149,024		$	159,466		$	(129,470	)	$	(129,470	)
Gains (losses) included in earnings		—		(2	)		(3	)		75		(1,917	)		(1,847	)		3,671			3,671
Gains (losses) included in OCI		10		—			—			—		—			10			—			—
Additions		—		37			128			—		59,312			59,477			—			—
Settlements		—		(85	)		(300	)		—		(62	)		(447	)		—			—
Adjustments		—		—			—			—		—			—			962			962

Balance at June 30, 2015	$	1,445	$	1,192		$	6,046		$	1,619	$	206,357		$	216,659		$	(124,837	)	$	(124,837	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2015	$	—	$	—		$	6		$	119	$	2,570		$	2,695		$	3,671		$	3,671


Six months ended June 30, 2015
	MBS								Other
	classified		CMOs						securities
	as investment		classified			MBS			classified
	securities		as trading			classified as			as trading		Mortgage
	available-		account			trading account			account		servicing			Total			Contingent			Total
(In thousands)	for-sale		securities			securities			securities		rights			assets			consideration			liabilities
Balance at January 1, 2015	$	1,325	$	1,375		$	6,229		$	1,563	$	148,694		$	159,186		$	(133,634	)	$	(133,634	)
Gains (losses) included in earnings		—		(4	)		14			56		(6,846	)		(6,780	)		7,835			7,835
Gains (losses) included in OCI		2		—			—			—		—			2			—			—
Additions		118		37			258			—		64,571			64,984			—			—
Sales		—		(44	)		(80	)		—		—			(124	)		—			—
Settlements		—		(172	)		(375	)		—		(62	)		(609	)		—			—
Adjustments		—		—			—			—		—			—			962			962

Balance at June 30, 2015	$	1,445	$	1,192		$	6,046		$	1,619	$	206,357		$	216,659		$	(124,837	)	$	(124,837	)

Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2015	$	—	$	(1	)	$	25		$	142	$	1,886		$	2,052		$	7,835		$	7,835

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 quarters and six months ended June 30, 2016 and 2015.

Gains and losses (realized and unrealized) included in earnings for the quarters and six months ended June 30, 2016 and 2015 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:


	Quarter ended June 30, 2016						Six months ended June 30, 2016
				Changes in unrealized						Changes in unrealized
	Total gains			gains (losses) relating to			Total gains			gains (losses) relating to
	(losses) included			assets still held at			(losses) included			assets still held at
(In thousands)	in earnings			reporting date			in earnings			reporting date
Interest income	$	—		$	—		$	(2	)	$	—
FDIC loss share (expense) income		(7,688	)		(7,688	)		(8,131	)		(8,131	)
Mortgage banking activities		(4,340	)		632			(12,817	)		(3,233	)
Trading account profit (loss)		(2	)		22			57			116

Total	$	(12,030	)	$	(7,034	)	$	(20,893	)	$	(11,248	)

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	Quarter ended June 30, 2015					Six months ended June 30, 2015
				Changes in unrealized					Changes in unrealized
	Total gains			gains (losses) relating to		Total gains			gains (losses) relating to
	(losses) included			assets still held at		(losses) included			assets still held at
(In thousands)	in earnings			reporting date		in earnings			reporting date
FDIC loss share (expense) income	$	3,671		$	3,671	$	7,835		$	7,835
Mortgage banking activities		(1,917	)		2,570		(6,846	)		1,886
Trading account profit (loss)		70			125		66			166

Total	$	1,824		$	6,366	$	1,055		$	9,887

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 June 30,
(In thousands)	2016			Valuation technique	Unobservable inputs	Weighted average (range)
CMO’s - trading	$	1,399		Discounted cash flow model	Weighted average life	3.0 years (0.3 - 4.4 years)
					Yield	3.8% (1.0% - 4.7%)
					Prepayment speed	20.5% (18.0% - 24.9%)
Other - trading	$	640		Discounted cash flow model	Weighted average life	5.3 years
					Yield	11.7%
					Prepayment speed	10.8%
Mortgage servicing rights	$	203,577		Discounted cash flow model	Prepayment speed	5.7% (0.2% - 11.8%)
					Weighted average life	6.9 years (0.1 - 17.3 years)
					Discount rate	11.2% (9.5% - 15.0%)
Contingent consideration	$	(127,876	)	Discounted cash flow model	Credit loss rate on covered loans	2.9% (0.0% - 100.0%)
					Risk premium component of discount rate	6.2%
Loans held-in-portfolio	$	30,169	^[1]	External appraisal	Haircut applied on external appraisals	39.9% (38.9% - 40.0%)
Other real estate owned	$	30,938	^[2]	External appraisal	Haircut applied on external appraisals	20.9% (10.0% - 40.0%)

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

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

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial instruments are valued internally by the Corporation’s investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation’s Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

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

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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 27 – Fair value of financial instruments

The fair value of financial instruments is the amount at which an assets or obligations 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 June 30, 2016 and December 31, 2015, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern.

The following tables present the carrying amount, or notional amounts, as applicable, 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.


	June 30, 2016
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	365,308	$	365,308	$	—	$	—	$	365,308
Money market investments		2,785,500		2,687,458		98,042		—		2,785,500
Trading account securities, excluding derivatives^[1]		72,530		—		65,127		7,403		72,530
Investment securities available-for-sale^[1]		7,242,676		399		7,240,879		1,398		7,242,676
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	97,444	$	—	$	—	$	79,419	$	79,419
Collateralized mortgage obligation-federal agency		81		—		—		85		85
Other		2,000		—		1,744		221		1,965

Total investment securities held-to-maturity	$	99,525	$	—	$	1,744	$	79,725	$	81,469

Other investment securities:
FHLB stock	$	59,459	$	—	$	59,459	$	—	$	59,459
FRB stock		93,983		—		93,983		—		93,983
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,923		—		—		4,929		4,929

Total other investment securities	$	168,563	$	—	$	166,640	$	4,929	$	171,569

Loans held-for-sale	$	122,338	$	—	$	469	$	124,526	$	124,995
Loans not covered under loss sharing agreement with the FDIC		22,022,522		—		—		20,405,987		20,405,987
Loans covered under loss sharing agreements with the FDIC		576,589		—		—		570,791		570,791
FDIC loss share asset		214,029		—		—		228,561		228,561
Mortgage servicing rights		203,577		—		—		203,577		203,577
Derivatives		13,154		—		13,154		—		13,154

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	June 30, 2016
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	20,783,110	$	—	$	20,783,110	$	—	$	20,783,110
Time deposits		7,954,746		—		7,943,768		—		7,943,768

Total deposits	$	28,737,856	$	—	$	28,726,878	$	—	$	28,726,878

Federal funds purchased and assets sold under agreements to repurchase	$	821,604	$	—	$	823,288	$	—	$	823,288
Other short-term borrowings^[2]	$	31,200	$	—	$	31,200	$	—	$	31,200
Notes payable:
FHLB advances	$	674,342	$	—	$	717,262	$	—	$	717,262
Unsecured senior debt securities		443,747		—		444,191		—		444,191
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,309		—		379,349		—		379,349
Others		18,550		—		—		18,550		18,550

Total notes payable	$	1,575,948	$	—	$	1,540,802	$	18,550	$	1,559,352

Derivatives	$	11,879	$	—	$	11,879	$	—	$	11,879

Contingent consideration	$	128,511	$	—	$	—	$	128,511	$	128,511


(In thousands)	Notional amount		Level 1		Level 2		Level 3		Fair value
Commitments to extend credit	$	7,322,699	$	—	$	—	$	554	$	554
Letters of credit		36,530		—		—		611		611

[1]	Refer to Note 26 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.

[2]	Refer to Note 18 to the consolidated financial statements for the composition of other short-term borrowings.

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	December 31, 2015
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks	$	363,674	$	363,674	$	—	$	—	$	363,674
Money market investments		2,180,092		2,083,839		96,253		—		2,180,092
Trading account securities, excluding derivatives^[1]		71,659		—		62,687		8,972		71,659
Investment securities available-for-sale^[1]		6,062,992		276		6,061,282		1,434		6,062,992
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions		98,817		—		—		80,815		80,815
Collateralized mortgage obligation-federal agency		86		—		—		91		91
Other		2,000		—		1,740		243		1,983

Total investment securities held-to-maturity	$	100,903	$	—	$	1,740	$	81,149	$	82,889

Other investment securities:
FHLB stock	$	59,387	$	—	$	59,387	$	—	$	59,387
FRB stock		97,740		—		97,740		—		97,740
Trust preferred securities		13,198		—		13,198		—		13,198
Other investments		1,923		—		—		4,966		4,966

Total other investment securities	$	172,248	$	—	$	170,325	$	4,966	$	175,291

Loans held-for-sale	$	137,000	$	—	$	1,364	$	138,031	$	139,395
Loans not covered under loss sharing agreement with the FDIC		21,843,180		—		—		20,849,150		20,849,150
Loans covered under loss sharing agreements with the FDIC		611,939		—		—		593,002		593,002
FDIC loss share asset		310,221		—		—		313,224		313,224
Mortgage servicing rights		211,405		—		—		211,405		211,405
Derivatives		16,959		—		16,959		—		16,959

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	December 31, 2015
	Carrying
(In thousands)	amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	19,044,355	$	—	$	19,044,355	$	—	$	19,044,355
Time deposits		8,165,368		—		8,134,029		—		8,134,029

Total deposits	$	27,209,723	$	—	$	27,178,384	$	—	$	27,178,384

Federal funds purchased and assets sold under agreements to repurchase	$	762,145	$	—	$	764,599	$	—	$	764,599
Other short-term borrowings^[2]	$	1,200	$	—	$	1,200	$	—	$	1,200
Notes payable:
FHLB advances		761,501		—		780,411		—		780,411
Unsecured senior debt		442,704		—		435,186		—		435,186
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,295		—		352,673		—		352,673
Others		19,008		—		—		19,008		19,008

Total notes payable	$	1,662,508	$	—	$	1,568,270	$	19,008	$	1,587,278

Derivatives	$	14,343	$	—	$	14,343	$	—	$	14,343

Contingent consideration	$	120,380	$	—	$	—	$	120,380	$	120,380


(In thousands)	Notional amount		Level 1		Level 2		Level 3		Fair value
Commitments to extend credit	$	7,434,108	$	—	$	—	$	1,080	$	1,080
Letters of credit		51,710		—		—		572		572

[1]	Refer to Note 26 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.

[2]	Refer to Note 18 to the consolidated financial statements for the composition of other short-term borrowings.

Following is a description of the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed.

Cash and due from banks

Cash and due from banks include cash on hand, cash items in process of collection, and non-interest bearing deposits due from other financial institutions. The carrying amount of cash and due from banks is a reasonable estimate of its fair value. Cash and due from banks are classified as Level 1.

Money market investments

Investments in money market instruments include highly liquid instruments with an average maturity of three months or less. For this reason, they carry a low risk of changes in value as a result of changes in interest rates, and the carrying amount approximates their fair value. Money market investments include federal funds sold, securities purchased under agreements to resell, time deposits with other banks, and cash balances, including those held at the Federal Reserve. These money market investments are classified as Level 2, except for cash balances which generate interest, including those held at the Federal Reserve, which are classified as Level 1.

Investment securities held-to-maturity

•

Obligations of Puerto Rico, States and political subdivisions: Municipal bonds include Puerto Rico public municipalities debt and bonds collateralized by second mortgages under the Home Purchase Stimulus Program. Puerto Rico public

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municipalities debt was valued internally based on benchmark treasury notes and a credit spread derived from comparable Puerto Rico government trades and recent issuances. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was based on internal yield and prepayment speed assumptions, these municipal bonds are classified as Level 3.

•

Agency collateralized mortgage obligation: The fair value of the agency collateralized mortgage obligation (“CMO”), which is guaranteed by GNMA, was based on internal yield and prepayment speed assumptions. This agency CMO is classified as Level 3.

•

Other: Other securities include foreign debt and a private non-profit institution security. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. Since the fair value of the private non-profit institution security was internally derived using a price/yield methodology, in which the spread was defined based on the obligor risk rating and the corresponding transfer price, this security is classified as Level 3.

Other investment securities

•

Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

•

Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

•

Trust preferred securities: These securities represent the equity-method investment in the common stock of these trusts. Book value is the same as fair value for these securities since the fair value of the junior subordinated debentures is the same amount as the fair value of the trust preferred securities issued to the public. The equity-method investment in the common stock of these trusts is classified as Level 2.

•

Other investments: Other investments include private equity method investments and Visa Class B common stock held by the Corporation. Since there are no observable market values, private equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3.

Loans held-for-sale

For loans held-for-sale originated with the intent to sell in the secondary market, its fair value was determined using similar characteristics of loans and secondary market prices assuming the conversion to mortgage-backed securities. Given that the valuation methodology uses internal assumptions based on loan level data, these loans are classified as Level 3. The fair value of certain other loans held-for-sale is based on bids received from potential buyers; binding offers; or external appraisals, net of internal adjustments and estimated costs to sell. Loans held-for-sale based on binding offers are classified as Level 2. Loans held-for-sale based on indicative offers and/or external appraisals are classified as Level 3.

Loans held-in-portfolio

The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting expected cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair valuation of the lease financing portfolio, therefore it is included in the loans total at its carrying amount. Loans held-in-portfolio are classified as Level 3.

107

FDIC loss share asset

Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net losses were discounted using the U.S. Government agency curve. The loss share asset is classified as Level 3.

Deposits

•

Demand deposits: The fair value of demand deposits, which have no stated maturity, was calculated based on the amount payable on demand as of the respective dates. These demand deposits include non-interest bearing demand deposits, savings, NOW, and money market accounts. Thus, these deposits are classified as Level 2.

•

Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these certificates of deposit incorporate an early cancellation estimate based on historical experience. Time deposits are classified as Level 2.

Assets sold under agreements to repurchase

•

Securities sold under agreements to repurchase: Securities sold under agreements to repurchase with short-term maturities approximate fair value because of the short-term nature of those instruments. Resell and repurchase agreements with long-term maturities were valued using discounted cash flows based on the three-month LIBOR. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. Securities sold under agreements to repurchase are classified as Level 2.

Other short-term borrowings

The carrying amount of other short-term borrowings approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Thus, these other short-term borrowings are classified as Level 2.

Notes payable

•

FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows over their contractual term. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2.

•

Unsecured senior debt securities: The fair value of publicly-traded unsecured senior debt securities was determined using recent trades of similar transactions. Publicly-traded unsecured senior debt securities are classified as Level 2.

•

Junior subordinated deferrable interest debentures (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2.

•

Others: The other category includes capital lease obligations. Generally accepted accounting principles do not require a fair valuation of capital lease obligations, therefore; it is included at its carrying amount. Capital lease obligations are classified as Level 3.

Commitments to extend credit and letters of credit

Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. Since the fair value of commitments to extend credit varies depending on the undrawn amount of the credit facility,

108

fees are subject to constant change, and cash flows are dependent on the creditworthiness of borrowers, commitments to extend credit are classified as Level 3. The fair value of letters of credit was based on fees currently charged on similar agreements. Given that the fair value of letters of credit constantly vary due to fees being subject to constant change and whether the fees are received depends on the creditworthiness of the account parties, letters of credit are classified as Level 3.

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Note 28 – 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 and six months ended June 30, 2016 and 2015:


	Quarters ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2016			2015			2016			2015
Net income from continuing operations	$	88,987		$	597,437		$	173,986		$	670,922
Net income from discontinued operations		—			15			—			1,356
Preferred stock dividends		(931	)		(931	)		(1,862	)		(1,861	)

Net income applicable to common stock	$	88,056		$	596,521		$	172,124		$	670,417

Average common shares outstanding		103,245,717			102,859,591			103,217,266			102,899,537
Average potential dilutive common shares		97,769			243,127			80,441			213,743

Average common shares outstanding - assuming dilution		103,343,486			103,102,718			103,297,707			103,113,280

Basic EPS from continuing operations	$	0.85		$	5.80		$	1.67		$	6.51

Basic EPS from discontinued operations	$	—		$	—		$	—		$	0.01

Total Basic EPS	$	0.85		$	5.80		$	1.67		$	6.52

Diluted EPS from continuing operations	$	0.85		$	5.79		$	1.67		$	6.49

Diluted EPS from discontinued operations	$	—		$	—		$	—		$	0.01

Total Diluted EPS	$	0.85		$	5.79		$	1.67		$	6.50

For the quarter and six months ended June 30, 2016 the Corporation calculated the impact of potential dilutive common shares under the treasury method, consistent with the method used for the preparation of the financial statements for the year ended December, 31 2015. For a discussion of the calculation under the treasury stock method, refer to Note 37 of the consolidated financial statements included in the 2015 Form 10-K.

For the quarters and six months ended June 30, 2016 and 2015, there were no stock options outstanding.

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Note 29 – Other service fees

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


	Quarters ended June 30,				Six months ended June 30,
(In thousands)	2016		2015		2016		2015
Debit card fees	$	11,382	$	11,995	$	22,669	$	23,120
Insurance fees		13,885		13,606		26,735		25,647
Credit card fees		17,700		17,611		34,558		33,760
Sale and administration of investment products		5,417		6,601		10,256		12,531
Trust fees		4,827		4,914		9,063		9,516
Other fees		3,734		4,694		7,046		8,473

Total other services fees	$	56,945	$	59,421	$	110,327	$	113,047

111

Note 30 – 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 June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Amortization of loss-share indemnification asset	$	(4,036	)	$	(31,065	)	$	(8,078	)	$	(58,381	)
80% mirror accounting on credit impairment losses (reversal)^[1]		475			7,647			(1,618	)		15,893
80% mirror accounting on reimbursable expenses		2,235			42,730			6,185			64,275
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		(3,956	)		(5,203	)		(4,601	)		(7,822	)
Change in true-up payment obligation		(7,688	)		3,672			(8,131	)		7,836
Other		394			1,294			521			1,413

Total FDIC loss-share (expense) income	$	(12,576	)	$	19,075		$	(15,722	)	$	23,214

[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.

112

Note 31 – 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 June 30,						Quarters ended June 30,
(In thousands)	2016			2015			2016			2015
Interest cost	$	6,291		$	7,403		$	348		$	407
Expected return on plan assets		(9,623	)		(11,056	)		(538	)		(589	)
Amortization of net loss		4,880			4,465			332			311

Total net periodic pension cost (benefit)	$	1,548		$	812		$	142		$	129


	Pension Plans						Benefit Restoration Plans
	Six months ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Interest Cost	$	12,583		$	14,806		$	696		$	814
Expected return on plan assets		(19,246	)		(22,112	)		(1,076	)		(1,178	)
Amortization of net loss		9,760			8,930			663			622

Total net periodic pension cost (benefit)	$	3,097		$	1,624		$	283		$	258

During the quarter ended June 30, 2016 the Corporation made a contribution to the benefit restoration plans of $43 thousand. The total contributions expected to be paid during the year 2016 for the pension and benefit restoration plans amount to approximately $45.2 million.

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.


	Postretirement Benefit Plan
	Quarters ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Service cost	$	289		$	368		$	578		$	735
Interest cost		1,505			1,589			3,010			3,178
Amortization of prior service cost		(950	)		(950	)		(1,900	)		(1,900	)
Amortization of net loss		275			249			550			498

Total net periodic postretirement benefit cost	$	1,119		$	1,256		$	2,238		$	2,511

Contributions made to the postretirement benefit plan for the quarter ended June 30, 2016 amounted to approximately $1.8 million. The total contributions expected to be paid during the year 2016 for the postretirement benefit plan amount to approximately $6.4 million.

113

Note 32 - Stock-based compensation

The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

As of June 30, 2016 there were no stock options outstanding. During the first quarter of 2015, all stock options outstanding which amounted to 44,797 with a weighted average exercise price of $ 272 expired.

Incentive Plan

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

Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service. The vesting schedule for restricted shares granted on 2014 and thereafter was modified as follows, the first part ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The restricted shares granted consistent with the requirements of the TARP Interim Final Rule vest in two years from grant date.

114

The following table summarizes the restricted stock and performance shares activity under the Incentive Plan for members of management.


(Not in thousands)	Shares			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2014		628,009		$	27.13
Granted		323,814			33.37
Vested		(430,646	)		30.45
Forfeited		(25,446	)		28.65

Non-vested at December 31, 2015		495,731		$	28.25
Granted		344,488			25.86
Quantity adjusted by TSR factor		10,315			26.45
Vested		(403,654	)		27.09

Non-vested at June 30, 2016		446,880		$	26.86

During the quarter ended June 30, 2016 118,390 shares of restricted stock (June 30, 2015 – 231,830) were awarded to management under the Incentive Plan. For the six-month period ended June 30, 2016, 279,890 shares of restricted stock (June 30, 2015 – 231,830) were awarded to management under the Incentive Plan, from which no shares were awarded to management consistent with the requirements of the TARP Interim Final Rule.

Beginning in 2015, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS performance metric is considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS goal as of each reporting period. The TSR and EPS metrics are equally weighted and work independently. The number of shares that will ultimately vest ranges from 50% to a 150% of target based on both market (TSR) and performance (EPS) conditions. The performance shares vest at the end of the three-year performance cycle. The vesting is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. For the quarter ended June 30, 2016 64,598 (June 30, 2015 - 91,984) performance shares were granted. For the six-month period ended June 30, 2016, 64,598 (June 30, 2015 - 91,984) performance shares were granted under this plan.

During the quarter ended June 30, 2016, the Corporation recognized $ 1.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 0.4 million (June 30, 2015 - $ 5.5 million, with a tax benefit of $ 0.8 million). For the six-month period ended June 30, 2016, the Corporation recognized $ 5.6 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 1.0 million (June 30, 2015 - $ 7.4 million, with a tax benefit of $ 1.1 million). For the six-month period ended June 30, 2016, the fair market value of the restricted stock vested was $6.8 million at grant date and $6.5 million at vesting date. This triggers a shortfall of $0.1 million of which $30 thousand was recorded as a windfall pool in additional paid in capital. No windfall pool was recorded for the remaining $87 thousand due to the valuation allowance of the deferred tax asset. During the quarter ended June 30, 2016 the Corporation recognized $0.1 million of performance shares expense, with a tax benefit of $11 thousand (June 30, 2015 - $2.0 million, with a tax benefit of $0.2 million). For the six-month period ended June 30, 2016, the Corporation recognized $1.2 million of performance shares expense, with a tax benefit of $0.1 million (June 30, 2015 - $2.0 million, with a tax benefit of $0.2 million). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at June 30, 2016 was $ 9.7 million and is expected to be recognized over a weighted-average period of 2.4 years.

115

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, 2014		—		$	—
Granted		22,119			32.29
Vested		(22,119	)		32.29
Forfeited		—			—

Non-vested at December 31, 2015		—		$	—
Granted		40,517			29.77
Vested		(40,517	)		29.77
Forfeited		—			—

Non-vested at June 30, 2016		—		$	—

During the quarter ended June 30, 2016, the Corporation granted 38,179 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (June 30, 2015 – 15,386). During this period, the Corporation recognized $0.3 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $32 thousand (June 30, 2015 - $0.1 million, with a tax benefit of $18 thousand). For the six-month period ended June 30, 2016, the Corporation granted 40,517 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (June 30, 2015 – 18,029). During this period, the Corporation recognized $0.5 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $53 thousand (June 30, 2015 - $0.3 million, with a tax benefit of $34 thousand). The fair value at vesting date of the restricted stock vested during the six months ended June 30, 2016 for directors was $ 1.2 million.

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Note 33 – 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
	June 30, 2016						June 30, 2015
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax expense at statutory rates	$	47,359			39	%	$	24,923			39	%
Net benefit of tax exempt interest income		(15,890	)		(13	)		(16,141	)		(25	)
Deferred tax asset valuation allowance		3,436			3			(542,706	)		(849	)
Difference in tax rates due to multiple jurisdictions		(1,113	)		(1	)		(542	)		—
Effect of income subject to preferential tax rate		(4,722	)		(4	)		593			1
State and local taxes		2,158			2			1,388			2
Others		1,218			1			(1,048	)		(2	)

Income tax expense (benefit)	$	32,446			27	%	$	(533,533	)		(834	)%


	Six months ended
	June 30, 2016						June 30, 2015
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax expense at statutory rates	$	93,092			39	%	$	66,283			39	%
Net benefit of tax exempt interest income		(31,474	)		(13	)		(31,169	)		(18	)
Deferred tax asset valuation allowance		8,709			3			(537,067	)		(316	)
Difference in tax rates due to multiple jurisdictions		(1,977	)		(1	)		(817	)		(1	)
Effect of income subject to preferential tax rate		(8,136	)		(3	)		(1,878	)		(1	)
State and local taxes		5,085			2			2,719			1
Others		(588	)		—			965			1

Income tax expense (benefit)	$	64,711			27	%	$	(500,964	)		(295	)%

Income tax expense amounted to $32.4 million for the quarter ended June 30, 2016, compared with an income tax benefit of $533.5 million for the same quarter of 2015. During the second quarter of 2015, the Corporation recorded a partial reversal of the valuation allowance on the deferred tax asset from the U.S. operations amounting to $544.9 million.

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


(In thousands)	June 30, 2016		December 31, 2015
Deferred tax assets:
Tax credits available for carryforward	$	13,651	$	13,651
Net operating loss and other carryforward available		1,254,304		1,262,197
Postretirement and pension benefits		113,395		116,036
Deferred loan origination fees		5,944		6,420
Allowance for loan losses		649,374		670,592
Deferred gains		5,410		5,966
Accelerated depreciation		8,092		8,335
Intercompany deferred gains		2,421		2,743
Difference in outside basis from pass-through entities		10,972		12,684
Other temporary differences		31,614		29,208

Total gross deferred tax assets		2,095,177		2,127,832

Deferred tax liabilities:
FDIC-assisted transaction		92,321		90,778
Indefinite-lived intangibles		68,775		63,573
Unrealized net gain on trading and available-for-sale securities		44,633		22,281
Other temporary differences		7,647		6,670

Total gross deferred tax liabilities		213,376		183,302

Valuation allowance		638,791		642,727

Net deferred tax asset	$	1,243,010	$	1,301,803

The net deferred tax asset shown in the table above at June 30, 2016 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, 2015 - $1.3 billion) and $772 thousand in deferred tax liabilities in the “Other liabilities” caption (December 31, 2015 - $649 thousand), 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 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.

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, amounting to $1.1 billion and 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 recent 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 June 30, 2016 the U.S. operations are not in a three year cumulative loss position, taking into account taxable income exclusive of reversing temporary differences. All of these factors lead 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. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as deemed necessary. At June 30, 2016 a valuation allowance is recorded on the deferred tax asset of the U.S. operation in the amount of $600 million.

At June 30, 2016, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $706 million.

118

The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position, taking into account taxable income exclusive of reversing temporary differences, and has sustained profitability for the three year period ended June 30, 2016. 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 not in a cumulative loss taking into account taxable income exclusive of reversing temporary differences, for the three year period ended June 30, 2016. However, it has sustained losses for year ended December 31, 2015 and the period ended June 30, 2016. Management expect these losses will be a trend in early future years. The losses in recent periods together with the expected losses in future years 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 $39 million as of June 30, 2016.

The reconciliation of unrecognized tax benefits was as follows:


(In millions)	2016		2015
Balance at January 1	$	9.0	$	8.0
Additions for tax positions - January through March		0.4		0.3
Reduction as a result of settlements - January through March		—		(0.5	)

Balance at March 31	$	9.4	$	7.8
Additions for tax positions - April through June		0.3		0.3

Balance at June 30	$	9.7	$	8.1

At June 30, 2016, the total amount of interest recognized in the statement of financial condition approximated $3.9 million (December 31, 2015 - $3.2 million). The total interest expense recognized at June 30, 2016 was $694 thousand (December 31, 2015 - $57 thousand). Management determined that at June 30, 2016 and December 31, 2015 there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, whiles the penalties, if any, are reported in other operating expenses in the consolidated statements of operations.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation’s effective tax rate, was approximately $12.5 million at June 30, 2016 (December 31, 2015 - $11.2 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the 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 June 30, 2016, the following years remain subject to examination in the U.S. Federal jurisdiction: 2012 and thereafter; and in the Puerto Rico jurisdiction, 2010 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 $3.3 million.

119

Note 34 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the six months ended June 30, 2016 and June 30, 2015 are listed in the following table:


(In thousands)	June 30, 2016		June 30, 2015
Non-cash activities:
Loans transferred to other real estate	$	62,409	$	67,199
Loans transferred to other property		15,442		19,103

Total loans transferred to foreclosed assets		77,851		86,302
Transfers from loans held-in-portfolio to loans held-for-sale		—		61,290
Transfers from loans held-for-sale to loans held-in-portfolio		4,220		8,523
Account receivable from sale of loan		14,477		—
Transfers from trading securities to available-for-sale securities		—		5,523
Loans securitized into investment securities^[1]		383,441		517,265
Trades receivable from brokers and counterparties		78,994		111,964
Trades payable to brokers and counterparties		43,142		73,155
Recognition of mortgage servicing rights on securitizations or asset transfers		5,023		7,302

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

As previously disclosed in Note 5, Business Combination, on February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, BPPR, in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver. As part of this transaction, BPPR received as of June 30, 2015 net cash proceeds of approximately $ 738 million for consideration of the assets and liabilities acquired.

120

Note 35 – Segment reporting

The Corporation’s corporate structure consists of two reportable segments – Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations and sold during 2014.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at June 30, 2016, additional disclosures are provided for the business areas included in this reportable segment, as described below:

•

Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

•

Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally on residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

•

Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during 2008. During the third quarter of 2015, BPNA and E-LOAN completed an asset purchase and sale transaction in which E-LOAN sold to BPNA all of its outstanding loan portfolio, including residential mortgage loans and home equity lines of credit, which had a carrying value of approximately $213 million. Prior to this transaction, the Corporation provided additional disclosures for the BPNA reportable segment related to E-LOAN. After the close of the above mentioned asset purchase and sale transaction, additional disclosures with respect to E-LOAN are no longer considered relevant to the financial statements and accordingly are not presented. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network.

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, Leon. The Corporate group also includes the expenses of certain corporate areas that are identified as critical to the organization: Finance, Risk Management and Legal.

The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

121

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

2016


For the quarter ended June 30, 2016
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	310,361	$	65,505	$	—
Provision for loan losses		39,123		1,317		—
Non-interest income		98,241		5,250		—
Amortization of intangibles		2,931		166		—
Depreciation expense		9,915		1,344		—
Other operating expenses		234,704		44,398		—
Income tax expense		31,295		11,103		—

Net income	$	90,634	$	12,427	$	—

Segment assets	$	29,190,397	$	8,223,781	$	(15,239	)


For the quarter ended June 30, 2016
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	375,866	$	(15,202	)	$	(113	)	$	360,551
Provision for loan losses		40,440		32			—			40,472
Non-interest income		103,491		8,062			(1,050	)		110,503
Amortization of intangibles		3,097		—			—			3,097
Depreciation expense		11,259		176			—			11,435
Other operating expenses		279,102		16,717			(1,202	)		294,617
Income tax expense (benefit)		42,398		(9,979	)		27			32,446

Net income (loss)	$	103,061	$	(14,086	)	$	12		$	88,987

Segment assets	$	37,398,939	$	4,953,432		$	(4,746,223	)	$	37,606,148


For the six months ended June 30, 2016
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	615,711	$	127,762	$	—
Provision for loan losses		79,924		5,386		—
Non-interest income		196,808		10,200		—
Amortization of intangibles		5,879		332		—
Depreciation expense		20,111		2,677		—
Other operating expenses		459,373		85,728		—
Income tax expense		63,172		19,560		—

Net income	$	184,060	$	24,279	$	—

Segment assets	$	29,190,397	$	8,223,781	$	(15,239	)


For the six months ended June 30, 2016
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	743,473	$	(30,397	)	$	(113	)	$	712,963
Provision (reversal fof provision) for loan losses		85,310		(3	)		—			85,307
Non-interest income		207,008		16,239			(1,114	)		222,133
Amortization of intangibles		6,211		—			—			6,211
Depreciation expense		22,788		353			—			23,141
Other operating expenses		545,101		38,449			(1,810	)		581,740
Income tax expense (benefit)		82,732		(18,260	)		239			64,711

Net income (loss)	$	208,339	$	(34,697	)	$	344		$	173,986

Segment assets	$	37,398,939	$	4,953,432			(4,746,223	)	$	37,606,148

122

2015


For the quarter ended June 30, 2015
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	316,085	$	61,932		$	—
Provision (reversal of provision) for loan losses		76,068		(61	)		—
Non-interest income		125,735		5,670			125
Amortization of intangibles		2,563		318			—
Depreciation expense		10,103		1,746			—
Other operating expenses		279,887		48,472			—
Income tax expense (benefit)		17,312		(543,833	)		—

Net income	$	55,887	$	560,960		$	125

Segment assets	$	29,669,355	$	7,458,709		$	(589,902	)


For the quarter ended June 30, 2015
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	378,017		$	(15,464	)	$	—		$	362,553
Provision for loan losses		76,007			227			—			76,234
Non-interest income		131,530			10,483			(1,254	)		140,759
Amortization of intangibles		2,881			—			—			2,881
Depreciation expense		11,849			181			—			12,030
Other operating expenses		328,359			20,604			(700	)		348,263
Income tax benefit		(526,521	)		(6,796	)		(216	)		(533,533	)

Net income (loss)	$	616,972		$	(19,197	)	$	(338	)	$	597,437

Segment assets	$	36,538,162		$	4,909,006		$	(4,697,055	)	$	36,750,113


For the six months ended June 30, 2015
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	622,696	$	114,033		$	—
Provision (reversal of provision) for loan losses		118,305		(2,263	)		—
Non-interest income		229,265		11,836			125
Amortization of intangibles		4,562		423			—
Depreciation expense		20,211		3,363			—
Other operating expenses		507,463		102,957			—
Income tax expense (benefit)		54,761		(542,896	)		—

Net income	$	146,659	$	564,285		$	125

Segment assets		29,669,355		7,458,709			(589,902	)


For the six months ended June 30, 2015
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	736,729		$	(30,981	)	$	—		$	705,748
Provision for loan losses		116,042			227			—			116,269
Non-interest income		241,226			16,125			(1,357	)		255,994
Amortization of intangibles		4,985			—			—			4,985
Depreciation expense		23,574			375			—			23,949
Other operating expenses		610,420			37,592			(1,431	)		646,581
Income tax benefit		(488,135	)		(12,858	)		29			(500,964	)

Net income (loss)	$	711,069		$	(40,192	)	$	45		$	670,922

Segment assets		36,538,162			4,909,006			(4,697,055	)		36,750,113

123

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

2016


For the quarter ended June 30, 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	$	122,430		$	185,216	$	1,680	$	1,035		$	310,361
Provision for loan losses		(1,669	)		40,792		—		—			39,123
Non-interest income		17,598			55,606		25,128		(91	)		98,241
Amortization of intangibles		49			1,810		1,072		—			2,931
Depreciation expense		4,245			5,447		223		—			9,915
Other operating expenses		63,919			154,036		16,840		(91	)		234,704
Income tax expense		23,228			5,137		2,930		—			31,295

Net income	$	50,256		$	33,600	$	5,743	$	1,035		$	90,634

Segment assets	$	12,894,262		$	17,664,592	$	474,482	$	(1,842,939	)	$	29,190,397


For the six months ended June 30, 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	$	237,333	$	372,411	$	3,295	$	2,672		$	615,711
Provision for loan losses		13,240		66,684		—		—			79,924
Non-interest income		39,330		111,214		46,439		(175	)		196,808
Amortization of intangibles		71		3,646		2,162		—			5,879
Depreciation expense		8,520		11,138		453		—			20,111
Other operating expenses		121,151		304,248		34,149		(175	)		459,373
Income tax expense		41,397		17,516		4,259		—			63,172

Net income	$	92,284	$	80,393	$	8,711	$	2,672		$	184,060

Segment assets	$	12,894,262	$	17,664,592	$	474,482	$	(1,842,939	)	$	29,190,397

2015


For the quarter ended June 30, 2015
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking			Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	119,205		$	194,737	$	2,143	$	—		$	316,085
Provision for loan losses		66,792			9,276		—		—			76,068
Non-interest income		35,992			66,436		23,407		(100	)		125,735
Amortization of intangibles		(23	)		1,912		674		—			2,563
Depreciation expense		4,703			5,104		296		—			10,103
Other operating expenses		101,717			160,871		17,399		(100	)		279,887
Income tax (benefit) expense		(13,395	)		27,530		3,177		—			17,312

Net (loss) income	$	(4,597	)	$	56,480	$	4,004	$	—		$	55,887

Segment assets	$	10,038,389		$	19,853,299	$	744,519	$	(966,852	)	$	29,669,355

124


For the six months ended June 30, 2015
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking		Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	237,680	$	380,989	$	4,023	$	4		$	622,696
Provision for loan losses		63,236		55,069		—		—			118,305
Non-interest income		63,142		122,440		43,878		(195	)		229,265
Amortization of intangibles		6		3,684		872		—			4,562
Depreciation expense		9,023		10,616		572		—			20,211
Other operating expenses		167,573		305,939		34,146		(195	)		507,463
Income tax expense		12,658		37,308		4,795		—			54,761

Net income	$	48,326	$	90,813	$	7,516	$	4		$	146,659

Segment assets	$	10,038,389	$	19,853,299	$	744,519	$	(966,852	)	$	29,669,355

Geographic Information


	Quarter ended				Six months ended
(in thousands)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Revenues:
Puerto Rico	$	384,902	$	415,972	$	764,938	$	801,026
United States		67,543		67,235		132,183		123,945
Other		18,609		20,105		37,975		36,771

Total consolidated revenues	$	471,054	$	503,312	$	935,096	$	961,742

[1]

Total revenues include net interest income (expense), service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) and valuation adjustments on investment securities, trading account (loss) profit, net (loss) gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income and other operating income.

Selected Balance Sheet Information:


(In thousands)	June 30, 2016		December 31, 2015
Puerto Rico
Total assets	$	28,210,388	$	26,764,184
Loans		17,126,140		17,477,070
Deposits		22,124,865		20,893,232
United States
Total assets	$	8,491,277	$	7,859,217
Loans		5,397,679		4,873,504
Deposits		5,503,937		5,288,886
Other
Total assets	$	904,483	$	1,138,332
Loans		746,350		778,656
Deposits ^[1]		1,109,054		1,027,605

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

125

Note 36 – 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 June 30, 2016 and December 31, 2015, and the results of their operations and cash flows for periods ended June 30, 2016 and 2015.

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.

126

Condensed Consolidating Statement of Financial Condition (Unaudited)


At June 30, 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	$	37,306		$	595		$	365,034		$	(37,627	)	$	365,308
Money market investments		262,285			18,488			2,785,215			(280,488	)		2,785,500
Trading account securities, at fair value		2,271			—			70,349			(90	)		72,530
Investment securities available-for-sale, at fair value		258			—			7,242,418			—			7,242,676
Investment securities held-to-maturity, at amortized cost		—			—			99,525			—			99,525
Other investment securities, at lower of cost or realizable value		9,850			4,492			154,221			—			168,563
Investment in subsidiaries		5,775,328			1,838,488			—			(7,613,816	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			122,338			—			122,338

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,159			—			22,654,718			—			22,655,877
Loans covered under loss-sharing agreements with the FDIC		—			—			607,170			—			607,170
Less - Unearned income		—			—			115,216			—			115,216
Allowance for loan losses		34			—			548,686			—			548,720

Total loans held-in-portfolio, net		1,125			—			22,597,986			—			22,599,111

FDIC loss-share asset		—			—			214,029			—			214,029
Premises and equipment, net		3,077			—			532,788			—			535,865
Other real estate not covered under loss-sharing agreements with the FDIC		283			—			176,742			—			177,025
Other real estate covered under loss-sharing agreements with the FDIC		—			—			37,984			—			37,984
Accrued income receivable		103			145			120,819			(88	)		120,979
Mortgage servicing assets, at fair value		—			—			203,577			—			203,577
Other assets		57,937			23,292			2,113,461			(15,630	)		2,179,060
Goodwill		—			—			631,095			—			631,095
Other intangible assets		554			—			50,429			—			50,983

Total assets	$	6,150,377		$	1,885,500		$	37,518,010		$	(7,947,739	)	$	37,606,148

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	6,568,735		$	(37,627	)	$	6,531,108
Interest bearing		—			—			22,487,236			(280,488	)		22,206,748

Total deposits		—			—			29,055,971			(318,115	)		28,737,856

Federal funds purchased and assets sold under agreements to repurchase		—			—			821,604			—			821,604
Other short-term borrowings		—			—			31,200			—			31,200
Notes payable		734,557			148,498			692,893			—			1,575,948
Other liabilities		55,898			6,262			1,031,686			(15,952	)		1,077,894
Liabilities from discontinued operations		—			—			1,815			—			1,815

Total liabilities		790,455			154,760			31,635,169			(334,067	)		32,246,317

Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,040			2			56,306			(56,309	)		1,039
Surplus		4,224,309			4,111,207			5,698,606			(9,801,287	)		4,232,835
Retained earnings (accumulated deficit)		1,237,505			(2,400,493	)		271,530			2,120,437			1,228,979
Treasury stock, at cost		(7,480	)		—			—			(90	)		(7,570	)
Accumulated other comprehensive loss,net of tax		(145,612	)		20,024			(143,601	)		123,577			(145,612	)

Total stockholders’ equity		5,359,922			1,730,740			5,882,841			(7,613,672	)		5,359,831

Total liabilities and stockholders’ equity	$	6,150,377		$	1,885,500		$	37,518,010		$	(7,947,739	)	$	37,606,148

127

Condensed Consolidating Statement of Financial Condition (Unaudited)


At December 31, 2015
							All other
	Popular, Inc.			PNA			subsidiaries and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			eliminations			entries			Consolidated
Assets:
Cash and due from banks	$	24,298		$	600		$	363,620		$	(24,844	)	$	363,674
Money market investments		262,204			23,931			2,179,887			(285,930	)		2,180,092
Trading account securities, at fair value		2,020			—			69,639			—			71,659
Investment securities available-for-sale, at fair value		216			—			6,062,776			—			6,062,992
Investment securities held-to-maturity, at amortized cost		—			—			100,903			—			100,903
Other investment securities, at lower of cost or realizable value		9,850			4,492			157,906			—			172,248
Investment in subsidiaries		5,539,325			1,789,512			—			(7,328,837	)		—
Loans held-for-sale, at lower of cost or fair value		—			—			137,000			—			137,000

Loans held-in-portfolio:
Loans not covered under loss-sharing agreements with the FDIC		1,176			—			22,452,637			—			22,453,813
Loans covered under loss-sharing agreements with the FDIC		—			—			646,115			—			646,115
Less - Unearned income		—			—			107,698			—			107,698
Allowance for loan losses		3			—			537,108			—			537,111

Total loans held-in-portfolio, net		1,173			—			22,453,946			—			22,455,119

FDIC loss-share asset		—			—			310,221			—			310,221
Premises and equipment, net		2,823			—			499,788			—			502,611
Other real estate not covered under loss-sharing agreements with the FDIC		532			—			154,699			—			155,231
Other real estate covered under loss-sharing agreements with the FDIC		—			—			36,685			—			36,685
Accrued income receivable		85			115			124,070			(36	)		124,234
Mortgage servicing assets, at fair value		—			—			211,405			—			211,405
Other assets		54,908			23,596			2,132,616			(17,958	)		2,193,162
Goodwill		—			—			626,388			—			626,388
Other intangible assets		554			—			57,555			—			58,109

Total assets	$	5,897,988		$	1,842,246		$	35,679,104		$	(7,657,605	)	$	35,761,733

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—		$	—		$	6,426,359		$	(24,844	)	$	6,401,515
Interest bearing		—			—			21,094,138			(285,930	)		20,808,208

Total deposits		—			—			27,520,497			(310,774	)		27,209,723

Federal funds purchased and assets sold under agreements to repurchase		—			—			762,145			—			762,145
Other short-term borrowings		—			—			1,200			—			1,200
Notes payable		733,516			148,483			780,509			—			1,662,508
Other liabilities		59,148			6,659			971,429			(18,218	)		1,019,018
Liabilities from discontinued operations		—			—			1,815			—			1,815

Total liabilities		792,664			155,142			30,037,595			(328,992	)		30,656,409

Stockholders’ equity:
Preferred stock		50,160			—			—			—			50,160
Common stock		1,038			2			56,307			(56,309	)		1,038
Surplus		4,220,629			4,111,208			5,712,635			(9,815,316	)		4,229,156
Retained earnings (accumulated deficit)		1,096,484			(2,416,251	)		128,459			2,279,265			1,087,957
Treasury stock, at cost		(6,101	)		—			—			—			(6,101	)
Accumulated other comprehensive loss, net of tax		(256,886	)		(7,855	)		(255,892	)		263,747			(256,886	)

Total stockholders’ equity		5,105,324			1,687,104			5,641,509			(7,328,613	)		5,105,324

Total liabilities and stockholders’ equity	$	5,897,988		$	1,842,246		$	35,679,104		$	(7,657,605	)	$	35,761,733

128

Condensed Consolidating Statement of Operations (Unaudited)


Quarter ended June 30, 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	$	24,200		$	—		$	—		$	(24,200	)	$	—
Loans		20			—			369,701			—			369,721
Money market investments		323			30			3,889			(353	)		3,889
Investment securities		143			81			36,501			—			36,725
Trading account securities		—			—			1,875			—			1,875

Total interest and dividend income		24,686			111			411,966			(24,553	)		412,210

Interest expense:
Deposits		—			—			30,952			(353	)		30,599
Short-term borrowings		—			—			2,058			—			2,058
Long-term debt		13,118			2,692			3,192			—			19,002

Total interest expense		13,118			2,692			36,202			(353	)		51,659

Net interest income (expense)		11,568			(2,581	)		375,764			(24,200	)		360,551
Provision for loan losses- non-covered loans		31			—			39,637			—			39,668
Provision for loan losses- covered loans		—			—			804			—			804

Net interest income (expense) after provision for loan losses		11,537			(2,581	)		335,323			(24,200	)		320,079

Service charges on deposit accounts		—			—			40,296			—			40,296
Other service fees		—			—			58,224			(1,279	)		56,945
Mortgage banking activities		—			—			16,227			—			16,227
Net gain on sale of investment securities		1,583			—			—			—			1,583
Other-than-temporary impairment losses on investment securities		—			—			(209	)		—			(209	)
Trading account profit		35			—			1,082			—			1,117
Adjustments (expense) to indemnity reserves on loans sold		—			—			(5,746	)		—			(5,746	)
FDIC loss-share expense		—			—			(12,576	)		—			(12,576	)
Other operating income		1,812			(1,636	)		12,701			(11	)		12,866

Total non-interest income		3,430			(1,636	)		109,999			(1,290	)		110,503

Operating expenses:
Personnel costs		10,634			—			106,074			—			116,708
Net occupancy expenses		845			—			20,869			—			21,714
Equipment expenses		643			—			14,618			—			15,261
Other taxes		47			—			10,123			—			10,170
Professional fees		2,331			30			78,491			(227	)		80,625
Communications		140			—			5,872			—			6,012
Business promotion		486			—			13,219			—			13,705
FDIC deposit insurance		—			—			5,362			—			5,362
Other real estate owned (OREO) expenses		68			—			12,912			—			12,980
Other operating expenses		(15,950	)		4			39,998			(537	)		23,515
Amortization of intangibles		—			—			3,097			—			3,097

Total operating expenses		(756	)		34			310,635			(764	)		309,149

Income (loss) before income tax and equity in earnings of subsidiaries		15,723			(4,251	)		134,687			(24,726	)		121,433
Income tax (benefit) expense		—			(1,488	)		34,140			(206	)		32,446

Income (loss) before equity in earnings of subsidiaries		15,723			(2,763	)		100,547			(24,520	)		88,987
Equity in undistributed earnings ofsubsidiaries		73,264			12,176			—			(85,440	)		—

Net Income	$	88,987		$	9,413		$	100,547		$	(109,960	)	$	88,987

Comprehensive income, net of tax	$	125,125		$	16,343		$	137,225		$	(153,568	)	$	125,125

129

Condensed Consolidating Statement of Operations (Unaudited)


Six months ended June 30, 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	$	53,900		$	—		$	—		$	(53,900	)	$	—
Loans		39			—			732,879			—			732,918
Money market investments		578			51			6,752			(629	)		6,752
Investment securities		381			161			72,454			—			72,996
Trading account securities		—			—			3,564			—			3,564

Total interest and dividend income		54,898			212			815,649			(54,529	)		816,230

Interest expense:
Deposits		—			—			61,102			(629	)		60,473
Short-term borrowings		—			—			3,919			—			3,919
Long-term debt		26,235			5,385			7,255			—			38,875

Total interest expense		26,235			5,385			72,276			(629	)		103,267

Net interest income (expense)		28,663			(5,173	)		743,373			(53,900	)		712,963
Provision for loan losses- non-covered loans		(3	)		—			87,611			—			87,608
Provision for loan losses- covered loans		—			—			(2,301	)		—			(2,301	)

Net interest income (expense) after provision for loan losses		28,666			(5,173	)		658,063			(53,900	)		627,656

Service charges on deposit accounts		—			—			80,158			—			80,158
Other service fees		—			—			111,663			(1,336	)		110,327
Mortgage banking activities		—			—			26,778			—			26,778
Net gain on sale of investment securities		1,583			—			—			—			1,583
Other-than-temporary impairment losses on investment securities		—			—			(209	)		—			(209	)
Trading account profit		59			—			896			—			955
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			—			(304	)		—			(304	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			(9,844	)		—			(9,844	)
FDIC loss-share expense		—			—			(15,722	)		—			(15,722	)
Other operating income		5,068			(2,939	)		26,300			(18	)		28,411

Total non-interest income		6,710			(2,939	)		219,716			(1,354	)		222,133

Operating expenses:
Personnel costs		26,055			—			217,744			—			243,799
Net occupancy expenses		1,761			—			40,383			—			42,144
Equipment expenses		1,088			—			28,721			—			29,809
Other taxes		94			—			20,271			—			20,365
Professional fees		5,212			60			151,096			(284	)		156,084
Communications		277			—			12,055			—			12,332
Business promotion		951			—			23,864			—			24,815
FDIC deposit insurance		—			—			12,732			—			12,732
Other real estate owned (OREO) expenses		68			—			22,053			—			22,121
Other operating expenses		(36,378	)		43			78,104			(1,089	)		40,680
Amortization of intangibles		—			—			6,211			—			6,211

Total operating expenses		(872	)		103			613,234			(1,373	)		611,092

Income (loss) before income tax and equity in earnings of subsidiaries		36,248			(8,215	)		264,545			(53,881	)		238,697
Income tax expense (benefit)		3			(2,875	)		67,576			7			64,711

Income (loss) before equity in
earnings of subsidiaries		36,245			(5,340	)		196,969			(53,888	)		173,986
Equity in undistributed earnings of subsidiaries		137,741			21,099			—			(158,840	)		—

Net Income	$	173,986		$	15,759		$	196,969		$	(212,728	)	$	173,986

Comprehensive income, net of tax	$	285,260		$	43,638		$	309,260			(352,898	)	$	285,260

130

Condensed Consolidating Statement of Operations (Unaudited)


	Quarter ended June 30, 2015
(In thousands)	Popular, Inc. Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	1,500		$	—		$	—		$	(1,500	)	$	—
Loans		169			2			374,109			(147	)		374,133
Money market investments		2			1			1,844			(2	)		1,845
Investment securities		190			80			31,027			—			31,297
Trading account securities		—			—			3,026			—			3,026

Total interest and dividend income		1,861			83			410,006			(1,649	)		410,301

Interest expense:
Deposits		—			—			26,260			(2	)		26,258
Short-term borrowings		—			127			1,883			(147	)		1,863
Long-term debt		13,117			2,695			3,815			—			19,627

Total interest expense		13,117			2,822			31,958			(149	)		47,748

Net interest (expense) income		(11,256	)		(2,739	)		378,048			(1,500	)		362,553
Provision for loan losses- non-covered loans		227			—			60,241			—			60,468
Provision for loan losses- covered loans		—			—			15,766			—			15,766

Net interest (expense) income after provision for loan losses		(11,483	)		(2,739	)		302,041			(1,500	)		286,319

Service charges on deposit accounts		—			—			40,138			—			40,138
Other service fees		—			—			60,661			(1,240	)		59,421
Mortgage banking activities		—			—			21,325			—			21,325
Net gain on sale of investment securities		—			—			5			—			5
Other-than-temporary impairment losses on investment securities		—			—			(14,445	)		—			(14,445	)
Trading account loss		(18	)		—			(3,090	)		—			(3,108	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			681			—			681
Adjustments (expense) to indemnity reserves on loans sold		—			—			419			—			419
FDIC loss-share income		—			—			19,075			—			19,075
Other operating income		3,423			524			13,315			(14	)		17,248

Total non-interest income		3,405			524			138,084			(1,254	)		140,759

Operating expenses:
Personnel costs		14,470			—			106,507			—			120,977
Net occupancy expenses		787			—			22,499			—			23,286
Equipment expenses		472			—			15,453			—			15,925
Other taxes		652			—			10,461			—			11,113
Professional fees		2,323			32			76,154			(60	)		78,449
Communications		108			—			6,045			—			6,153
Business promotion		408			—			13,368			—			13,776
FDIC deposit insurance		—			—			8,542			—			8,542
Other real estate owned (OREO) expenses		—			—			44,816			—			44,816
Other operating expenses		(15,184	)		109			46,795			(638	)		31,082
Amortization of intangibles		—			—			2,881			—			2,881
Restructuring cost		—			—			6,174			—			6,174

Total operating expenses		4,036			141			359,695			(698	)		363,174

(Loss) income before income tax and equity in earnings of subsidiaries		(12,114	)		(2,356	)		80,430			(2,056	)		63,904
Income tax benefit		(47	)		—			(533,270	)		(216	)		(533,533	)

(Loss) income before equity in earnings of subsidiaries		(12,067	)		(2,356	)		613,700			(1,840	)		597,437
Equity in undistributed earnings of subsidiaries		609,504			559,026			—			(1,168,530	)		—

Income from continuing operations		597,437			556,670			613,700			(1,170,370	)		597,437
Income from discontinued operations, net of tax		—			—			15			—			15
Equity in undistributed earnings of discontinued operations		15			15			—			(30	)		—

Net Income	$	597,452		$	556,685		$	613,715		$	(1,170,400	)	$	597,452

Comprehensive income, net of tax	$	572,821		$	545,987		$	589,116		$	(1,135,103	)	$	572,821

131

Condensed Consolidating Statement of Operations (Unaudited)


	Six months ended June 30, 2015
(In thousands)	Popular, Inc. Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Interest and dividend income:
Dividend income from subsidiaries	$	3,000		$	—		$	—		$	(3,000	)	$	—
Loans		309			2			729,722			(269	)		729,764
Money market investments		4			3			3,288			(4	)		3,291
Investment securities		333			161			61,104			—			61,598
Trading account securities		—			—			5,722			—			5,722

Total interest and dividend income		3,646			166			799,836			(3,273	)		800,375

Interest expense:
Deposits		—			—			52,126			(4	)		52,122
Short-term borrowings		—			228			3,638			(269	)		3,597
Long-term debt		26,235			5,390			7,283			—			38,908

Total interest expense		26,235			5,618			63,047			(273	)		94,627

Net interest (expense) income		(22,589	)		(5,452	)		736,789			(3,000	)		705,748
Provision for loan losses- non-covered loans		227			—			89,952			—			90,179
Provision for loan losses- covered loans		—			—			26,090			—			26,090

Net interest (expense) income after provision for loan losses		(22,816	)		(5,452	)		620,747			(3,000	)		589,479

Service charges on deposit accounts		—			—			79,155			—			79,155
Other service fees		—			—			114,375			(1,328	)		113,047
Mortgage banking activities		—			—			34,177			—			34,177
Net gain on sale of investment securities		—			—			5			—			5
Other-than temporary impairment losses on
investment securities		—			—			(14,445	)		—			(14,445	)
Trading account profit (loss)		22			—			(2,716	)		—			(2,694	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			602			—			602
Adjustments (expense) to indemnity reserves on loans sold		—			—			(4,107	)		—			(4,107	)
FDIC loss-share expense		—			—			23,214			—			23,214
Other operating income (loss)		6,391			(305	)		20,984			(30	)		27,040

Total non-interest income (loss)		6,413			(305	)		251,244			(1,358	)		255,994

Operating expenses:
Personnel costs		26,378			—			211,057			—			237,435
Net occupancy expenses		1,767			—			43,228			—			44,995
Equipment expenses		1,017			—			28,319			—			29,336
Other taxes		(806	)		—			20,493			—			19,687
Professional fees		5,097			442			148,586			(148	)		153,977
Communications		225			—			12,104			—			12,329
Business promotion		844			—			23,745			—			24,589
FDIC deposit insurance		—			—			14,940			—			14,940
Other real estate owned (OREO) expenses		—			—			67,885			—			67,885
Other operating expenses		(32,119	)		218			81,614			(1,283	)		48,430
Amortization of intangibles		—			—			4,985			—			4,985
Restructuring costs		—			—			16,927			—			16,927

Total operating expenses		2,403			660			673,883			(1,431	)		675,515

(Loss) income before income tax and equity in earnings of subsidiaries		(18,806	)		(6,417	)		198,108			(2,927	)		169,958
Income tax (benefit) expense		—			—			(500,993	)		29			(500,964	)

(Loss) income before equity in earnings of subsidiaries		(18,806	)		(6,417	)		699,101			(2,956	)		670,922
Equity in undistributed earnings of subsidiaries		689,728			560,295			—			(1,250,023	)		—

Income from continuing operations		670,922			553,878			699,101			(1,252,979	)		670,922
Income from discontinued operations, net of tax		—			—			1,356			—			1,356
Equity in undistributed earnings of discontinued operations		1,356			1,356			—			(2,712	)		—

Net Income	$	672,278		$	555,234		$	700,457		$	(1,255,691	)	$	672,278

Comprehensive income, net of tax	$	683,119		$	557,827			711,194		$	(1,269,021	)	$	683,119

132

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Six months ended June 30, 2016
(In thousands)	Popular, Inc. Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net income	$	173,986		$	15,759		$	196,969		$	(212,728	)	$	173,986

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(137,741	)		(21,099	)		—			158,840			—
Provision (reversal) for loan losses		(3	)		—			85,310			—			85,307
Amortization of intangibles		—			—			6,211			—			6,211
Depreciation and amortization of premises and equipment		353			—			22,788			—			23,141
Net accretion of discounts and amortization of premiums and deferred fees		1,043			15			(25,782	)		—			(24,724	)
Other-than-temporary impairment on investment securities		—			—			209			—			209
Fair value adjustments on mortgage servicing rights		—			—			12,817			—			12,817
FDIC loss-share expense		—			—			15,722			—			15,722
Adjustments (expense) to indemnity reserves on loans sold		—			—			9,844			—			9,844
(Earnings) losses from investments under the equity method		(5,069	)		2,939			(11,551	)		—			(13,681	)
Deferred income tax expense (benefit)		3			(2,875	)		52,180			8			49,316
(Gain) loss on:
Disposition of premises and equipment and other productive assets		(1	)		—			2,425			—			2,424
Sale and valuation adjustments of investment securities		(1,583	)		—			—			—			(1,583	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(15,577	)		—			(15,577	)
Sale of foreclosed assets, including write-downs		68			—			9,503			—			9,571
Acquisitions of loans held-for-sale		—			—			(148,725	)		—			(148,725	)
Proceeds from sale of loans held-for-sale		—			—			43,110			—			43,110
Net originations on loans held-for-sale		—			—			(247,287	)		—			(247,287	)
Net (increase) decrease in:
Trading securities		(251	)		—			393,339			90			393,178
Accrued income receivable		(17	)		(30	)		3,252			50			3,255
Other assets		839			35			(19,889	)		(2,336	)		(21,351	)
Net (decrease) increase in:
Interest payable		—			—			(1,158	)		(50	)		(1,208	)
Pension and other postretirement benefits obligations		—			—			2,300			—			2,300
Other liabilities		(3,244	)		(397	)		7,635			2,316			6,310

Total adjustments		(145,603	)		(21,412	)		196,676			158,918			188,579

Net cash provided by (used in) operating activities		28,383			(5,653	)		393,645			(53,810	)		362,565

Cash flows from investing activities:
Net (increase) decrease in money market investments		(82	)		5,442			(605,325	)		(5,442	)		(605,407	)
Purchases of investment securities:
Available-for-sale		—			—			(1,682,199	)		—			(1,682,199	)
Other		—			—			(70,302	)		—			(70,302	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			632,284			—			632,284
Held-to-maturity		—			—			2,209			—			2,209
Other		—			—			47,859			—			47,859
Proceeds from sale of investment securities:
Other		1,583			—			26,127			—			27,710
Net repayments (disbursements) on loans		17			—			(61,216	)		—			(61,199	)
Proceeds from sale of loans		—			—			95,940			—			95,940
Acquisition of loan portfolios		—			—			(308,949	)		—			(308,949	)
Net payments from FDIC under loss-sharing agreements		—			—			88,588			—			88,588
Return of capital from equity method investments		118			206			—			—			324
Return of capital from wholly-owned subsidiaries		14,000			—			—			(14,000	)		—
Acquisition of premises and equipment		(651	)		—			(60,093	)		—			(60,744	)
Proceeds from sale of:
Premises and equipment and other productive assets		46			—			2,793			—			2,839
Foreclosed assets		216			—			28,679			—			28,895

Net cash provided by (used in) investing activities		15,247			5,648			(1,863,605	)		(19,442	)		(1,862,152	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			1,537,432			(7,341	)		1,530,091
Federal funds purchased and assets sold under agreements to repurchase		—			—			59,460			—			59,460
Other short-term borrowings		—			—			30,000			—			30,000
Payments of notes payable		—			—			(216,501	)		—			(216,501	)
Proceeds from issuance of notes payable		—			—			128,883			—			128,883
Proceeds from issuance of common stock		3,710			—			—			—			3,710
Dividends paid to parent company		—			—			(53,900	)		53,900			—
Dividends paid		(32,953	)		—			—			—			(32,953	)
Net payments for repurchase of common stock		(1,379	)		—			—			(90	)		(1,469	)
Return of capital to parent company		—			—			(14,000	)		14,000			—

Net cash (used in) provided by financing activities		(30,622	)		—			1,471,374			60,469			1,501,221

Net increase (decrease) in cash and due from banks		13,008			(5	)		1,414			(12,783	)		1,634
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	$	37,306		$	595		$	365,034		$	(37,627	)	$	365,308

During the six months ended June 30, 2016 there have not been any cash flows associated with discontinued operations.

133

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Six months ended June 30, 2015
							All other
	Popular, Inc.			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			and eliminations			entries			Consolidated
Cash flows from operating activities:
Net income	$	672,278		$	555,234		$	700,457		$	(1,255,691	)	$	672,278

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(691,084	)		(561,651	)		—			1,252,735			—
Provision for loan losses		227			—			116,042			—			116,269
Amortization of intangibles		—			—			4,985			—			4,985
Depreciation and amortization of premises and equipment		374			—			23,575			—			23,949
Net accretion of discounts and amortization of premiums and deferred fees		—			—			(42,167	)		—			(42,167	)
Other-than-temporary impairment on investment securities		—			—			14,445			—			14,445
Fair value adjustments on mortgage servicing rights		—			—			6,846			—			6,846
FDIC loss-share income		—			—			(23,214	)		—			(23,214	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			4,107			—			4,107
(Earnings) losses from investments under the equity method		(6,391	)		305			(3,720	)		—			(9,806	)
Deferred income tax benefit		—			—			(511,157	)		29			(511,128	)
(Gain) loss on:
Disposition of premises and equipment		(1	)		—			(1,428	)		—			(1,429	)
Sale and valuation adjustments of investment securities		—			—			(5	)		—			(5	)
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities		—			—			(15,034	)		—			(15,034	)
Sale of foreclosed assets, including write-downs		—			—			54,711			—			54,711
Acquisitions of loans held-for-sale		—			—			(249,059	)		—			(249,059	)
Proceeds from sale of loans held-for-sale		—			—			51,062			—			51,062
Net originations on loans held-for-sale		—			—			(379,264	)		—			(379,264	)
Net (increase) decrease in:
Trading securities		(117	)		—			481,388			—			481,271
Accrued income receivable		(183	)		(1	)		(655	)		183			(656	)
Other assets		2,298			55			31,314			(115	)		33,552
Net increase (decrease) in:
Interest payable		—			183			475			(183	)		475
Pension and other postretirement benefits obligations		—			—			1,641			—			1,641
Other liabilities		(10,443	)		(61	)		(30,976	)		42			(41,438	)

Total adjustments		(705,320	)		(561,170	)		(466,088	)		1,252,691			(479,887	)

Net cash (used in) provided by operating activities		(33,042	)		(5,936	)		234,369			(3,000	)		192,391

Cash flows from investing activities:
Net decrease (increase) in money market investments		18,481			(933	)		(1,451,033	)		933			(1,432,552	)
Purchases of investment securities:
Available-for-sale		—			—			(985,427	)		—			(985,427	)
Held-to-maturity		—			—			(250	)		—			(250	)
Other		—			—			(12,805	)		—			(12,805	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			867,168			—			867,168
Held-to-maturity		—			—			2,389			—			2,389
Other		—			—			31,592			—			31,592
Proceeds from sale of investment securities:
Available for sale		—			—			70,005			—			70,005
Other		—			—			8,399			—			8,399
Net repayments on loans		22,400			1			374,209			(22,386	)		374,224
Proceeds from sale of loans		—			—			27,780			—			27,780
Acquisition of loan portfolios		—			(350	)		(140,492	)		171			(140,671	)
Net payments from FDIC under loss-sharing agreements		—			—			164,423			—			164,423
Net cash received and acquired from business combination		—			—			738,296			—			738,296
Acquisition of servicing assets		—			—			(3,897	)		—			(3,897	)
Cash paid related to business acquisitions		—			—			(17,250	)		—			(17,250	)
Mortgage servicing rights purchased		—			—			(2,400	)		—			(2,400	)
Acquisition of premises and equipment		(677	)		—			(30,140	)		—			(30,817	)
Proceeds from sale of:
Premises and equipment		4			—			7,897			—			7,901
Foreclosed assets		—			—			98,287			—			98,287

Net cash provided by (used in) investing activities		40,208			(1,282	)		(253,249	)		(21,282	)		(235,605	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			752,959			(7,172	)		745,787
Federal funds purchased and assets sold under agreements to repurchase		—			—			(150,413	)		—			(150,413	)
Other short-term borrowings		—			7,214			(77,815	)		22,386			(48,215	)
Payments of notes payable		—			—			(430,003	)		—			(430,003	)
Proceeds from issuance of notes payable		—			—			103,231			—			103,231
Proceeds from issuance of common stock		2,536			—			—			—			2,536
Dividends paid to parent company		—			—			(3,000	)		3,000			—
Dividends paid		(1,861	)		—			—			—			(1,861	)
Net payments for repurchase of common stock		(1,696	)		—			1			—			(1,695	)
Return of capital to parent company		—			—			171			(171	)		—

Net cash (used in) provided by financing activities		(1,021	)		7,214			195,131			18,043			219,367

Net increase (decrease) in cash and due from banks		6,145			(4	)		176,251			(6,239	)		176,153
Cash and due from banks at beginning of period		20,448			608			380,890			(20,851	)		381,095

Cash and due from banks at end of period	$	26,593		$	604		$	557,141		$	(27,090	)	$	557,248

The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.

134

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, including residential mortgage loan originations, 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, under the name Popular Community Bank (“PCB”), operates branches in New York, New Jersey and Southern Florida. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments. As of June 30, 2016, the Corporation had a 15.74% 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 June 30, 2016 the Corporation recorded $1.6 million in earnings from its investment in EVERTEC which had a carrying amount of $35.1 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 June 30, 2016 the Corporation recorded $6.3 million in earnings from its investment in BHD Leon, which had a carrying amount of $116.0 million, as of the end of the quarter.

135

QUARTERLY HIGHLIGHTS

•

The Corporation’s results for the second quarter of 2016, include the sale of commercial and construction loans with a carrying value of approximately $100 million and OREO with a carrying value of $9 million acquired in 2010 from the FDIC as receiver for Westernbank (“WB”). The sale resulted in a net benefit before taxes of approximately $8 million from the sale of the loans and a loss of $5.1 million from the sale of OREOs. Additionally, the Corporation incurred $1.8 million in fees for professional services directly associated with this transaction.

•

OVERVIEW

Table 1 provides selected financial data and performance indicators for the quarters and six months ended June 30, 2016 and 2015.

136

Table 1 - Financial Highlights

Financial Condition Highlights


Financial Condition Highlights
	Ending balances at						Average for the six months ended
(In thousands)	June 30, 2016		December 31, 2015		Variance		June 30, 2016		June 30, 2015		Variance
Money market investments	$	2,785,500	$	2,180,092	$	605,408	$	2,594,697	$	2,231,909	$	362,788
Investment and trading securities		7,583,294		6,407,802		1,175,492		7,024,039		5,941,278		1,082,761
Loans		23,270,169		23,129,230		140,939		23,064,939		22,949,753		115,186
Earning assets		33,638,963		31,717,124		1,921,839		32,683,676		31,122,940		1,560,736
Total assets		37,606,148		35,761,733		1,844,415		36,629,755		34,696,180		1,933,575
Deposits*		28,737,856		27,209,723		1,528,133		28,093,043		26,459,216		1,633,827
Borrowings		2,428,752		2,425,853		2,899		2,374,022		2,866,035		(492,013	)
Stockholders’ equity		5,359,831		5,105,324		254,507		5,226,895		4,363,634		863,261
Liabilities from discontinued operations		1,815		1,815		—		1,815		2,384		(569	)

*	Average deposits exclude average derivatives.


Operating Highlights	Quarters ended June 30,								Six months ended June 30,
(In thousands, except per share information)	2016		2015			Variance			2016			2015			Variance
Net interest income	$	360,551	$	362,553		$	(2,002	)	$	712,963		$	705,748		$	7,215
Provision for loan losses - non-covered loans		39,668		60,468			(20,800	)		87,608			90,179			(2,571	)
Provision (reversal) for loan losses - covered loans		804		15,766			(14,962	)		(2,301	)		26,090			(28,391	)
Non-interest income		110,503		140,759			(30,256	)		222,133			255,994			(33,861	)
Operating expenses		309,149		363,174			(54,025	)		611,092			675,515			(64,423	)

Income from continuing operations before income tax		121,433		63,904			57,529			238,697			169,958			68,739
Income tax expense (benefit)		32,446		(533,533	)		565,979			64,711			(500,964	)		565,675

Income from continuing operations	$	88,987	$	597,437		$	(508,450	)	$	173,986		$	670,922		$	(496,936	)

Income from discontinued operations, net of tax		—		15			(15	)		—			1,356			(1,356	)

Net income	$	88,987	$	597,452		$	(508,465	)	$	173,986		$	672,278		$	(498,292	)

Net income applicable to common stock	$	88,056	$	596,521		$	(508,465	)	$	172,124		$	670,417		$	(498,293	)

Net income from continuing operations	$	0.85	$	5.80		$	(4.95	)	$	1.67		$	6.51		$	(4.84	)
Net income from discontinued operations	$	—	$	—		$	—		$	—		$	0.01		$	(0.01	)

Net income per Common Share – Basic	$	$ 0.85	$	5.80			(4.95	)	$	1.67		$	6.52		$	(4.85	)

Net income from continuing operations	$	0.85	$	5.79		$	(4.94	)	$	1.67		$	6.49		$	(4.82	)
Net income from discontinued operations	$	—	$	—		$	—		$	—		$	0.01		$	(0.01	)

Net income per Common Share – Diluted	$	0.85	$	5.79		$	(4.94	)	$	1.67		$	6.50		$	(4.83	)

137


	Quarters ended June 30,						Six months ended June 30,
Selected Statistical Information	2016			2015			2016			2015
Common Stock Data
Market price
High	$	31.34		$	35.45		$	31.34		$	35.58
Low		26.66			28.86			22.62			28.86
End		29.30			28.86			29.30			28.86
Book value per common share at period end		51.20			47.34			51.52			47.34

Profitability Ratios
Return on assets		0.96	%		6.74	%		0.96	%		3.91	%
Return on common equity		6.80			54.93			6.69			31.34
Net interest spread (taxable equivalent) - Non-GAAP		4.35			4.60			4.41			4.62
Net interest margin (taxable equivalent) - Non-GAAP		4.57			4.80			4.64			4.83

Capitalization Ratios
Average equity to average assets		14.08	%		12.38	%		14.27	%		12.58	%
Tier I capital		16.29			15.93			16.29			15.93
Total capital		19.29			18.50			19.29			18.50
Tier 1 leverage		11.29			11.59			11.29			11.59

Adjusted results of operations – Non-GAAP financial measure

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”), the (“reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain transactions on the results of its operations. Throughout this MD&A, the Corporation presents a discussion of its financial results excluding the impact of these events to arrive at the “adjusted results”. Management believes that the “adjusted results” provide meaningful information about the underlying performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to tables 42 to 47 for a reconciliation of the reported results for the quarter and six months ended June 30, 2016 and June 30, 2015.

Net interest income on a taxable equivalent basis-Non-GAAP financial measure

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables 2 and 3 for the quarter and six-months ended June 30, 2016 as compared with the same periods in 2015, segregated by major categories of interest earning assets and interest bearing liabilities.

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

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

138

Financial highlights for the quarter ended June 30, 2016

•

For the quarter ended June 30, 2016, the Corporation recorded net income of $89.0 million, compared to a net income of $597.5 million for the same quarter of the previous year. The results for the second quarter of 2015 include a tax benefit of $544.9 million as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from the U.S. operations. The adjusted net income for the second quarter of 2016 was $90.6 million, compared to $90.1 million for the same quarter of 2015. Refer to tables 42 to 44 for a detail of the adjustments to arrive at the adjusted net income.

•

Net interest income, on a taxable equivalent basis, was $382.5 million, relatively flat when compared to the same quarter of 2015. Excluding the benefit of the $2.1 million in income related to the bulk loan sale of WB loans, detailed in table 42, net interest income was $380.4 million for the second quarter of 2016, a decrease of $2.3 million when compared to the same quarter of 2015 driven by lower income from WB loans as this portfolio continues its expected run-off, the impact of lower mortgage loans originations and higher expense from deposits due to higher volumes; partially offset by higher income from investment securities and income from commercial and consumer loans at the BPNA segment. Net interest margin, on a taxable equivalent basis, for the second quarter of 2016 was 4.59%, compared to 4.80% for the same quarter of 2015. The adjusted net interest margin for the second quarter of 2016 was 4.57%, a decrease of 23 basis points when compared to the 4.80% for the same quarter of 2015.

•

Non-interest income decreased by $30.3 million for the quarter ended June 30, 2016, compared with the same quarter of the previous year. The FDIC loss share income (expense) reflected an unfavorable variance of $31.7 million mainly from mirror accounting income of $17.6 million related to the loss on a bulk sale of covered OREO and an unfavorable fair value adjustment on the true up payment obligation, offset by lower amortization of the indemnification asset. The results for the second quarter of 2016 include an unfavorable adjustment of $2.2 million that represents the Corporation’s proportionate share of the impact of the restatement of EVERTEC’s financial statements, as described in Note 25 to the financial statements in this form 10Q. The results for the second quarter of 2015 include an other-than-temporary impairment of $14.4 million on the portfolio of securities classified as Obligations from the Puerto Rico Government. On an adjusted basis, non-interest income declined by $35.2 million.

•

The total provision for loan losses was $40.5 million, compared to $76.2 million for the same quarter of 2015, reflecting lower loss trends and lower reserves for impairment losses in P.R. Credit metrics for the BPNA segment continued strong, while reflecting the impact of loan growth. The results for the second quarter of 2016, include recoveries of $5.4 million from the bulk sale of WB loans. On an adjusted basis, the total provision for loan losses reflected a decrease of $30.3 million compared to the same quarter of 2015.

•

Total non-performing assets, including covered, were $836 million at June 30, 2016, a decline of $7 million, or 1% from December 31, 2015. The decline reflects lower non-performing loans by $30 million, offset by an increase in OREO of $23 million, mainly residential properties. At June 30, 2016, NPLs to total loans held-in-portfolio was 2.6% compared to 2.7% in December 31, 2015. Refer to the Credit Risk Management and Loan Quality 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, the allowance for loan losses and selected loan losses statistics.

•

Operating expenses decreased by $54.0 million for the quarter ended June 30, 2016, compared to the same quarter of the previous year, mainly due to lower OREO expenses by $31.8 million due to the loss of $22.0 million from the bulk sale of covered OREO completed in 2015, lower other operating expenses and lower restructuring costs from the reorganization of BPNA. On an adjusted basis, operating expenses decreased by $20.0 million.

•

The income tax expense for the second quarter of 2016 was $32.4 million, compared to an income tax benefit of $533.5 million for the same quarter of the previous year, which reflected the tax benefit of $544.9 million as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from the U.S. operations. On an adjusted basis, the income tax expense for the second quarter of 2016 was $32.1 million, compared to $21.5 million for the same quarter of 2015.

•

The Corporation’s total assets at June 30, 2016 amounted to $37.6 billion, compared to $35.8 billion at December 31, 2015. Money market and investment securities increased by $605.4 million, due mainly to increase in cash balances from deposits. Investment securities available-for-sale increased by $1.1 billion due to purchases of MBS and U.S. Treasury securities. Total deposits increased by $1.5 billion, mainly from government deposit accounts at BPPR, NOW accounts and commercial checking accounts, offset by lower brokered CDs.

139

•

Stockholders’ equity totalled $5.4 billion at June 30, 2016, compared with $5.1 billion at December 31, 2015. The increase resulted mainly from the Corporation’s net income of $174.0 million, a favorable variance of $108 million in unrealized gains on securities available-for-sale, partially offset by payments of dividends of $31.1 million on common stock of $0.15 per share and $1.9 million in dividends on preferred stock.

Refer to the Financial Condition Analysis section of this MD&A for additional information.

•

Capital ratios continued to be strong. As of June 30, 2016 the Corporation’s Common equity Tier 1 Capital ratio was 16.29% while the tangible common equity ratio was 12.53%. Refer to Table 14 for capital ratios and Table 15 for Non-GAAP reconciliations.

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 2015 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 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 2015 Form 10-K. Also, refer to Note 2 to the consolidated financial statements included in the 2015 Form 10-K for a summary of the Corporation’s significant accounting policies.

140

OPERATING RESULTS ANALYSIS

NET INTEREST INCOME

Average outstanding securities balances are based on amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Excluding the discount accretion on covered loans accounted for under Subtopic ASC 310-30, interest income for the quarter and six-months ended June 30, 2016 included a favorable impact for the amortization of these items, of $3.4 million and $8.2 million, respectively, compared with a favorable impact of $4.9 million and $6.5 million in the same periods in 2015.

Taxable equivalent net interest income was $382.5 million for the second quarter of 2016, compared to $382.7 million for the same quarter of the previous year. Net interest margin, on a taxable equivalent basis, for the second quarter of 2016 was 4.59%, compared to 4.80% for the same quarter of 2015.

Excluding the impact of the $2.1 million in income related to the bulk loan sale, net interest income on a taxable equivalent basis was $380.4 million for the second quarter of 2016, a decrease of $2.3 million when compared to the $382.7 million for same quarter of 2015. The adjusted net interest margin for the second quarter of 2016 was 4.57%, a decrease of 23 basis points when compared to the 4.80% for the same quarter of 2015. The main reasons for the decrease are described below:

•

Lower interest income from WB loans related to a lower volume as part of the normal portfolio run-off.

•

Lower income from mortgage loans mainly from lower volumes at both P.R. and U.S. due to slower origination activity.

•

Higher interest expense on deposits mainly due to higher average volumes in most categories mainly higher volume of deposits from the public sector and higher volumes in the U.S. to fund the loan growth. These increases were partially offset by a decrease in the average volume of brokered CDs. The increase in deposit cost is mostly related to a higher cost of time deposits and money markets in the U.S.

These negative variances were partially offset by:

•

Higher interest income from investment securities due mainly to higher volumes of mortgage backed securities; partially offset by lower yields on acquired investments.

•

Higher income from commercial loans mainly due to higher volume of loans in the U.S. at lower yields.

•

Higher interest income from consumer loans due to higher volume of personal loans related to acquired loans mainly in the BPNA segment, partially offset by lower income from credit cards mainly due to lower average volume in the portfolio.

141

Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations

Quarters ended June 30,


																								Variance
Average Volume							Average Yields /Costs										Interest							Attributable to
2016		2015		Variance			2016			2015			Variance				2016		2015		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	3,003	$	2,530	$	473			0.52	%		0.29	%		0.23	%	Money market investments	$	3,889	$	1,845	$	2,044		$	1,767		$	277
	7,147		5,812		1,335			2.72			2.66			0.06		Investment securities		48,661		38,591		10,070			(794	)		10,864
	136		233		(97	)		7.13			6.25			0.88		Trading securities		2,415		3,635		(1,220	)		447			(1,667	)

	10,286		8,575		1,711			2.14			2.06			0.08		Total money market, investment and trading securities		54,965		44,071		10,894			1,420			9,474

																Loans:
	9,150		8,776		374			5.05			5.19			(0.14	)	Commercial		114,925		113,515		1,410			(3,346	)		4,756
	723		682		41			5.43			6.02			(0.59	)	Construction		9,747		10,247		(500	)		(1,084	)		584
	651		583		68			6.73			6.93			(0.20	)	Leasing		10,951		10,100		851			(302	)		1,153
	6,743		7,175		(432	)		5.53			5.44			0.09		Mortgage		93,145		97,561		(4,416	)		1,534			(5,950	)
	3,865		3,823		42			10.47			10.45			0.02		Consumer		100,628		99,587		1,041			(481	)		1,522

	21,132		21,039		93			6.26			6.30			(0.04	)	Sub-total loans		329,396		331,010		(1,614	)		(3,679	)		2,065
	2,013		2,350		(337	)		9.53			9.44			0.09		WB loans [1]		47,737		55,335		(7,598	)		(12	)		(7,586	)

	23,145		23,389		(244	)		6.54			6.62			(0.08	)	Total loans		377,133		386,345		(9,212	)		(3,691	)		(5,521	)

$	33,431	$	31,964	$	1,467			5.19	%		5.40	%		(0.21	)%	Total earning assets	$	432,098	$	430,416	$	1,682		$	(2,271	)	$	3,953

																Interest bearing deposits:
$	7,023	$	5,507	$	1,516			0.38	%		0.36	%		0.02	%	NOW and money market [2]	$	6,596	$	4,911	$	1,685		$	720		$	965
	7,487		7,040		447			0.24			0.23			0.01		Savings		4,447		4,102		345			(5	)		350
	7,866		8,530		(664	)		1.00			0.81			0.19		Time deposits		19,556		17,245		2,311			3,373			(1,062	)

	22,376		21,077		1,299			0.55			0.50			0.05		Total deposits		30,599		26,258		4,341			4,088			253

	801		1,052		(251	)		1.03			0.71			0.32		Short-term borrowings		2,058		1,864		194			647			(453	)
	1,506		1,803		(297	)		5.07			4.36			0.71		Other medium and long-term debt		19,002		19,626		(624	)		1,412			(2,036	)

	24,683		23,932		751			0.84			0.80			0.04		Total interest bearing liabilities		51,659		47,748		3,911			6,147			(2,236	)

	6,481		6,247		234											Non-interest bearing demand deposits
	2,267		1,785		482											Other sources of funds

$	33,431	$	31,964	$	1,467			0.62	%		0.60	%		0.02	%	Total source of funds		51,659		47,748		3,911			6,147			(2,236	)

								4.57	%		4.80	%		(0.23	)%	Adjusted net interest margin/income on a taxable equivalent basis		380,439		382,668		(2,229	)	$	(8,418	)	$	6,189

								4.35	%		4.60	%		(0.25	)%	Adjusted net interest spread

																Impact of bulk loan sale		2,057		—		2,057
								4.59	%		4.80	%		(0.21	)%	Net interest margin/ income on a taxable equivalent basis	$	382,496	$	382,668	$	(172	)

																Taxable equivalent adjustment		21,945		20,115		1,830

																Net interest income	$	360,551	$	362,553	$	(2,002	)

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]	Including the impact of the WB loans bulk sale, the yield for WB loans would have been 9.94%.

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

142

Taxable equivalent net interest income was $756.4 million for the six-month period ended June 30, 2016, compared to $746.9 million for the same period of 2015. Net interest margin for the six-month period ended June 30, 2016 was 4.65%, compared to 4.83% for the same period of the previous year.

Excluding the impact of the $2.1 million in income related to the bulk loan sale, net interest income on a taxable equivalent basis was $754.4 million for the six-month period ended June 30, 2016, an increase of $7.5 million when compared to the $746.9 million for the same period of 2015. The adjusted net interest margin for the six-month period ended June 30, 2016 was 4.64%, a decrease of 19 basis points when compared to the 4.83% for the same period of 2015. The main reasons for the increase are described below:

•

Higher interest income from investment securities mainly due to higher volumes of mortgage backed securities and money market investments; partially offset by lower yields on acquired investments.

•

Higher income from commercial, consumer and leasing as a result of higher average volume of loans mainly in the U.S.

These positive variances were partially offset by:

•

Lower interest income from WB loans related to a lower volume as part of the normal portfolio run-off.

•

Higher interest expense on deposits mainly due a higher cost of time deposits and money markets in the U.S. to fund loan growth.

143

Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)

Six months ended June 30,


Average Volume							Average Yields /Costs										Interest							Attributable to
2016		2015		Variance			2016			2015			Variance				2016		2015		Variance			Rate			Volume
(In millions)																	(In thousands)
$	2,595	$	2,232	$	363			0.52	%		0.30	%		0.22	%	Money market investments	$	6,752	$	3,291	$	3,461		$	3,105		$	356
	6,894		5,724		1,170			2.81			2.67			0.14		Investment securities		96,778		76,234		20,544			(541	)		21,085
	130		217		(87	)		7.11			6.49			0.62		Trading securities		4,586		6,979		(2,393	)		631			(3,024	)

	9,619		8,173		1,446			2.25			2.12			0.13		Total money market, investment and trading securities		108,116		86,504		21,612			3,195			18,417

																Loans:
	9,054		8,581		473			5.09			5.18			(0.09	)	Commercial		229,016		220,402		8,614			(3,379	)		11,993
	713		559		154			5.37			5.89			(0.52	)	Construction		19,035		16,324		2,711			(1,498	)		4,209
	641		576		65			6.75			6.97			(0.22	)	Leasing		21,626		20,074		1,552			(640	)		2,192
	6,786		6,955		(169	)		5.51			5.39			0.12		Mortgage		187,041		187,602		(561	)		4,042			(4,603	)
	3,836		3,834		2			10.49			10.41			0.08		Consumer		200,148		197,837		2,311			1,271			1,040

	21,030		20,505		525			6.27			6.30			(0.03	)	Sub-total loans		656,866		642,239		14,627			(204	)		14,831
	2,035		2,445		(410	)		9.14			9.29			(0.15	)	WB loans [1]		92,641		112,765		(20,124	)		4,769			(24,893	)

	23,065		22,950		115			6.52			6.62			(0.10	)	Total loans		749,507		755,004		(5,497	)		4,565			(10,062	)

$	32,684	$	31,123	$	1,561			5.27	%		5.44	%		(0.17	)%	Total earning assets	$	857,623	$	841,508	$	16,115		$	7,760		$	8,355

																Interest bearing deposits:
$	6,367	$	5,246	$	1,121			0.39	%		0.35	%		0.04	%	NOW and money market [2]	$	12,203	$	9,130	$	3,073		$	1,374		$	1,699
	7,381		6,966		415			0.24			0.23			0.01		Savings		8,695		8,026		669			40			629
	7,962		8,141		(179	)		1.00			0.87			0.13		Time deposits		39,575		34,966		4,609			5,314			(705	)

	21,710		20,353		1,357			0.56			0.52			0.04		Total deposits		60,473		52,122		8,351			6,728			1,623

	807		1,083		(276	)		0.98			0.67			0.31		Short-term borrowings		3,919		3,597		322			1,453			(1,131	)
	1,567		1,783		(216	)		4.97			4.37			0.60		Other medium and long-term debt		38,875		38,908		(33	)		2,744			(2,777	)

	24,084		23,219		865			0.86			0.82			0.04		Total interest bearing liabilities		103,267		94,627		8,640			10,925			(2,285	)

	6,387		6,106		281											Demand deposits
	2,213		1,798		415											Other sources of funds

$	32,684	$	31,123	$	1,561			0.63	%		0.61	%		0.02	%	Total source of funds		103,267		94,627		8,640			10,925			(2,285	)

								4.64	%		4.83	%		(0.19	)%	Adjusted net interest margin/ income on a taxable equivalent basis		754,356		746,881		7,475		$	(3,165	)	$	10,640

								4.41	%		4.62	%		(0.21	)%	Adjusted net interest spread

																Impact of bulk loan sale		2,057		—		2,057
								4.65	%		4.83	%		(0.18	)%	Net interest margin/ income on a taxable equivalent basis	$	756,413	$	746,881	$	9,532

																Taxable equivalent adjustment		43,450		41,133		2,317

																Net interest income	$	712,963	$	705,748	$	7,215

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]	Including the impact of the WB loans bulk sale, the yield for WB loans would have been 9.34%.

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

144

Provision for Loan Losses

The Corporation’s total provision for loan losses was $40.5 million for the quarter ended June 30, 2016, compared to $76.2 million for the quarter ended June 30, 2015, a decrease of $35.7 million.

The provision for loan losses for the non-covered loan portfolio totaled $39.7 million, compared to $60.5 million for the same quarter in 2015, a decrease of $20.8 million, mostly related to lower provision in the BPPR segment. Despite challenging operating conditions in Puerto Rico credit metrics continued to be stable. Net charge-offs, excluding net recoveries of $5.4 million related to the bulk sale of commercial and construction loans acquired in 2010 from the FDIC as receiver of Westernbank, decreased by $11.0 million when compared with the same quarter in 2015.

The provision for loan losses for the non-covered loan portfolio at the BPPR segment decreased by $22.2 million, mainly driven by lower loss trends and lower reserve for impaired loans. The net recoveries of $5.4 million related to the bulk sale defined earlier had a positive impact on the provision for the same amount. The adjusted provision for the BPPR segment for the second quarter of 2016 was $43.8 million. During the quarter ended June 30, 2015, the aggregate write-down of $30.5 million on loans transferred to held-for-sale had minimal impact on the provision as $29.0 million were previously reserved.

The provision for loan losses for the BPNA segment amounted to $1.3 million, compared to a release of $61 thousand for the same quarter in 2015. Provision increase was mainly driven by loan growth. Credit trends for the BPNA segment continued to be strong with low levels of non-performing loans and net charge-offs.

The provision for covered loan portfolio totaled $804 thousand in the second quarter of 2016, compared to $15.8 million for the same quarter in 2015, decreasing by $15.0 million, mostly reflective of the reclassification at the end of the second quarter of 2015 to non-covered loans of the non-single family loans that were previously covered by the commercial loss agreement with the FDIC.

For the six months ended June 30, 2016, the Corporation’s total provision for loan losses totaled $85.3 million, compared with $116.3 million for the same period in 2015, decreasing by $31.0 million mostly driven by lower provision for covered loans.

For the six months period ended June 30, 2016, the provision for loan losses for the non-covered loan portfolio decreased by $2.6 million when compared to the same period of 2015. This decrease was driven by a decrease of $10.2 million in the BPPR segment, which includes $5.4 million positive impact related to the bulk sale of WB loans, offset by an increase of $7.6 million in the BPNA segment driven in part by reserve releases of $2.3 million during the six month period ended June 30, 2015.

The provision for the covered portfolio decreased by $28.4 million for the six month period ended June 30, 2016. This decrease was mainly due to the reclassification to non-covered loans of the non-single family loans that were previously covered by the commercial loss agreement with the FDIC at the end of the second quarter of 2015, as mentioned above.

Refer to the Credit Risk Management and Loan Quality sections 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 decreased by $30.3 million during the quarter ended June 30, 2016, compared with the same quarter of the previous year. The decrease in non-interest income was principally due to:

•

Lower other service fees by $2.5 million mainly in the BPPR segment due to a decrease in investment management fees and other fees;

•

Lower income from mortgage banking activities by $5.1 million due to an unfavorable variance in the valuation adjustment on mortgage servicing rights and higher realized losses on closed derivative positions;

•

Unfavorable variance in adjustments to indemnity reserves by $6.2 million due to an increase of $2.5 million in the reserve, during the second quarter of 2016, related to the residential mortgage loans bulk sale completed during 2013; the reversal of $1.8 million during the second quarter of 2015 related to the reserve established during 2013 in connection with the bulk sale of commercial and construction loans and OREO; and to a provision reversal during the second quarter of 2015 of the reserve for representations and warranties;

145

•

Unfavorable variance in the FDIC loss share (expense) income of $31.7 million due to lower mirror accounting on reimbursable expenses in part due to the impact of a $17.6 million loss related to the commercial OREO bulk sale completed during the second quarter of 2015, an unfavorable change in the true-up payment obligation due to the fair value adjustment of this liability mainly as a result of the improvement in the Corporation’s credit spreads and lower mirror accounting on credit impairment losses, partially offset by lower amortization of the indemnification asset in part due to the $10.9 million expense during the second quarter of 2015 related to losses that were not claimed to the FDIC prior to the expiration of the loss-share agreement on June 30, 2015. Refer to Table 4 for a breakdown of FDIC loss share income (expenses) by major categories; and

•

Lower other operating income by $4.4 million in part related to the unfavorable adjustment of $2.2 million resulting from the EVERTEC restatement.

These decreases were partially offset by:

•

Higher net gain on investment securities by $1.6 million related to the redemption of an investment at the Corporate segment;

•

Lower other-than-temporary impairment losses on investment securities by $14.2 million due to the other-than-temporary impairment charge during the second quarter of 2015 on the portfolio of Puerto Rico government investment securities available-for-sale of $14.4 million; and

•

Higher trading account profit by $4.2 million principally resulting from favorable fair value adjustments of P.R. municipal bonds and higher unrealized gains on MBS outstanding.

Non-interest income decreased by $33.9 million during the six months ended June 30, 2016, compared with the same period of the previous year. The decrease in non-interest income was mainly due to lower income from mortgage banking activities by $7.4 million due to an unfavorable variance in the valuation adjustment on mortgage servicing rights, which was partially offset by higher mortgage servicing fees, including those from the portfolio acquired from Doral Bank; an unfavorable variance in adjustments to indemnity reserves by $5.7 million which includes the reversal of $5.0 million during the six month period ended June 30, 2015 related to the reserve established in connection with BPPR’s bulk sale; and an unfavorable variance in FDIC loss share (expense) income of $38.9 million; partially offset by lower other-than-temporary impairment losses on investment securities by $14.2 million as previously discussed; and higher trading account profit by $3.6 million.

Excluding the impact of certain events detailed in Tables 42 to 44 Adjusted Results (Non-GAAP), non-interest income decreased by $35.2 million during the second quarter of 2016. Excluding the impact of certain events detailed in Tables 45 to 47 Adjusted Results (Non-GAAP), non-interest income decreased $37.7 million during the six months ended June 30, 2016.

The following table provides a summary of the revenues and expenses derived from the assets acquired in the FDIC-assisted transaction during the quarters and six months ended June 30, 2016 and 2015.

146

Table 4 - Financial Information - Westernbank FDIC-Assisted Transaction


	Quarters ended June 30,									Six months ended June 30,
(In thousands)	2016			2015			Variance			2016			2015			Variance
Interest income on WB loans	$	49,794		$	55,335		$	(5,541	)	$	94,698		$	112,766		$	(18,068	)

FDIC loss-share (expense) income:
Amortization of loss-share indemnification asset		(4,036	)		(31,065	)		27,029			(8,078	)		(58,381	)		50,303
80% mirror accounting on credit impairment losses (reversal)^[1]		475			7,647			(7,172	)		(1,618	)		15,893			(17,511	)
80% mirror accounting on reimbursable expenses		2,235			42,730			(40,495	)		6,185			64,275			(58,090	)
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		(3,956	)		(5,203	)		1,247			(4,601	)		(7,822	)		3,221
Change in true-up payment obligation		(7,688	)		3,672			(11,360	)		(8,131	)		7,836			(15,967	)
Other		394			1,294			(900	)		521			1,413			(892	)

Total FDIC loss-share (expense) income		(12,576	)		19,075			(31,651	)		(15,722	)		23,214			(38,936	)

Total revenues		37,218			74,410			(37,192	)		78,976			135,980			(57,004	)

Provision for loan losses		(7,282	)		15,766			(23,048	)		(7,638	)		26,090			(33,728	)

Total revenues less provision for loan losses	$	44,500		$	58,644		$	(14,144	)	$	86,614		$	109,890		$	(23,276	)

[1]


Average balances
	Quarters ended June 30,							Six months ended June 30,
(In millions)	2016		2015		Variance			2016		2015		Variance
WB Loans	$	2,013	$	2,350	$	(337	)	$	2,035	$	2,444	$	(409	)
FDIC loss-share asset		211		391		(180	)		222		410		(188	)

Operating Expenses

Operating expenses decreased by $54.0 million for the quarter ended June 30, 2016, compared with the same quarter of the previous year. Refer to Table 5 for a breakdown of operating expenses by major categories. The decrease in operating expenses was driven primarily by:

•

Lower personnel cost by $4.3 million due to the grant of employees restricted stock and performance shares awarded during the second quarter of 2015, while for 2016 performance shares were awarded during the first quarter;

•

Lower FDIC deposit insurance by $3.2 million due to improvements in the risk profile of the Corporation;

•

Lower OREO expenses by $31.8 million mainly due to a loss on a bulk sale of covered commercial properties during the second quarter of 2015 of $22.0 million and lower commercial and construction write-downs by $16.1 million;

•

Lower other operating expenses by $7.6 million mainly due to property tax payments on covered assets at BPPR by $6.0 million during the second quarter of 2015, most of which was related to loss sharing expense reimbursable by the FDIC; and

•

Lower restructuring cost by $6.2 million, expenses incurred during 2015 in connection with the reorganization of BPNA.

Excluding the impact of certain transactions, as detailed in the Adjusted Results Non-GAAP Tables 42 through 44, operating expenses decreased by $20.0 million compared to the same quarter of the previous year.

Operating expenses decreased by $64.4 million for the six months ended June 30, 2016, when compared to the same period in 2015. The decrease in operating expenses was driven primarily by:

•

Lower OREO expenses by $45.8 million mainly due to lower write-downs on commercial and construction properties by $30.7 million and as a result of higher loss on the bulk sale during 2015 mentioned above;

•

Lower other operating expenses by $7.8 million mainly due to property tax payments at BPPR during 2015; and

•

Lower restructuring cost incurred during 2015 in connection with the reorganization of BPNA by $16.9 million.

147

These decreases were partially offset by:

•

Higher personnel cost by $6.4 million due to higher salaries impacted by higher headcount as a result of the Doral Bank Transaction, and higher pension cost due to changes in actuarial assumptions;

Excluding the impact of certain transactions, as detailed in the Adjusted Results Non-GAAP Tables 45 through 47; operating expenses decreased by $9.6 million, when compared to the same period in 2015.

Table 5 - Operating Expenses


	Quarters ended June 30,							Six months ended June 30,
(In thousands)	2016		2015		Variance			2016		2015		Variance
Personnel costs:
Salaries	$	75,792	$	76,453	$	(661	)	$	153,090	$	148,847	$	4,243
Commissions, incentives and other bonuses		16,983		24,214		(7,231	)		37,751		42,672		(4,921	)
Pension, postretirement and medical insurance		12,279		9,075		3,204			25,390		21,088		4,302
Other personnel costs, including payroll taxes		11,654		11,235		419			27,568		24,828		2,740

Total personnel costs		116,708		120,977		(4,269	)		243,799		237,435		6,364

Net occupancy expenses		21,714		23,286		(1,572	)		42,144		44,995		(2,851	)
Equipment expenses		15,261		15,925		(664	)		29,809		29,336		473
Other taxes		10,170		11,113		(943	)		20,365		19,687		678
Professional fees:
Collections, appraisals and other credit related fees		4,974		7,688		(2,714	)		9,474		13,611		(4,137	)
Programming, processing and other technology services		50,232		49,405		827			100,096		94,566		5,530
Other professional fees		25,419		21,356		4,063			46,514		45,800		714

Total professional fees		80,625		78,449		2,176			156,084		153,977		2,107

Communications		6,012		6,153		(141	)		12,332		12,329		3
Business promotion		13,705		13,776		(71	)		24,815		24,589		226
FDIC deposit insurance		5,362		8,542		(3,180	)		12,732		14,940		(2,208	)
Other real estate owned (OREO) expenses		12,980		44,816		(31,836	)		22,121		67,885		(45,764	)
Other operating expenses:
Credit and debit card processing, volume and interchange expenses		6,616		5,762		854			12,339		10,583		1,756
Transportation and travel		1,916		1,887		29			3,365		3,626		(261	)
Printing and supplies		848		1,059		(211	)		1,472		1,878		(406	)
Operational losses		7,146		2,674		4,472			9,807		5,924		3,883
All other		6,989		19,700		(12,711	)		13,697		26,419		(12,722	)

Total other operating expenses		23,515		31,082		(7,567	)		40,680		48,430		(7,750	)

Amortization of intangibles		3,097		2,881		216			6,211		4,985		1,226
Restructuring costs		—		6,174		(6,174	)		—		16,927		(16,927	)

Total operating expenses	$	309,149	$	363,174	$	(54,025	)	$	611,092	$	675,515	$	(64,423	)

INCOME TAXES

For the quarter ended June 30, 2016, the Corporation recorded an income tax expense of $32.4 million, compared to an income tax benefit of $533.5 million for the same quarter of the previous year. During the quarter ended June 30, 2015, the Corporation recorded a tax benefit of $544.9 million as a result of the partial reversal of the valuation allowance on the Corporation’s deferred tax asset from the U.S. operations.

The effective income tax rate for the second quarter of 2016 was 27%. The effective tax rate is impacted by the composition and source of the taxable income.

Adjusting for the tax effect of certain transactions detailed in Tables 43 and 44, Non-GAAP results, the income tax expense for the second quarter of 2016 was $32.1 million, compared to $21.5 million for the same quarter of 2015. The adjusted effective income tax rate for the second quarter of 2016 was 26%, compared to 19% for the same quarter of 2015.

The increase in the adjusted income tax expense for the second quarter of 2016 was primarily due to the increase in the income tax expense at the U.S. operations and an increase in income before tax at the P.R operations partially offset by higher income subject to preferential tax rates. The Corporation is subject to a 39% statutory income tax rate in Puerto Rico. For the second quarter 2016, the adjusted effective tax rate of 26% reflects the impact of net exempt interest income and other items which reduce the rate. The impact of these was partially offset by an effective tax rate for the U.S. operations of approximately 45%.

148

For the six months ended June 30, 2016 the Corporation recorded an income tax expense of $64.7 million, compared to an income tax benefit of $501.0 million for the same period of the previous year, driven by the above mentioned partial release of the valuation allowance of the deferred tax asset at the U.S. operations.

Adjusting for the tax effect of certain transactions detailed in Tables 46 and 47, Non-GAAP results, the income tax expense for the six months ended June 30, 2016 was $64.4 million, compared to $57.0 million for the same quarter of 2015. The adjusted effective income tax rate for the six months ended June 30, 2016 was 27%, compared to 24% for the same period of 2015. As discussed above, the adjusted tax rate reflects the impact of exempt income and other items that reduce the effective tax rate.

Refer to Note 33 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. These reportable segments pertain only to the continuing operations of Popular, Inc. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations and sold during 2014.

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 35 to the consolidated financial statements.

The Corporate group reported a net loss of $14.1 million for the quarter ended June 30, 2016, compared with a net loss of $19.2 million for the quarter ended June 30, 2015. For the six months ended June 30, 2016, the Corporate group reported a net loss of $34.7 million, compared with a net loss of $40.2 million for the same period of the previous year.

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 $90.6 million for the quarter ended June 30, 2016, compared with a net income of $55.9 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

•

Lower net interest income by $5.7 million mostly due to:

•

A decrease of $5.5 million in income from the WB loans portfolio due mainly to lower average balances by $337 million as part of the normal portfolio run-off and loan resolutions;

•

Lower income from mortgage loans by $3.2 million due mainly to lower volume of originations; and

•

Lower income from commercial loans by $2.6 million due to lower average volumes;

Partially offset by:

•

Higher income from investment securities by $4.9 million mostly due to higher levels of mortgage-backed securities; and

•

Lower cost of funds by $2.0 million due to lower levels of borrowings and lower levels of brokered deposits.

149

The net interest margin was 4.71% for the quarter ended June 30, 2016, compared to 4.92% for the same period in 2015.

•

Provision for loan losses of $39.1 million, a decrease of $36.9 million, driven by a decline of $22.0 million for the non-covered portfolio due to lower loss trends and lower reserve for impaired loans. The net recoveries of $5.4 million related to the bulk sale defined earlier had a positive impact on the provision for the same amount. The provision for the covered portfolio declined by approximately $15.0 million, mostly reflective of the reclassification at the end of the second quarter of 2015 to non-covered loans of the non-single family loans that were previously covered by the commercial loss-sharing agreement with the FDIC;

•

Lower non-interest income by $27.5 million mainly due to:

•

Lower mortgage banking activities revenues by $5.1 million due to an unfavorable variance in the MSRs valuation and higher realized losses on closed derivative positions;

•

Unfavorable variance in adjustments to indemnity reserves by $7.3 million due to an increase of $2.5 million in the reserve, during the second quarter of 2016, related to the residential mortgage loans bulk sale completed during 2013; the reversal of $1.8 million during the second quarter of 2015 related to the reserve established during 2013 in connection with the bulk sale of commercial and construction loans and OREO; and to a provision reversal during the second quarter of 2015 of the reserve for representations and warranties; and

•

Partially offset by:

•

Operating expenses were lower by $45.0 million mainly due to:

•

Lower FDIC deposit insurance expense by $2.1 million due to improvements in the risk profile of BPPR;

•

Lower OREO expenses by $31.2 million mainly due to a loss on a bulk sale of covered commercial properties during the second quarter of 2015 of $22.0 million and lower commercial and construction write-downs; and

•

Lower other operating expenses by $9.6 million mainly due to property tax payments on covered assets of $6.0 million during the second quarter of 2015, most of which was related to loss sharing expense reimbursable by the FDIC.

•

Higher income tax expense by $14.0 million due to higher taxable income.

150

Net income for the six months ended June 30, 2016 amounted to $184.1 million, compared to $146.7 million for the same period of the previous year. The principal factors that contributed to the variance in the financial results included the following:

•

Lower net interest income by $7.0 million mostly due to:

•

A decrease of $18.1 million in income from the WB loans portfolio due mainly to lower average balances by $409 million as part of the normal portfolio run-off and loan resolutions; and

•

Lower income from commercial loans by $2.7 million due to lower average volumes.

Partially offset by:

•

Higher income from investment securities by $10.6 million mostly due to higher average balances of mortgage-backed securities;

•

Higher income from mortgage loans by $2.0 million due mainly to higher yields; and

•

Lower cost of funds by $2.5 million due to lower levels of borrowings and lower levels of brokered deposits.

•

Lower provision for loan losses by $38.4 million, mainly due to lower loss trends and reserves for impaired loans and the impact of the net recoveries of $5.4 million related to the bulk sale defined earlier;

•

Lower non-interest income by $32.5 million, mainly due to lower income from mortgage banking activities by $7.5 million due to an unfavorable variance in the MSRs valuation adjustment, which was partially offset by higher mortgage servicing fees, including those from the portfolio acquired from Doral Bank; lower provision for indemnity reserves by $6.8 million and an unfavorable variance in the FDIC loss share (expense) income of $38.9 million; partially offset by lower other-than-temporary impairment losses on investment securities by $14.2 million as previously discussed;

•

Lower operating expenses by $46.9 million, mainly due to lower OREO expenses by $41.7 million, reflecting the loss of $22.0 million on the bulk sale mentioned earlier and lower write-downs; lower other operating expenses by $10.6 million due mainly to the property tax payments in 2015 mentioned above; partially offset by higher personnel cost by $6.7 million due to higher salaries impacted by higher headcount as a result of the Doral Bank Transaction, and higher pension cost due to changes in actuarial assumptions; and

•

Higher income tax expense by $8.4 million due to higher taxable income.

Banco Popular North America

For the quarter ended June 30, 2016, the reportable segment of Banco Popular North America reported net income of $12.4 million, compared to net income from continuing operations of $561.0 million for the same quarter of the previous year, impacted by the previously mentioned partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. Other factors that contributed to the variance in the financial results included the following:

•

Net interest income was $65.5 million, an increase of $3.6 million compared to the same quarter of the previous year. The net interest income improvement is mostly due to higher income from loans by $8.3 million, mainly from commercial and consumer loans due to higher volumes as a result of purchases and originations. A higher level of mortgage-backed securities also contributed to the increase in the net interest income by $1.6 million. This increase was partially offset by higher cost of funds by $6.2 million driven by a higher volume of non-brokered time deposits and borrowings to fund loan growth. Net interest margin was 3.80% compared to 4.03% for the same quarter of the previous year;

•

Provision for loan losses was $1.3 million, an increase of $1.4 million compared to the reserve release of $61 thousand for 2015;

•

Lower non-interest income by $0.4 million, reflecting lower service fees and higher losses on sales of loans, partially offset by a favorable variance in the provision for indemnity reserve;

•

Lower operating expenses by $4.6 million mainly due to restructuring costs of $6.2 million in the second quarter of 2015 and lower FDIC insurance expense by $1.1 million due to the improved risk profile of BPNA, partially offset by higher professional fees by $1.9 million due to intercompany shared services fees, loan servicing fees and technology services charged by BPPR; and

151

•

Unfavorable variance in income tax expense of $554.9 million due to the above mentioned tax benefit of $544.9 million recorded during the second quarter of 2015 as a result of the partial reversal of the valuation allowance on the deferred tax asset.

Net income from continuing operations for the six months ended June 30, 2016 amounted to $24.3 million, compared to $564.3 million for the same period of the previous year, largely due to the previously mentioned partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. Other factors that contributed to the variance in the financial results included the following:

•

Net interest income was $127.8 million, an increase of $13.7 million compared to the same period of the previous year. The increase in the net interest income is mostly due to higher income from loans by $23.4 million, mainly from higher levels of commercial, construction and consumer loans, impacted by the loans acquired as part of the Doral Bank transaction on February 27, 2015, and other purchases as well as originations. Income from investment securities was also higher by $2.1 million, mainly from higher levels of mortgage-backed securities. This increase was partially offset by higher cost of funds by $11.7 million driven by a higher volume of non-brokered time deposits and borrowings to fund loan growth. Net interest margin was 3.76% compared to 3.94% for the same period of the previous year;

•

Provision for loan losses was $5.4 million, an increase of $7.6 million compared to the reserve release of $2.3 million for 2015;

•

Lower non-interest income by $1.6 million, reflecting lower service fees, lower other operating income and higher losses on sales of loans, partially offset by a favorable variance in the provision for indemnity reserve;

•

Lower operating expenses by $18.0 million mainly due to restructuring costs of $16.9 million during 2015 and lower OREO expenses by $4.1 million due to lower write-downs; and

•

Unfavorable variance in income tax expense of $562.5 million due to the above mentioned tax benefit of $544.9 million recorded during the second quarter of 2015 as a result of the partial reversal of the valuation allowance on the deferred tax asset.

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $37.6 billion at June 30, 2016 compared to $35.8 billion at December 31, 2015. Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of financial condition as of such dates.

Money market investments, trading and investment securities

Money market investments totaled $2.8 billion at June 30, 2016, compared to $2.2 billion at December 31, 2015. The increase was mainly at BPPR due to an increase in cash balances from deposits, partially offset by purchases of MBS and U.S. Treasury securities, as discussed below.

Trading account securities amounted to $73 million at June 30, 2016, relatively flat when compared to $72 million at December 31, 2015. 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 $7.3 billion at June 30, 2016, compared with $6.2 billion at December 31, 2015. The increase of $1.1 billion was mainly due to purchases of MBS at both BPPR and BPNA and purchases of U.S. Treasury securities at BPPR.

Table 6 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 7 and 8 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM. The portfolio of obligations of the Puerto Rico Government is mainly comprised of securities with specific sources of income or revenues identified for repayments.

152

Table 6 - Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity


(In thousands)	June 30, 2016		December 31, 2015
U.S. Treasury securities	$	1,624,776	$	1,183,328
Obligations of U.S. Government sponsored entities		773,841		939,641
Obligations of Puerto Rico, States and political subdivisions		123,079		121,176
Collateralized mortgage obligations		1,438,802		1,560,923
Mortgage-backed securities		3,367,243		2,344,196
Equity securities		2,520		2,398
Others		11,940		12,233

Total investment securities AFS and HTM	$	7,342,201	$	6,163,895

Loans

Refer to Table 7 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 7. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. As of June 30, 2016, the Corporation’s covered loans portfolio amounted to $607 million, comprised mainly of residential mortgage loans.

Refer to Note 9 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

The Corporation’s total loan portfolio amounted to $23.3 billion at June 30, 2016, compared to $23.1 billion at December 31, 2015.

153

Table 7 - Loans Ending Balances


(In thousands)	June 30, 2016		December 31, 2015		Variance
Loans not covered under FDIC loss sharing agreements:
Commercial	$	10,359,815	$	10,099,163	$	260,652
Construction		717,332		681,106		36,226
Legacy^[1]		49,709		64,436		(14,727	)
Lease financing		664,094		627,650		36,444
Mortgage		6,864,118		7,036,081		(171,963	)
Consumer		3,885,593		3,837,679		47,914

Total non-covered loans held-in-portfolio		22,540,661		22,346,115		194,546

Loans covered under FDIC loss sharing agreements:
Mortgage		589,256		627,102		(37,846	)
Consumer		17,914		19,013		(1,099	)

Total covered loans held-in-portfolio		607,170		646,115		(38,945	)

Total loans held-in-portfolio		23,147,831		22,992,230		155,601

Loans held-for-sale:
Commercial		39,544		45,074		(5,530	)
Construction		—		95		(95	)
Mortgage		82,794		91,831		(9,037	)

Total loans held-for-sale		122,338		137,000		(14,662	)

Total loans	$	23,270,169	$	23,129,230	$	140,939

[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 increased by $195 million to $22.5 billion at June 30, 2016. The increase was mainly at BPNA by $438 million, driven by growth in the commercial, construction and consumer loan portfolios, partially offset by a decrease of $243 million at BPPR mainly due to lower originations of residential mortgages and the bulk sale of WB loans with a carrying value of approximately $100 million.

The loans held-for-sale portfolio decreased by $15 million from December 31, 2015, mainly at BPPR due mostly to lower originations of mortgage loans held-for-sale.

Covered loans

The covered loans portfolio amounted to $607 million at June 30, 2016, compared to $646 million at December 31, 2015. The decrease of $39 million is mostly from residential mortgage loans due to loan resolutions and the normal portfolio run-off. Refer to Table 7 for a breakdown of the covered loans by major loan type categories.

Tables 8 and 9 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 increases in cash flow expectations on the loan pool based on quarterly revisions of the portfolio. The increase in the accretable discount is recognized as interest income using the effective yield method over the estimated life of each applicable loan pool.

154

Table 8 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30


	Quarter ended June 30,						Six months ended June 30,
(In thousands)	2016 [1]			2015			2016			2015
Beginning balance	$	1,935,441		$	2,367,096		$	1,974,501		$	2,444,172
Accretion		48,476			53,994			92,009			109,691
Collections/loan sales/charge-offs^[2]		(183,974	)		(284,012	)		(266,567	)		(416,785	)

Ending balance	$	1,799,943		$	2,137,078		$	1,799,943		$	2,137,078
Allowance for loan losses (ALLL)		(66,995	)		(47,049	)		(66,995	)		(47,049	)

Ending balance, net of ALLL	$	1,732,948		$	2,090,029		$	1,732,948		$	2,090,029

[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 $597 million as of June 30, 2016.

[2]	For the quarter ended June 30, 2016, includes the impact of the bulk sale of loans with a carrying value of approximately $99 million.

Table 9 - Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30


	Quarter ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Beginning balance	$	1,128,808		$	1,258,948		$	1,112,458		$	1,271,337
Accretion [1]		(48,476	)		(53,994	)		(92,009	)		(109,691	)
Change in expected cash flows		(8,652	)		40,970			51,231			84,278

Ending balance	$	1,071,680		$	1,245,924		$	1,071,680		$	1,245,924

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

FDIC loss share asset

Table 10 sets forth the activity in the FDIC loss share asset for the quarters and six months ended June 30, 2016 and 2015.

Table 10 – Activity of Loss Share Asset


	Quarters ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of period	$	219,448		$	409,844		$	310,221		$	542,454
Amortization of loss-share indemnification asset		(4,036	)		(31,065	)		(8,078	)		(58,381	)
Credit impairment losses (reversal) to be covered under loss-sharing agreements		475			7,647			(1,618	)		15,893
Reimbursable expenses		2,235			42,730			6,185			64,275
Recoveries on covered assets		(4,093	)		—			(4,093	)		—
Net payments from FDIC under loss-sharing agreements		—			(32,158	)		(88,588	)		(164,423	)
Other adjustments attributable to FDIC loss-sharing agreements		—			(4,051	)		—			(6,871	)

Balance at end of period	$	214,029		$	392,947		$	214,029		$	392,947

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 11 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount) for the periods presented.

155

Table 11 - Activity in the Remaining FDIC Loss-Share Asset Discount


	Quarters ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015
Balance at beginning of period^[1]	$	25,205		$	38,687		$	26,100		$	53,095
Amortization of negative discount^[2]		(4,036	)		(31,065	)		(8,078	)		(58,381	)
Impact of lower projected losses		2,022			20,871			5,169			33,779

Balance at end of period	$	23,191		$	28,493		$	23,191		$	28,493

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

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

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

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At June 30, 2016, OREO increased to $215 million from $192 million at December 31, 2015 mainly at BPPR on residential properties, partially offset by the bulk sale of WB commercial OREOs with a book value of $9 million during the second quarter of 2016. Refer to Note 14 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 15 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the consolidated statements of financial condition at June 30, 2016 and December 31, 2015. Other assets decreased by $14 million from December 31, 2015 to June 30, 2016, due mostly to a decrease in the deferred tax asset, partially offset by an increase in guaranteed mortgage loan claims.

Goodwill

Goodwill increased by $5 million from December 31, 2015 to June 30, 2016, due to a goodwill adjustment related to the Doral Bank Transaction. Refer to Note 16 to the consolidated financial statements for detailed information on the Corporation’s goodwill.

Liabilities

The Corporation’s total liabilities were $32.2 billion at June 30, 2016 compared to $30.7 billion at December 31, 2015. Refer to the Corporation’s consolidated statements of financial condition included in this Form 10-Q.

Deposits and Borrowings

The composition of the Corporation’s financing sources to total assets at June 30, 2016 and December 31, 2015 is included in Table 12.

156

Table 12 - Financing to Total Assets


	June 30,		December 31,		% increase (decrease)			% of total assets
(In millions)	2016		2015		from 2015 to 2016			2016			2015
Non-interest bearing deposits	$	6,531	$	6,402		2.0	%		17.4	%		17.9	%
Interest-bearing core deposits		17,278		15,641		10.5			45.9			43.7
Other interest-bearing deposits		4,929		5,167		(4.6	)		13.1			14.4
Fed funds purchased and repurchase agreements		821		762		7.7			2.2			2.1
Other short-term borrowings		31		1		N.M.			0.1			—
Notes payable		1,576		1,663		(5.2	)		4.2			4.7
Other liabilities		1,078		1,019		5.8			2.9			2.9
Liabilities from discontinued operations		2		2		—			—			—
Stockholders’ equity		5,360		5,105		5.0			14.2			14.3

N.M.	- Not meaningful.

Deposits

The Corporation’s deposits totaled $28.7 billion at June 30, 2016 compared to $27.2 billion at December 31, 2015. The deposits increase of $1.5 billion was mainly at BPPR by $1.2 billion largely due to increases in government deposit accounts, NOW accounts and commercial checking accounts, partially offset by a decline in brokered CDs. Refer to Table 13 for a breakdown of the Corporation’s deposits at June 30, 2016 and December 31, 2015.

Table 13 - Deposits Ending Balances


(In thousands)	June 30, 2016		December 31, 2015		Variance
Demand deposits [1]	$	8,106,291	$	7,221,238	$	885,053
Savings, NOW and money market deposits (non-brokered)		12,289,793		11,440,693		849,100
Savings, NOW and money market deposits (brokered)		387,026		382,424		4,602
Time deposits (non-brokered)		7,570,673		7,274,157		296,516
Time deposits (brokered CDs)		384,073		891,211		(507,138	)

Total deposits	$	28,737,856	$	27,209,723	$	1,528,133

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

Borrowings

The Corporation’s borrowings remained flat at $2.4 billion at June 30, 2016 and December 31, 2015. Refer to Note 18 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 totaled $5.4 billion at June 30, 2016, compared with $5.1 billion at December 31, 2015. The increase resulted from the Corporation’s net income of $174 million for the six months ended June 30, 2016, a favorable variance of $108 million in unrealized gains on securities available-for-sale, partially offset by payments of dividends of $31.1 million on common stock of $0.15 per share and $1.9 million in dividends on preferred stock. Refer to the consolidated statements of financial condition, comprehensive income and of changes in stockholders’ equity for information on the composition of stockholders’ equity.

157

REGULATORY CAPITAL

The Corporation, BPPR and BPNA are subject to Basel III capital requirements, which are effective since January 1, 2015. Basel III capital requirements include a revised minimum and well capitalized regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets. As of June 30, 2016, the Corporation continues to exceed the well-capitalized adequacy requirements promulgated by the U.S. federal bank regulatory agencies.

Basel III capital rules require the phase out of non-qualifying Tier 1 capital instruments such as trust preferred securities. At June 30, 2016, the Corporation had $427 million in trust preferred securities outstanding which no longer qualified for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment. At December 31, 2015, approximately $107 million of these trust preferred securities outstanding still qualified as Tier I capital.

As part of the adoption of Basel III Capital Rules, the Corporation, as well as its banking subsidiaries, made the one-time permanent election to exclude the effects on regulatory capital computations of certain accumulated other comprehensive income (loss) (“AOCI”) items as permitted under the Basel III capital rules.

Risk-based capital ratios presented in Table 14, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of June 30, 2016, are calculated based on the Basel III regulatory guidance related to the measurement of capital, risk-weighted assets and average assets.

Table 14 - Capital Adequacy Data


(Dollars in thousands)	June 30, 2016			December 31, 2015
Common equity tier 1 capital:
Common stockholders equity - GAAP basis	$	5,309,671		$	5,055,164
AOCI related adjustments due to opt-out election		107,542			220,956
Goodwill, net of associated deferred tax liability (DTL)		(563,661	)		(564,323	)
Intangible assets, net of associated DTLs		(29,222	)		(22,222	)
Deferred tax assets and other deductions		(755,566	)		(639,999	)

Common equity tier 1 capital	$	4,068,764		$	4,049,576

Additional tier 1 capital:
Preferred stock		50,160			50,160
Trust preferred securities subject to phase out of additional tier 1		—			106,650
Other additional tier 1 capital deductions		(50,160	)		(156,810	)

Tier 1 capital	$	4,068,764		$	4,049,576

Tier 2 capital:
Trust preferred securities subject to phase in as tier 2		426,602			319,952
Other inclusions (deductions), net		321,549			322,881

Tier 2 capital	$	748,151		$	642,833

Total risk-based capital	$	4,816,915		$	4,692,409

Minimum total capital requirement to be well capitalized	$	2,497,201		$	2,498,714

Excess total capital over minimum well capitalized	$	2,319,714		$	2,193,695

Total risk-weighted assets	$	24,972,007		$	24,987,144

Total assets for leverage ratio	$	36,031,888		$	34,253,625

Risk-based capital ratios:
Common equity tier 1 capital		16.29	%		16.21	%
Tier 1 capital		16.29			16.21
Total capital		19.29			18.78
Tier 1 leverage		11.29			11.82

158

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 June 30, 2016, the Corporation, BPPR and BPNA were well-capitalized under Basel III Capital Rules.

The slight increase in the common equity tier I capital ratio and tier I capital ratio on June 30, 2016 as compared to December 31, 2015 was mostly due to the six months period earnings partially offset by the complete phase out of the trust preferred securities under Basel III which at December 31, 2015 allowed approximately $107 million to be included as tier I capital. Total capital ratio was not negatively impacted by the phase out of the trust preferred securities because they qualified as tier 2 capital and therefore continued to be included as part of the total capital ratio. The decrease in leverage ratio was mainly due 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 generally accepted accounting principles in the United States of America (“GAAP”). Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Table 15 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of June 30, 2016, and December 31, 2015.

Table 15 - Reconciliation of Tangible Common Equity and Tangible Assets


(In thousands, except share or per share information)	June 30, 2016			December 31, 2015
Total stockholders’ equity	$	5,359,831		$	5,105,324
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(631,095	)		(626,388	)
Less: Other intangibles		(50,983	)		(58,109	)

Total tangible common equity	$	4,627,593		$	4,370,667

Total assets	$	37,606,148		$	35,761,733
Less: Goodwill		(631,095	)		(626,388	)
Less: Other intangibles		(50,983	)		(58,109	)

Total tangible assets	$	36,924,070		$	35,077,236

Tangible common equity to tangible assets		12.53	%		12.46	%
Common shares outstanding at end of period		103,703,041			103,618,976
Tangible book value per common share	$	44.62		$	42.18

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.

159

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 22 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

Contractual Obligations and Commercial Commitments

The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations.

Purchase obligations include major legal and binding contractual obligations outstanding at June 30, 2016, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions. Purchase obligations amounted to $211 million at June 30, 2016 of which approximately 68% mature in 2016, 16% in 2017, 8% in 2018 and 8% 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 18 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 16 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at June 30, 2016.

Table 16 - Off-Balance Sheet Lending and Other Activities


	Amount of commitment - Expiration Period
(In millions)	Remaining 2016		Years 2017 - 2018		Years 2019 - 2020		Years 2021 - thereafter		Total
Commitments to extend credit	$	5,796	$	1,341	$	109	$	76	$	7,322
Commercial letters of credit		2		—		—		—		2
Standby letters of credit		17		18		—		—		35
Commitments to originate or fund mortgage loans		20		5		—		—		25

Total	$	5,835	$	1,364	$	109	$	76	$	7,384

At June 30, 2016 and December 31, 2015, the Corporation maintained a reserve of approximately $9 million and $10 million, respectively, 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 23 to the consolidated financial statements for additional information on credit commitments and contingencies.

MARKET RISK

The financial results and capital levels of the Corporation are constantly exposed to market risk. Market risk represents the risk of loss due to adverse movements in market rates or financial asset prices, which include interest rates, foreign exchange rates, and bond and equity security prices; the failure to meet financial obligations coming due because of the inability to liquidate assets or obtain adequate funding; and the inability to easily unwind or offset specific exposures without significantly lowering prices because of inadequate market depth or market disruptions.

While the Corporation is exposed to various business risks, the risks relating to interest rate risk and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature.

The Asset Liability Management Committee (“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 Corporation’s Risk Management Committee. In addition, the Risk Management Group independently monitors and reports adherence with established market and liquidity policies and recommends actions to enhance and strengthen controls surrounding interest, liquidity, and market risks. 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 risks 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.

Interest rate risk (“IRR”), a component of market risk, is considered by management as a predominant market risk in terms of its potential impact on profitability or market value. 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. It is performed under a static balance sheet assumption, and the Corporation also runs scenarios that incorporate assumptions on balance sheet growth and expected changes in its composition, estimated prepayments in accordance with projected interest rates, pricing and maturity expectations on new volumes and other non-interest related data. It is a dynamic process, emphasizing future performance under diverse economic conditions.

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, parallel ramps and parallel 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 third-party 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, estimates on the duration of the Corporation’s deposits and interest rate scenarios.

The Corporation processes net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline instantaneously by the same amount. The rising rate scenarios considered in these market risk simulations reflect parallel changes of 200 and 400 basis points during the twelve-month period ending June 30, 2017. Under a 200 basis points rising rate scenario, 2016 projected net interest income increases by $118 million, while under a 400 basis points rising rate scenario,

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2016 projected net interest income increases by $230 million. These scenarios were compared against the Corporation’s flat or unchanged interest rates forecast scenario. Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future.

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

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

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk adjustments which could have a positive or negative effect in the Corporation’s earnings.

The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third-party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of mortgage-backed securities and collateralized mortgage obligations, since prepayments could shorten (or lower prepayments could extend) the weighted average life of these portfolios.

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico (“BPPR”) and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail securities 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 is hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

At June 30, 2016, the Corporation held trading securities with a fair value of $73 million, representing approximately 0.2% of the Corporation’s total assets, compared with $72 million and 0.2% at December 31, 2015. As shown in Table 17, the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at June 30, 2016 were investment grade securities. As of June 30, 2016, the trading portfolio also included $6.3 million in Puerto Rico government obligations and shares of Closed-end funds that invest primarily in Puerto Rico government obligations (December 31, 2015 - $6.0 million). 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 $1.1 million for the quarter ended June 30, 2016 and a trading account loss of $3.1 million for the quarter ended June 30, 2015.

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Table 17 - Trading Portfolio


	June 30, 2016					December 31, 2015
(Dollars in thousands)	Amount		Weighted Average Yield [1]			Amount		Weighted Average Yield [1]
Mortgage-backed securities	$	52,370		4.72	%	$	51,155		5.22	%
Collateralized mortgage obligations		1,399		5.31			2,054		5.06
Puerto Rico government obligations		4,815		5.33			4,590		5.41
Interest-only strips		640		11.73			687		12.10
Other		13,306		2.39			13,173		3.31

Total	$	72,530		4.41	%	$	71,659		4.94	%

[1]	Not on a taxable equivalent basis.

The Corporation’s trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk (“VAR”), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5-day holding period, given a 99% probability.

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

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

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 June 30, 2016, inclusion of credit risk in the fair value of the derivatives resulted in a net gain of $0.2 million recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $0.1 million resulting from the Corporation’s own credit standing adjustment and a gain of $0.1 million from the assessment of the counterparties’ credit risk. During the six months ended June 30, 2016, inclusion of credit risk in the fair value of the derivatives resulted in a net gain of $0.2 million recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $0.1 million resulting from the Corporation’s own credit standing adjustment and a gain of $0.1 million 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.

Refer to Note 26 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At June 30, 2016, approximately $ 7.3 billion, or 97%, 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 $ 16 million at June 30, 2016, of which $ 7 million were Level 3 assets and $ 9 million were Level 2 assets. Level 3 assets consisted

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principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from an average of two indicative 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 2015 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 2015 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 and six months ended June 30, 2016, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance. In addition, during the quarter and six months ended June 30, 2016 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.

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

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plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

During the six months ended June 30, 2016, the Corporation declared quarterly dividends on its common stock of $ 0.15 per share, for a total of $ 31.1 million. The quarterly dividend declared to shareholders of record as of the close of business on June 10, 2016, which amounted to $15.6 million, was paid on July 1, 2016.

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

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 76% of the Corporation’s total assets at June 30, 2016 and December 31, 2015. The ratio of total ending loans to deposits was 81% at June 30, 2016, compared to 85% at December 31, 2015. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At June 30, 2016, these borrowings consisted primarily of $ 822 million in assets sold under agreement to repurchase, $704 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 $ 444 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 18 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 18 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, and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the discount window of the Fed, and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of outstanding obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.

During the six months ended June 30, 2016, BPPR declared a cash dividend of $39.4 million, a portion of which was used by Popular, Inc. for the payment of the quarterly cash dividend on its outstanding common stock, as mentioned above.

Note 36 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 Federal Reserve and unused secured lines held at the Fed and FHLB, in addition to liquid unpledged securities. The Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits.

The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the potential effect of a downgrade in the credit ratings.

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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 13 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 $ 23.8 billion, or 83% of total deposits, at June 30, 2016, compared with $22.0 billion, or 81% of total deposits, at December 31, 2015. Core deposits financed 71% of the Corporation’s earning assets at June 30, 2016, compared with 69% at December 31, 2015.

Certificates of deposit with denominations of $100,000 and over at June 30, 2016 totaled $ 4.2 billion, or 15% of total deposits (December 31, 2015 - $4.2 billion, or 15% of total deposits). Their distribution by maturity at June 30, 2016 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	$	1,673,787
3 to 6 months		485,353
6 to 12 months		638,152
Over 12 months		1,434,944

Total	$	4,232,236

At June 30, 2016 approximately 2% of the Corporation’s assets were financed by brokered deposits, as compared to 4% at December 31, 2015. The Corporation had $ 771 million in brokered deposits at June 30, 2016, compared with $1.3 billion at December 31, 2015. In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts.

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

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At June 30, 2016 and December 31, 2015, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $4.1 billion and $3.9 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $704 million at June 30, 2016 and $762 million at December 31, 2015. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At June 30, 2016 the credit facilities authorized with the FHLB were collateralized by $5.0 billion in loans held-in-portfolio, compared with $4.7 billion at December 31, 2015. Refer to Note 18 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.

At June 30, 2016 and December 31, 2015, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.3 billion which remained unused as of both dates. This facility is a collateralized source of credit that is highly reliable even under difficult market conditions. 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 June 30, 2016 and December 31, 2015, this credit facility with the Fed was collateralized by $2.4 billion and $2.5 billion, respectively, in loans held-in-portfolio.

At June 30, 2016, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances if desired, 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

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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 holding companies 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 six months ended June 30, 2016, PIHC received $39.4 million in dividends from BPPR and $ 2.3 million in dividends from EVERTEC’s parent company. PIHC also received $14.5 million in dividends from its non-banking subsidiaries. In addition, during the six months ended June 30, 2016 the holding companies received $12.1 million in dividends from its investment in BHD Leon.

Another use of liquidity at the parent holding company is the payment of dividends on its outstanding stock. During the six months ended June 30, 2016, the Corporation declared quarterly dividends on its common stock of $ 0.15 per share, for a total of $ 31.1 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $ 1.9 million for the six months ended June 30, 2016.

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 36 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 $883 million at June 30, 2016 and $882 million at December 31, 2015, net of debt issuance cost. 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 June 30, 2016 are presented in Table 19.

Table 19 - Distribution of BHC’s Notes Payable by Contractual Maturity


Year	(In thousands)
2016	$	—
2017		—
2018		—
2019		443,746
2020		—
Later years		439,310

Total	$	883,056

As indicated previously, the BHC did not issue new registered debt in the capital markets during the quarter ended June 30, 2016.

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

Non-banking subsidiaries

The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, and borrowed funds from their direct parent companies or the holding companies. The principal uses

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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 $ 2.8 billion at June 30, 2016 and $3.0 billion at December 31, 2015. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.

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 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.

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

The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, 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 $20 million in deposits at June 30, 2016 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $2 million at June 30, 2016, with the Corporation providing collateral totaling $4 million to cover the net liability position with counterparties on these derivative instruments.

168

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 the Guarantees section of this MD&A, 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 $71 million at June 30, 2016. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

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 June 30, 2016.

Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. The Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the non-accretable balance, the net charge-off ratio including the acquired loans is lower for the single-family loan portfolios which includes covered loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across periods, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures, excluding covered loans and related amounts from both the numerator and denominator, provides a better perspective into underlying trends related to the quality of its loan portfolio.

Despite challenging economic and fiscal conditions in Puerto Rico, non-performing assets remained stable during the second quarter of 2016. Total non-performing assets, including covered, were $836 million at June 30, 2016, decreasing by $7 million, or 1%, from December 31, 2015, driven by lower non-performing loans, including held-for-sale, by $30 million, in part offset by higher OREOs by $23 million. Non-covered non-performing loans held-in-portfolio decreased by $24 million when compared to December 31, 2015, mainly driven by lower mortgage and commercial non-performing loans by $13 million and $6 million, respectively. Non-performing mortgage loans decrease was mostly driven by improvements in the BPPR mortgage portfolio due to the improved collection efforts. At June 30, 2016, NPLs to total loans held-in-portfolio was 2.6% compared to 2.7% in December 31, 2015.

At June 30, 2016, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $485 million in the Puerto Rico operations and $23 million in the U.S. operations. These figures compare to $504 million in the Puerto Rico operations and $22 million in the U.S. operations at December 31, 2015. In addition to the non-performing loans included in Table 20 at June 30, 2016, there were $159 million of non-covered performing loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performing and are considered impaired, compared with $160 million at December 31, 2015.

169

Table 20 - Non-Performing Assets


(Dollars in thousands)	June 30, 2016			As a % of loans HIP by category [4]			December 31, 2015			As a % of loans HIP by category [4]
Commercial	$	175,615			1.7	%	$	181,816			1.8	%
Construction		2,523			0.4			3,550			0.5
Legacy^[1]		3,839			7.7			3,649			5.7
Leasing		3,019			0.5			3,009			0.5
Mortgage		338,048			4.9			351,471			5.0
Consumer		54,695			1.4			58,304			1.5

Total non-performing loans held-in- portfolio, excluding covered loans		577,739			2.6	%		601,799			2.7	%
Non-performing loans held-for-sale ^[2]		39,544						45,169
Other real estate owned (“OREO”), excluding covered OREO		177,025						155,231

Total non-performing assets, excluding covered assets	$	794,308					$	802,199
Covered loans and OREO ^[3]		41,466						40,571

Total non-performing assets	$	835,774					$	842,770

Accruing loans past due 90 days or more^[5] [6]	$	413,319					$	446,725

Ratios excluding covered loans:^[7]
Non-performing loans held-in-portfolio to loans held-in-portfolio		2.56	%					2.69	%
Allowance for loan losses to loans held-in-portfolio		2.30						2.25
Allowance for loan losses to non-performing loans, excluding held-for-sale		89.68						83.57

Ratios including covered loans:
Non-performing assets to total assets		2.22	%					2.36	%
Non-performing loans held-in-portfolio to loans held-in-portfolio		2.51						2.63
Allowance for loan losses to loans held-in-portfolio		2.37						2.34
Allowance for loan losses to non-performing loans, excluding held-for-sale		94.41						88.68

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]	Non-performing loans held-for-sale consist $40 million in commercial loans as of June 30, 2016 (December 31, 2015 - $45 million in commercial loans and $95 thousand in construction loans).

[3]

The amount consists of $3 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $38 million in covered OREO as of June 30, 2016 (December 31, 2015 - $4 million and $37 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[4]	Loans held-in-portfolio used in the computation exclude $607 million in covered loans at June 30, 2016 (December 31, 2015 - $646 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 $280 million at June 30, 2016 (December 31, 2015 - $349 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

[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 $149 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2016 (December 31, 2015 - $164 million). Furthermore, the Corporation has approximately $63 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2015 - $70 million).

[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.

170

Table 21 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)


	For the quarter ended June 30, 2016									For the six months ended June 30, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	508,747		$	31,778		$	540,525		$	519,385		$	21,101		$	540,486
Plus:
New non-performing loans		105,903			9,338			115,241			206,446			32,597			239,043
Advances on existing non-performing loans		—			8			8			—			11			11
Less:
Non-performing loans transferred to OREO		(14,336	)		(445	)		(14,781	)		(24,969	)		(445	)		(25,414	)
Non-performing loans charged-off		(25,875	)		(438	)		(26,313	)		(41,823	)		(1,095	)		(42,918	)
Loans returned to accrual status / loan collections		(75,774	)		(18,881	)		(94,655	)		(160,374	)		(30,809	)		(191,183	)

Ending balance NPLs	$	498,665		$	21,360		$	520,025		$	498,665		$	21,360		$	520,025

Table 22 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)


	For the quarter ended June 30, 2015									For the six months ended June 30, 2015
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	597,999		$	20,556		$	618,555		$	567,351		$	13,144		$	580,495
Plus:
New non-performing loans		102,647			16,991			119,638			237,914			32,253			270,167
Advances on existing non-performing loans		—			397			397			—			430			430
Other		8,075			—			8,075			8,075			—			8,075
Less:
Non-performing loans transferred to OREO		(11,865	)		(314	)		(12,179	)		(17,779	)		(314	)		(18,093	)
Non-performing loans charged-off		(59,802	)		(1,151	)		(60,953	)		(76,335	)		(1,841	)		(78,176	)
Loans returned to accrual status / loan collections		(89,130	)		(8,179	)		(97,309	)		(171,302	)		(17,410	)		(188,712	)
Loans transferred to held-for-sale		(44,996	)		—			(44,996	)		(44,996	)		2,038			(42,958	)

Ending balance NPLs	$	502,928		$	28,300		$	531,228		$	502,928		$	28,300		$	531,228

For the quarter ended June 30, 2016, total non-performing loan inflows, excluding consumer loans, decreased by $5 million, or 4%, when compared to the inflows for the same quarter in 2015. Inflows of non-performing loans held-in-portfolio at the BPPR segment remained stable, increasing slightly by $3 million, or 3%, compared to the inflows for the second quarter of 2015, mostly related to higher commercial inflows by $9 million, in part offset by lower mortgage inflows by $6 million. Inflows of non-performing loans held-in-portfolio at the BPNA segment decreased by $8 million or 46%, from the same period in 2015, mostly due to lower mortgage inflows by $5 million. Refer to Tables 21 and 22 for more information in the non-performing loans activity for the quarters and six months periods ended June 30, 2016 and 2015.

171

Refer to Table 23 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the quarters ended June 30, 2016 and 2015.

Table 23 - Allowance for Loan Losses and Selected Loan Losses Statistics - Quarterly Activity


	Quarters ended June 30,
	2016			2016			2016			2015			2015			2015
(Dollars in thousands)	Non-covered loans			Covered loans			Total			Non-covered loans			Covered loans			Total
Balance at beginning of period	$	508,427		$	30,045		$	538,472		$	516,224		$	72,473		$	588,697
Provision for loan losses		39,668			804			40,472			60,468			15,766			76,234

		548,095			30,849			578,944			576,692			88,239			664,931

Charged-offs:
Commercial		24,879			—			24,879			23,755			23,697			47,452
Construction		1,531			—			1,531			2,194			16,040			18,234
Leases		879			—			879			1,693			—			1,693
Legacy^[1]		134			—			134			480			—			480
Mortgage		14,082			884			14,966			11,701			520			12,221
Consumer		28,673			(427	)		28,246			27,157			767			27,924

		70,178			457			70,635			66,980			41,024			108,004

Recoveries:
Commercial		20,497			—			20,497			7,575			3,864			11,439
Construction		4,757			—			4,757			473			1,425			1,898
Leases		445			—			445			720			—			720
Legacy^[1]		1,027			—			1,027			450			—			450
Mortgage		602			185			787			786			342			1,128
Consumer		7,449			4			7,453			10,534			88			10,622

		34,777			189			34,966			20,538			5,719			26,257

Net loans charged-offs (recovered):
Commercial		4,382			—			4,382			16,180			19,833			36,013
Construction		(3,226	)		—			(3,226	)		1,721			14,615			16,336
Leases		434			—			434			973			—			973
Legacy^[1]		(893	)		—			(893	)		30			—			30
Mortgage		13,480			699			14,179			10,915			178			11,093
Consumer		21,224			(431	)		20,793			16,623			679			17,302

		35,401			268			35,669			46,442			35,305			81,747

Allowance transferred from covered to non-covered loans ^[2]		—			—			—			13,037			(13,037	)		—

Net recoveries (write-downs)^[3]		5,445			—			5,445			(30,548	)		(1,823	)		(32,371	)

Balance at end of period	$	518,139		$	30,581		$	548,720		$	512,739		$	38,074		$	550,813

Ratios:
Annualized net charge-offs to average loans held-in-portfolio^[4]		0.63	%					0.62	%		0.89	%					1.41	%
Provision for loan losses to net charge-offs^[4]		1.27	x					1.29	x		1.28	x					0.92	x

[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]	Represents the allowance transfer of covered to non-covered loans at June 30, 2015.

[3]	Net recoveries (write-downs) are related to loans sold or reclassified to held-for-sale.

[4]	Excluding provision for loan losses and net recoverires (write-downs) related to loans sold or reclassified to held-for-sale.

172

Refer to Table 24 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the six months ended June 30, 2016 and 2015.

Table 24 - Allowance for Loan Losses and Selected Loan Losses Statistics - Year-to-date Activity


	Six months ended June 30,
	2016			2016			2016			2015			2015			2015
(Dollars in thousands)	Non-covered loans			Covered loans			Total			Non-covered loans			Covered loans			Total
Balance at beginning of period	$	502,935		$	34,176		$	537,111		$	519,719		$	82,073		$	601,792
Provision (reversal) for loan losses		87,608			(2,301	)		85,307			90,179			26,090			116,269

		590,543			31,875			622,418			609,898			108,163			718,061

Charged-offs:
Commercial		34,342			—			34,342			33,777			37,936			71,713
Construction		2,075			—			2,075			2,194			25,086			27,280
Leases		3,006			—			3,006			2,930			—			2,930
Legacy^[1]		243			—			243			954			—			954
Mortgage		30,495			2,105			32,600			22,895			3,905			26,800
Consumer		58,700			(394	)		58,306			59,374			767			60,141

		128,861			1,711			130,572			122,124			67,694			189,818

Recoveries:
Commercial		27,051			—			27,051			13,274			6,504			19,778
Construction		4,990			—			4,990			3,398			4,700			8,098
Leases		934			—			934			1,188			—			1,188
Legacy^[1]		1,383			—			1,383			2,752			—			2,752
Mortgage		2,089			410			2,499			1,353			446			1,799
Consumer		14,565			7			14,572			17,831			815			18,646

		51,012			417			51,429			39,796			12,465			52,261

Net loans charged-off (recovered):
Commercial		7,291			—			7,291			20,503			31,432			51,935
Construction		(2,915	)		—			(2,915	)		(1,204	)		20,386			19,182
Leases		2,072			—			2,072			1,742			—			1,742
Legacy^[1]		(1,140	)		—			(1,140	)		(1,798	)		—			(1,798	)
Mortgage		28,406			1,695			30,101			21,542			3,459			25,001
Consumer		44,135			(401	)		43,734			41,543			(48	)		41,495

		77,849			1,294			79,143			82,328			55,229			137,557

Allowance transferred from covered to non-covered loans ^[2]		—			—			—			13,037			(13,037	)		—

Net recoveries (write-downs)^[3]		5,445			—			5,445			(27,868	)		(1,823	)		(29,691	)

Balance at end of period	$	518,139		$	30,581		$	548,720		$	512,739		$	38,074		$	550,813

Ratios:
Annualized net charge-offs to average loans held-in-portfolio^[4]		0.70	%					0.69	%		0.81	%					1.20	%
Provision for loan losses to net charge-offs^[4]		1.20	x					1.15	x		1.08	x					0.84	x

[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]	Represents the allowance transfer of covered to non-covered loans at June 30, 2015.

[3]	Net recoveries (write-downs) are related to loans sold or reclassified to held-for-sale.

[4]	Excluding provision for loan losses and net recoveries (write-down) related to loans sold or reclassified to held-for-sale.

173

Refer to the “Allowance for Loan Losses” subsection in this MD&A for tables detailing the composition of the allowance for loan losses between general and specific reserves, and for qualitative information on the main factors driving the variances.

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 and six months ended June 30, 2016 and 2015.

Table 25 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio (Non-covered loans)


	Quarters ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Commercial		0.17	%		0.74	%		0.14	%		0.48	%
Construction		(1.78	)		1.03			(0.82	)		(0.44	)
Leases		0.27			0.67			0.65			0.61
Legacy		(6.71	)		0.16			(4.03	)		(4.78	)
Mortgage		0.79			0.62			0.83			0.63
Consumer		2.19			1.74			2.29			2.17

Total annualized net charge-offs to average loans held-in-portfolio		0.63	%		0.89	%		0.70	%		0.81	%

Net charge-offs, excluding covered loans, for the quarter ended June 30, 2016, decreased by $11.0 million, excluding the recoveries of $5.4 million resulting from the bulk sale of WB loans, when compared to the second quarter of 2015, mainly driven by the BPPR segment with lower commercial and construction net charge-offs of $11.4 million and $4.9 million, respectively, offset in part by higher consumer net charge-offs of $5.2 million.

The Corporation continued to exhibit a stable credit performance despite a challenging operating environment in Puerto Rico. The shift in the risk profile of the credit portfolios over the last few years has better positioned the Corporation to operate in this complex environment. The Corporation continues attentive to changes in credit quality trends and is focused in taking measures to minimize risks. The U.S. operation continued to reflect strong credit quality with low level of charge-offs and non-performing loans.

The discussions in the sections that follow assess credit quality performance for the second quarter of 2016 for most of the Corporation’s non-covered loan portfolios.

Commercial loans

Non-covered non-performing commercial loans held-in-portfolio decreased by $6 million, or 3%, from December 31, 2015, mainly driven by a reduction of $5 million in the BPPR segment. The percentage of non-performing commercial loans held-in-portfolio to commercial loans held-in-portfolio decreased to 1.70% at June 30, 2016 from 1.80% at December 31, 2015.

Tables 26 and 27 present the changes in the non-performing commercial loans held-in-portfolio for the quarters and six months periods ended June 30, 2016 and 2015 for the BPPR (excluding covered loans) and BPNA segments. For the quarter ended June 30, 2016, inflows of commercial non-performing loans held-in-portfolio at the BPPR segment increased by $9 million, when compared to inflows for the same period in 2015. Inflows of commercial non-performing loans held-in-portfolio at the BPNA segment remained flat at approximately $2 million, compared to inflows for the same quarter in 2015.

174

Table 26 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans)


	For the quarter ended June 30, 2016									For the six months ended June 30, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	182,639		$	14,992		$	197,631		$	177,902		$	3,914		$	181,816
Plus:
New non-performing loans		26,029			2,254			28,283			47,686			17,318			65,004
Advances on existing non-performing loans		—			8			8			—			9			9
Less:
Non-performing loans transferred to OREO		(1,815	)		—			(1,815	)		(2,918	)		—			(2,918	)
Non-performing loans charged-off		(15,219	)		(254	)		(15,473	)		(20,168	)		(635	)		(20,803	)
Loans returned to accrual status / loan collections		(19,050	)		(13,969	)		(33,019	)		(29,918	)		(17,575	)		(47,493	)

Ending balance NPLs	$	172,584		$	3,031		$	175,615		$	172,584		$	3,031		$	175,615

Table 27 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans)


	For the quarter ended June 30, 2015									For the six months ended June 30, 2015
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	264,631		$	9,807		$	274,438		$	257,910		$	2,315		$	260,225
Plus:
New non-performing loans		17,092			1,386			18,478			44,518			9,416			53,934
Advances on existing non-performing loans		—			383			383			—			383			383
Reclassification from covered loans		7,395			—			7,395			7,395			—			7,395
Less:
Non-performing loans transferred to OREO		(3,568	)		—			(3,568	)		(4,637	)		—			(4,637	)
Non-performing loans charged-off		(51,804	)		(399	)		(52,203	)		(60,179	)		(825	)		(61,004	)
Loans returned to accrual status / loan collections		(9,351	)		(282	)		(9,633	)		(20,612	)		(394	)		(21,006	)
Loans transferred to held-for-sale		(44,996	)		—			(44,996	)		(44,996	)		—			(44,996	)

Ending balance NPLs	$	179,399		$	10,895		$	190,294		$	179,399		$	10,895		$	190,294

175

Table 28 - Non-Performing Commercial Loans and Net Charge-offs (Excluding Covered Loans)


	BPPR						BPNA						Popular, Inc.
(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
Non-performing commercial loans	$	172,584		$	177,902		$	3,031		$	3,914		$	175,615		$	181,816
Non-performing commercial loans to commercial loans HIP		2.39	%		2.41	%		0.10	%		0.14	%		1.70	%		1.80	%

	BPPR						BPNA						Popular, Inc.
	For the quarters ended						For the quarters ended						For the quarters ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Commercial loan net charge-offs (recoveries)	$	5,647		$	17,059		$	(1,265	)	$	(879	)	$	4,382		$	16,180
Commercial loan net charge-offs (recoveries) (annualized) to average commercial loans HIP		0.31	%		1.07	%		(0.17	)%		(0.15	)%		0.17	%		0.74	%

	BPPR						BPNA						Popular, Inc.
	For the six months ended						For the six months ended						For the six months ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Commercial loan net charge-offs (recoveries)	$	8,351		$	21,861			(1,060	)	$	(1,358	)	$	7,291		$	20,503
Commercial loan net charge-offs (recoveries) (annualized) to average commercial loans HIP		0.23	%		0.69	%		(0.07	)%		(0.13	)%		0.14	%		0.48	%

There was one commercial loan relationship greater than $10 million in non-accrual status at June 30, 2016 and December 31, 2015, with an outstanding aggregate balance of $34 million and $36 million, respectively.

Commercial loan net charge-offs, excluding net charge-offs for covered loans and the net recoveries of $4.4 million resulting from the bulk sale of WB loans, decreased by $11.8 million, when compared to the second quarter of 2015, mostly driven by lower net charge-offs in the BPPR segment of $11.4 million. For the quarter ended June 30, 2016, the charge-offs associated with collateral dependent impaired commercial loans amounted to approximately $9.2 million at the BPPR segment. The BPNA segment continued to show low levels of charge-offs reflective of improvements in credit quality.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $6.9 billion at June 30, 2016, of which $2.1 billion was secured with owner occupied properties, compared with $6.6 billion and $2.1 billion, respectively, at December 31, 2015. CRE non-performing loans, excluding covered loans, amounted to $140 million at June 30, 2016, compared with $142 million at December 31, 2015. The CRE non-performing loans ratios for the BPPR and BPNA segments were 3.01% and 0.06%, respectively, at June 30, 2016, compared with 3.00% and 0.03%, respectively, at December 31, 2015.

Construction loans

Non-covered non-performing construction loans held-in-portfolio decreased by $1 million when compared with December 31, 2015, mostly concentrated in the BPPR segment. Stable credit trends in the construction portfolio are the result of de-risking strategies executed by the Corporation over the past several years. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, decreased to 0.35% at June 30, 2016 from 0.52% at December 31, 2015.

Tables 29 and 30 present changes in non-performing construction loans held-in-portfolio for the quarters and six months periods ended June 30, 2016 and 2015 for the BPPR (excluding covered loans) and BPNA segments.

176

Table 29 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans)


	For the quarter ended June 30, 2016									For the six months ended June 30, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	3,270		$	671		$	3,941		$	3,550		$	—		$	3,550
Plus:
New non-performing loans		186			—			186			393			671			1,064
Less:
Non-performing loans transferred to OREO		—			—			—			(304	)		—			(304	)
Non-performing loans charged-off		(8	)		—			(8	)		(118	)		—			(118	)
Loans returned to accrual status / loan collections		(1,025	)		(571	)		(1,596	)		(1,098	)		(571	)		(1,669	)

Ending balance NPLs	$	2,423		$	100		$	2,523		$	2,423		$	100		$	2,523

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


	For the quarter ended June 30, 2015								For the six months ended June 30, 2015
(Dollars in thousands)	BPPR			BPNA		Popular, Inc.			BPPR			BPNA		Popular, Inc.
Beginning balance	$	13,214		$	—	$	13,214		$	13,812		$	—	$	13,812
Plus:
New non-performing loans		—			671		671			456			671		1,127
Reclassification from covered loans		112			—		112			112			—		112
Less:
Non-performing loans transferred to OREO		(2,194	)		—		(2,194	)		(2,194	)		—		(2,194	)
Loans returned to accrual status / loan collections		(6,376	)		—		(6,376	)		(7,430	)		—		(7,430	)

Ending balance NPLs	$	4,756		$	671	$	5,427		$	4,756		$	671	$	5,427

Construction loan net charge-offs (recoveries), excluding net charge-offs for covered loans and net recoveries of approximately $1 million resulting from the bulk sale of WB loans, amounted to net recoveries of $3.2 million for the quarter ended June 30, 2016, improving by $4.9 million from the quarter ended June 30, 2015.

Table 31 provides information on construction non-performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio) segments.

177

Table 31 - Non-Performing Construction Loans and Net Charge-offs (Excluding Covered Loans)


	BPPR						BPNA						Popular, Inc.
(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
Non-performing construction loans	$	2,423		$	3,550		$	100		$	—		$	2,523		$	3,550
Non-performing construction loans to construction loans HIP		2.34	%		3.52	%		0.02	%		—	%		0.35	%		0.52	%

	BPPR						BPNA						Popular, Inc.
	For the quarters ended						For the quarters ended						For the quarters ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Construction loan net charge-offs (recoveries)	$	(3,226	)	$	1,721		$	—		$	—		$	(3,226	)	$	1,721
Construction loan net charge-offs (recoveries) (annualized) to average construction loans HIP		(12.25	)%		8.02	%		—	%		—	%		(1.78	)%		1.03	%

	BPPR						BPNA						Popular, Inc.
	For the six months ended						For the six months ended						For the six months ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Construction loan net charge-offs (recoveries)	$	(2,915	)	$	(1,204	)	$	—		$	—		$	(2,915	)	$	(1,204	)
Construction loan net charge-offs (recoveries) (annualized) to average construction loans HIP		(5.41	)%		(2.04	)%		—	%		—	%		(0.82	)%		(0.44	)%

Mortgage loans

Non-covered non-performing mortgage loans held-in-portfolio decreased by $13 million from December 31, 2015, driven by improvements in the BPPR segment, reflective of the improved risk profile of the portfolio, as well as aggressive loss mitigation and collection efforts.

The percentage of non-performing mortgage loans held-in-portfolio to mortgage loans held-in-portfolio decreased to 4.92% at June 30, 2016 from 5.00% at December 31, 2015. Tables 32 and 33 present changes in non-performing mortgage loans held-in-portfolio for the BPPR (excluding covered loans) and BPNA segments.

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


	For the quarter ended June 30, 2016									For the six months ended June 30, 2016
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	322,838		$	12,069		$	334,907		$	337,933		$	13,538		$	351,471
Plus:
New non-performing loans		79,688			6,532			86,220			158,367			13,452			171,819
Less:
Non-performing loans transferred to OREO		(12,521	)		(445	)		(12,966	)		(21,747	)		(445	)		(22,192	)
Non-performing loans charged-off		(10,648	)		(130	)		(10,778	)		(21,537	)		(406	)		(21,943	)
Loans returned to accrual status / loan collections		(55,699	)		(3,636	)		(59,335	)		(129,358	)		(11,749	)		(141,107	)

Ending balance NPLs	$	323,658		$	14,390		$	338,048		$	323,658		$	14,390		$	338,048

178

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


	For the quarter ended June 30, 2015									For the six months ended June 30, 2015
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.			BPPR			BPNA			Popular, Inc.
Beginning balance	$	320,154		$	8,461		$	328,615		$	295,629		$	9,284		$	304,913
Plus:
New non-performing loans		85,555			11,857			97,412			192,940			18,089			211,029
Reclassification from covered loans		568			—			568			568			—			568
Less:
Non-performing loans transferred to OREO		(6,103	)		(314	)		(6,417	)		(10,948	)		(314	)		(11,262	)
Non-performing loans charged-off		(7,998	)		(319	)		(8,317	)		(16,156	)		(442	)		(16,598	)
Loans returned to accrual status / loan collections		(73,403	)		(7,637	)		(81,040	)		(143,260	)		(16,607	)		(159,867	)
Loans transferred to held-for-sale		—			—			—			—			2,038			2,038

Ending balance NPLs	$	318,773		$	12,048		$	330,821		$	318,773		$	12,048		$	330,821

For the quarter ended June 30, 2016, inflows of mortgage non-performing loans held-in-portfolio at the BPPR segment decreased by $6 million, or 7%, when compared to inflows for the same period in 2015. Inflows of mortgage non-performing loans held-in-portfolio at the BPNA segment decreased by $5 million, or 45%, when compared to inflows for the same period in 2015.

Mortgage loan net charge-offs, excluding net charge-offs for covered loans, increased by $2.6 million when compared with the quarter ended June 30, 2015. Net charge-off activity derived mainly from loans in the BPPR segment. The net charge-offs in the BPNA segment continued at low levels, reflective of the improved risk profile of the portfolio, strengthened by the sale of certain non-performing and classified assets during the year 2014. For the quarter ended June 30, 2016, charge-offs associated with mortgage loans individually evaluated for impairment amounted to $3.3 million in the BPPR segment.

Table 34 provides information on mortgage non-performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio).

179

Table 34 - Non-Performing Mortgage Loans and Net Charge-Offs (Excluding Covered Loans)


	BPPR						BPNA						Popular, Inc.
(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
Non-performing mortgage loans	$	323,658		$	337,933		$	14,390		$	13,538		$	338,048		$	351,471
Non-performing mortgage loans to mortgage loans HIP		5.38	%		5.52	%		1.71	%		1.49	%		4.92	%		5.00	%

	BPPR						BPNA						Popular, Inc.
	For the quarters ended						For the quarters ended						For the quarters ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Mortgage loan net charge-offs	$	13,464		$	10,739		$	16		$	176		$	13,480		$	10,915
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP		0.91	%		0.71	%		0.01	%		0.07	%		0.79	%		0.62	%

	BPPR						BPNA						Popular, Inc.
	For the six months ended						For the six months ended						For the six months ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Mortgage loan net charge-offs	$	28,160		$	21,212			246		$	330		$	28,406		$	21,542
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP		0.95	%		0.73	%		0.06	%		0.06	%		0.83	%		0.63	%

Consumer loans

Non-covered non-performing consumer loans held-in-portfolio decreased by $4 million when compared to December 31, 2015, primarily driven by reductions in the BPPR segment.

For the quarter ended June 30, 2016, the BPPR segment inflows of consumer non-performing loans held-in-portfolio amounted to $18 million, decreasing by $2 million when compared to the same period of 2015. Inflows of consumer non-performing loans held-in-portfolio at the BPNA segment amounted to $4 million, increasing by $1 million when compared to inflows for the same period of 2015.

The Corporation’s consumer net charge-offs, excluding recoveries resulting from the bulk sale of WB loans, increased by $4.6 million, when compared with the same period of 2015. For the quarter ended June 30, 2016, charge-offs associated with consumer loans individually evaluated for impairment amounted to $3.3 million in the BPPR segment.

Table 35 provides information on consumer non-performing loans and net charge-offs by segments.

180

Table 35 - Non-Performing Consumer Loans and Net Charge-Offs (Excluding Covered Loans)


	BPPR						BPNA						Popular, Inc.
(Dollars in thousands)	June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015			June 30, 2016			December 31, 2015
Non-performing consumer loans	$	48,948		$	52,440		$	5,747		$	5,864		$	54,695		$	58,304
Non-performing consumer loans to consumer loans HIP		1.47	%		1.57	%		1.02	%		1.19	%		1.41	%		1.52	%

	BPPR						BPNA						Popular, Inc.
	For the quarters ended						For the quarters ended						For the quarters ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Consumer loan net charge-offs	$	19,903		$	14,654		$	1,321		$	1,969		$	21,224		$	16,623
Consumer loan net charge-offs (annualized) to average consumer loans HIP		2.40	%		1.74	%		0.95	%		1.72	%		2.19	%		1.74	%

	BPPR						BPNA						Popular, Inc.
	For the six months ended						For the six months ended						For the six months ended
(Dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Consumer loan net charge-offs	$	41,201		$	38,307		$	2,934		$	3,236		$	44,135		$	41,543
Consumer loan net charge-offs (annualized) to average consumer loans HIP		2.48	%		2.27	%		1.10	%		1.39	%		2.29	%		2.17	%

Troubled debt restructurings

The Corporation’s TDR loans, excluding covered loans, increased by $47 million, or 4%, from December 31, 2015. TDRs in accruing status increased by $63 million from December 31, 2015, due to sustained borrower performance, while non-accruing TDRs decreased by $15 million.

At June 30, 2016, commercial loan TDRs, excluding covered loans, for the BPPR segment amounted to $254 million, of which $87 million were in non-performing status. This compares with $255 million, of which $88 million were in non-performing status at December 31, 2015.

At June 30, 2016, construction loan TDRs, excluding covered loans, for the BPPR segment amounted to $1 million, of which $1 million were in non-performing status. This compares with $2 million, which were in non-performing status at December 31, 2015.

At June 30, 2016, the mortgage loan TDRs for the BPPR and BPNA segments amounted to $817 million (including $392 million guaranteed by U.S. sponsored entities) and $9 million, respectively, of which $115 million and $2 million, respectively, were in non-performing status. This compares with $768 million (including $359 million guaranteed by U.S. sponsored entities) and $7 million, respectively, of which $128 million and $2 million were in non-performing status at December 31, 2015.

At June 30, 2016, the consumer loan TDRs for the BPPR and BPNA segments amounted to $113 million and $2 million, respectively, of which $13 million and $106 thousand, respectively, were in non-performing status, compared with $115 million and $2 million, respectively, of which $12 million and $239 thousand, respectively, were in non-performing status at December 31, 2015.

Refer to Note 10 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.

181

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 the Corporation’s 2015 Annual Report on Form 10K for a description of the Corporation’s allowance for loan losses methodology.

The following tables set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) at June 30, 2016 and December 31, 2015 by loan category and by whether the allowance and related provisions were calculated individually pursuant to the requirements for specific impairment or through a general valuation allowance.

182

Table 36 - Composition of ALLL


	June 30, 2016
(Dollars in thousands)	Commercial			Construction			Legacy ^[2]			Leasing			Mortgage			Consumer			Total^[3]
Specific ALLL	$	53,350		$	116		$	—		$	548		$	43,909		$	24,898		$	122,821
Impaired loans ^[1]	$	335,881		$	1,036		$	—		$	2,110		$	484,725		$	111,610		$	935,362
Specific ALLL to impaired loans ^[1]		15.88	%		11.20	%		—	%		25.97	%		9.06	%		22.31	%		13.13	%

General ALLL	$	156,331		$	10,949		$	1,852		$	9,546		$	97,577		$	119,063		$	395,318
Loans held-in-portfolio, excluding impaired loans ^[1]	$	10,023,934		$	716,296		$	49,709		$	661,984		$	6,379,393		$	3,773,983		$	21,605,299
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		1.56	%		1.53	%		3.73	%		1.44	%		1.53	%		3.15	%		1.83	%

Total ALLL	$	209,681		$	11,065		$	1,852		$	10,094		$	141,486		$	143,961		$	518,139
Total non-covered loans held-in-portfolio ^[1]	$	10,359,815		$	717,332		$	49,709		$	664,094		$	6,864,118		$	3,885,593		$	22,540,661
ALLL to loans held-in-portfolio ^[1]		2.02	%		1.54	%		3.73	%		1.52	%		2.06	%		3.70	%		2.30	%

[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 June 30, 2016, the general allowance on the covered loans amounted to $30.6 million.

Table 37 - Composition of ALLL


	December 31, 2015
(Dollars in thousands)	Commercial			Construction			Legacy^[2]			Leasing			Mortgage			Consumer			Total^[3]
Specific ALLL	$	49,243		$	264		$	—		$	573		$	44,029		$	23,963		$	118,072
Impaired loans ^[1]	$	337,133		$	2,481		$	—		$	2,404		$	471,932		$	111,836		$	925,786
Specific ALLL to impaired loans ^[1]		14.61	%		10.64	%		—	%		23.84	%		9.33	%		21.43	%		12.75	%

General ALLL	$	147,590		$	8,605		$	2,687		$	10,420		$	89,283		$	126,278		$	384,863
Loans held-in-portfolio, excluding impaired loans ^[1]	$	9,762,030		$	678,625		$	64,436		$	625,246		$	6,564,149		$	3,725,843		$	21,420,329
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		1.51	%		1.27	%		4.17	%		1.67	%		1.36	%		3.39	%		1.80	%

Total ALLL	$	196,833		$	8,869		$	2,687		$	10,993		$	133,312		$	150,241		$	502,935
Total non-covered loans held-in-portfolio ^[1]	$	10,099,163		$	681,106		$	64,436		$	627,650		$	7,036,081		$	3,837,679		$	22,346,115
ALLL to loans held-in-portfolio ^[1]		1.95	%		1.30	%		4.17	%		1.75	%		1.89	%		3.91	%		2.25	%

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

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

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

At June 30, 2016, the allowance for loan losses, excluding covered loans, increased by $15 million when compared with December 31, 2015, mostly driven by higher reserves for the BPPR portfolios of $11 million.

At June 30, 2016, the allowance for loan losses for non-covered loans at the BPPR segment increased to $481 million, or 2.77% of non-covered loans held-in-portfolio, compared with $470 million, or 2.67% of non-covered loans held-in-portfolio, at December 31, 2015. The ratio of the allowance to non-performing loans held-in-portfolio was 87.30% at June 30, 2016, compared with 81.75% at December 31, 2015.

183

The allowance for loan losses at the BPNA segment increased to $37 million, or 0.72% of loans held-in-portfolio, compared with $33 million, or 0.69% of loans held-in-portfolio, at December 31, 2015. The ratio of the allowance to non-performing loans held-in-portfolio was 138.04% at June 30, 2016, compared with 122.43% at December 31, 2015.

The allowance for loan losses for commercial loans held-in-portfolio, excluding covered loans, increased by $13 million from December 31, 2015. The allowance for loan losses for the commercial loan portfolio in the BPPR segment, excluding the allowance for covered loans, totaled $200 million, or 2.77% of non-covered commercial loans held-in-portfolio at June 30, 2016, compared with $187 million, or 2.54%, at December 31, 2015. At the BPNA segment, the allowance for loan losses of the commercial loan portfolio amounted to $10 million at June 30, 2016, flat when compared to December 31, 2015. The allowance for loan losses for commercial loans held-in-portfolio at the BPNA segment was 0.31% of commercial loans held-in-portfolio, at June 30, 2016, compared with 0.36%, at December 31, 2015. The Corporation’s ratio of allowance to non-performing loans held-in-portfolio in the commercial loan category was 119.40% at June 30, 2016, compared with 108.26% at December 31, 2015.

The allowance for loan losses for construction loans held-in-portfolio, excluding covered loans, increased by $2 million from December 31, 2015. The allowance for loan losses corresponding to the construction loan portfolio for the BPPR segment, excluding the allowance for covered loans, totaled $4 million, or 3.48% of non-covered construction loans held-in-portfolio, at June 30, 2016, compared with $5 million, or 4.91%, at December 31, 2015. At the BPNA segment, the allowance for loan losses of the construction loan portfolio totaled $7 million, or 1.22% of construction loans held-in-portfolio, at June 30, 2016, compared with $4 million, or 0.67%, at December 31, 2015. The Corporation’s ratio of allowance to non-performing loans held-in portfolio in the construction loan category was 438.57% at June 30, 2016, compared with 249.83% at December 31, 2015.

The allowance for loan losses for mortgage loans held-in-portfolio, excluding covered loans, increased by $8 million from December 31, 2015. The allowance for loan losses corresponding to the mortgage loan portfolio at the BPPR segment totaled $137 million, or 2.27% of mortgage loans held-in-portfolio, excluding covered loans, at June 30, 2016, compared with $128 million, or 2.09%, respectively, at December 31, 2015. At the BPNA segment, the allowance for loan losses corresponding to the mortgage loan portfolio remained unchanged at $5 million, or 0.56% of mortgage loans held-in-portfolio, at June 30, 2016, compared to 0.55% of mortgage loans held-in-portfolio, at December 31, 2015.

The allowance for loan losses for the consumer portfolio, excluding covered loans, decreased by $6 million from December 31, 2015. The allowance for loan losses of the non-covered consumer loan portfolio in the BPPR segment totaled $130 million, or 3.93% of that portfolio, at June 30, 2016, compared with $139 million, or 4.15%, at December 31, 2015. At the BPNA segment, the allowance for loan losses of the consumer loan portfolio totaled $13 million, or 2.39% of consumer loans, at June 30, 2016, compared with $12 million, or 2.34%, at December 31, 2015.

Table 38 - Impaired Loans (Non-Covered Loans) and the Related Valuation Allowance


	June 30, 2016				December 31, 2015
(In millions)	Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance
Impaired loans:
Valuation allowance	$	803.0	$	122.8	$	807.4	$	118.1
No valuation allowance required		132.4		—		118.4		—

Total impaired loans	$	935.4	$	122.8	$	925.8	$	118.1

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The following tables set forth the activity in the specific reserves for non-covered impaired loans for the quarters ended June 30, 2016 and 2015.

Table 39 - Activity in Specific ALLL for the Quarter Ended June 30, 2016


(In thousands)	Commercial			Construction			Mortgage			Legacy		Consumer			Leasing			Total
Beginning balance	$	55,098		$	172		$	43,252		$	—	$	24,907		$	608		$	124,037
Provision for impaired loans		7,486			(48	)		3,923			—		3,278			5			14,644
Less: Net charge-offs		(9,234	)		(8	)		(3,266	)		—		(3,287	)		(65	)		(15,860	)

Specific allowance for loan losses at June 30, 2016	$	53,350		$	116		$	43,909		$	—	$	24,898		$	548		$	122,821

Table 40 - Activity in Specific ALLL for the Quarter Ended June 30, 2015


(In thousands)	Commercial			Construction			Mortgage			Legacy		Consumer			Leasing			Total
Beginning balance	$	69,946		$	158		$	42,570		$	—	$	25,604		$	687		$	138,965
Provision for impaired loans		38,492			4,949			4,080			34		3,761			(39	)		51,277
Less: Net charge-offs		(9,985	)		(4,382	)		(2,488	)		—		(4,338	)		(41	)		(21,234	)
Net write-downs		(29,997	)		—			—			—		—			—			(29,997	)

Specific allowance for loan losses at June 30, 2015	$	68,456		$	725		$	44,162		$	34	$	25,027		$	607		$	139,011

For the quarter ended June 30, 2016, total net charge-offs for individually evaluated impaired loans amounted to approximately $15.8 million related to the BPPR segment.

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 June 30, 2016 and December 31, 2015.

Table 41 - Non-Covered Impaired Loans with Appraisals Dated 1 year or Older

June 30, 2016

Total Impaired Loans – Held-in-portfolio (HIP)

Impaired Loans with
Appraisals Over One-
Year Old [1]

(In thousands)

Loan Count

Outstanding Principal
Balance

Commercial

118

282,171

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

December 31, 2015

Total Impaired Loans – Held-in-portfolio (HIP)

Impaired Loans with
Appraisals Over One-
Year Old [1]

(In thousands)

Loan Count

Outstanding Principal
Balance

Commercial

118

281,478

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

Allowance for loan losses – Covered loan portfolio

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

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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.

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 35 to the consolidated financial statements. A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into recession in the second quarter of 2006. Puerto Rico’s gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), grew by 0.5% in fiscal year 2012 and decreased by 0.2% and 0.9% in fiscal years 2013 and 2014, respectively. The change in the gross national product in fiscal year 2012 likely responds to the large amount of governmental stimulus and deficit spending in that fiscal year. According to the Puerto Rico Planning Board’s baseline scenario projections, for fiscal years 2015 and 2016, gross national product is projected to further contract by 0.9% and 1.2%, respectively. The latest Government Development Bank for Puerto Rico (“GDB”) Economic Activity Index, which is an indicator of general economic activity and not a direct measurement of gross national product, reflected a 1.6% reduction in the average for fiscal year 2015 (July 2014 to June 2015), compared to the prior fiscal year. During the first ten months of fiscal year 2016, the Economic Activity Index reflected a 1.4% reduction in the average when compared to the same period of the prior fiscal year. The annual growth rate of the Economic Activity Index is not the same as the annual growth rate of real gross national product.

The Commonwealth of Puerto Rico (the “Commonwealth”) is experiencing a severe fiscal crisis resulting from persistent and significant budget deficits, a high debt burden, the continuing economic contraction and lack of access to the capital markets, among other factors. Budget deficits were historically covered with bond financings, loans from GDB and extraordinary one-time revenue measures. As a result of multiple downgrades of the Commonwealth and its instrumentalities’ obligations to below investment grade ratings since February 2014 and ongoing liquidity constraints at the Commonwealth’s central government and GDB, the Commonwealth’s ability to finance future budget deficits is expected to be very limited, if any.

For fiscal year 2016, the Government approved a $9.8 billion budget, which is $235 million higher than the approved budget for fiscal year 2015 due primarily to a significant increase in debt service payments and special pension contributions. In July 2016, however, the Government revised its revenue estimate for fiscal year 2016 downward by $625 million, to approximately $9.175 billion.

The Government has indicated that it has been forced to implement certain extraordinary measures in order to confront its liquidity constraints and this decrease in revenues, while continuing to provide essential services and comply, in part, with constitutional obligations for the payment of general obligation bonds. These measures have included, among others: (i) requiring advance payment to the Treasury Department from the two largest government retirement systems of funds required for the payment of retirement benefits to participants (instead of the usual reimbursements made by the retirement systems to the Treasury Department for pension benefit payments made by the Treasury Department on behalf of the retirement systems); (ii) placing $400 million of tax and revenue anticipation notes with certain Commonwealth instrumentalities to fund fiscal year 2016 working capital needs; (iii) suspending Commonwealth set-asides required by Act No. 39 of May 13, 1976, as amended, for the payment of its general obligation debt during fiscal year 2016; (iv) retaining certain tax revenues that were assigned to particular public corporations and redirecting those revenues to pay general obligation debt of the Commonwealth (commonly referred to as the exercise of the clawback of revenues); (v) delaying the payment of third-party payables or amounts due to public corporations; (vi) deferring the disbursement of certain budgetary appropriations; and (vii) delaying the payment of income tax refunds. The Government has stated that some of these measures are unsustainable and have significant negative economic effects. Also, since these measures are not sufficient to address the Commonwealth’s liquidity needs, the Commonwealth has indicated it will need to implement additional measures.

The Commonwealth also did not appropriate in the approved budget for fiscal year 2016 the funds necessary to pay principal of and interest on bonds issued by the Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of GDB, which reflects the Commonwealth’s serious liquidity constraints. As a result, in fiscal year 2016, PFC has not paid debt service on approximately $1.1 billion of bonds payable solely from Commonwealth legislative appropriations. As of July 1, 2016, missed payments amount to approximately $93 million. In addition, as a result of the clawback of revenues mentioned above, other public corporations (including the Infrastructure Financing Authority, the Highways and Transportation Authority and the Convention Center District Authority) were not able to meet their debt obligations due on January 1, 2016 and July 1, 2016 or did so using moneys previously held by the bond indenture trustees in reserves or other accounts. On May 1, 2016, Governor Alejandro Garcĺa Padilla declared a moratorium on a $422 million debt payment due on May 2, 2016 by GDB, resulting in a default on its obligations. GDB reached an agreement with a group of local credit unions to defer until May 2017 approximately $39 million of debt payments due on May 1, 2016.

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Further in response to the fiscal crisis, the Commonwealth has also enacted various revenue raising and expense reduction measures, including an increase in the sales and use tax (“SUT”) rate pursuant to Act 72-2015, enacted on May 29, 2015. Effective July 1, 2015, transactions that were subject to the 7% SUT have been subject to an 11.5% SUT (10.5% collected on behalf of the Puerto Rico Sales Tax Financing Corporation (“COFINA’”) and the Commonwealth, of which 0.5% goes to a special fund for the benefit of the municipalities, and 1% is collected by the municipalities). In addition, from October 1, 2015: (i) business-to-business transactions that were taxable prior to July 1, 2015 are subject to an 11.5% SUT, (ii) certain business-to-business services and designated professional services that were previously exempt from SUT are subject to a Commonwealth SUT of 4% (but no municipal SUT will apply to these services), and (iii) specific services are exempt from SUT.

On the expense side, the measures have included a comprehensive reform of the principal pension system of the Commonwealth, which is severely underfunded and faces asset depletion in the near future, and the enactment of a fiscal emergency law that freezes benefits under collective bargaining agreements and formula appropriations to various governmental entities and other branches of the central government, among various expense control measures. As further explained below, these measures were insufficient to allow the Commonwealth to meet its debt service obligations while continuing to provide essential services to the residents of Puerto Rico.

In response to the continued fiscal and economic challenges, the Government of Puerto Rico engaged a group of former International Monetary Fund economists to analyze the Commonwealth’s economic and financial stability and growth prospects. The group’s final report, commonly known as the “Krueger Report,” was delivered to the Governor of Puerto Rico on June 28, 2015 and states that Puerto Rico faces an acute crisis in the face of faltering economic activity, fiscal solvency and debt sustainability, and institutional credibility. Some of the report’s principal conclusions are as follows: (i) the economic problems of Puerto Rico are structural, not cyclical, and are not going away without structural reforms, (ii) fiscal deficits are much larger than assumed and are set to deteriorate, (iii) the central government deficits (as measured in the report) over the coming years imply an unsustainable trajectory of large financing gaps, and (iv) Puerto Rico’s public debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability.

The report concludes that, even after factoring in a substantial fiscal effort, a large residual financing gap persists into the next decade, implying a need for debt relief. To close the financing gap, the government would need to seek relief from a significant but progressively declining proportion of principal and interest due during fiscal years 2016-2024. The report acknowledges that any debt restructuring would be challenging as there is no precedent of this scale and scope, but concludes that, from an economic perspective, the fact remains that the central government faces large financing gaps even with substantial adjustment efforts (as there are limits to how much expenditures can be cut or taxes raised).

On June 29, 2015, the Governor of Puerto Rico issued an Executive Order to create the Puerto Rico Fiscal and Economic Recovery Working Group (the “Working Group”). The Working Group was created to consider the measures necessary, including the measures recommended in the Krueger Report, to address the fiscal crisis of the Commonwealth and to develop and recommend to the Governor of Puerto Rico a fiscal and economic adjustment plan.

On September 9, 2015, the Working Group presented a draft of the Fiscal and Economic Growth Plan (the “FEGP”), which was subsequently updated on January 18, 2016. The FEGP projects that, absent further corrective action, the Commonwealth’s cumulative five-year financing gap for fiscal years 2016 to 2020 will be approximately $27.9 billion ($63.4 billion for the ten-year projection period), and that this financing gap could be reduced to approximately $16.1 billion ($23.9 billion for the ten-year projection period) through a combination of identified revenue increases and expense reduction measures and assuming a level of economic growth. With approximately $33 billion of debt service over the next ten years, the FEGP concludes that the Commonwealth will not have sufficient projected surplus to pay its scheduled debt service and that a debt restructuring is necessary to avoid a disorderly default and allow the Commonwealth to implement the structural reforms and growth initiatives identified in the FEGP. The FEGP also concludes that, unless economic growth can be achieved, the Commonwealth’s debt is not sustainable. The FEGP also states that without the emergency measures taken in fiscal year 2016, which have significantly increased the economic burden on taxpayers and third party suppliers, the Commonwealth would have already exhausted its liquidity and that, in any case, it will not have sufficient resources at the end of the fiscal year to meet its debt obligations. The FEGP does not include

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the debt of Puerto Rico’s municipalities. The FEGP contemplates, however, as part of the expense reduction measures, that the central government will gradually reduce subsidies provided to the municipalities. The FEGP is publicly available in GDB’s website.

On January 2016, Government officials and advisors met with the advisors to the Commonwealth’s creditors to present the Commonwealth’s initial restructuring proposal, which was subsequently made public. Following the release of such initial proposal, certain bondholder groups have made various proposals for the restructuring of their bonds and the Commonwealth has presented various counterproposals. The Commonwealth presented its latest formal proposal on June 14, 2016, which was followed by discussions with certain bondholder groups, which then presented separate counterproposals regarding their own credits. On June 17, 2016, the Commonwealth informally responded to such counterproposals. A summary of the terms of the Commonwealth’s last proposal is as follows:

•

GO holders would receive an 83.5% recovery of their principal in the form of a mandatorily payable bond (“Base Bond”).

•

Senior COFINA holders would receive an 80% recovery of their principal in the form of a Base Bond.

•

Subordinated COFINA holders would receive a 60% recovery of their principal in the form of a Base Bond.

•

COFINA creditors would consent to the release of the Sales and Use Tax Fund during the first half of the fiscal year, on terms to be agreed upon.

•

The Base Bond given to COFINA and GO holders in a potential exchange would receive a 5% interest coupon to be paid as a combination of cash and in kind, with variations depending on the credit and with the cash portion increasing incrementally over a five-year period until paid entirely in cash.

There can be no assurance, that the Commonwealth will be able to successfully consummate its proposal or any other voluntary debt restructuring without the involvement of the oversight board created under PROMESA (defined below), in particular given the large amount of targeted debt and extremely complex nature of these credits.

In August 2014, as a result of PREPA’s inability to comply with certain scheduled debt payments, PREPA entered into forbearance agreements with certain bondholders, municipal bond insurers, and lenders (including BPPR) pursuant to which the forbearing creditors agreed to forbear from exercising certain rights and remedies under their applicable debt instruments. On November 5, 2015, PREPA announced that it had entered into a restructuring support agreement with certain creditors setting forth the economic terms of a recovery plan. Execution of the transactions set forth in the restructuring support agreement was subject to a number of material conditions, including the enactment of legislation by January 22, 2016. When such condition was not met, the restructuring support agreement automatically terminated. On January 27, 2016, PREPA and certain creditors, including monoline bond insurers that were not party to the original restructuring support agreement, entered into a new restructuring support agreement, also subject to various material conditions, including the approval of legislation by February 16, 2016. With respect to PREPA’s credit facilities, the restructuring support agreement contemplates that the lenders, which hold approximately $700 million of matured debt, would convert their existing credit facilities into term loans to be repaid over six years in accordance with an amortization schedule.

On June 30, 2016, PREPA executed a bond purchase agreement with a group of institutional creditors and thereby avoided default on July 1, 2016. The utility used the proceeds from $264 million in new bonds to supplement other available funds to make a larger $418 million debt service payment. PREPA also announced an extension of the Restructuring Support Agreement (“RSA”) to December 15, 2016. At June 30, 2016, BPPR is a lender in PREPA’s syndicated credit facility and BPPR’s exposure was of $39.6 million, as shown in Note 23 to the consolidated financial statements.

On April 6, 2016, the Governor of Puerto Rico signed an emergency bill entitled the “Puerto Rico Emergency Moratorium and Financial Rehabilitation Act”. The Act, among other things, allows the Governor to declare a moratorium on any debt payments through January 31, 2017 (subject to being extended until March 31, 2017). The Act applies to debt issued by the Commonwealth and its instrumentalities, including COFINA. Among other things, the Act (a) grants the Governor (i) authority to declare a moratorium on debt service payments (including principal) for the Commonwealth and certain of its instrumentalities; (ii) discretion to pay interest owed on the obligations and, if interest is not paid during the covered period, such interest will accrue at the contractual rate; (iii) the authorization to create a “bridge bank” in the event GDB is placed in receivership to carry out some of its liabilities, including deposits, and continue certain of the existing functions; and (b) creates a new entity called the Puerto Rico Fiscal Agency and Financial Advisory Authority to assume GDB’s role as the Commonwealth’s fiscal agent and financial advisor, and oversee the Commonwealth’s debt restructuring efforts. The Act also provides for the expropriation of property or property interests through eminent domain without the requirement that funds be deposited in court prior to the acquisition of title and a stay on litigation during the emergency period.

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Shortly after the approval of Act 21, the Governor of Puerto Rico declared a state of emergency at GDB and provided that, among other things, only withdrawals to fund necessary costs for essential services would be allowed. At that time, the Governor’s order did not declare a moratorium on GDB’s principal and interest payments in order to continue negotiations with creditors.

On June 30, 2016, President Obama signed into law the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”). The legislation establishes a seven-member oversight board with powers to approve the Commonwealth’s budget and carry on negotiations with creditors. The legislation also includes a judicial process for the restructuring of the debt obligations of the Commonwealth and its instrumentalities. Among other things, PROMESA provides for: a stay on litigation to enforce remedies or rights related to outstanding liabilities of the Commonwealth, its political subdivisions, including municipalities, instrumentalities and public corporations, the creation of a committee to provide recommendations on economic development initiatives and an amendment to the Fair Labor Standards Act that would allow for a lower minimum wage for young workers in Puerto Rico subject to the satisfaction of certain conditions, including oversight board approval. PROMESA requires the Commonwealth to create a fiscal plan to bring the island back from its current financial situation and such fiscal plan must look forward at least five years, respect existing legal priorities and liens, and provide a method to achieve fiscal responsibility and access to the capital markets. The oversight board shall remain in place until market access is restored and balanced budgets are produced for four consecutive years.

On June 30, 2016, the Governor of Puerto Rico declared a moratorium on the payment of principal and interest on obligations issued or guaranteed by the Commonwealth of Puerto Rico (“GO debt”) and debt issued by certain other instrumentalities due on July 1, 2016. This triggered a default on approximately $911 million of bonds, including $779 million related to GO debt. Holders of insured bonds may receive some portion of the amounts due from insurers that issued the policies insuring their bonds, if available. The Governor also warned that he will implement extraordinary liquidity measures in the next six months to continue providing essential services to the Commonwealth’s residents.

On June 30, 2016 the Puerto Rico House and Senate approved an $8.7 billion budget for Fiscal Year 2017. Consistent with the provisions of Act 21 and the executive orders issued thereunder, the approved budget does not allocate funds for the payment of debt service on the Commonwealth GO debt or other debt payable from Commonwealth appropriations.

The lingering effects of the prolonged recession are still reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on mortgage loans granted in Puerto Rico. 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, those adverse effects could continue or worsen in ways that we are not able to predict. Any reduction in consumer spending as a result of these issues may also adversely impact our interest and non-interest revenues.

At June 30, 2016, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 609 million, of which approximately $ 582 million is outstanding ($669 million and $ 578 million, respectively, at December 31, 2015). Of the amount outstanding, $ 505 million consists of loans and $ 77 million are securities ($ 502 million and $ 76 million, respectively, at December 31, 2015). Of the amount outstanding, $ 62 million represents obligations from the Government of Puerto Rico and public corporations that have a specific source of income or revenues identified for their repayment ($ 76 million at December 31, 2015). Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as public utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The remaining $ 520 million represents obligations from various municipalities in Puerto Rico for which, in most cases, the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment ($ 502 million at December 31, 2015). These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. These loans have seniority to the payment of operating cost and expenses of the municipality. The Corporation performs periodic credit quality reviews on these issuers.

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

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In addition, at June 30, 2016, the Corporation had $418 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $334 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2015 - $316 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Also, the Corporation had $51 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMO’s, and $33 million of industrial development notes ($50 million and $28 million, respectively, at December 31, 2015).

As further detailed in Notes 7 and 8 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, $869 million of residential mortgages and $101 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at June 30, 2016. The Corporation does not have any exposure to European sovereign debt.

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.

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Adjusted results of operations – Non-GAAP Financial Measure

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain transactions on the results of its operations. Throughout this MD&A, the Corporation presents a discussion of its financial results excluding the impact of these events to arrive at the “adjusted results”. Management believes that the “adjusted basis” provides meaningful information about the underlying performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to the following tables for a reconciliation of the reported results to the “adjusted results” for the quarters and six months ended June 30, 2016, and 2015.

Table 42 - Adjusted Consolidated Statement of Operations for the Quarter Ended June 30, 2016 (Non-GAAP)


(Unaudited)	Quarter ended June 30, 2016
(In thousands)	Actual Results (US GAAP)			Impact of EVERTEC’s Restatement [2]			Bulk Sale of WB loans and OREO [3]			Adjusted Results (Non-GAAP)
Net interest income	$	360,551		$	—		$	2,057		$	358,494
Provision for loan losses – non-covered loans		39,668			—			(5,445	)		45,113
Provision for loan losses – covered loans [1]		804			—			—			804

Net interest income after provision for loan losses		320,079			—			7,502			312,577
Other-than-temporary impairment losses on investment securities		(209	)		—			—			(209	)
FDIC loss-share (expense) income		(12,576	)		—			291			(12,867	)
Other non-interest income		123,288			(2,173	)		—			125,461

Total non-interest income		110,503			(2,173	)		291			112,385

Personnel costs		116,708			—			—			116,708
Net occupancy expenses		21,714			—			—			21,714
Equipment expenses		15,261			—			—			15,261
Professional fees		80,625			—			1,812			78,813
Communications		6,012			—			—			6,012
Business promotion		13,705			—			—			13,705
Other real estate owned (OREO) expenses		12,980			—			5,090			7,890
Other operating expenses		42,144			—			—			42,144

Total operating expenses		309,149			—			6,902			302,247

Income before income tax		121,433			(2,173	)		891			122,715
Income tax expense		32,446			—			347			32,099

Net income	$	88,987		$	(2,173	)	$	544		$	90,616

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

[2]	Represents Popular Inc’s. proportionate share of the cumulative impact of EVERTEC’s restatement and other corrective adjustments to its financial statements, as disclosed in EVERTEC’s 2015 Annual Report on Form 10K.

[3]	Represent the impact of the bulk sale of Westernbank loans and OREO.

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Table 43 - Adjusted Consolidated Statement of Operations for the Quarter Ended June 30, 2015 (Non-GAAP)


(Unaudited)	Quarter ended June 30, 2015
(In thousands)	Actual Results (U.S. GAAP)			BPNA Reorganization [2]			Doral Transaction [3]			OTTI [4]			Reversal of DTA - U.S. Operations [5]			Loss on Bulk Sale of Covered OREOs [6]			Adjustment to FDIC Indemnification Assets [7]			Adjusted Results (Non- GAAP)
Net interest income	$	362,553		$	—		$	—		$	—		$	—		$	—		$	—		$	362,553
Provision for loan losses – non-covered loans		60,468			—			—			—			—			—			—			60,468
Provision for loan losses – covered loans [1]		15,766			—			—			—			—			—			—			15,766

Net interest income after provision for loan losses		286,319			—			—			—			—			—			—			286,319
Other-than-temporary impairment losses on investment securities		(14,445	)		—			—			(14,445	)		—			—			—			—
FDIC loss-share income		19,075			—			—			—			—			17,566			(10,887	)		12,396
Other non-interest income		136,129			—			961			—			—			—			—			135,168

Total non-interest income		140,759			—			961			(14,445	)		—			17,566			(10,887	)		147,564

Personnel costs		120,977			—			3,865			—			—			—			—			117,112
Net occupancy expenses		23,286			—			2,309			—			—			—			—			20,977
Equipment expenses		15,925			—			725			—			—			—			—			15,200
Professional fees		78,449			—			4,885			—			—			—			—			73,564
Communications		6,153			—			70			—			—			—			—			6,083
Business promotion		13,776			—			401			—			—			—			—			13,375
Other real estate owned (OREO) expenses		44,816			—			—			—			—			21,957			—			22,859
Restructuring costs		6,174			6,174			—			—			—			—			—			—
Other operating expenses		53,618			—			509			—			—			—			—			53,109

Total operating expenses		363,174			6,174			12,764			—			—			21,957			—			322,279

Income from continuing operations before income tax		63,904			(6,174	)		(11,803	)		(14,445	)		—			(4,391	)		(10,887	)		111,604
Income (benefit) tax expense		(533,533	)		—			(3,744	)		(2,486	)		(544,927	)		(1,712	)		(2,177	)		21,513

Income from continuing operations	$	597,437		$	(6,174	)	$	(8,059	)	$	(11,959	)	$	544,927		$	(2,679	)	$	(8,710	)	$	90,091

Income from discontinued operations, net of tax	$	15		$	15		$	—		$	—		$	—		$	—		$	—		$	—

Net income	$	597,452		$	(6,159	)	$	(8,059	)	$	(11,959	)	$	544,927		$	(2,679	)	$	(8,710	)	$	90,091

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

[2]	Represents restructuring charges associated with the reorganization of BPNA.

[3]

Includes approximately $1.0 million of fees charged for services provided to the alliance co-bidders, including loan servicing and other interim services, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $3.9 million, building rent expense of Doral Bank’s administrative offices for $2.3 million, professional fees and business promotion expenses directly associated with the Doral Bank Transaction and systems conversion for $5.3 million and other expenses, including equipment, business promotions and communications, of $1.3 million.

[4]

Represents an other than temporary impairment (“OTTI”) recorded on Puerto Rico government investment securities available-for-sale. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the government’s recent announcements regarding its ability to pay its debt, the Corporation determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other than temporary.

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

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

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[7]

The quarter’s negative amortization of the FDIC’s Indemnification Asset included a $10.9 million expense related to losses incurred by the corporation that were not claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations.

Table 44 - Adjusted Consolidated Statement of Operations (Non-GAAP) - Comparative Quarters


	Adjusted Results (Non-GAAP)
(Unaudited)	For the quarters ended
(In thousands)	June 30, 2016			June 30, 2015		Variance
Net interest income	$	358,494		$	362,553	$	(4,059	)
Provision for loan losses – non-covered loans		45,113			60,468		(15,355	)
Provision for loan losses – covered loans [1]		804			15,766		(14,962	)

Net interest income after provision for loan losses		312,577			286,319		26,258
Other-than-temporary impairment losses on investment securities		(209	)		—		(209	)
FDIC loss-share (expense) income		(12,867	)		12,396		(25,263	)
Other non-interest income		125,461			135,168		(9,707	)

Total non-interest income		112,385			147,564		(35,179	)

Personnel costs		116,708			117,112		(404	)
Net occupancy expenses		21,714			20,977		737
Equipment expenses		15,261			15,200		61
Professional fees		78,813			73,564		5,249
Communications		6,012			6,083		(71	)
Business promotion		13,705			13,375		330
Other real estate owned (OREO) expenses		7,890			22,859		(14,969	)
Other operating expenses		42,144			53,109		(10,965	)

Total operating expenses		302,247			322,279		(20,032	)

Income before income tax		122,715			111,604		11,111
Income tax expense		32,099			21,513		10,586

Net income	$	90,616		$	90,091	$	525

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

193

Table 45 - Adjusted Consolidated Statement of Operations for the Six Months Ended June 30, 2016 (Non-GAAP)


				For the six months ended June 30, 2016
(In thousands)	Actual Results (U.S. GAAP)			Impact of EVERTEC’s Restatement [2]			Bulk Sale of WB loans and OREO [3]			Adjusted Results (Non-GAAP)
Net interest income	$	712,963		$	—		$	2,057		$	710,906
Provision for loan losses – non-covered loans		87,608			—			(5,445	)		93,053
Provision (reversal) for loan losses – covered loans [1]		(2,301	)		—			—			(2,301	)

Net interest income after provision for loan losses		627,656			—			7,502			620,154
Other-than-temporary impairment losses on investment securities		(209	)		—			—			(209	)
FDIC loss share (expense) income		(15,722	)		—			291			(16,013	)
Other non-interest income		238,064			(2,173	)		—			240,237

Total non-interest income		222,133			(2,173	)		291			224,015

Personnel costs		243,799			—			—			243,799
Net occupancy expenses		42,144			—			—			42,144
Equipment expenses		29,809			—			—			29,809
Professional fees		156,084			—			1,812			154,272
Communications		12,332			—			—			12,332
Business promotion		24,815			—			—			24,815
Other real estate owned (OREO) expenses		22,121			—			5,090			17,031
Other operating expenses		79,988			—			—			79,988

Total operating expenses		611,092			—			6,902			604,190

Income before income tax		238,697			(2,173	)		891			239,979
Income tax expense		64,711			—			347			64,364

Net income	$	173,986		$	(2,173	)	$	544		$	175,615

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

[2]	Represents Popular Inc’s. proportionate share of the cumulative impact of EVERTEC’s restatement and other corrective adjustments to its financial statements, as disclosed in EVERTEC’s 2015 Annual Report on Form 10K.

[3]	Represent the impact of the bulk sale of Westernbank loans and OREO.

194

Table 46 - Adjusted Consolidated Statement of Operations for the Six Months Ended June 30, 2015 (Non-GAAP)


	For the six months ended June 30, 2015
(In thousands)	Actual Results (U.S. GAAP)			BPNA Reorganization [2]			Doral Transaction [3]			OTTI [4]			Reversal of DTA - U.S. Operations [5]			Loss on Bulk Sale of Covered OREOs [6]			Adjustment to FDIC Indemnification Asset [7]			Adjusted Results (Non-GAAP)
Net interest income	$	705,748		$	—		$	—		$	—		$	—		$	—		$	—		$	705,748
Provision for loan losses – non-covered loans		90,179			—			—			—			—			—			—			90,179
Provision for loan losses – covered loans [1]		26,090			—			—			—			—			—			—			26,090

Net interest income after provision for loan losses		589,479			—			—			—			—			—			—			589,479
Other-than-temporary impairment losses on investment securities		(14,445	)		—			—			(14,445	)		—			—			—			—
FDIC loss-share income (expense)		23,214			—			—			—			—			17,566			(10,887	)		16,535
Other non-interest income		247,225			—			2,082			—			—			—			—			245,143

Total non-interest income		255,994			—			2,082			(14,445	)		—			17,566			(10,887	)		261,678

Personnel costs		237,435			—			6,297			—			—			—			—			231,138
Net occupancy expenses		44,995			—			2,952			—			—			—			—			42,043
Equipment expenses		29,336			—			725			—			—			—			—			28,611
Professional fees		153,977			—			11,882			—			—			—			—			142,095
Communications		12,329			—			70			—			—			—			—			12,259
Business promotion		24,589			—			401			—			—			—			—			24,188
Other real estate owned (OREO) expenses		67,885			—			—			—			—			21,957			—			45,928
Restructuring costs		16,927			16,927			—			—			—			—			—			—
Other operating expenses		88,042			—			509			—			—			—			—			87,533

Total operating expenses		675,515			16,927			22,836			—			—			21,957			—			613,795

Income (loss) from continuing operations before income tax		169,958			(16,927	)		(20,754	)		(14,445	)		—			(4,391	)		(10,887	)		237,362
Income tax (benefit) expense		(500,964	)		—			(6,640	)		(2,486	)		(544,927	)		(1,712	)		(2,177	)		56,978

Income (loss) from continuing operations	$	670,922			(16,927	)		(14,114	)		(11,959	)		544,927			(2,679	)		(8,710	)	$	180,384

Income (loss) from discontinued operations, net of tax	$	1,356		$	1,356		$	—		$	—		$	—		$	—		$	—		$	—

Net income (loss)	$	672,278		$	(15,571	)	$	(14,114	)	$	(11,959	)	$	544,927		$	(2,679	)	$	(8,710	)	$	180,384

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

[2]	Represents restructuring charges associated with the reorganization of BPNA.

[3]

Includes approximately $2.1 million of fees charged for services provided to the alliance co-bidders, including loan servicing and other interim services, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $6.3 million, building rent expense of Doral Bank’s administrative offices for $3.0 million, professional fees and business promotion expenses directly associated with the Doral Bank Transaction and systems conversion for $12.3 million and other expenses, including equipment, business promotions and communications, of $1.3 million.

[4]

Represents an other than temporary impairment (“OTTI”) recorded on Puerto Rico government investment securities available- for-sale. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the government’s recent announcements regarding its ability to pay its debt, the Corporation determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other than temporary.

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

195

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

[7]

Table 47 - Adjusted Consolidated Statement of Operations (Non-GAAP) - Comparative


	Adjusted Results (Non-GAAP) for the six months ended
(In thousands)	June 30, 2016			June 30, 2015		Variance
Net interest income	$	710,906		$	705,748	$	5,158
Provision for loan losses – non-covered loans		93,053			90,179		2,874
Provision for loan losses – covered loans [1]		(2,301	)		26,090		(28,391	)

Net interest income after provision for loan losses		620,154			589,479		30,675
Other-than-temporary impairment losses on investment securities		(209	)		—		(209	)
FDIC loss share (expense) income		(16,013	)		16,535		(32,548	)
Other non-interest income		240,237			245,143		(4,906	)

Total non-interest income		224,015			261,678		(37,663	)

Personnel costs		243,799			231,138		12,661
Net occupancy expenses		42,144			42,043		101
Equipment expenses		29,809			28,611		1,198
Professional fees		154,272			142,095		12,177
Communications		12,332			12,259		73
Business promotion		24,815			24,188		627
Other real estate owned (OREO) expenses		17,031			45,928		(28,897	)
Other operating expenses		79,988			87,533		(7,545	)

Total operating expenses		604,190			613,795		(9,605	)

Income before income tax		239,979			237,362		2,617
Income tax expense		64,364			56,978		7,386

Net income	$	175,615		$	180,384	$	(4,769	)

[1]	Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

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 2015 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

196

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 June 30, 2016 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 23, “Commitments and Contingencies”, to the Consolidated Financial Statements.

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 2015 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 7 – 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 2015 Form 10-K.

There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporation’s 2015 Form 10-K, except for the risks described below.

The risks described in our 2015 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. As of June 30, 2016 the maximum number of shares of common stock that may have been granted under this plan was 3,500,000.

In connection with the Corporation’s participation in the Capital Purchase Program under the Troubled Asset Relief Program, the consent of the U.S. Department of the Treasury will be required for the Corporation to repurchase its common stock other than in connection with benefit plans consistent with past practice and certain other specified circumstances. The Corporation terminated its participation in the Troubled Asset Relief Program, after the repurchase on July 23, 2014, of the outstanding warrants issued to the U.S. Treasury.

197

The following table sets forth the details of purchases of Common Stock during the quarter ended June 30, 2016 under the 2004 Omnibus Incentive Plan.


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		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
April 1- April 30		38,179	$	30.16		—		—
May 1- May 31		118,390		28.96		—		—
June 1- June 30		—		—		—		—

Total June 30, 2016		156,569	$	29.25		—		—

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

198

Item 6.

Exhibits


Exhibit No.		Exhibit Description

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

199

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: August 9, 2016	By:	/s/ Carlos J. Vázquez
	Carlos J. Vázquez
	Executive Vice President & Chief Financial Officer
	Executive Vice President & Chief Financial Officer

Date: August 9, 2016	By:	/s/ Jorge J. García
	Jorge J. García
	Senior Vice President & Corporate Comptroller

200