Exhibit 13.1

20 ANNUAL REPORT 17 INFORME ANUAL

CONTENTS I NDICE Letter from the Executive Chairman. 1 Letter from the President & Chief Executive Officer . 2 25-Year Historical Financial Summary .6 Management & Board of Directors. 8 Carta del Presidente Ejecutivo de la Junta de Directores. 9 Carta del Presidente y Principal Oficial Ejecutivo. 10 Resumen Financiero Historico (25 anos) . 14 Gerencia y Junta de Directores . 16 Popular, Inc. (NASDAQ:BPOP) is a Popular, Inc. (NASDAQ:BPOP) es un full-service financial provider based in proveedor de servicios financieros con Puerto Rico, with operations in Puerto sede en Puerto Rico y operaciones en Rico, the Virgin Islands and the Puerto Rico, Islas VI rgenes y Estados United States. In Puerto Rico, Popular Unidos. En Puerto Rico es la institucion is the leading banking institution, by bancaria lI der, tanto en activos como both assets and deposits, and ranks en depositos, y se encuentra entre los among the largest 50 banks in the 50 bancos m s grandes de Estados U.S. by assets. Unidos por total de activos. CORPORATE INFORMATION INFORMACION CORPORATIVA Independent Registered Public Firma registrada de Contabilidad Accounting Firm: Publica Independiente: PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP The company s Form 10-K, proxy El Formulario 10-K, el proxy y statement and any other financial otra informaciOn financiera est n information is available on disponibles en popular.com/en/ popular.com/ investor-relations/annual-reports/ accionistas/informe-anual/ ANNUAL MEETING REUNION ANUAL The 2018 Annual Stockholders La ReuniOn Anual de Accionistas 2018 Meeting of Popular, Inc. will be held de Popular, Inc., se llevara a cabo el on Tuesday, May 8, at 9:00 a.m. at martes, 8 de mayo, a las 9:00 a.m. the penthouse of the Popular Center en el piso PH de Popular Center, San Building, San Juan, Puerto Rico. Juan, Puerto Rico.

After 26 years as Popular s CEO, in July of 2017 I assumed the position of Executive Chairman and was proud to see my colleague and friend, Ignacio Alvarez, named as the new CEO by the Board of Directors. Serving as the CEO for over two decades has undoubtedly been one of the most While I have officially rewarding experiences of my life. It is immensely gratifying to see an organization been a part of Popular that is not only financially strong, but that remains committed to fulfilling the for 41 years, Popular has needs of our customers, caring for our employees and taking an active role in the been, and will be, a part communities we serve. The values that have guided us since our beginnings 125 years ago are stronger than ever today, and it fills me with pride that Popular is, of me for my entire life. particularly in Puerto Rico, a symbol of excellence and progress. I am grateful to all my colleagues for being a constant source of inspiration, to our clients for their trust and to you, fellow shareholders, for your support throughout all of these years. With Popular on a solid position, the time was right for both Ignacio and me to assume our new roles. Since he joined Popular in 2010 as General Counsel, and more recently as President and COO, Ignacio demonstrated he has the experience, the skills and the vision to lead this organization. It is a privilege for me to continue serving Popular from a different position and it is exciting to collaborate with Ignacio and his team as they take Popular into the future. The vision and the strategy are clear, and the energy is evident. While I have officially been a part of Popular for 41 years, Popular has been, and will be, a part of me for my entire life. From a special vantage point, I have witnessed this organization thrive during good times and persevere and strengthen in challenging ones. The response of all our colleagues in the aftermath of the 2017 s hurricanes is the most recent example of the spirit that makes Popular a successful, and unique organization. I am confident that Popular s best days lie ahead. Sincerely, RICHARD L. CARRION Executive Popular, Inc. Chairman 2017 ANNUAL REPORT | 1

POPULAR, YEAR IN REVIEW INC. Dear Shareholders, It is an honor to provide my first annual compared to $358 million in the approximately $1.5 billion in retail auto shareholder update as Popular s CEO, a previous year. The adjusted results for loans and $340 million in commercial position that I was privileged to assume 2017 were adversely affected by the loans. We anticipate the transaction in July of 2017. impact of the hurricanes on provision, to close during the second quarter of revenues and expenses, which totaled 2018 and be accretive to earnings. I am grateful and humbled by the $73 million, net of income tax, and a confidence the Board of Directors and $38 million loan loss provision expense, Despite concerns about Puerto Rico s Richard have placed in me. Richard is in net of income tax, related to our taxi economic and fiscal situation, for the many ways the founder of the modern medallion portfolio in the U.S. acquired first nine months of 2017, the price of Popular, helping it evolve during his in 2015 as part of the Doral transaction. Popular s shares roughly correlated tenure as CEO from a much smaller bank to the movement of the U.S. KBW in Puerto Rico to a diversified financial Credit quality remained stable during Regional Bank Index, albeit with a services institution that currently ranks 2017. In Puerto Rico, our credit metrics higher volatility. However, the price of among the top 50 in the United States. for the first eight months of the year our share was severely affected by the were stable despite a weak economy. impact of Hurricane Maria, closing the As everyone knows, 2017 was an eventful Year-end results include the effect year at $35.49, 19% lower than 2016 year for Popular and for Puerto Rico. of the loan payment moratorium and below our U.S. Peers and the KBW Barely three months after I became CEO, granted to consumer and commercial Regional Bank Index. Nevertheless, this two major hurricanes, Irma and Maria, borrowers after the hurricanes, which performance compared favorably to struck the Virgin Islands and Puerto Rico paused in ows into delinquent status. other Puerto Rican banks. I am happy in the span of two weeks, leaving a trail In our U.S. operation, excluding the to report that our share price has of destruction in their wake. Throughout impact of the taxi medallion portfolio, increased 21% through the first eight this difficult period, we demonstrated the asset quality remained strong. weeks of 2018. power and resilience of our organization by continuing to serve our clients in an During the first quarter of 2017, we incredibly challenging environment. executed a series of actions that re ect We mobilized to restore the strength of our capital position. operations, support In 2017, we achieved net income of $108 We increased the quarterly common million, compared with $217 million in stock dividend from $0.15 per share our colleagues in need 2016. Our 2017 results include a $168 to $0.25 per share and completed the and assist the most million expense related to the impact of repurchase of $75 million in common affected communities. the U.S. tax reform on the deferred tax stock. Our capital base remains strong, asset (DTA) of our U.S. operation. Net closing the year with a Common Equity The hurricanes devastated critical income in 2016 included, among other Tier 1 ratio of 16.3%. infrastructure, leaving the entire significant items, the effects of two population without access to electricity, adverse arbitration awards related to In February 2018, we announced an agreement to acquire and assume from water and telecommunications in claims made by us under the commercial its aftermath. Further complicating loss-share agreement with the FDIC, as Reliable Financial Services, Inc. and Reliable Finance Holding Company, matters, the severe damage to roads receiver for Westernbank, which resulted and the scarcity of fuel delayed initial in an expense of $131 million, net of tax. both subsidiaries of Wells Fargo & Company, certain assets and liabilities recovery efforts and hindered the After adjusting for the impact of related to Wells Fargo s auto finance supply of basic necessities such as these items, among others, adjusted business in Puerto Rico. As part of food, medicines and drinking water. net income for 2017 was $276 million, the transaction, Popular will acquire Against this backdrop, as soon as 2 | POPULAR, INC.

it was safe, we mobilized to restore severe damages, and we accelerated operations, support our colleagues the payout of the annual statutory in need and assist the most affected Christmas bonus to employees in communities. Puerto Rico and the U.S. and British Virgin Islands. In Puerto Rico, cash became in many cases the only viable payment method We also mobilized quickly to help due to the impact that the lack of severely impacted communities by In Puerto Rico, our electricity and telecommunications launching the Embracing Puerto Rico had on the point-of-sale (POS) and fund, which today has commitments deposit balances automatic teller machines (ATMs) of more than $6 million, including our increased by $4.3B networks. To help stabilize the situation, initial contribution of $1 million. We are and our customer we provided access to cash and other grateful for the generous donations of base by close to 31K. essential banking services through our many business partners and friends ATM and branch network as quickly that enabled us to deliver immediate as possible. Despite many operational relief to the areas most affected by the transformation of our retail network challenges, thanks to the remarkable disaster. The fund, which is managed with the renovation or relocation of efforts of our colleagues, we opened by our foundation, FundaciOn Banco eight branches, which has helped the first branches within 72 hours of Popular, is now focused on helping spur branch deposit growth. Hurricane Maria s landfall. Thereafter, community-based organizations implement innovative solutions to pressing We continued making headway the number of branches and ATMs social problems. in simplifying our technology in operation increased consistently, infrastructure and migrating trans-reaching 124 or 74% and 333 or 52%, While much of the discussion of 2017 actions to digital channels to achieve respectively, within four weeks of the naturally centers on the hurricanes, greater efficiencies and deliver storm s passing. In addition, as owners of the most extensive ATM network the year also included other important a superior customer experience. accomplishments: Digital deposit transactions sur-on the Island, we waived all ATM fees passed 40% of total deposits in both for several weeks after the storm to Puerto Rico and the United States. In Puerto Rico, we continued all customers, including those of other financial institutions. On the credit side, to improve our leading market position. Notwithstanding the pro- We also expanded our efforts to we provided relief to our customers tracted economic recession and attract, develop and retain the best by offering a principal and interest the effects of the hurricanes, our talent in the markets we serve. payment moratorium on residential, deposit balances increased by $4.3 We launched and strengthened consumer and commercial loans and billion and our customer base by initiatives in areas such as training, waived late payment fees, close to 31,000. We also achieved diversity and inclusion and wellness. . growth in several portfolios, such as commercial loans and auto loans. We look forward to 2018, aware of At the same time, we made it a priority the challenges, but ready to seize to take care of our colleagues during In the United States, we grew opportunities that will undoubtedly this difficult time. Among many commercial loans by 16%, launched arise. The Puerto Rico economy remains initiatives, we increased the Employee a private banking initiative, and the most significant headwind we Emergency Fund to offer financial strengthened our mortgage face. An environment that was already assistance to those who suffered origination unit. We continued the extremely complex due to the fiscal and 2017 ANNUAL REPORT | 3

POPULAR, YEAR IN REVIEW INC. public debt situation has become even hurricanes. We now have a unique more challenging after the hurricanes. opportunity to make significant Fit for the Future Strengthening our foundation Processes that were already underway changes in areas such as energy, by attracting and developing will have to be adjusted to re ect the housing, health and education. As our talent around the post-hurricane reality. the leading financial institution on the Island, Popular is ready to play capabilities needed for the future and enhancing In the months following the hurricanes, an important role, as we have done our internal controls to economic activity was inevitably throughout our history, in efforts to effectively manage risks impacted mainly due to delays in the build a stronger and more sustainable restoration of electricity in Puerto Rico. Puerto Rico. This framework ensures that we Nevertheless, we are heartened to consistently balance our focus between see signs that the economic situation Our U.S. business continues to be present and future needs, and helps us on the Island has begun to stabilize, strategically important to Popular identify the necessary steps to achieve with several metrics such as our as the main source of diversification our strategic goals. customers debit card purchases and of risk, expansion of revenues, and auto sales returning to pre-storm potential growth. We remain focused I take this opportunity to express levels. There has also been a great deal on diversifying our loan portfolio, my gratitude to our Board of of discussion of an acceleration of out- strengthening our deposit franchise, Directors and my colleagues for their migration after the hurricanes. While driving fee income, and transforming extraordinary response to the crisis the increase is undeniable, estimates our retail network. brought about by the hurricanes. vary considerably, and it still is unclear Managing responsibilities at Popular how many of those who have left the In December 2017, we unveiled a new while tending to difficult situations in Island will eventually return as the strategic framework founded on a their home, our employees in Puerto situation continues to stabilize. In the vision to deliver an excellent customer Rico and the U.S. and British Virgin end, the solution to the migration issue experience by offering financial Islands responded heroically, and we is to accelerate economic growth in solutions in a simple way. This vision is could not have achieved what we did Puerto Rico. supported by four strategic pillars: without their dedication and hard work. The support of our colleagues The pace of economic recovery will in the mainland United States was be heavily dependent on the speed of Sustainable and Profitable Growth also very important throughout those the remaining power restoration and Identifying sustainable trying months. on the magnitude and timing of funds and profitable growth owing into Puerto Rico from federal opportunities I also want to thank N stor O. Rivera, agencies and insurance companies. former head of the Retail Banking Simplicity These funds, which are estimated to Group, who retired in 2017 after a Simplifying our company exceed $25 billion, are likely to have a by streamlining our long and successful career at Popular stimulative effect on the economy on processes and technological spanning close to 50 years. N stor s the short to medium term. platform to reduce costs legacy will endure, as he worked to grow our Puerto Rico branch network, Puerto Rico s longer-term economic Customer Focus helped shape Popular s technology prospects will hinge on the decisions Creating a customer- strategy and mentored generations of regarding Puerto Rico s rebuilding. The focused service culture with leaders who learned the importance of a consistent experience Island was facing serious structural our values and organizational culture across channels problems before the impact of the through his counsel and example. Luis 4 | POPULAR, INC.

Cestero, who joined Popular in 1995 and has close to 20 years of experience in the Retail Banking Group, assumed leadership of this group after Nestor s retirement. Luis has proven his deep knowledge of the business, and, more importantly, has demonstrated strong leadership skills, earning the respect of everyone around him. Popular is today a much stronger organization than it was before the 2017 hurricanes. We worked as a team, adapted to change, developed creative solutions and responded decisively. We demonstrated all that we can achieve when we have a shared purpose. We begin 2018, year in which we celebrate our 125th anniversary, committed to preserving the spirit and the attitudes that allowed us to not only face 2017 s challenges, but to become a better organization as a result of them. We do not need a crisis to show our very best. Our colleagues, our customers, our communities and our shareholders expect, deserve and will get our best, every day. Sincerely, IGNACIO ALVAREZ President and Chief Executive Popular, Officer Inc. CLIENTS,COLLEAGUES COMMITTED TO OUR AND COMMUNITIES In September 2017, Puerto Rico and the Virgin Islands suffered the catastrophic impact of two major hurricanes in the span of two weeks, destroying structures, devastating the natural landscape and leaving entire populations without access to electricity, water, telecommunications, medical services and basic supplies. Popular demonstrated its unwavering commitment to its clients, employees and communities, rapidly restoring access to banking services and reaching out to those who needed it most. Our Customers Wellness and support Access to cash and other basic banking Distributed water, food vouchers and services despite operational challenges packages with basic supplies to Operating 31% of branches and 24% of employees in need. ATMs one week after Hurricane Maria; Established childcare centers for reached 92% and 82%, respectively, employees children in our main by year-end. buildings. Reestablished call center operations Temporarily lifted restrictions in the on September; resumed 24/7 service medical insurance plan to ensure care on October 23. in urgent cases, extended our On Site Offered uninterrupted online and Health and Wellness Center services mobile banking services. to employees dependents and coordinated specialized programs to address emotional aspects. Relief and support Implemented a payment moratorium for credit cards, personal OUR COMMUNITIES loans, auto loans and mortgages. Embracing Puerto Rico Waived ATM fees for 25 days to our Established the Embracing Puerto customers and customers of other Rico fund with an initial contribution financial institutions. of $1 million; has reached $6.1 million in Opened seven hubs across the island commitments. to offer commercial clients work Completed 34 missions to distribute spaces with Internet access. over 800k pounds of basic provisions, Offered customers and the general impacting over 140k individuals public guidance on insurance and FEMA claims processes. Currently focused on projects that will stabilize communities by providing OUR PEOPLE access to clean water, solar energy and jump-starting Puerto Rico s economic Financial Assistance recovery. Increased the Employee Emergency Supported various initiatives, such Fund and deployed over $800k to as United for Puerto Rico and Somos employees who suffered major losses. Una Voz. Advanced payroll the week of the We are moving into a new phase of hurricane and accelerated the payout actions, centered on transitioning our of the Christmas bonus. communities across the Island into Offered bank-owned properties to long-term recovery. colleagues who needed housing.

HISTORICAL 25-YEAR FINANCIAL SUMMARY (Dollars in millions, except per share data) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Selected Financial Information Net Income (Loss) $109.4 $124.7 $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 Assets 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 Gross Loans 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 Deposits 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 Stockholders Equity 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 Market Capitalization $1,014.7 $923.7 $1,276.8 $2,230.5 $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 Return on Average Assets (ROAA) 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% Return on Average Common Equity 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% (ROACE) Per Common Share1 Net Income (Loss)—Basic $4.18 $4.59 $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 Net Income (Loss)—Diluted 4.18 4.59 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 17.36 Dividends (Declared) 1.20 1.25 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 5.05 Book Value 31.86 34.35 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 96.60 Market Price 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 Assets by Geographical Area Puerto Rico 79% 76% 75% 74% 74% 71% 71% 72% 68% 66% 62% United States 16% 20% 21% 22% 23% 25% 25% 26% 30% 32% 36% Caribbean and Latin America 5% 4% 4% 4% 3% 4% 4% 2% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Traditional Delivery System Banking Branches Puerto Rico 165 166 166 178 201 198 199 199 196 195 193 Virgin Islands 8 8 8 8 8 8 8 8 8 8 8 United States2 32 34 40 44 63 89 91 95 96 96 97 Subtotal 205 208 214 230 272 295 298 302 300 299 298 Non-Banking Offices Popular Financial Holdings 58 73 91 102 117 128 137 136 149 153 181 Popular Cash Express 51 102 132 154 195 129 Popular Finance 26 28 31 39 44 48 47 61 55 36 43 Popular Auto 8 10 9 8 10 10 12 12 20 18 18 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 Popular Mortgage 3 3 3 11 13 21 25 29 32 Popular Securities 1 2 2 2 3 4 7 8 Popular One Popular Insurance and 2 2 2 2 Popular Risk Services Popular Insurance Agency, U.S.A. 1 1 1 Popular Insurance V.I. 1 1 E-LOAN EVERTEC 4 4 4 5 5 Subtotal 92 111 134 153 183 258 327 382 427 460 431 Total 297 319 348 383 455 553 625 684 727 759 729 Electronic Delivery System ATMs Owned Puerto Rico 234 262 281 327 391 421 442 478 524 539 557 Virgin Islands 8 8 8 9 17 59 68 37 39 53 57 United States 11 26 38 53 71 94 99 109 118 131 129 Total 253 296 327 389 479 574 609 624 681 723 743 Employees (full-time equivalent) 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 6 | POPULAR, INC.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $489.9 $540.7 $357.7 $(64.5) $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 $7,685.6 $5,836.5 $5,003.4 $2,968.3 $1,455.1 $1,445.4 $3,211.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 1.23% 1.17% 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 17.60% 17.12% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% $17.95 $19.78 $12.41 $(2.73) $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 17.92 19.74 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 $1.02 6.20 6.40 6.40 6.40 4.80 0.20 ————— 0.30 0.60 1.00 109.45 118.22 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 288.30 211.50 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 55% 53% 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 43% 45% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 192 194 191 196 179 173 185 183 175 171 168 173 171 168 8 8 8 8 8 8 8 9 9 9 9 9 9 9 128 136 142 147 139 101 96 94 92 90 47 50 51 51 328 338 341 351 326 282 289 286 276 270 224 232 231 228 183 212 158 134 2 114 4 43 49 52 51 9 18 17 15 12 12 10 10 10 10 9 9 9 9 9 15 14 11 24 22 30 33 32 32 32 33 36 37 37 38 25 24 17 14 9 12 12 13 7 6 6 4 4 3 3 3 2 2 4 5 6 6 6 5 5 2 2 2 2 1 1 1 1 1 1 1 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 5 5 7 9 9 9 421 351 292 280 97 61 55 58 59 59 46 46 37 34 749 689 633 631 423 343 344 344 335 329 270 278 268 262 568 583 605 615 605 571 624 613 597 599 602 622 635 633 59 61 65 69 74 77 17 20 20 22 21 21 20 22 163 181 192 187 176 136 138 135 134 132 83 87 101 110 790 825 862 871 855 784 779 768 751 753 706 730 756 765 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 1Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2Excludes a Banco Popular de Puerto Rico branch operating in New York. 2017 ANNUAL REPORT | 7

POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS Senior Management Team RICHARD L. CARRION IGNACIO ALVAREZ CAMILLE BURCKHART LUIS CESTERO MANUEL A. CHINEA JAVIER D. FERRER Executive Chairman President and Executive Vice President & Executive Vice President Executive Vice President Executive Vice President, Chief Legal Popular, Inc. Chief Executive Officer Chief Information and Digital Officer Retail Banking Group Popular, Inc. Officer & Corporate Secretary Popular, Inc. Innovation, Technology & Banco Popular de Puerto Rico Chief Operating Officer General Counsel & Operations Group Popular Community Bank Corporate Matters Group Popular, Inc. Popular, Inc. JUAN O. GUERRERO GILBERTO MONZON EDUARDO J. NEGRON ELI S. SEP LVEDA LIDIO V. SORIANO CARLOS J. VAZQUEZ Executive Vice President Executive Vice President Executive Vice President Executive Vice President Executive Vice President & Executive Vice President & Financial and Insurance Individual Credit Group Administration Group Commercial Credit Group Chief Risk Officer Chief Financial Officer Services Group Banco Popular de Puerto Rico Popular, Inc. Banco Popular de Puerto Rico Corporate Risk Management Group Popular, Inc. Banco Popular de Puerto Rico Popular, Inc. Board of Directors RICHARD L. CARRION IGNACIO ALVAREZ JOAQUI N E. ALEJANDRO M. JOHN W. DIERCKSEN MARI A LUISA FERR Executive Chairman President and BACARDI , III BALLESTER Principal President & Chief Executive Officer Popular, Inc. Chief Executive Officer Chairman President Greycrest, LLC FRG, Inc. Popular, Inc. Edmundo B. Fernandez, Inc. Ballester Hermanos, Inc. DAVID E. GOEL C. KIM GOODWIN WILLIAM J. CARLOS A. UNANUE Managing General Partner Private Investor TEUBER JR. President Matrix Capital Private Investor Goya de Puerto Rico Management Company, LP

Despu s de 26 anos como CEO de Popular, en julio del 2017 asumI el cargo de Presidente Ejecutivo de la Junta de Directores y me llenO de orgullo ver a mi companero y amigo, Ignacio Alvarez, designado por la Junta como el nuevo CEO. Servir de CEO por mas de dos d cadas ha sido, sin duda alguna, una de las Mientras que oficialmente experiencias mas gratificantes de mi vida. Siento una gran satisfacciOn al ver he formado parte de una organizaciOn que no solo es financieramente fuerte, sino que permanece Popular por 41 anos, comprometida con atender las necesidades de nuestros clientes, cuidar de Popular ha sido, y nuestros empleados y asumir un papel activo en las comunidades que servimos. Los valores que nos han guiado desde nuestros inicios hace 125 anos son hoy mas continuara siendo, fuertes que nunca, y me enorgullece que Popular es, particularmente en Puerto una parte de mI por Rico, un sI mbolo de excelencia y progreso. Agradezco a mis colegas por ser una toda mi vida. fuente constante de inspiraciOn, a nuestros clientes por su confianza y a ustedes, mis companeros accionistas, por su apoyo a trav s de todos estos anos. Con Popular en una posiciOn sOlida, ste era el momento indicado para que Ignacio y yo asumi ramos nuevos roles. Desde que se uniO a Popular en el 2010, y mas recientemente como presidente y COO, Ignacio demostrO que tiene la experiencia, las destrezas y la visiOn para liderar esta organizaciOn. Es un privilegio para mI continuar sirviendo a Popular desde una posiciOn diferente y estoy sumamente entusiasmado de colaborar con Ignacio y su equipo mientras trazan el futuro de Popular. La visiOn y la estrategia estan claras, y la energI a es evidente. Mientras que oficialmente he formado parte de Popular por 41 anos, Popular ha sido, y continuara siendo, una parte de mI por toda mi vida. Desde un punto de vista especial, he sido testigo de cOmo esta organizaciOn prospera en tiempos buenos y persevera y se fortalece en tiempos difI ciles. La respuesta de nuestros colegas a la crisis provocada por los huracanes del 2017 es el ejemplo mas reciente del espI ritu que hace a Popular una organizaciOn exitosa y nica. No tengo duda de que los mejores dI as de Popular estan por delante. Sinceramente, RICHARD L. CARRION Presidente Junta de Directores Ejecutivo de la Popular, Inc. 2017 INFORME ANUAL | 9

POPULAR, RESUMEN DEL INC . ANO Estimados accionistas: Es un honor presentar mi primer Luego de ajustar para excluir el Holding Company, subsidiarias de informe a los accionistas como impacto de estas partidas, entre otras, Wells Fargo & Company, relacionados Principal Oficial Ejecutivo (CEO) de el ingreso neto ajustado para el 2017 a su negocio de financiamiento de Popular, una posiciOn que tuve el fue de $276 millones, comparado autos en Puerto Rico. Como parte privilegio de asumir en julio de 2017. con $358 millones en el ano anterior. de la transacciOn, Popular adquirira Los resultados ajustados del 2017 aproximadamente $1,500 millones en Agradezco humildemente la confianza se afectaron negativamente por pr stamos de auto y $340 millones en que la Junta de Directores y Richard han el impacto de los huracanes en la pr stamos comerciales. Anticipamos puesto en mI . Richard es, en muchos provisiOn, en ingresos y en gastos, que la transacciOn se completara aspectos, el fundador del Popular que alcanzO $73 millones, netos de en el segundo trimestre del 2018 y moderno. Durante sus anos como CEO, contribuciones, y a una provisiOn para que contribuira positivamente a los ayudO a evolucionar la organizaciOn p rdidas en pr stamos de $38 millones, ingresos de la corporaciOn. de un banco mucho mas pequeno netos de contribuciones, relacionada en Puerto Rico a una instituciOn de a nuestra cartera de pr stamos para A pesar de las preocupaciones servicios financieros diversificados licencias de taxis en los Estados Unidos relacionadas a la situaciOn fiscal y que hoy se encuentra entre las 50 adquirida como parte de la transacciOn econOmica de Puerto Rico, durante principales en los Estados Unidos. de Doral. los primeros nueve meses del 2017, el precio de las acciones de Popular Como todos sabemos, el 2017 fue un La calidad de cr dito permaneciO tuvo un movimiento parecido al I ndice ano retante para Popular y para Puerto estable durante el 2017. En Puerto Rico, Regional de Bancos de KBW en los Rico. Luego de tan solo tres meses los indicadores para los primeros ocho Estados Unidos, aunque mas volatil. de ser CEO, dos huracanes de gran meses del ano se mantuvieron estables Sin embargo, el precio de nuestras magnitud, Irma y MarI a, azotaron las a pesar de la debilidad de la economI a. acciones se vio severamente afectado Islas VI rgenes y Puerto Rico en menos Las m tricas para el fin de ano incluyen por el impacto del huracan MarI a, de dos semanas, dejando a su paso el efecto de la moratoria de pagos cerrando el ano en $35.49, 19% mas una extensa destrucciOn. Durante este de pr stamos ofrecida a clientes bajo que en el 2016 y por debajo de momento difI cil, demostramos la fuerza individuales y comerciales tras el nuestros bancos pares en Estados y resiliencia de nuestra organizaciOn, paso de los huracanes, que suspendiO Unidos y del I ndice Regional de Bancos sirviendo a nuestros clientes en un temporeramente el que estos fuesen de KBW. No obstante, este desempeno ambiente increI blemente desafiante. considerados como delincuentes. En compara favorablemente con el de los Estados Unidos, excluyendo la otros bancos en Puerto Rico. Me En el 2017 alcanzamos un ingreso neto cartera de licencias de taxi, la calidad complace informar que el precio de la de $108 millones, comparado con $217 del cr dito se mantuvo fuerte. acciOn ha aumentado un 21% durante millones en el 2016. Nuestros resultados las primeras ochos semanas del 2018. para el 2017 incluyen un gasto de $168 Durante el primer trimestre del 2017, millones como resultado del impacto tomamos una serie de acciones que de la reforma contributiva federal reflejan la fortaleza de nuestra posiciOn Nos movilizamos para sobre nuestro activo de contribuciones de capital. Aumentamos el dividendo restablecer nuestras diferidas relacionado a nuestras trimestral de $0.15 a $0.25 por acciOn operaciones, apoyar a operaciones en Estados Unidos. El com n y recompramos $75 millones ingreso neto en el 2016 incluyO, entre de acciones comunes. Nuestra base de aquellos companeros otros eventos significativos, el efecto de capital contin a fuerte, terminando el que lo necesitaban y a dos decisiones adversas relacionadas a ano con una relaciOn de capital basico asistir a las comunidades reclamaciones hechas por nosotros al (Common Equity Tier 1) de 16.3%. mas afectadas. FDIC como sI ndico de Westernbank bajo el acuerdo de participaciOn de En febrero del 2018, anunciamos un p rdidas en pr stamos comerciales, acuerdo para adquirir y asumir ciertos Los huracanes devastaron infraes- que resultaron en un gasto de $131 activos y pasivos de Reliable Financial tructura crI tica, dejando tras su paso millones, neto de contribuciones. Services, Inc. y Reliable Finance a la poblaciOn entera sin acceso a 10 | POPULAR, INC.

electricidad, agua y telecomunicaciones. durante ese momento difI cil. Entre Complicando a n mas la situaciOn, muchas iniciativas, aumentamos el los danos severos a las carreteras y la Fondo de Emergencia de Empleados escasez de combustible obstaculizaron para ofrecer asistencia financiera a la distribuciOn de bienes basicos como empleados que sufrieron danos severos, alimentos, medicamentos y agua y aceleramos el pago del bono anual potable. En este contexto, tan pronto de Navidad establecido por ley a los como fue seguro, nos movilizamos empleados en Puerto Rico y las Islas para restablecer nuestras operaciones, VI rgenes estadounidenses y britanicas. En Puerto Rico, nuestros apoyar a aquellos companeros que lo balances de depOsitos necesitaban y a asistir a las comunidades Tambi n, nos movilizamos rapida- aumentaron por mas afectadas. mente para ayudar a comunidades severamente afectadas, lanzando $4,300 millones y nuestra En Puerto Rico, el dinero en efectivo el fondo Abrazando a Puerto Rico, base de clientes por se convirtiO en muchos casos en el que hoy tiene compromisos de mas aproximadamente 31K. nico m todo de pago viable debido de $6 millones, incluyendo nuestra al impacto que la falta de electricidad contribuciOn inicial de $1 millOn. y telecomunicaciones tuvo en las Agradecemos las donaciones generosas Continuamos la transformaciOn redes de puntos de venta y de cajeros de muchos socios y amigos que nos de nuestra red de sucursales, automaticos. Para ayudar a estabilizar permitieron llevar socorro inmediato a remodelando o relocalizando ocho de la situaciOn, proporcionamos acceso a las areas mas afectadas por el desastre. El fondo, que es manejado por la estas, lo que ha ayudado a promover efectivo a trav s de nuestras sucursales FundaciOn Banco Popular, ahora esta el crecimiento de depOsitos en las y cajeros automaticos a la mayor enfocado en apoyar a organizaciones sucursales. brevedad posible. A pesar de m ltiples retos operacionales, abrimos las comunitarias en la implantaciOn de Seguimos progresando en la simplifi-primeras sucursales 72 horas despu s soluciones innovadoras a problemas caciOn de nuestra infraestructura del embate del huracan MarI a. A sociales apremiantes. de tecnologI a y en la migraciOn de partir de ese momento, el n mero de Aunque gran parte de la discusiOn del transacciones a canales digitales, para sucursales y cajeros automaticos en 2017 naturalmente gira alrededor de alcanzar mayores eficiencias y ofrecer operaciOn aumentO consistentemente, los huracanes, durante el ano tambi n una experiencia superior a nuestros alcanzando 124 o 74% y 333 o 52%, alcanzamos otros logros importantes: clientes. Los depOsitos a trav s de respectivamente, cuatro semanas canales digitales sobrepasaron el despu s del paso del huracan. Ademas, En Puerto Rico, continuamos forta- 40% del total de depOsitos, tanto en como duenos de la red de cajeros Puerto Rico como los Estados Unidos. automaticos mas extensa en la isla, leciendo nuestra posiciOn de liderazgo en el mercado. A pesar de Ademas, expandimos nuestros eliminamos todos los cargos por uso de la recesiOn econOmica prolongada y esfuerzos por atraer, desarrollar los cajeros automaticos durante varias del efecto de los huracanes, nuestros y retener el mejor talento en los semanas despu s del huracan a todos balances de depOsitos aumentaron mercados que servimos. Lanzamos los clientes, incluyendo a aquellos de por $4,300 millones y nuestra base y fortalecimos iniciativas en areas otras instituciones financieras. En el lado de clientes por aproximadamente como adiestramientos, diversidad e de cr dito, brindamos alivio a nuestros 31,000. Alcanzamos crecimiento, inclusiOn y bienestar. clientes, ofreciendo una moratoria ademas, en varias carteras, como Comenzamos el 2018 con entusiasmo, de pago de inter s y principal en los las de pr stamos comerciales y conscientes de los retos, pero listos pr stamos hipotecarios, personales y pr stamos de auto. comerciales y suspendiendo los cargos para aprovechar las oportunidades por pagos tardI os, En los Estados Unidos, aumentamos que sin duda surgiran. La economI a de . los pr stamos comerciales por 16%, Puerto Rico contin a siendo el desafI o lanzamos una iniciativa de banca principal que enfrentamos. Un entorno A la misma vez, establecimos como una privada y fortalecimos nuestra que era complicado de por sI debido a prioridad apoyar a nuestros companeros unidad de originaciOn hipotecaria. la situaciOn fiscal y de la deuda p blica, 2017 INFORME ANUAL | 11

POPULAR, RESUMEN DEL INC . ANO se tornO a n mas retante tras el paso de oportunidad nica para hacer cambios los huracanes. Procesos que ya habI an significativos en areas como energI a, Preparados para el futuro comenzado tendran que ser ajustados vivienda, salud y educaciOn. Como la Fortalecer nuestra para re ejar una nueva realidad. principal instituciOn financiera en la organizaciOn, atrayendo isla, Popular esta listo para jugar un y desarrollando nuestro En los meses posteriores a los papel importante, como hemos hecho talento alrededor de las huracanes, la actividad econOmica a trav s de nuestra historia, en los capacidades necesarias se impactO inevitablemente por esfuerzos por construir un Puerto Rico para el futuro y enfatizando demoras en el restablecimiento del mas fuerte y sustentable. nuestros controles servicio el ctrico en Puerto Rico. internos para manejar Sin embargo, nos alienta ver senales Nuestro negocio en los Estados Unidos efectivamente el riesgo. de que la situaciOn econOmica en la contin a teniendo una importancia isla ha comenzado a estabilizarse. estrat gica como nuestra fuente Este marco asegura que consis-Algunas m tricas, como las compras principal de diversificaciOn de riesgo, tentemente balanceemos nuestro de nuestros clientes con tarjetas de expansiOn de ingresos y potencial enfoque entre las necesidades d bito y las ventas de autos, ya estan de crecimiento. Seguimos enfocados presentes y futuras, y nos ayuda regresando a los niveles previos a los en diversificar nuestra cartera de a identificar los pasos necesarios huracanes. Se ha discutido mucho pr stamos, generar ingresos que no para alcanzar nuestros objetivos sobre la aceleraciOn de la emigraciOn provienen de intereses y transformar estrat gicos. despu s de los huracanes. Aunque el nuestra red de sucursales. aumento es innegable, los estimados Aprovecho esta oportunidad para varI an considerablemente y todavI a no En diciembre del 2017, develamos un expresar mi agradecimiento a la Junta esta claro cuantos de los que se fueron nuevo marco estrat gico fundamen- de Directores y a mis companeros de la Isla regresaran eventualmente, tado en una visiOn de brindar una por su respuesta extraordinaria ante a medida que la situaciOn contin e experiencia excelente a nuestros clientes, la crisis provocada por los huracanes. estabilizandose. A fin de cuentas, la ofreci ndoles soluciones financieras de No hubi semos logrado lo que hicimos soluciOn para el tema de migraciOn es una forma sencilla. Esta visiOn se apoya sin la dedicaciOn y trabajo de nuestros acelerar el crecimiento econOmico en en cuatro pilares estrat gicos: empleados en Puerto Rico y las Islas Puerto Rico. VI rgenes estadounidenses y britanicas, Crecimiento quienes respondieron de forma heroica, El ritmo de la recuperaciOn econOmica rentable y sostenible manejando sus responsabilidades dependera en gran parte de la Identificar oportunidades en Popular a la vez que atendI an rapidez con que se restablezca el de crecimiento situaciones difI ciles en sus hogares. servicio el ctrico restante, asI como la rentable y sostenible El apoyo de nuestros companeros en magnitud y la velocidad del ujo de los los Estados Unidos tambi n fue de fondos de las agencias federales y de Sencillez mucho valor a trav s de esos meses las companI as de seguros hacia Puerto Simplificar nuestra tan complicados. Rico. Estos fondos, que se estima organizaciOn, optimizando excederan los $25,000 millones, nuestros procesos y nuestra Quiero agradecer tambi n a N stor posiblemente serviran de estI mulo a la plataforma tecnolOgica O. Rivera, anteriormente jefe del economI a a corto y mediano plazo. para reducir costos Grupo de Banca Individual, quien se Enfoque en el cliente retirO en el 2017 luego de una larga y El futuro econOmico de Puerto exitosa carrera en Popular abarcando Rico a largo plazo dependera de Crear una cultura enfocada cerca de 50 anos. El legado de N stor las decisiones que se tomen sobre en el servicio al cliente y perdurara, pues trabajO para crecer durante el proceso de reconstrucciOn. proveer una experiencia nuestra red de sucursales en Puerto La isla enfrentaba serios problemas consistente a trav s de Rico, ayudO a forjar la estrategia de estructurales antes del impacto de todos los canales tecnologI a de Popular y sirviO de los huracanes. Ahora tenemos una mentor a generaciones de lI deres que 12 | POPULAR, INC.

COMPROMETIDOS CON NUESTROS CLIENTES, COMPANEROS Y COMUNIDADES aprendieron la importancia de nuestros En septiembre del 2017, Puerto Rico y las Islas VI rgenes enfrentaron el impacto valores y cultura organizacional a catastrOfico de los poderosos huracanes Irma y MarI a en un periodo de dos trav s de su consejo y ejemplo. Luis semanas, destruyendo estructuras, devastando el paisaje natural y dejando a Cestero, quien se uniO a Popular en poblaciones enteras sin acceso a electricidad, agua, telecomunicaciones, servicios m dicos y suministros basicos. Popular demostrO su compromiso inquebrantable el 1995 y tiene aproximadamente 20 con sus clientes, empleados y comunidades, restableciendo rapidamente el acceso anos de experiencia en el Grupo de a servicios bancarios y ofreciendo ayuda a los mas necesitados. Banca Individual, asumiO el liderato del grupo tras el retiro de N stor. Luis ha demostrado su profundo conocimiento Nuestros Clientes Ofrecimos propiedades del banco a del negocio y, a n mas importante, sus empleados que necesitaban un hogar. cualidades como lI der, ganandose el Acceso a efectivo y a otros servicios Bienestar y apoyo respeto de todos los que le rodean. bancarios basicos a pesar de retos operacionales Distribuimos agua, vales de comida y Popular es hoy una organizaciOn Operando 31% de las sucursales y paquetes con suministros basicos a mucho mas fuerte de lo que era antes 24% de los cajeros automaticos empleados necesitados. una semana luego del Huracan de los huracanes del 2017. Trabajamos MarI a; alcanzamos 92% y 82%, Establecimos centros de cuido de en equipo, nos adaptamos al cambio, respectivamente, para fin de ano. ninos para los hijos de empleados en desarrollamos soluciones creativas y nuestros edificios principales. respondimos decisivamente. Demos- Restablecimos la operaciOn del centro de llamadas el 25 de septiembre; Suspendimos temporeramente las tramos todo lo que podemos lograr reanudamos el servicio 24/7 el 23 de restricciones en el plan m dico para cuando tenemos un propOsito com n. octubre. asegurar cuidado en casos urgentes, Ofrecimos servicio ininterrumpido a extendimos el servicio de nuestro Comenzamos el 2018, ano en el que trav s del Internet y dispositivos mOviles. Centro Interno de Salud y Bienestar a los celebramos nuestro 125 aniversario, Alivio y apoyo dependientes de nuestros empleados y coordinamos programas especiales para comprometidos con preservar el Implantamos una moratoria dI as atender aspectos emocionales. espI ritu y las actitudes que nos para tarjetas de cr dito, pr stamos permitieron no solo enfrentar los retos personales, pr stamos de auto e Nuestras Comunidades del 2017, sino fortalecernos como hipotecas. resultado de ellos. No necesitamos una Abrazando a Puerto Rico Eliminamos los cargos en cajeros crisis para mostrar lo mejor de nosotros. automaticos por 25 dI as a clientes Establecimos el fondo Abrazando a Nuestros companeros, nuestros nuestros y de otras instituciones Puerto Rico con una contribuciOn clientes, nuestras comunidades y financieras. inicial de $1 millOn; ha alcanzado $6.1 nuestros accionistas esperan, merecen Abrimos siete centros a trav s de la millones en compromisos. y recibiran lo mejor de nosotros, todos isla para ofrecer a nuestros clientes comerciales lugares de trabajo con Completamos 35 misiones para dis-los dI as. tribuir mas de 800,000 libras de acceso al Internet. suministros basicos, impactando mas Sinceramente, Ofrecimos asesorI a a clientes y al p blico de 140,000 individuos. general sobre el proceso de reclamaciOn a FEMA y a companI as de seguro. Enfocados en proyectos para estabilizar comunidades a trav s de acceso a agua potable y energI a Nuestra Gente solar, y para fomentar la recuperaciOn econOmica de Puerto Rico. Asistencia Financiera Apoyamos varias iniciativas, como Aumentamos el Fondo de Emergencia Unidos por Puerto Rico y Somos una Voz. de Empleados y distribuimos mas de $800,000 a empleados que sufrieron Evolucionando a una nueva fase p rdidas severas. enfocada en transicionar nuestras IGNACIO ALVAREZ Adelantamos la nOmina la semana comunidades en una recuperaciOn a Presidente y Principal Oficial Ejecutivo del huracan y aceleramos el pago del largo plazo. Popular, Inc. bono de Navidad.

RESUMEN 25 ANOS FINANCIERO HISTORICO (DOlares en millones, excepto informaciOn 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 por acciOn) InformaciOn Financiera Seleccionada Ingreso neto (P rdida Neta) $109.4 $124.7 $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 Activos 11,513.4 12,778.4 15,675.5 16,764.1 19,300.5 23,160.4 25,460.5 28,057.1 30,744.7 33,660.4 36,434.7 Pr stamos Brutos 6,346.9 7,781.3 8,677.5 9,779.0 11,376.6 13,078.8 14,907.8 16,057.1 18,168.6 19,582.1 22,602.2 DepOsitos 8,522.7 9,012.4 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 14,804.9 16,370.0 17,614.7 18,097.8 Capital de Accionistas 834.2 1,002.4 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 1,993.6 2,272.8 2,410.9 2,754.4 Valor agregado en el mercado $1,014.7 $923.7 $1,276.8 $2,230.5 $3,350.3 $4,611.7 $3,790.2 $3,578.1 $3,965.4 $4,476.4 $5,960.2 Rendimiento de Activos Promedio (ROAA) 1.02% 1.02% 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% Rendimiento de Capital Com n Promedio 13.80% 13.80% 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% (ROACE) Por AcciOn Com n1 Ingreso neto (P rdida Neta)—Basico $4.18 $4.59 $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 Ingreso neto (P rdida Neta)—Diluido 4.18 4.59 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 17.36 Dividendos (Declarados) 1.20 1.25 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 5.05 Valor en los Libros 31.86 34.35 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 96.60 Precio en el Mercado 39.38 35.16 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 Activos por Area Geografica Puerto Rico 79% 76% 75% 74% 74% 71% 71% 72% 68% 66% 62% Estados Unidos 16% 20% 21% 22% 23% 25% 25% 26% 30% 32% 36% Caribe y Latinoam rica 5% 4% 4% 4% 3% 4% 4% 2% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Sistema de DistribuciOn Tradicional Sucursales Bancarias Puerto Rico 165 166 166 178 201 198 199 199 196 195 193 Islas VI rgenes 8 8 8 8 8 8 8 8 8 8 8 Estados Unidos2 32 34 40 44 63 89 91 95 96 96 97 Subtotal 205 208 214 230 272 295 298 302 300 299 298 Oficinas No Bancarias Popular Financial Holdings 58 73 91 102 117 128 137 136 149 153 181 Popular Cash Express 51 102 132 154 195 129 Popular Finance 26 28 31 39 44 48 47 61 55 36 43 Popular Auto 8 10 9 8 10 10 12 12 20 18 18 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 Popular Mortgage 3 3 3 11 13 21 25 29 32 Popular Securities 1 2 2 2 3 4 7 8 Popular One Popular Insurance y 2 2 2 2 Popular Risk Services Popular Insurance Agency, U.S.A. 1 1 1 Popular Insurance V.I. 1 1 E-LOAN EVERTEC 4 4 4 5 5 Subtotal 92 111 134 153 183 258 327 382 427 460 431 Total 297 319 348 383 455 553 625 684 727 759 729 Sistema ElectrOnico de DistribuciOn Cajeros Automaticos Propios y Administrados Puerto Rico 234 262 281 327 391 421 442 478 524 539 557 Islas VI rgenes 8 8 8 9 17 59 68 37 39 53 57 Estados Unidos 11 26 38 53 71 94 99 109 118 131 129 Total 253 296 327 389 479 574 609 624 681 723 743 Empleados 7,533 7,606 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 (equivalente a tiempo completo) 14 | POPULAR, INC.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $489.9 $540.7 $357.7 $(64.5) $(1,243.9) $(573.9) $137.4 $151.3 $245.3 $599.3 $(313.5) $895.3 $216.7 $107.7 44,401.6 48,623.7 47,404.0 44,411.4 38,882.8 34,736.3 38,815.0 37,348.4 36,506.9 35,748.8 33,086.8 35,761.7 38,661.6 44,277.3 28,742.3 31,710.2 32,736.9 29,911.0 26,268.9 23,803.9 26,458.9 25,314.4 25,093.6 24,706.7 22,053.2 23,129.2 23,435.4 24,942.5 20,593.2 22,638.0 24,438.3 28,334.4 27,550.2 25,924.9 26,762.2 27,942.1 27,000.6 26,711.1 24,807.5 27,209.7 30,496.2 35,453.5 3,104.6 3,449.2 3,620.3 3,581.9 3,268.4 2,538.8 3,800.5 3,918.8 4,110.0 4,626.2 4,267.4 5,105.3 5,198.0 5,103.9 $7,685.6 $5,836.5 $5,003.4 $2,968.3 $1,455.1 $1,445.4 $3,211.4 $1,426.0 $2,144.9 $2,970.6 $3,523.4 $2,936.6 $4,548.1 $3,622.4 1.23% 1.17% 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 17.60% 17.12% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% $17.95 $19.78 $12.41 $(2.73) $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 17.92 19.74 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 $1.02 6.20 6.40 6.40 6.40 4.80 0.20 ————— 0.30 0.60 1.00 109.45 118.22 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 288.30 211.50 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 55% 53% 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 43% 45% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 192 194 191 196 179 173 185 183 175 171 168 173 171 168 8 8 8 8 8 8 8 9 9 9 9 9 9 9 128 136 142 147 139 101 96 94 92 90 47 50 51 51 328 338 341 351 326 282 289 286 276 270 224 232 231 228 183 212 158 134 2 114 4 43 49 52 51 9 18 17 15 12 12 10 10 10 10 9 9 9 9 9 15 14 11 24 22 30 33 32 32 32 33 36 37 37 38 25 24 17 14 9 12 12 13 7 6 6 4 4 3 3 3 2 2 4 5 6 6 6 5 5 2 2 2 2 1 1 1 1 1 1 1 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 5 5 7 9 9 9 421 351 292 280 97 61 55 58 59 59 46 46 37 34 749 689 633 631 423 343 344 344 335 329 270 278 268 262 568 583 605 615 605 571 624 613 597 599 602 622 635 633 59 61 65 69 74 77 17 20 20 22 21 21 20 22 163 181 192 187 176 136 138 135 134 132 83 87 101 110 790 825 862 871 855 784 779 768 751 753 706 730 756 765 12,139 13,210 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 1Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la divisiOn de acciones a la inversa realizada en mayo 2012. 2Excluye una sucursal de Banco Popular de Puerto Rico en Nueva York. 2017 INFORME ANUAL | 15

POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES Gerencia RICHARD L. CARRION IGNACIO ALVAREZ CAMILLE BURCKHART LUIS CESTERO MANUEL A. CHINEA JAVIER D. FERRER Presidente Ejecutivo Presidente y Vicepresidenta Ejecutiva y Vicepresidente Ejecutivo Vicepresidente Ejecutivo Vicepresidente Ejecutivo, de la Junta de Directores Principal Oficial Ejecutivo Principal Oficial de Informatica y Grupo de Banca Individual Popular, Inc. Principal Oficial Legal y Popular, Inc. Popular, Inc. Estrategia Digital Banco Popular de Puerto Rico Principal Oficial de Operaciones Secretario Corporativo Grupo de InnovaciOn, TecnologI a y Popular Community Bank Grupo de ConsejerI a General y Operaciones Asuntos Corporativos Popular, Inc. Popular, Inc. JUAN O. GUERRERO GILBERTO MONZON EDUARDO J. NEGRON ELI S. SEP LVEDA LIDIO V. SORIANO CARLOS J. VAZQUEZ Vicepresidente Ejecutivo Vicepresidente Ejecutivo Vicepresidente Ejecutivo Vicepresidente Ejecutivo Vicepresidente Ejecutivo y Vicepresidente Ejecutivo y Grupo de Servicios Financieros y Grupo de Cr dito a Individuo Grupo de AdministraciOn Grupo de Cr dito Comercial Principal Oficial de Riesgo Principal Oficial Financiero Seguros Banco Popular de Puerto Rico Popular, Inc. Banco Popular de Puerto Rico Grupo Corporativo de Popular, Inc. Banco Popular de Puerto Rico Manejo de Riesgo Popular, Inc. Junta de Directores RICHARD L. CARRION IGNACIO ALVAREZ JOAQUI N E. ALEJANDRO M. JOHN W. DIERCKSEN MARI A LUISA FERR Presidente Ejecutivo Presidente y BACARDI , III BALLESTER Principal Presidenta y de la Junta de Directores Principal Oficial Ejecutivo Presidente de la Presidente Greycrest, LLC Principal Oficial Ejecutiva Popular, Inc. Popular, Inc. Junta de Directores Ballester Hermanos, Inc. FRG, Inc. Edmundo B. Fernandez, Inc. DAVID E. GOEL C. KIM GOODWIN WILLIAM J. CARLOS A. UNANUE Socio Gerente General Inversionista Privada TEUBER JR. Presidente Matrix Capital Inversionista Privado Goya de Puerto Rico Management Company, LP

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

Financial Review and Supplementary Information

Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Statistical Summaries	75
Financial Statements Report of Management on Internal Control Over Financial Reporting	80
Report of Independent Registered Public Accounting Firm	81
Consolidated Statements of Financial Condition as of December 31, 2017 and 2016	83
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015	84
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015	85
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015	86
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015	87
Notes to Consolidated Financial Statements	88

1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements	3
Overview	4
Critical Accounting Policies / Estimates	12
Statement of Operations Analysis	19
Net Interest Income	19
Provision for Loan Losses	22
Non-Interest Income	23
Operating Expenses	24
Income Taxes	26
Fourth Quarter Results	26
Reportable Segment Results	27
Statement of Financial Condition Analysis	30
Assets	30
Liabilities	34
Stockholders’ Equity	35
Regulatory Capital	35
Off-Balance Sheet Arrangements and Other Commitments	37
Contractual Obligations and Commercial Commitments	37
Risk Management	39
Risk Management Framework	39
Market / Interest Rate Risk	40
Liquidity	46
Credit Risk	51
Enterprise Risk and Operational Risk Management	71
Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards	72
Adjusted net income – Non-GAAP Financial Measure	73
Statistical Summaries	75
Statements of Financial Condition	75
Statements of Operations	76
Average Balance Sheet and Summary of Net Interest Income	77
Quarterly Financial Data	79

2

The following Management’s Discussion and Analysis (“MD&A”) provides information which management believes is necessary for understanding the financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, consolidated financial statements, and corresponding notes included in this “Financial Review and Supplementary Information - 2017 Annual Report” (“the report”) should be considered an integral part of this MD&A.

FORWARD-LOOKING STATEMENTS

The information included in this report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc’s (“Popular,” the “Corporation,” “we,” “us,” “our”) financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital market conditions, capital adequacy and liquidity, the effect of legal and regulatory proceedings and new accounting standards on the Corporation’s financial condition and results of operations, the impact of Hurricanes Irma and Maria on us, and the anticipated impact of our acquisition and assumption, if consummated, of certain assets and liabilities of Reliable Financial Services and Reliable Finance Holding Company, subsidiaries of Wells Fargo & Company, related to Wells Fargo’s retail auto loan and commercial auto dealership financing business in Puerto Rico (the “Reliable Transaction”). All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions are generally intended to identify forward-looking statements.

Forward-looking statements are not guarantees of future performance and are based on management’s current expectations and, by their nature, involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the rate of growth or decline in the economy and employment levels, as well as general business and economic conditions in the geographic areas we serve and, in particular, in Puerto Rico, where a significant portion of our business in concentrated; the impact of Hurricanes Irma and Maria on the economies of Puerto Rico and the U.S. and British Virgin Islands, and on our customers and our business, including the impact of measures taken by us to address customer needs; the impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board, on the economy, our customers and our business; the impact of the Commonwealth’s fiscal and economic condition on the value and performance of our portfolio of Puerto Rico government securities and loans to governmental entities, as well as on our commercial, mortgage and consumer loan portfolios where private borrowers could be directly affected by governmental action; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) on the Corporation’s businesses, business practices and costs of operations; regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located; the performance of the stock and bond markets; competition in the financial services industry; additional FDIC assessments; and possible legislative, tax or regulatory changes; a failure in or breach of our operational or security systems or infrastructure as a result of cyberattacks or otherwise, including those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, and other third parties providing services to us; and risks related to the Reliable Transaction, if consummated. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; 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 and regulatory proceedings, as discussed in “Part I, Item 3. Legal Proceedings”, is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.

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

The description of the Corporation’s business and risk factors contained in Item 1 and 1A of its Form 10-K for the year ended December 31, 2017 discusses additional information about the business of the Corporation and the material risk factors that, in addition to the other information in this report, readers should consider.

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OVERVIEW

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. The Corporation’s mortgage origination business is conducted under the brand name Popular Mortgage, a division of BPPR. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, Inc. The BPNA franchise operates under the brand name of Popular Community Bank. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, New Jersey and Southern Florida. E-LOAN, Inc. marketed deposit accounts under its name for the benefit of BPNA until March 31, 2017, when said operations were transferred to Popular Direct, a division of BPNA. Commencing in July 2017, the E-LOAN brand is being used by BPPR to offer personal loans through an online platform. Note 41 to the consolidated financial statements presents information about the Corporation’s business segments.

The Corporation has several investments which it accounts for under the equity method. These include the 16.10% interest in EVERTEC, a 15.84% interest in Centro Financiero BHD Leon, S.A. (“BHD Leon”), a 24.9% interest in PR Asset Portfolio 2013-1 International, LLC and a 24.9% interest in PRLP 2011 Holdings LLP, among other investments in limited partnerships which mainly hold investment securities. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s systems infrastructure and transaction processing businesses. BHD León is a diversified financial services institution operating in the Dominican Republic. PR Asset Portfolio 2013-1 International, LLC is a joint venture to which the Corporation sold construction and commercial loans and commercial and residential real estate owned assets, most of which were non-performing, with a fair value of $306 million during the year 2013. PRLP 2011 Holdings LLP is a joint venture to which the Corporation sold construction and commercial loans, most of which were non-performing, with a fair value of $148 million during the year 2011. For the year ended December 31, 2017, the Corporation recorded approximately $34.1 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2017 were $215.3 million. Refer to Note 17 to the consolidated financial statements for additional information of the Corporation’s investments under the equity method.

SIGNIFICANT EVENTS

Entry into an Agreement to Acquire Wells Fargo’s Auto Finance Business in Puerto Rico

On February 14, 2018, Banco Popular de Puerto Rico entered into an agreement to acquire and assume from Reliable Financial Services, Inc. and Reliable Finance Holding Company, subsidiaries of Wells Fargo & Company (“Wells Fargo”), certain assets and liabilities related to Wells Fargo’s auto finance business in Puerto Rico (“Reliable”).

As part of the transaction, Banco Popular will acquire approximately $1.5 billion in retail auto loans and $340 million in commercial loans. The acquired auto loan portfolio has credit characteristics that are similar to Banco Popular’s existing self-originated portfolio. Banco Popular will also acquire certain other assets and assume certain liabilities of Reliable.

The purchase price for the all-cash transaction is expected to be approximately $1.7 billion, reflecting an aggregate discount of 4.5% on the assets to be acquired. Banco Popular will fund the purchase price with existing liquidity. The transaction is not subject to the receipt by the parties of any further regulatory approvals. Subject to satisfaction of customary closing conditions, Popular anticipates the transaction to close during the second quarter of 2018 and be accretive to earnings.

On or after closing, Reliable employees will become employees of Banco Popular. Reliable will continue operating independently as a division of Banco Popular for a period of time after closing to provide continuity of service to Reliable customers while allowing Popular to assess best practices before integrating Reliable’s operations with Popular Auto’s operations.

Hurricanes Irma and Maria

During September 2017, Hurricanes Irma and Maria (the “hurricanes”), impacted Puerto Rico, the U.S. and British Virgin Islands, causing extensive damage and disrupting the markets in which Banco Popular de Puerto Rico (“BPPR”) does business.

On September 6, 2017, Hurricane Irma made landfall in the USVI and the BVI as a Category 5 hurricane on the Saffir-Simpson scale, causing catastrophic wind and water damage to the islands’ infrastructure, homes and businesses. Hurricane Irma’s winds and resulting flooding also impacted certain municipalities of Puerto Rico, causing the failure of electricity infrastructure in a significant portion of the island. While hurricane Irma also struck Popular’s operations in Florida, neither our operations nor those of our clients in the region were materially impacted.

4

Two weeks later, on September 20, 2017, Hurricane Maria, made landfall in Puerto Rico as a Category 4 hurricane, causing extensive destruction and flooding throughout Puerto Rico. Following the passage of Hurricane Maria, all Puerto Rico was left without electrical power, other basic utility and infrastructure services (such as water, communications, ports and other transportation networks) were severely curtailed and the government imposed a mandatory curfew. The hurricanes caused a significant disruption to the island’s economic activity. Most business establishments, including retailers and wholesalers, financial institutions, manufacturing facilities and hotels, were closed for several days.

Puerto Rico and the USVI were declared disaster zones by President Trump due to the impact of the hurricanes, thus making them eligible for Federal assistance. Notwithstanding the significant recovery operation that is underway by the Federal, state and local governments, as of the date of this report, many businesses and homes in Puerto Rico and the USVI remain without power, other basic utility and infrastructure remains significantly impacted, and many businesses are partially operating or remain closed and others have permanently closed. Electronic transactions, a significant source of revenue for the bank, declined significantly in the months following the hurricanes as a result of the lack of power and telecommunication services. Several reports indicate that the hurricanes have also accelerated the outmigration trends that Puerto Rico was experiencing, with many residents moving to the mainland United States, either on a temporary or permanent basis.

The damages caused by the hurricanes are substantial and have had a material adverse impact on economic activity in Puerto Rico, as reflected by, among other things, the slowdown in production and sales activity and the reduction in the government’s tax revenues. Employment levels are also expected to decrease at least in the short-term. It is still, however, too early, to fully assess and quantify the extent of the damage caused by the hurricanes, as well as their long-term economic impact on economic activity. Furthermore, the hurricanes severely damaged or destroyed buildings, homes and other structures, impacting the value of such properties, some of which may serve as collateral to our loans. While our collateral is generally insured, the value of such insured structures, as well as other structures unaffected by the hurricanes, may be significantly impacted. Although some of the impact of the hurricanes, including its short-term impact on economic activity, may be offset by recovery and reconstruction activity and the influx of Federal emergency funds and private insurance proceeds, it is too early to know the amount of Federal and private insurance money to be received and whether such transfers will significantly offset the negative economic, fiscal and demographic impact of the hurricanes.

Prior to the hurricanes, the Corporation had implemented its business continuity action program. Although the Corporation’s business critical systems experienced minimal outages as a result of the storms, the Corporation’s physical operations in Puerto Rico, the USVI and the BVI, including its branch and ATM networks, were materially disrupted by the storms mostly due to lack of electricity and communication as well as limited accessibility.

After the hurricanes, Popular has worked diligently to provide service to the Puerto Rico and Virgin Islands markets, including reopening retail locations and providing assistance to the communities it serves. A priority for Popular has been to maintain cash in its branches and ATM’s and to mobilize its workforce to ensure continuity of service to its customers and that of other financial institutions. Popular has implemented several initiatives to provide assistance to individuals and businesses impacted by the hurricanes. Actions taken by Popular, directly or through its affiliated P.R. and U.S.-based foundations, include:

Payment Moratoriums. Payment moratoriums for eligible customers in mortgage, consumer, auto and commercial loans, subject to certain terms and conditions.

Fee Waivers. The waiver of certain fees and service charges, including late-payment charges and ATM transaction fees in hurricane-affected areas.

Employee Relief. Popular increased the Employee Relief Fund to $750,000 to assist affected employees. Popular also assisted employees by providing means to obtain water, food and other supplies, child care services, orientation on how to submit claims to the Federal Emergency Management Agency (“FEMA”) and other special offers.

Other Charitable Initiatives. The Corporation’s philanthropic arms, Fundación Banco Popular and the Popular Community Bank Foundation, launched relief efforts for the victims of hurricane Irma and Maria, through the “Embracing Puerto Rico” and “Embracing the Islands” campaigns, to which Popular has donated $1.2 million. As needs unfold, the Foundations are expected to direct funding to address immediate and long-term needs arising from the impact of the hurricanes. Popular also contributed to “Unidos por Puerto Rico”, a fundraising campaign spearheaded by Puerto Rico’s First Lady and was one of two sponsors of the “Somos Una Voz” concert that has raised over $35 million for earthquake victims in Mexico and hurricane victims in Texas, Florida, Puerto Rico and the Caribbean. Fundación Banco Popular is leveraging the relationships it has developed with non-profit organizations and community leaders throughout its almost 40-year history, delivering assistance directly to those who need it most.

During the fourth quarter of 2017, the Corporation continued normalizing its operations after the impact of the hurricanes. The government’s restoration of the electric and telecommunication services in the areas in which our branch network operates was the most critical factor leading the Corporation to operate under improved conditions. Reconstruction of the island’s electric infrastructure and restoration of the telecommunications network remain the most critical challenges for Puerto Rico’s recovery from the hurricanes.

5

Financial impact of the hurricanes

During the year ended December 31, 2017, the Corporation recorded $88.0 million in pre-tax hurricane-related expenses, including an incremental provision for loan losses of $67.7 million, which includes $5.8 million for the covered loan portfolio. These amounts are net of amounts receivable for related insurance claims of $1.1 million related to physical damages to the Corporation’s premises, equipment and other real estate owned (“OREO”). Refer to additional information on Note 2 to the Financial Statements, Hurricanes Irma and Maria, and the Provision for Loan Losses and Operating Expenses sections of this MD&A.

In addition to the incremental provision and direct operating expenses, results for the year ended December 31, 2017 were impacted by the hurricanes in the form of a reduction in revenue resulting from reduced merchant transaction activity, the waiver of certain late fees and service charges, including ATM transaction fees, to businesses and consumers in hurricane-affected areas, as well as the economic and operational disruption in the Corporation’s mortgage origination, servicing and loss mitigation activities. These resulted in a decrease in revenue of approximately $31 million when compared to pre-hurricane levels.

While significant progress has been made in economic and transactional activity since September, the continued impact on transactional and collection based revenues will depend on the speed at which electricity, telecommunications and general merchant services can be restored across the region.

We expect the hurricanes to continue to impact the Corporation’s earnings in future periods. For additional information of the financial impact associated with the hurricanes, refer to Note 2 to the accompanying Financial Statements. Also, refer to the Net Interest Income, Non-Interest Income, Operating Expenses and Credit Quality sections in this MD&A for additional discussions of the impact of the hurricanes in the Corporation’s financial statements.

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Trump. The Act, among other things, reduced the maximum corporate tax rate from 35% to 21% in the U.S. As a result, during the fourth quarter of 2017 the Corporation recorded an income tax expense of $168.4 million, related to the write-down of the deferred tax asset (“DTA”) from its U.S. operations.

The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years.

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

6

Table 1 - Selected Financial Data

	Years ended December 31,
(Dollars in thousands, except per common share data)	2017			2016			2015			2014			2013
CONDENSED STATEMENTS OF OPERATIONS
Interest income	$	1,725,944		$	1,634,573		$	1,603,014		$	1,633,543		$	1,647,940
Interest expense		223,980			212,518			194,031			688,471			303,366
Net interest income		1,501,964			1,422,055			1,408,983			945,072			1,344,574
Provision for loan losses:
Non-covered loans		319,682			171,126			217,458			223,999			536,710
Covered loans		5,742			(1,110	)		24,020			46,135			69,396
Non-interest income		419,167			297,936			519,541			386,515			791,013
Operating expenses		1,257,196			1,255,635			1,288,221			1,193,684			1,221,990
Income tax expense (benefit)		230,830			78,784			(495,172	)		58,279			(251,327	)
Income (loss) from continuing operations		107,681			215,556			893,997			(190,510	)		558,818
Income (loss) from discontinued operations, net of tax		—			1,135			1,347			(122,980	)		40,509
Net income (loss)	$	107,681		$	216,691		$	895,344		$	(313,490	)	$	599,327
Net income (loss) applicable to common stock	$	103,958		$	212,968		$	891,621		$	(317,213	)	$	595,604
PER COMMON SHARE DATA
Net income (loss):
Basic:
From continuing operations	$	1.02		$	2.05		$	8.65		$	(1.88	)	$	5.41
From discontinued operations		—			0.01			0.01			(1.20	)		0.39
Total	$	1.02		$	2.06		$	8.66		$	(3.08	)	$	5.80
Diluted:
From continuing operations	$	1.02		$	2.05		$	8.64		$	(1.88	)	$	5.39
From discontinued operations		—			0.01			0.01			(1.20	)		0.39
Total	$	1.02		$	2.06		$	8.65		$	(3.08	)	$	5.78
Dividends declared	$	1.00		$	0.60		$	0.30		$	—		$	—
Common equity per share		49.51			49.60			48.79			40.76			44.26
Market value per common share		35.49			43.82			28.34			34.05			28.73
Outstanding shares:
Average - basic		101,966,429			103,275,264			102,967,186			102,848,792			102,693,685
Average - assuming dilution		102,045,336			103,377,283			103,124,309			102,848,792			103,061,475
End of period		102,068,981			103,790,932			103,618,976			103,476,847			103,397,699
AVERAGE BALANCES
Net loans[1]	$	23,511,293		$	23,062,242		$	23,045,308		$	22,366,750		$	22,799,878
Earning assets		37,668,573			33,713,158			31,451,081			29,897,273			29,741,099
Total assets		41,404,139			37,613,742			35,186,305			35,181,857			36,266,993
Deposits		33,182,522			29,066,010			26,778,582			24,647,355			24,571,382
Borrowings		2,000,840			2,339,399			2,757,334			3,514,203			4,291,861
Total stockholders’ equity		5,345,244			5,278,477			4,704,862			4,555,752			4,176,349
PERIOD END BALANCE
Net loans[1]	$	24,942,463		$	23,435,446		$	23,129,230		$	22,053,217		$	24,706,719
Allowance for loan losses		623,426			540,651			537,111			601,792			640,555
Earning assets		40,680,553			34,861,193			31,717,124			29,594,365			31,521,963
Total assets		44,277,337			38,661,609			35,761,733			33,086,771			35,748,752
Deposits		35,453,508			30,496,224			27,209,723			24,807,535			26,711,145
Borrowings		2,023,485			2,055,477			2,425,853			2,994,761			3,644,665
Total stockholders’ equity		5,103,905			5,197,957			5,105,324			4,267,382			4,626,150
SELECTED RATIOS
Net interest margin (taxable equivalent basis)[2]		4.28	%		4.48	%		4.74	%		3.45	%		4.73	%
Return on average total assets		0.26			0.58			2.54			(0.89	)		1.65
Return on average common stockholders’ equity		1.96			4.07			19.16			(7.04	)		14.43
Tier I Capital to risk-adjusted assets		16.30			16.48			16.21			18.13			19.15
Total Capital to risk-adjusted assets		19.22			19.48			18.78			19.41			20.42

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

[2] Net interest margin for the year ended December 31, 2014 includes the impact of the cost associated with the refinancing of structured repos at BPNA and the accelerated amortization of the discount related to the TARP funds amounting to $39.2 million and $414.1 million, respectively.

7

Adjusted results of operations – Non-GAAP financial measure

Adjusted net income

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the United States (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors Adjusted net income of the Corporation and excludes the impact of certain transactions on the results of its operations. Management believes that Adjusted net income provides meaningful information to investors about the underlying performance of the Corporation’s ongoing operations. Adjusted net income is a non-GAAP financial measure. Refer to tables 46 to 48 for a reconciliation of net income to Adjusted net income for the years ended December 31, 2017, 2016 and 2015.

Net interest income on a taxable equivalent basis

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables 5 and 6 for the years ended December 31, 2017 as compared with the same periods in 2016 and 2015, segregated by major categories of interest earning assets and interest bearing liabilities.

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

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

Financial highlights for the year ended December 31, 2017

The Corporation’s net income for the year ended December 31, 2017 amounted to $107.7 million, compared to a net income of $216.7 million and $895.3 million, for 2016 and 2015, respectively. The Corporation’s results for the year ended December 31, 2017, include the impact of an income tax expense of $168.4 million related to the impact of the Federal Tax Cuts and Job Act on the Corporation’s U.S. deferred tax asset during the fourth quarter of 2017 and the expenses related to Hurricanes Irma and Maria of approximately $88 million, on a pre-tax basis, during the third and fourth quarters of 2017.

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

Net income from continuing operations of $895.3 million for the year ended December 31, 2015 include $18.4 million in restructuring charges related to the U.S. operations; the impact of $17.9 million of net expenses associated with the acquisition in 2015, of certain assets and assumption of non-brokered deposits of Doral Bank from the FDIC, as receiver (the “Doral Bank Transaction”); an other-than-temporary impairment charge of $14.4 million on the portfolio of Puerto Rico government investment securities; a write-down of the FDIC indemnification asset of $10.9 million; a fair value gain of $4.4 million associated with a portfolio of mortgage servicing rights (“MSRs”) acquired in connection with a backup servicing agreement; losses on proposed bulk sales of loans acquired from Westernbank of $15.2 million; a loss of $5.9 million from a bulk sale of non-covered loans; a net loss of $4.4 million on a bulk sale of covered OREOs completed during the year and a partial reversal of the valuation allowance on its deferred tax assets from its U.S. operations for approximately $589.0 million.

Excluding the impact of the above mentioned transactions, detailed in Tables 46 through 48, the Adjusted net income for the year ended December 31, 2017 was $276.0 million, compared to $358.1 million for 2016 and $374.8 million for 2015. Refer to Tables 46 through 48 for the reconciliation to the Adjusted net income.

On April 30, 2010, BPPR acquired certain assets and assumed certain liabilities of Westernbank from the FDIC in an assisted transaction. Table 2 provides a summary of the gross revenues derived from the assets acquired in the FDIC-assisted transaction during 2017, 2016 and 2015.

8

Table 2 - Financial Information—Westernbank FDIC-Assisted Transaction

	Years ended December 31,
(In thousands)	2017			2016			2015
Interest income on WB loans	$	148,033		$	175,207		$	208,779
FDIC loss share (expense) income :
Amortization of loss share indemnification asset		(469	)		(10,201	)		(66,238	)
80% mirror accounting on credit impairment losses[1]		3,136			(239	)		15,658
80% mirror accounting on reimbursable expenses		2,454			8,433			73,205
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC		2,405			(31,338	)		(13,836	)
Change in true-up payment obligation		(11,700	)		(33,413	)		9,559
Arbitration decision charge		—			(136,197	)		—
Other		(5,892	)		(4,824	)		1,714
Total FDIC loss share (expense) income		(10,066	)		(207,779	)		20,062
Total revenues (expenses)		137,967			(32,572	)		228,841
Provision (reversal) for loan losses		16,336			(3,318	)		54,113
Total revenues (expenses) less provision (reversal) for loan losses	$	121,631		$	(29,254	)	$	174,728

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

Average balances

	Years ended December 31,
(In millions)	2017		2016		2015
Loans	$	1,724	$	1,949	$	2,333
FDIC loss share asset		49		191		362

Interest income on Westernbank loans for the year 2017 amounted to $ 148 million versus $ 175 million in 2016, reflecting a yield of 8.59% versus 8.99%, for each year, respectively. Interest income on this portfolio, due to its nature, should continue to decline as scheduled payments are received and workout arrangements are made.

The FDIC loss share reflected an expense of $ 10 million for 2017, compared to an expense of $ 208 million for 2016. During 2016, the Corporation recorded a $136 million write-down to the indemnification asset related to the arbitration decision. Refer to the Non-Interest Income section of this MD&A for additional information on the FDIC loss share (expense) income.

An increase in estimated cash flows will reduce any allowance for loan losses established after the acquisition and then increases the accretable yield to be recognized over the life of the loans. It also has the effect of lowering the realizable value of the loss share asset since the Corporation would receive lower FDIC payments under the loss share agreements. This is reflected in the amortization of the loss share asset.

The discussion that follows provides highlights of the Corporation’s results of operations for the year ended December 31, 2017 compared to the results of operations of 2016. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 3 presents a five-year summary of the components of net income (loss) as a percentage of average total assets.

9

Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets

	2017			2016			2015			2014			2013
Net interest income		3.63	%		3.78	%		4.00	%		2.69	%		3.71	%
Provision for loan losses		(0.79	)		(0.45	)		(0.69	)		(0.77	)		(1.67	)
Mortgage banking activities		0.06			0.15			0.23			0.09			0.21
Net gain and valuation adjustments on investment securities		—			—			—			—			0.02
Other-than-temporary impairment losses on investment securities		(0.02	)		—			(0.04	)		—			—
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		—			0.02			—			0.12			(0.15	)
Adjustments (expense) to indemnity reserves		(0.05	)		(0.05	)		(0.05	)		(0.12	)		(0.10	)
Trading account (loss) profit		—			—			(0.01	)		0.01			(0.04	)
FDIC loss share (expense) income		(0.02	)		(0.55	)		0.06			(0.29	)		(0.23	)
Other non-interest income		1.05			1.22			1.29			1.29			2.47
Total net interest income and non-interest income, net of provision for loan losses		3.86			4.12			4.79			3.02			4.22
Operating expenses		(3.04	)		(3.34	)		(3.66	)		(3.39	)		(3.37	)
Income (loss) from continuing operations before income tax		0.82			0.78			1.13			(0.37	)		0.85
Income tax expense (benefit)		0.56			0.20			(1.41	)		0.17			(0.69	)
Income (loss) from continuing operations		0.26			0.58			2.54			(0.54	)		1.54
(Loss) income from discontinued operations, net of tax		—			—			—			(0.35	)		0.11
Net income (loss)		0.26	%		0.58	%		2.54	%		(0.89	)%		1.65	%

Net interest income for the year ended December 31, 2017 was $1.5 billion, an increase of $79.9 million when compared to 2016. On a taxable equivalent basis, net interest income increased by $101.3 million. Net interest margin decreased by 23 basis points to 3.99% in 2017, compared to 4.22% in 2016. On a taxable equivalent basis, net interest margin was 4.28% in 2017, compared to 4.48% in 2016. In the low interest rate environment that has prevailed in the past years, the mix and overall size of our earning assets and the cost of funding those assets, although accretive to net interest income, has negatively impacted the Corporation’s net interest margin. Refer to the Net Interest Income section of this MD&A for additional information.

The Corporation’s total provision for loan losses (including covered and non-covered loans) totaled $325.4 million for the year ended December 31, 2017, compared with $170.0 million for 2016. The increase in the provision was mainly due to the impact of the hurricanes on the Corporation’s loan portfolios, as previously described, as well as a higher provision for the taxi medallion portfolio.

Credit metrics in 2017 were impacted by the relief initiatives implemented by the Corporation related to the hurricanes, including the loan payment moratorium. Non-performing assets, excluding covered loans and OREO, at December 31, 2017 were $720 million, a decrease of $18 million when compared with December 31, 2016. The decrease was mainly reflected in the other real estate (“OREO”) category, which decreased by approximately $11 million, mainly in residential properties at BPPR and write-downs related to Hurricane Maria.

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

Non-interest income for the year ended December 31, 2017 amounted to $419.2 million, an increase of $121.2 million, when compared with 2016. The increase was mainly due to a favorable variance in FDIC loss share (expense) income of $197.7 million as a result of a charge of $136.2 million related to the arbitration award recorded during 2016 and lower fair value adjustments to the true-up payment obligation which were mainly impacted by changes in the discount rate.

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

Total operating expenses amounted to $1.3 billion for the year 2017, relatively flat when compared to 2016. Refer to the Operating Expenses section of this MD&A for additional information.

Income tax expense amounted to $230.8 million for the year ended December 31, 2017, compared with an income tax expense of $78.8 million for the previous year. As previously described, during the fourth quarter of 2017, the Corporation recognized an income tax expense of $168.4 million resulting from the impact of the Federal Tax Cuts and Jobs Act in the Corporation’s income tax expense. Refer to the Income Taxes section in this MD&A and Note 39 to the consolidated financial statements for additional information on income taxes.

10

At December 31, 2017, the Corporation’s total assets were $44.3 billion, compared with $38.7 billion at December 31, 2016, an increase of $5.6 billion. The increase is mainly driven by an increase in the Corporation’s money market investments of $2.4 billion and in the investment securities available-for-sale portfolio by $2.0 billion driven by the increase in deposits balances. Also, the loans held-in-portfolio increased by $1.5 billion due mainly to growth in the commercial and construction loan portfolios at BPNA and the increase in mortgage loans at BPPR due to the rebooking of loans previously pooled into GNMA securities. Refer to the Statement of Condition Analysis section of this MD&A for additional information.

Deposits amounted to $35.5 billion at December 31, 2017, compared with $30.5 billion at December 31, 2016. Table 15 presents a breakdown of deposits by major categories. The increase in deposits was mainly from higher retail and commercial savings, NOW deposits, demand deposits from the Puerto Rico public sector and retail and commercial checking accounts at BPPR. The Corporation’s borrowings remained relatively flat at $2.0 billion at December 31, 2017, compared to $2.1 billion at December 31, 2016. Refer to Note 20 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings.

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

Stockholders’ equity totaled $5.1 billion at December 31, 2017, compared with $5.2 billion at December 31, 2016. The decrease was mainly related to the impact of the common stock repurchase of $75 million completed during the first quarter of 2017 and higher accumulated other comprehensive loss by $30 million principally in unrealized losses on securities available-for-sale. The Corporation and its banking subsidiaries continue to be well-capitalized at December 31, 2017. The Common Equity Tier 1 Capital ratio at December 31, 2017 was 16.30%, compared to 16.48% at December 31, 2016.

In summary, during 2017, in spite of the significant impact of the hurricanes in Puerto Rico and the USVI, the Corporation reflected strong results, evidenced by an increase in net interest income, year over year, the continued growth of the U.S. portfolios and a solid capital position. The Corporation also continued to benefit from its stake in EVERTEC and BHD León, the second largest bank in the Dominican Republic.                

Hurricanes Irma and Maria have had and continue to have an impact on the people and communities in which the Corporation does business. The Corporation will continue to monitor the effects of these hurricanes on its operations and clients. Popular, as the leading financial institution in Puerto Rico, is committed to partnering with our neighbors and communities to aid in the rebuilding process.

The Corporation continues to seek to capitalize on growth opportunities, such as the recently announced agreement to acquire the Reliable auto finance business. We look forward to the benefits from this acquisition and will continue to employ our strategy to strengthen our organization and deliver strong, sustainable results in the future.

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

The shares of the Corporation’s common stock are traded on the NASDAQ Global Select Market under the symbol BPOP. Table 4 shows the Corporation’s common stock performance on a quarterly basis during the last five years.

11

Table 4—Common Stock Performance

	Market Price				Cash Dividends		Book Value		Dividend			Price/ Earnings				Market/Book
	High		Low		Declared per Share		Per Share		Yield [1]			Ratio				Ratio
2017							$	49.51		2.57	%		34.79		x		71.68	%
4th quarter	$	36.71	$	32.29	$	0.25
3rd quarter		43.12		35.27		0.25
2nd quarter		42.69		37.18		0.25
1st quarter		45.75		38.46		0.25
2016								49.60		1.87			21.27				88.35
4th quarter	$	44.70	$	35.41	$	0.15
3rd quarter		39.74		28.00		0.15
2nd quarter		31.34		26.66		0.15
1st quarter		28.80		22.62		0.15
2015								48.79		0.97			3.27				58.09
4th quarter	$	32.39	$	26.96	$	0.15
3rd quarter		31.49		27.19		0.15
2nd quarter		35.45		28.86		—
1st quarter		35.58		30.52		—
2014								40.76		N.M.			(11.06	)			83.54
4th quarter	$	34.14	$	27.34	$	—
3rd quarter		34.64		29.44		—
2nd quarter		34.18		28.93		—
1st quarter		31.50		25.50		—
2013								44.26		N.M.			4.95				64.91
4th quarter	$	29.17	$	24.07	$	—
3rd quarter		34.20		26.25		—
2nd quarter		30.60		26.88		—
1st quarter		28.92		21.70		—

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

N.M. – Not meaningful.                

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform with generally accepted accounting principles in the United States of America (“GAAP”) and general practices within the financial services industry. The Corporation’s significant accounting policies are described in detail in Note 3 to the consolidated financial statements and should be read in conjunction with this section.

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

Fair Value Measurement of Financial Instruments

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, 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 Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.

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

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

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

Refer to Note 31 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At December 31, 2017, approximately $ 10.2 billion, or 98%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, consisted principally of U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States 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 $ 7 million at December 31, 2017, of which $ 1 million were Level 3 assets and $ 6 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3.

During the year ended December 31, 2017, certain MBS and CMO’s amounting to $4.3 million, were transferred from Level 3 to Level 2 due to a change in valuation technique from an internally-prepared pricing matrix and discounted cash flow model, respectively, to a bond’s theoretical value. There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2016, and 2015. The Corporation’s policy is to recognize transfers as of the end of the reporting period.

Trading Account Securities and Investment Securities Available-for-Sale

The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the year ended December 31, 2017, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers.

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 year ended December 31, 2017, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.

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

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

Refer to Note 31 to the consolidated financial statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value.

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Loans and Allowance for Loan Losses

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

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

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

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

For a detailed description of the principal factors used to determine the general reserves of the allowance for loan losses and for the principal enhancements Management made to its methodology, refer to Note 10.

According to the loan impairment accounting guidance in ASC Section 310-10-35, a loan is impaired when, based on current information and events, it is probable that the principal and/or interest are not going to be collected according to the original contractual terms of the loan agreement. Current information and events include “environmental” factors, e.g. existing industry, geographical, economic and political factors. Probable means the future event or events which will confirm the loss or impairment of the loan is likely to occur. The collateral dependent method is generally used for the impairment determination on commercial and construction loans since the expected realizable value of the loan is based upon the proceeds received from the liquidation of the collateral property. For commercial properties, the “as is” value or the “income approach” value is used depending on the financial condition of the subject borrower and/or the nature of the subject collateral. In most cases, impaired commercial loans do not have reliable or sustainable cash flow to use the discounted cash flow valuation method. As a general rule, the appraisal valuation used by the Corporation for impaired construction loans is based on discounted value to a single purchaser, discounted sell out or “as is” depending on the condition and status of the project and the performance of the same. Appraisals may be adjusted due to their age, property conditions, geographical area or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss severity information that can provide historical trends in the real estate market. Discount rates used may change from time to time based on management’s estimates.

For additional information on the Corporation’s policy of its impaired loans, refer to Note 3. In addition, refer to the Credit Risk section of this MD&A for detailed information on the Corporation’s collateral value estimation for other real estate.

The Corporation’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis following a systematic methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of the allowance for loan losses, the Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data to include when estimating losses, the level of volatility of losses in a specific portfolio, changes in underwriting standards, financial accounting standards and loan impairment measurement, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business, financial condition, liquidity, capital and results of operations could also be affected.

A restructuring constitutes a TDR when the Corporation separately concludes that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. For information on the Corporation’s TDR policy, refer to Note 3.

Acquisition Accounting for Covered Loans and Related Indemnification Asset

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

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

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The initial valuation of these loans and related indemnification asset required management to make subjective judgments concerning estimates about how the acquired loans would perform in the future using valuation methods, including discounted cash flow analyses and independent third-party appraisals. Factors that may significantly affect the initial valuation included, among others, market-based and industry data related to expected changes in interest rates, assumptions related to probability and severity of credit losses, estimated timing of credit losses including the timing of foreclosure and liquidation of collateral, expected prepayment rates, required or anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any loss share agreement, and specific industry and market conditions that may impact discount rates and independent third-party appraisals.

The Corporation applied the guidance of ASC Subtopic 310-30 to all loans acquired in the Westernbank FDIC-assisted transaction (including loans that do not meet the scope of ASC Subtopic 310-30), except for credit cards and revolving lines of credit. ASC Subtopic 310-30 provides two specific criteria that have to be met in order for a loan to be within its scope: (1) credit deterioration on the loan from its inception until the acquisition date and (2) that it is probable that not all of the contractual cash flows will be collected on the loan. Once in the scope of ASC Subtopic 310-30, the credit portion of the fair value discount on an acquired loan cannot be accreted into income until the acquirer has assessed that it expects to receive more cash flows on the loan than initially anticipated.

Acquired loans that meet the definition of nonaccrual status fall within the Corporation’s definition of impaired loans under ASC Subtopic 310-30. It is possible that performing loans would not meet criteria number 1 above related to evidence of credit deterioration since the date of loan origination, and therefore not fall within the scope of ASC Subtopic 310-30. Based on the fair value determined for the acquired portfolio, acquired loans that did not meet the Corporation’s definition of non-accrual status also resulted in the recognition of a significant discount attributable to credit quality.

Given the significant discount related to credit in the valuation of the Westernbank acquired portfolio, the Corporation considered two possible options for the performing loans (1) accrete the entire fair value discount (including the credit portion) using the interest method over the life of the loan in accordance with ASC Subtopic 310-20; or (2) analogize to ASC Subtopic 310-30 and only accrete the portion of the fair value discount unrelated to credit.

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

• Option 1 - Since the credit portion of the fair value discount is associated with an expectation of cash flows that an acquirer does not expect to receive over the life of the loan, it does not appear appropriate to accrete that portion over the life of the loan as doing so could eventually overstate the acquirer’s expected value of the loan and ultimately result in recognizing income (i.e. through the accretion of the yield) on a portion of the loan it does not expect to receive. Therefore, the Corporation does not believe this is an appropriate method to apply.

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

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

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

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

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

Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value of the loans, or the “accretable yield,” is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool is reasonably estimable. The non-accretable difference represents the difference between contractually required principal and interest and the

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cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively as an adjustment to accretable yield over the pool’s remaining life. Decreases in expected cash flows after the acquisition date are generally recognized by recording an allowance for loan losses.

The fair value discount of lines of credit with revolving privileges that are accounted for pursuant to the guidance of ASC Subtopic 310-20, represented the difference between the contractually required loan payment receivable in excess of the initial investment in the loan. Any cash flows collected in excess of the carrying amount of the loan are recognized in earnings at the time of collection. The carrying amount of lines of credit with revolving privileges, which are accounted pursuant to the guidance of ASC Subtopic 310-20, are subject to periodic review to determine the need for recognizing an allowance for loan losses.

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

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

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

The evaluation of estimated cash flows expected to be collected subsequent to acquisition on loans accounted pursuant to ASC Subtopic 310-30 and inherent losses on loans accounted pursuant to ASC Subtopic 310-20 require the continued usage of key assumptions and estimates. Given the current economic environment, the Corporation must apply judgment to develop its estimates of cash flows considering the impact of home price and property value changes, changing loss severities and prepayment speeds. Decreases in the expected cash flows for ASC Subtopic 310-30 loans and decreases in the net realizable value of ASC Subtopic 310-20 loans will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. These estimates are particularly sensitive to changes in loan credit quality.

The amount that the Corporation realizes on the covered loans and related indemnification assets could differ materially from the carrying value reflected in these financial statements, based upon the timing and amount of collections on the acquired loans in future periods. The Corporation’s losses on these assets may be mitigated to the extent covered under the specific terms and provisions of the loss share agreement.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

The calculation of periodic income taxes is complex and requires the use of estimates and judgments. The Corporation has recorded two accruals for income taxes: (i) the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential examination issues, and (ii) a deferred income tax that represents the estimated impact of temporary differences between how the Corporation recognizes assets and liabilities under accounting principles generally accepted in the United States (GAAP), and how such assets and liabilities are recognized under the tax code. Differences in the actual outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into consideration statutory, judicial and regulatory guidance.

A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The realization of deferred tax assets requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies.

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

For the evaluation of the realization of the deferred tax asset by taxing jurisdiction, refer to Note 39.

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

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

The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the financial statements or tax returns and future profitability. The accounting for deferred tax consequences represents management’s best estimate of those future events. Changes in management’s current estimates, due to unanticipated events, could have a material impact on the Corporation’s financial condition and results of operations.

The Corporation establishes tax liabilities or reduces tax assets for uncertain tax positions when, despite its assessment that its tax return positions are appropriate and supportable under local tax law, the Corporation believes it may not succeed in realizing the tax benefit of certain positions if challenged. In evaluating a tax position, the Corporation determines whether it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Corporation’s estimate of the ultimate tax liability contains assumptions based on past experiences, and judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Corporation evaluates these uncertain tax positions each quarter and adjusts the related tax liabilities or assets in light of changing facts and circumstances, such as the progress of a tax audit or the expiration of a statute of limitations. The Corporation believes the estimates and assumptions used to support its evaluation of uncertain tax positions are reasonable.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $9.0 million at December 31, 2017 and 2016. Refer to Note 39 to the consolidated financial statements for further information on this subject matter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.6 million.

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

Goodwill

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

Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles

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(including any unrecognized intangible assets, such as unrecognized core deposits and trademark) as if the reporting unit was being acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The Corporation estimates the fair values of the assets and liabilities of a reporting unit, consistent with the requirements of the fair value measurements accounting standard, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at the impairment test date. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidated statement of condition. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards.

At December 31, 2017, goodwill amounted to $627 million. Note 18 to the consolidated financial statements provides the assignment of goodwill by reportable segment.

For a detailed description of the annual goodwill impairment evaluation performed by the Corporation during the third quarter of 2017, refer to Note 18.

Pension and Postretirement Benefit Obligations

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

The estimated benefit costs and obligations of the pension and postretirement benefit plans are impacted by the use of subjective assumptions, which can materially affect recorded amounts, including expected returns on plan assets, discount rates, termination rates, retirement rates and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against current industry practice and the actual experience of the Corporation. The Corporation uses an independent actuarial firm for assistance in the determination of the pension and postretirement benefit costs and obligations. Detailed information on the Plans and related valuation assumptions are included in Note 33 to the consolidated financial statements.

The Corporation periodically reviews its assumption for the long-term expected return on pension plan assets. The Plans’ assets fair value at December 31, 2017 was $767.5 million. The expected return on plan assets is determined by considering various factors, including a total fund return estimate based on a weighted-average of estimated returns for each asset class in each plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of return, inflation, credit spreads, equity risk premiums and excess return expectations.

As part of the review, the Corporation’s independent consulting actuaries performed an analysis of expected returns based on each plan’s expected asset allocation for the year 2018 using the Willis Towers Watson US Expected Return Estimator. This analysis is reviewed by the Corporation and used as a tool to develop expected rates of return, together with other data. This forecast reflects the actuarial firm’s view of expected long-term rates of return for each significant asset class or economic indicator; for example, 8.5% for large cap stocks, 8.8% for small cap stocks, 9.0% for international stocks, 3.9% for aggregate fixed-income securities and 4.1% for long government/credit at January 1, 2018. A range of expected investment returns is developed, and this range relies both on forecasts and on broad-market historical benchmarks for expected returns, correlations, and volatilities for each asset class.

As a consequence of recent reviews, the Corporation decreased its expected return on plan assets for year 2018 to 5.5% for the Banco Popular de Puerto Rico Retirement Plan and to 6.0% for the Tax Qualified Retirement Restoration Plan. Expected rates of return of 6.50% and 6.88% had been used for 2017 and 2016, respectively, for both plans. Since the expected return assumption is on a long-term basis, it is not materially impacted by the yearly fluctuations (either positive or negative) in the actual return on assets. The expected return can be materially impacted by a change in the plan’s asset allocation.

Pension expense for the Plans amounted to $5.0 million in 2017. The total pension expense included a benefit of $42.8 million for the expected return on assets.

Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2018 from 5.5 % to 5.25% would increase the projected 2018 expense for the Banco Popular de Puerto Rico Retirement Plan, the Corporation’s largest plan, by approximately $1.8 million.

If the projected benefit obligation exceeds the fair value of plan assets, the Corporation shall recognize a liability equal to the unfunded projected benefit obligation and vice versa, if the fair value of plan assets exceeds the projected benefit obligation, the Corporation recognizes an asset equal to the overfunded projected benefit obligation. This asset or liability may result in a taxable or deductible temporary difference and its tax effect shall be recognized as an income tax expense or benefit which shall be allocated to various components of the financial statements, including other comprehensive income. The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s

18

consolidated statement of financial condition. Management believes that the fair value estimates of the pension plan assets are reasonable given the valuation methodologies used to measure the investments at fair value as described in Note 31. Also, the compositions of the plan assets are primarily in equity and debt securities, which have readily determinable quoted market prices. The Corporation had recorded a liability for the underfunded pension benefit obligation of $49.4 million at December 31, 2017.

The Corporation uses the spot rate yield curve from the Willis Towers Watson RATE: Link (10/90) Model to discount the expected projected cash flows of the plans. The Corporation used an equivalent single weighted average discount rate of 3.56% for the Banco Popular de Puerto Rico Retirement Plan, 3.54% for the Tax Qualified Retirement Restoration Plan, 3.55% for the Benefit Restoration Plan and 3.62% for the Retiree Health Care Benefit Plan to determine the benefit obligations at December 31, 2017.

A 50 basis point decrease to each of the rates in the December 31, 2017 Willis Towers Watson RATE: Link (10/90) Model as of the beginning of 2018 would increase the projected 2018 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.2 million. The change would not affect the minimum required contribution to the Plan.

The postretirement health care benefit plan was unfunded (no assets were held by the plan) at December 31, 2017. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $170.7 million at December 31, 2017 using an equivalent single discount rate of 3.62%. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. Note 33 to the consolidated financial statements provides information on the assumed rates considered by the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have on specified cost components and the postretirement benefit obligation of the Corporation.

STATEMENT OF OPERATIONS ANALYSIS

Net Interest Income

Net interest income is the difference between the revenue generated from earning assets, including loan fees, less the interest cost of deposits and borrowed money. Several risk factors might influence net interest income including the economic environment in which we operate, market driven events, changes in volumes, repricing characteristics, loans fees collected, moratoriums granted on loan payments and delay charges, interest collected on nonaccrual loans, as well as strategic decisions made by the Corporation’s management. Net interest income for the year ended December 31, 2017 was $1.5 billion compared to $1.4 billion in 2016. Net interest income, on a taxable equivalent basis, for the year ended December 31, 2017 was $1.6 billion compared to $1.5 billion in 2016.

The average key index rates for the years 2015 through 2017 were as follows:

	2017			2016			2015
Prime rate		4.10	%		3.51	%		3.26	%
Fed funds rate		1.00			0.39			0.13
3-month LIBOR		1.26			0.74			0.32
3-month Treasury Bill		0.94			0.31			0.04
10-year Treasury		2.33			1.84			2.13
FNMA 30-year		3.09			2.57			2.92

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the period ended December 31, 2017 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC Subtopic 310-30, of $19.0 million, related to those items, compared to $18.3 million for the same period in 2016. During the fourth quarter of 2017, after hurricanes Irma and Maria, the Corporation waived certain late fees and charges to businesses and consumers which affected the results of these line items during the moratorium period.

Table 5 presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2017, as compared with the same period in 2016, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin decreased by 23 basis points to 3.99% in 2017, compared to 4.22% in 2016 mainly due to the mix in the asset composition, as balances have increased in lower yielding bond and money market investments. On a taxable equivalent basis, net interest margin was 4.28% in 2017, compared to 4.48% in 2016. In the low interest rate environment that has prevailed in the past years, the mix and overall size of our earning assets and the cost of funding those assets,

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although accretive to net interest income, has negatively impacted the Corporation’s net interest margin. Net interest income increased by $79.9 million year over year. On a taxable equivalent basis, net interest income increased by $101.3 million. The increase of $21.4 million in the taxable equivalent adjustment is directly related to a higher volume of tax exempt investments in Puerto Rico. The main reasons for the variances in net interest income on a taxable equivalent basis were as follows:

• Higher interest income from money market investments due to both an increase in volume of funds available to invest, mainly related to an increase in Puerto Rico government deposits, and to recent increases in rates by the U.S. Federal Reserve. Average rate of such portfolios for the year increased 62 basis points when compared to the same period in 2016;

• Higher interest income from investment securities mainly from higher volumes, particularly on U.S. Treasuries and mortgage-backed securities related to recent purchases; and

• Higher income from commercial and construction loans; due to a higher volume of loans in the U.S. and improved yields in Puerto Rico mostly related to the effect on the variable rate portfolio of the above-mentioned rise in interest rates.

These positive variances were partially offset by:

• Lower interest income from mortgage loans due to lower average balances driven to lower lending activity, the above-mentioned waiver of late payment fees to clients and portfolio run-off in Puerto Rico and the U.S.;

• Lower interest income from loans acquired in the Westernbank FDIC-assisted transaction (‘WB Loans”) related to the normal portfolio run-off, as well as lower yields; and

• Higher interest expense on deposits mainly due to higher volumes in most categories, predominantly the increase in deposits from the Puerto Rico government and higher volumes in the U.S. to fund loan growth. These increases were partially offset by a lower average volume of brokered certificates of deposits and lower cost of interest bearing deposits resulting from a higher proportion of low cost deposits both in Puerto Rico and the U.S.

Table 6 presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2016, as compared with the same period in 2015, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin decreased by 26 basis points to 4.22% in 2016, compared to 4.48% in 2015 mainly driven by the mix in the assets composition. On a taxable equivalent basis, net interest margin was 4.48% in 2016, compared to 4.74% in 2015. The decline in the net interest margin was mainly attributed to a change in the asset composition, due to the maturity of higher yielding assets, such as WB and consumer loans in Puerto Rico and investment in securities and commercial loans at lower rates. On the liability side higher funding costs related to both a higher volume of public sector deposits in Puerto Rico and retail deposits in the U.S. to finance the asset growth. Net interest income increased by $13.1 million year over year. On a taxable equivalent basis, net interest income increased by $17.4 million. The main reasons for these variances were as follows:

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

• Higher volume from commercial and construction loans driven by loan growth in the U.S.; and

• Higher income from leases resulting from a higher average volume at the Puerto Rico auto and equipment leasing and financing subsidiary.

These positive variances were partially offset by:

• Lower volume from WB loans due to normal run-off, partially offset by higher yield as a result of the recast process and loan resolutions;

• Lower volume from mortgage loans due to lower origination activity in Puerto Rico and accelerate run-off of the mortgage portfolio in the U.S.; and

• Higher interest expense on deposits driven by increases in the volume of Puerto Rico deposits, mainly government deposits, and higher deposit costs in the U.S. to fund loan growth.

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

Years ended December 31,

Average Volume							Average Yields / Costs										Interest							Variance Attributable to
2017		2016		Variance			2017			2016			Variance				2017		2016		Variance			Rate			Volume
(In millions)																	(In thousands)
	$     4,481	$	3,104	$	1,377			1.15	%		0.53	%		0.62	%	Money market investments	$	51,496	$	16,428	$	35,068		$	25,835		$	9,233
	9,594		7,422		2,172			2.74			2.72			0.02		Investment securities		262,468		201,955		60,513			8,479			52,034
	83		125		(42	)		7.20			6.58			0.62		Trading securities		5,953		8,243		(2,290	)		717			(3,007	)
	14,158		10,651		3,507			2.26			2.13			0.13		Total money market, investment and trading securities Loans:		319,917		226,626		93,291			35,031			58,260
	9,971		9,203		768			5.19			5.08			0.11		Commercial		517,334		467,208		50,126			10,497			39,629
	829		726		103			5.64			5.38			0.26		Construction		46,758		39,079		7,679			1,912			5,767
	742		660		82			6.35			6.71			(0.36	)	Leasing		47,112		44,283		2,829			(2,479	)		5,308
	6,506		6,701		(195	)		5.53			5.54			(0.01	)	Mortgage		360,037		371,451		(11,414	)		(608	)		(10,806	)
	3,739		3,823		(84	)		10.59			10.42			0.17		Consumer		395,818		398,411		(2,593	)		3,402			(5,995	)
	21,787		21,113		674			6.27			6.25			0.02		Sub-total loans		1,367,059		1,320,432		46,627			12,724			33,903
	1,724		1,949		(225	)		8.59			8.99			(0.40	)	WB loans		148,033		175,207		(27,174	)		(7,592	)		(19,582	)
	23,511		23,062		449			6.44			6.49			(0.05	)	Total loans		1,515,092		1,495,639		19,453			5,132			14,321
$	37,669	$	33,713	$	3,956			4.87	%		5.11	%		(0.24	)%	Total earning assets Interest bearing deposits:	$	1,835,009	$	1,722,265	$	112,744		$	40,163		$	72,581
	$10,116	$	7,020	$	3,096			0.37	%		0.39	%		(0.02	)%	NOW and money market [1]	$	37,497	$	27,548	$	9,949		$	(228	)	$	10,177
	8,103		7,528		575			0.25			0.24			0.01		Savings		20,217		18,002		2,215			579			1,636
	7,625		7,910		(285	)		1.10			1.04			0.06		Time deposits		84,150		82,027		2,123			5,417			(3,294	)
	25,844		22,458		3,386			0.55			0.57			(0.02	)	Total deposits		141,864		127,577		14,287			5,768			8,519
	452		763		(311	)		1.27			1.02			0.25		Short-term borrowings		5,725		7,812		(2,087	)		1,212			(3,299	)
	1,549		1,576		(27	)		4.93			4.89			0.04		Other medium and long- term debt		76,392		77,129		(737	)		(21	)		(716	)
	27,845		24,797		3,048			0.80			0.86			(0.06	)	Total interest bearing liabilities		223,981		212,518		11,463			6,959			4,504
	7,339		6,608		731											Demand deposits
	2,485		2,308		177											Other sources of funds
	$    37,669	$	33,713	$	3,956			0.59	%		0.63	%		(0.04	)%	Total source of funds		223,981		212,518		11,463			6,959			4,504
								4.28	%		4.48	%		(0.20	)%	Net interest margin/ income on a taxable equivalent basis (Non-GAAP)		1,611,028		1,509,747		101,281		$	33,204		$	68,077
								4.07	%		4.25	%		(0.18	)%	Net interest spread
																Taxable equivalent adjustment		109,065		87,692		21,373
								3.99	%		4.22	%		(0.23	)%	Net interest margin/ income non-taxable equivalent basis (GAAP)	$	1,501,963	$	1,422,055	$	79,908

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

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

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

Years ended December 31,

Average Volume						Average Yields / Costs										Interest							Variance Attributable to
2016	2015		Variance			2016			2015			Variance				2016		2015		Variance			Rate			Volume
(In millions)																(In thousands)
$    3,104	$	2,382	$	722			0.53	%		0.30	%		0.23	%	Money market investments	$	16,428	$	7,243	$	9,185		$	7,205		$	1,980
7,422		5,815		1,607			2.72			2.80			(0.08	)	Investment securities		201,955		162,620		39,335			(11,922	)		51,257
125		209		(84	)		6.58			6.24			0.34		Trading securities		8,243		13,064		(4,821	)		677			(5,498	)
10,651		8,406		2,245			2.13			2.18			(0.05	)	Total money market, investment and trading securities		226,626		182,927		43,699			(4,040	)		47,739
															Loans:
9,203		8,705		498			5.08			5.10			(0.02	)	Commercial		467,208		444,307		22,901			(2,423	)		25,324
726		616		110			5.38			6.00			(0.62	)	Construction		39,079		36,939		2,140			(4,040	)		6,180
660		589		71			6.71			6.91			(0.20	)	Leasing		44,283		40,749		3,534			(1,211	)		4,745
6,701		6,978		(277	)		5.54			5.39			0.15		Mortgage		371,451		376,308		(4,857	)		10,321			(15,178	)
3,823		3,824		(1	)		10.42			10.37			0.05		Consumer		398,411		396,411		2,000			196			1,804
21,113		20,712		401			6.25			6.25			—		Sub-total loans		1,320,432		1,294,714		25,718			2,843			22,875
1,949		2,333		(384	)		8.99			8.95			0.04		WB loans		175,207		208,779		(33,572	)		12,088			(45,660	)
23,062		23,045		17			6.49			6.52			(0.03	)	Total loans		1,495,639		1,503,493		(7,854	)		14,931			(22,785	)
$    33,713	$	31,451	$	2,262			5.11	%		5.36	%		(0.25	)%	Total earning assets	$	1,722,265	$	1,686,420	$	35,845		$	10,891		$	24,954
															Interest bearing deposits:
$7,020	$	5,447	$	1,573			0.39	%		0.35	%		0.04	%	NOW and money market [1]	$	27,548	$	19,061	$	8,487		$	4,116		$	4,371
7,528		7,027		501			0.24			0.23			0.01		Savings		18,002		16,211		1,791			354			1,437
7,910		8,158		(248	)		1.04			0.89			0.15		Time deposits		82,027		72,261		9,766			10,234			(468	)
22,458		20,632		1,826			0.57			0.52			0.05		Total deposits		127,577		107,533		20,044			14,704			5,340
763		1,028		(265	)		1.02			0.73			0.29		Short-term borrowings		7,812		7,512		300			2,567			(2,267	)
1,576		1,729		(153	)		4.89			4.57			0.32		Other medium and long- term debt		77,129		78,986		(1,857	)		3,036			(4,893	)
24,797		23,389		1,408			0.86			0.83			0.03		Total interest bearing liabilities		212,518		194,031		18,487			20,307			(1,820	)
6,608		6,147		461											Non-interest bearing demand deposits
2,308		1,915		393											Other sources of funds
$    33,713	$	31,451	$	2,262			0.63	%		0.62	%		0.01	%	Total source of funds		212,518		194,031		18,487			20,307			(1,820	)
							4.48	%		4.74	%		(0.26	)%	Net interest margin/ income on a taxable equivalent basis (Non-GAAP)		1,509,747		1,492,389		17,358		$	(9,416	)	$	26,774
							4.25	%		4.53	%		(0.28	)%	Net interest spread
															Taxable equivalent adjustment		87,692		83,406		4,286
							4.22	%		4.48	%		(0.26	)%	Net interest margin/ income non-taxable equivalent basis (GAAP)	$	1,422,055	$	1,408,983	$	13,072
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
[1]   Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

Provision for Loan Losses

The Corporation’s total provision for loan losses totaled $325.4 million for the year ended December 31, 2017, compared with $170.0 million for 2016 and $241.5 million for 2015. The provision for loan losses for the non-covered loan portfolio totaled $319.7 million for the year ended December 31, 2017, compared to $171.1 million for the year ended December 31, 2016, an increase of $148.6 million.

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The provision for loan losses for the Puerto Rico non-covered portfolio amounted to $241.7 million for the year ended December 31, 2017, compared to $155.9 million for the year ended December 31, 2016. The increase of $85.8 million was mainly related to the $61.8 million provision related to the best estimate of the impact caused by the hurricanes on the Puerto Rico loan portfolios, coupled with higher net charge-offs by $28.4 million, driven by an increase of $13.8 million and $10.6 million in the consumer and mortgage portfolios, respectively. At December 31, 2017, within the total reserve for loan losses the Corporation maintained a reserve of $117.6 million for non-covered loans, based on the best estimate of the impact of the hurricanes on the Corporation’s loan portfolios. This reserve is based on the near mid-range of the estimated credit losses related to the hurricanes, which management had initially estimated to be in the range of $70 million to $160 million. The impact to the provision for loan losses of $61.8 million related to the hurricanes represents the difference between management’s best estimate of these losses and the amount already included as part of the reserves for environmental factors such as unemployment and deterioration in economic activity, which amounted to approximately $60 million. The consumer net charge-offs increase was in part related to the $7.1 million recovery in 2016 from the sale of previously charged-off credit cards and personal loans. These increases were partially offset by a decrease of $6.5 million related to the 2017 annual review of the allowance for loan losses methodology, while for the year 2016 the review resulted in an increase of $9.4 million.

The provision for loan losses for the U.S. operations amounted to $77.9 million for the year ended December 31, 2017, compared to $15.3 million for the year ended December 31, 2016. The increase of $62.6 million was largely related to higher reserves for the U.S. taxi medallion purchased credit impaired portfolio and an increase of $1.9 million related to the 2017 ALLL annual review. The effects of the 2016 annual review were immaterial for BPNA.

The provision for loan losses for the covered portfolio amounted to $5.7 million for the year ended December 31, 2017, compared to a reversal of provision of $1.1 million for same period of the previous year. The increase of $6.8 million was mainly due to a $5.8 million provision for which estimated cash flows were adjusted to reflect the payment moratorium implemented during the fourth quarter of 2017 related to the estimated impact of the hurricanes. The effects of the annual review of the components of the allowance for loan losses methodology were immaterial for the covered loans portfolio in 2017 and 2016.

The provision for loan losses for the Puerto Rico non-covered portfolio amounted to $155.9 million for the year ended December 31, 2016, compared to $216.8 million for the year ended December 31, 2015. The decrease of $60.9 million was mainly related to lower net charge-offs by $47.9 million and lower provision related to Westernbank loans by $32.3 million. Also, the results for the year 2016 include a recovery of $7.1 million related to the sale of previously charged-off credit cards and personal loans and a $5.4 million positive impact related to the bulk sale of Westernbank loans. These reductions were partially offset by a $9.4 million impact related to the 2016 annual review of the components of the allowance for loan losses. The review of the ALLL methodology in 2015 resulted in a net decrease of $2.6 million for the BPPR segment.

The provision for loan losses for the U.S. operations amounted to $15.3 million for the year ended December 31, 2016, compared to $0.6 million for the year ended December 31, 2015. Higher provision levels were the result of portfolio growth and higher net charge-offs by $5.6 million mostly driven by higher consumer net charge-offs of $3.6 million. The effect of the 2016 and 2015 annual recalibration was immaterial for BPNA.

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

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

Non-Interest Income

For the year ended December 31, 2017, non-interest income increased by $121.2 million when compared with the previous year, principally due to:

• Favorable variance in FDIC loss share (expense) income of $197.7 million as a result of a charge of $136.2 million related to the arbitration award recorded during 2016 and lower fair value adjustments to the true-up payment obligation which were mainly impacted by changes in the discount rate. Refer to Table 2 for a breakdown of FDIC loss share expense by major categories.

This positive variance was partially offset by the following:

• Lower service charge on deposits accounts by $7.1 million due to lower transactional cash management billings primarily due to the effects of Hurricane Maria;

• Lower other service fees by $17.5 million mainly by lower insurance fees as a result of lower contingency commissions of $7.5 million; lower debit card fees at BPPR due to lower volume of transactions; and lower credit card fees due to waivers offered as part of the hurricanes relief efforts;

• Lower mortgage banking activities by $31.0 million in part due to $9.9 million in lower mortgage servicing fees, which are recognized as loan payments are collected, due to lower mortgage payments from the moratoriums offered as part of the hurricanes relief efforts; higher unfavorable fair value adjustments on mortgage servicing rights by $11.2 million; and lower net gain on sale of loans. Refer to Note 12 for additional details on mortgage banking activities;

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• Higher other-than-temporary impairment losses on investment securities by $8.1 million due to the other-than-temporary impairment charge of $8.3 million recorded during the second quarter of 2017 on senior Puerto Rico Sales Tax Financing Corporation (“COFINA”) bonds classified as available-for-sale; and

• Unfavorable variance in gain on loans held-for-sale of $8.7 million as a result of the sale of a non-accrual public sector loan during 2016.

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

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

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

These negative variances were partially offset by the following:

• Lower other-than-temporary impairment losses on investment securities by $14.2 million due to the charge recorded during the second quarter of 2015 on the portfolio of Puerto Rico government investment securities available-for-sale of $14.4 million;

• Favorable variance in trading account (loss) profit of $3.9 million principally resulting from favorable fair value adjustments of P.R. government bonds;

• Higher net gain on sale of loans by $7.7 million as a result of the gain on the sale of a non-accrual public sector loan during the third quarter of 2016; and

• Higher other operating income by $3.1 million principally due to higher aggregated net earnings from investments under the equity method, partially offset by an unfavorable variance in the fair value adjustments on a contingent consideration at the insurance agency business.

Operating Expenses

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

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Table 7 - Operating Expenses

	Years ended December 31,
(In thousands)	2017			2016			2015			2014			2013
Personnel costs:
Salaries	$	313,394		$	308,135		$	304,618		$	281,252		$	276,072
Commissions, incentives and other bonuses		70,099			73,684			79,305			59,138			57,060
Pension, postretirement and medical insurance		47,533			51,284			44,059			32,416			55,106
Other personnel costs, including payroll taxes		53,204			54,373			49,537			45,873			40,459
Total personnel costs		484,230			487,476			477,519			418,679			428,697
Net occupancy expenses		89,194			85,653			86,888			86,707			86,651
Equipment expenses		65,142			62,225			60,110			48,917			46,028
Other taxes		43,382			42,304			39,797			56,918			58,028
Professional fees:
Collections, appraisals and other credit related fees		14,415			14,607			23,098			26,257			32,727
Programming, processing and other technology services		199,873			205,466			191,895			173,814			174,921
Legal fees, excluding collections		11,763			42,393			26,122			28,305			15,557
Other professional fees		66,437			60,577			67,870			53,679			54,922
Total professional fees		292,488			323,043			308,985			282,055			278,127
Communications		22,466			23,897			25,146			25,684			25,385
Business promotion		58,445			53,014			52,076			54,016			59,453
FDIC deposit insurance		26,392			24,512			27,626			40,307			56,728
Loss on early extinguishment of debt		—			—			—			532			3,388
Other real estate owned (OREO) expenses		48,540			47,119			85,568			49,611			79,658
Other operating expenses:
Credit and debit card processing, volume, interchange and other expenses		26,201			20,796			22,854			21,588			19,901
Operational losses		39,612			35,995			20,663			18,543			17,954
All other		51,726			33,656			51,558			55,242			54,021
Total other operating expenses		117,539			90,447			95,075			95,373			91,876
Amortization of intangibles		9,378			12,144			11,019			8,160			—
Goodwill and trademark impairment losses		—			3,801			—			—			—
Restructuring costs		—			—			18,412			26,725			—
Total operating expenses	$	1,257,196		$	1,255,635		$	1,288,221		$	1,193,684		$	1,214,019
Personnel costs to average assets		1.17	%		1.30	%		1.36	%		1.19	%		1.18	%
Operating expenses to average assets		3.04			3.34			3.66			3.39			3.37
Employees (full-time equivalent)		7,784			7,828			7,810			7,752			8,059
Average assets per employee (in millions)	$	5.32		$	4.81		$	4.51		$	4.54		$	4.50

Operating expenses for the year ended December 31, 2017 increased by $1.6 million, when compared with the previous year, mostly due to:

• Higher net occupancy expenses by $3.5 million due to higher repair and maintenance expense and higher energy costs due to the hurricanes impact;

• Higher equipment expense by $2.9 million due to higher software and maintenance expenses;

• Higher business promotions by $5.4 million mainly due to higher sponsorship, promotion and donations related to disaster relief activities and communications in response to the hurricanes and higher credit card reward expense; and

• Higher other operating expenses by $27.1 million as a result of a write-down of $7.6 million recognized during the first quarter of 2017, related to capitalized software cost for a project that was discontinued by the Corporation; higher sundry losses by $3.6 million; higher provision for unused commitments by $2.6 million; a write-down of $3.6 million on premises and equipment and other costs related to Hurricanes Irma and Maria.

These negative variances were partially offset by:

• Lower professional fees by $30.6 million mainly due to lower legal fees related to the FDIC arbitration proceedings, which were resolved during 2016, and lower expenses related to programming, processing and other technology services;

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• Lower amortization of intangibles by $2.8 million mainly due to core deposits intangible fully amortized in 2016 at BPPR;

• A goodwill impairment charge of $3.8 million at the securities subsidiary during 2016, recorded as part of the Corporation’s annual goodwill impairment analysis.

Operating expenses for the year ended December 31, 2016 decreased by $32.6 million, or 3%, when compared with the previous year, driven primarily by:

• Lower OREO by $38.4 million mainly due to the $22.0 million loss on the bulk sale of covered OREOs completed during the year 2015;

• Lower other operating expenses by $5.0 million due to lower property tax payments on covered assets at BPPR, most of which was related to loss sharing expenses reimbursable by the FDIC, partially offset by higher operational losses at BPPR and BPNA; and

• A decrease in restructuring cost by $18.4 million in connection with the reorganization of BPNA.

These positive variances were partially offset by:

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

• Higher professional fees by $14.1 million as a result of higher legal fees by $16.3 million mainly related to the FDIC arbitration proceedings and higher programming, processing and other technology services, partially offset by lower collections, appraisal and other credit related fees; and

• A goodwill impairment charge of $3.8 million at the securities subsidiary, recorded as part of the Corporation’s annual goodwill impairment analysis.

INCOME TAXES

For the year ended December 31, 2017, the Corporation recorded income tax expense of $230.8 million, compared to $78.8 million for the previous year. The results for the year ended December 31, 2017 include an income tax expense of $168.4 million as a result of the enactment of the Federal Tax Cuts and Jobs Act, primarily from the write down of the DTA of the Corporation’s U.S. operations, as a result of the reduction of the U.S. federal corporate income tax rate from a maximum rate of 35% to a single tax rate of 21%. The Act contains other provisions, effective on January 1, 2018, which may impact the Corporation’s tax calculations and related income tax expense in future years. At December 31, 2017, the Corporation had a deferred tax asset amounting to $1.0 billion, net of a valuation allowance of $0.4 billion. The DTA related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion.

The Government of Puerto Rico’s draft fiscal plan, submitted in February to the PROMESA Oversight Board, proposes to enact local comprehensive tax reform during the first half of calendar year 2018 with the intention of spurring economic development, lowering the cost of doing business and making Puerto Rico more competitive. The proposed tax reform seeks to, among other things, reduce individual and corporate income tax rates and gradually eliminate, over a two year period, the business-to-business sales and use tax. Maximum corporate tax rates in particular would be reduced from a current rate of 39% to a rate lower than 30%. The proposed changes to the tax code, including the reductions in income tax rates, are subject to the approval of Oversight Board due to their expected fiscal impact, which the government estimates at approximately $757 million. The Oversight Board has publicly asserted that any tax reform initiative must be revenue neutral.

A reduction in corporate tax rates to 29%, if approved, would result in a write down of the Corporation’s DTA related to its P.R. operations of approximately $190 million, with a corresponding charge to the Corporation’s income tax expense. If such a reduction in the Corporation’s DTA from its P.R. operations would have occurred as of December 31, 2017, Common Equity Tier 1 Capital and Total Regulatory Capital would have been reduced by an approximate 24 bps and 25 bps, respectively. On a forward-looking basis, a reduction of the maximum corporate income tax rate to 29% could result in a reduction in the Corporation’s effective tax rate of between 3% and 4%.

Refer to Note 39 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on DTA balances.

Fourth Quarter Results

The Corporation recognized a net loss of $102.2 million for the quarter ended December 31, 2017, compared with a net loss of $4.1 million for the same quarter of 2016. The results for the fourth quarter of 2017 reflect an income tax expense of $168.4 million related to the impact of the Federal Tax Cuts and Jobs Act on the Corporation’s U.S. deferred tax asset. These results also include net pre-tax expenses and provision (reversal) for loan losses amounting to $8.6 million related to the impact of Hurricanes Irma and Maria. The results for the fourth quarter of 2016 include an after-tax charge amounting to $86.7 million, related to the unfavorable outcome from the FDIC arbitration review board.

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Net interest income for the fourth quarter of 2017 amounted to $387.2 million, compared with $355.4 million for the fourth quarter of 2016. The increase in net interest income was primarily due to higher income from investment securities due to higher average balances of funds available to invest due to increases in deposit balances, mainly in Puerto Rico. This was partially offset by higher cost of deposits, due to higher average balances as mentioned above.

The provision for loan losses amounted to $71.5 million for the quarter ended December 31, 2017, compared to $41.4 million for the fourth quarter of 2016. The increase of $30.1 million is reflected at BPPR by $16.6 million mainly related to auto loans, partially offset by a decline in the provision for commercial and mortgage loans, and at BPNA by $13.5 million mainly related to the taxi medallion portfolio and higher net charge offs.

Non-interest income (expense) amounted to $86.1 million for the quarter ended December 31, 2017, compared with $(0.2) million for the same quarter in 2016. The favorable variance was mainly on the FDIC loss share (expense) income due to the $116.8 million charge related to the arbitration decision denying BPPR’s claims under the loss sharing agreement and $9.9 million additional adjustments related to restructured commercial loans recorded in 2016. Also, the fourth quarter of 2017 reflected a reduction in revenues related to Hurricanes Irma and Maria, including lower credit card late payment fees due to waivers for hurricane relief initiatives, lower mortgage servicing fees from lower collections related to the loan moratoriums and a higher provision for indemnity reserves, including $3.4 million related to the estimated hurricane losses.

Operating expenses totaled $322.0 million for the quarter ended December 31, 2017, compared with $320.9 million for the same quarter in the previous year. The increase reflects approximately $7.5 million in expenses related to the impact of the hurricanes, including personnel costs, occupancy and business promotions as well as higher operational loses, which were partially offset by lower professional fees, mainly legal costs, and lower OREO expenses.

Income tax expense amounted to $182.1 million for the quarter ended December 31, 2017, compared with income tax benefit of $1.8 million for the same quarter of 2016. The results for the fourth quarter include an income tax expense of $168.4 million from the write down of the DTA of the Corporation’s U.S. operations, as a result of the Tax Cuts and Jobs Act, which reduced the maximum federal corporate tax rate from 35% to 21%.

REPORTABLE SEGMENT RESULTS

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

For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 41 to the consolidated financial statements.

The Corporate group reported a net loss of $60.6 million for the years ended December 31, 2017 and 2016.

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 $312.4 million for the year ended December 31, 2017, compared with $230.1 million for the year ended December 31, 2016. The principal factors that contributed to the variance in the financial results included the following:

• Higher net interest income by $55.1 million impacted by higher interest income on money market investments by $34.2 million due to an increase in volume of funds available to invest, mainly related to an increase in Puerto Rico government deposits, and to recent increases in interest rates. Also, higher interest income on investment securities by $34.7 million driven by higher volumes of mortgage-backed securities and U.S. Treasury securities. These variances were partially offset by lower interest income on loans by $12.6 million driven by normal portfolio run-off of WB loans, lower average balances of mortgage portfolio due to lower lending activity and waiver of late payments fees; offset by improved yields from commercial and construction portfolio driven by the effect on the variable portfolio of the abovementioned rise in rates. The net interest margin in 2017 was 4.32% compared to 4.61% in the prior year. The reduction in margin is driven by earning asset allocation;

• Higher provision for loans losses by $98.2 million driven by the provision related to the estimate of the impact caused by the hurricanes on the Puerto Rico loan portfolios, higher net charge-offs, mainly in consumer and mortgage portfolios, and the impact of adjusting cash flows of the covered portfolio to reflect the aforementioned payment moratorium. These unfavorable variances were partially offset by a decrease related to the allowance for loan losses methodology annual review;

• Higher non-interest income by $120.8 million mainly due to:

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• Favorable variance in FDIC loss share (expense) income by $197.7 million driven by the impact of arbitration award charges of $136.2 million recorded in prior year and by lower fair value adjustment to the true-up payment obligation, which were mainly impacted by changes in the discount rate;

Partially offset by:

• Lower service charges on deposits accounts by $7.5 million driven by lower transactional cash management fees primarily related to the effects of Hurricane Maria;

• Lower other service fees by $17.6 million mostly due to lower insurance fees resulting from lower contingency commissions of $7.5 million, lower debit card fees driven by lower volume of transactions, and lower credit card fees due to waivers provided as part of the hurricanes relief efforts;

• Lower income from mortgage banking activities by $31.1 million driven by a higher unfavorable fair value adjustment on MSRs, lower mortgage servicing fees, and lower net gains from securitization transactions;

• Unfavorable variance in gain (loss) on sale and valuation adjustment on investment securities of $8.0 million principally resulting from other-than-temporary impairment losses on senior Puerto Rico Sales Tax Financing Corporation (COFINA) bonds;

• Lower net gain on sale of loans by $8.7 million mainly due to the gain on the sale of a non-accrual public sector loan during 2016; and

• Unfavorable variance in expense to indemnity reserves of $3.4 million driven by higher credit recourse reserve, including the estimated impact of the Hurricane Maria;

• Lower operating expenses by $1.9 million, mainly due to:

• Lower personnel cost by $3.4 million mostly driven by lower commissions expense;

• Favorable variance of $29.9 million in professional fees due to lower legal fees related to the FDIC arbitration proceedings resolved in 2016, and lower expenses related to programming, processing and other technology services; and

• Lower amortization of intangibles by $6.7 million mainly due to the impact in 2016 results of the core deposits intangible fully amortized and goodwill impairment charge;

Partially offset by:    

• Higher net occupancy expense by $3.2 million mostly driven by higher energy costs and higher repairs and maintenance expense associated with hurricanes impact;    

• An increase of $2.9 million in business promotions due to higher sponsorship, promotions and donations related to disaster relief activities and communications in response to the hurricanes, and higher credit cards reward expenses;

• Unfavorable variance of $3.1 million in FDIC deposit insurance due to asset growth;

• Higher OREO expense by $3.1 million due to higher write-downs on commercial and mortgage properties and higher mortgage properties expenses; partially offset by a favorable variance in net gains on sale of foreclosed asset; and

• Increase of $24.8 million in other operating expenses driven by a write-down of $7.6 million related to capitalized software cost charged-off on a discontinued project, higher sundry losses by $6.5 million due to higher operational and mortgage servicing losses, and $5.0 million of other costs related to Hurricanes Irma and Maria, including a premises and equipment write-down of $3.6 million;

• Favorable variance in income tax expense by $2.9 million mainly due to a lesser amount of reversal of reserves for uncertain tax positions than in previous year.

The Banco Popular de Puerto Rico reportable segment’s net income amounted to $230.1 million for the year ended December 31, 2016, compared with $318.4 million for the year ended December 31, 2015. The main factors that contributed to the unfavorable variance of $88.3 million in the financial results included the following:

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• Lower net interest income by $6.8 million impacted by lower interest income from loans by $35.9 million driven by normal portfolio run-off of WB loans, partially offset by higher income from investment securities by $21.9 million due to higher volume of investments. The net interest margin in 2016 was 4.61% compared to 4.87% in the prior year. The reduction in margin is driven by earning asset allocation;

• Lower provision for loans losses by $86.0 million due to lower net charge-offs and lower provision for the WB portfolio including losses on proposed bulk sales of loans acquired from WB of $15.2 million recognized in 2015;

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

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

• Lower income from mortgage banking activities by $25.4 million driven by an unfavorable fair value adjustment on MSRs and lower gains from securitization transactions;

Partially offset by:

• Lower other-than-temporary impairment losses on investment securities by $14.2 million, which is mostly driven by the charge recorded during the second quarter of 2015 on the portfolio of Puerto Rico government investment securities available-for-sale of $14.4 million;

• Favorable variance in trading account (loss) profit of $3.7 million principally resulting from favorable fair value adjustments of Puerto Rico government obligations;

• Higher net gain on sale of loans by $7.5 million as a result of the gain on the sale of a non-accrual public sector loan during 2016; and

• Higher other operating income by $4.8 million due to higher aggregated net earnings from investments under the equity method, partially offset by an unfavorable variance in the fair value adjustments on a contingent consideration at the insurance agency business;

• Lower operating expenses by $13.4 million, mainly due to:

• A decrease in OREO expense by $34.5 million due to the $22.0 million loss on the bulk sale of covered OREOs during 2015 and lower write-downs on commercial properties, partially offset by lower net gains on sales of commercial properties;

Partially offset by:

• Higher personnel cost by $8.7 million mainly due to increases in headcount associated with the Doral Bank Transaction, and higher pension, postretirement benefits, and medical insurance; and

• An increase of $12.1 million in professional fees mostly driven by higher legal fees mainly related to the FDIC arbitration proceedings and higher technology fees, partially offset by lower collections and appraisal fees;

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

Banco Popular North America

For the year ended December 31, 2017, the reportable segment of Banco Popular North America reported net loss of $147.6 million, compared with a net income of $47.3 million for the year ended December 31, 2016. The principal factors that contributed to the variance in the financial results included the following:

• Higher net interest income by $22.5 million mainly due to higher interest income from loans by $30.5 million principally driven by higher volume from commercial and higher volume and yield from construction loans, and higher interest income from investment securities by $4.6 million due to higher average balances and yield. These favorable variances were partially offset by lower yields from commercial loans and higher interest expense from deposits by $12.4 million driven by higher volume and cost of money market deposits and time deposits. The BPNA reportable segment’s net interest margin was 3.51% for 2017 compared with 3.64% for the same period in 2016;

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• Unfavorable variance in the provision for loan losses by $62.7 million driven by portfolio growth, higher net charge-offs and higher reserves for the U.S. taxi medallion purchased credit impaired portfolio;

• Lower non-interest income by $1.2 million mostly due to the reversal of a loan indemnification reserve recorded in 2016;

• Lower operating expenses by $2.7 million driven by a decrease in other operating expenses by $3.5 million due to lower operational losses, and lower OREO expense by $1.6 million due lower commercial properties expenses, including the impact of insurance reimbursements of $1.0 million. These favorable variances were partially offset by higher business promotion by $2.8 million driven by higher marketing expenses, including advertising, promotions and direct mailing due to new initiatives; and

• Income taxes unfavorable variance of $155.0 million mainly driven by the partial write-down of the deferred tax asset because of the impact of the Tax Cuts and Jobs Act. The Act reduces the maximum federal Corporate tax rate, thus resulting in lower realizable benefit at lower taxable rates.

For the year ended December 31, 2016, the reportable segment of Banco Popular North America reported net income of $47.3 million, compared with $648.6 million for the year ended December 31, 2015. In addition to the recognition during 2015 of a tax benefit of $589.0 million as a result of the partial reversal of the valuation allowance of a portion of its deferred tax asset, the principal factors that contributed to the unfavorable variance of $601.3 million in the financial results included the following:

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

• Higher net interest income by $19.0 million mainly due to higher interest income from loans by $37.4 million principally driven by higher volume from commercial loans and higher volume and yield from consumer loans, partially offset by higher interest expense from deposits by $19.6 million driven by higher volume and cost of money market deposits and time deposits. The BPNA reportable segment’s net interest margin was 3.64% for 2016 compared with 3.90% for the same period in 2015;

• Lower operating expenses by $13.0 million driven by $18.4 million in restructuring cost recorded in 2015 in connection with the reorganization of BPNA, lower OREO expense by $4.0 million due to lower write-downs on commercial properties, and a decrease in FDIC deposit insurance by $2.4 million due to a lower assessment rate by the FDIC, partially offset by higher personnel cost by $2.3 million due to higher medical insurance claims, higher professional fees by $3.8 million mainly due to loan servicing fees and technology fees, and higher other operating expenses by $6.1 million related to higher operational losses; and

• Income taxes unfavorable variance of $617.4 million mainly driven by the recognition during 2015 of a tax benefit of $589.0 million, as discussed above.

STATEMENT OF FINANCIAL CONDITION ANALYSIS                

Assets

The Corporation’s total assets were $44.3 billion at December 31, 2017, compared to $38.7 billion at December 31, 2016 due mainly to an increase in investments as a result of the deployment of additional funds from deposit growth. Refer to the Corporation’s Consolidated Statements of Financial Condition at December 31, 2017 and 2016 included in this 2017 Annual Report. Also, refer to the Statistical Summary 2013-2017 in this MD&A for Condensed Statements of Financial Condition for the past five years.

Money market, trading and investment securities

Money market investments totaled $5.3 billion at December 31, 2017 compared to $2.9 billion at December 31, 2016. The increase was mainly at BPPR due to higher liquidity driven by an increase in deposits.

Trading account securities amounted to $43 million at December 31, 2017, compared to $60 million at December 31, 2016. The decrease was at the BPPR segment, mainly mortgage-backed securities. Refer to the Market / Interest Rate Risk section of this MD&A for a table that provides a breakdown of the trading portfolio by security type.

Investment securities available-for-sale and held-to-maturity amounted to $10.3 billion at December 31, 2017, compared to $8.3 billion at 2016. The increase of $2.0 billion was mainly at BPPR due to purchases of U.S. Treasury securities and mortgage-backed agency pools driven by an increase in funds available to invest from increased liquidity, as discussed above. Table 8 provides a breakdown of the Corporation’s portfolio of investment 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.

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

(In thousands)	December 31, 2017		December 31, 2016
U.S. Treasury securities	$	3,928,164	$	2,136,620
Obligations of U.S. Government sponsored entities		608,933		711,850
Obligations of Puerto Rico, States and political subdivisions		99,364		118,798
Collateralized mortgage obligations		943,819		1,221,600
Mortgage-backed securities		4,688,662		4,105,332
Equity securities		1,815		2,122
Others		1,802		11,585
Total investment securities AFS and HTM	$	10,272,559	$	8,307,907

Loans

Refer to Table 9 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented separately in Table 9. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential loans. As of December 31, 2017, the Corporation’s covered loans portfolio amounted to $517 million, comprised mainly of residential mortgage loans.

The Corporation’s total loan portfolio amounted to $24.9 billion at December 31, 2017, compared to $23.4 billion at December 31, 2016. Refer to Note 9 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

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Table 9 - Loans Ending Balances

	At December 31,
(in thousands)	2017		2016		2015		2014		2013
Loans not covered under FDIC loss sharing agreements:
Commercial	$	11,488,861	$	10,798,507	$	10,099,163	$	8,134,267	$	10,037,184
Construction		880,029		776,300		681,106		251,820		206,084
Legacy[1]		32,980		45,293		64,436		80,818		211,135
Lease financing		809,990		702,893		627,650		564,389		543,761
Mortgage		7,270,407		6,696,361		7,036,081		6,502,886		6,681,476
Consumer		3,810,527		3,754,393		3,837,679		3,870,271		3,932,226
Total non-covered loans held-in-portfolio		24,292,794		22,773,747		22,346,115		19,404,451		21,611,866
Loans covered under FDIC loss sharing agreements:
Commercial		—		—		—		1,614,781		1,812,804
Construction		—		—		—		70,336		190,127
Mortgage		502,930		556,570		627,102		822,986		934,373
Consumer		14,344		16,308		19,013		34,559		47,123
Loans covered under FDIC loss sharing agreements		517,274		572,878		646,115		2,542,662		2,984,427
Total loans held-in-portfolio		24,810,068		23,346,625		22,992,230		21,947,113		24,596,293
Loans held-for-sale:
Commercial		—		—		45,074		309		603
Construction		—		—		95		—		—
Legacy[1]		—		—		—		319		—
Mortgage		132,395		88,821		91,831		100,166		109,823
Consumer		—		—		—		5,310		—
Total loans held-for-sale		132,395		88,821		137,000		106,104		110,426
Total loans	$	24,942,463	$	23,435,446	$	23,129,230	$	22,053,217	$	24,706,719

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

Non-covered loans

The non-covered loans held-in-portfolio increased by $1.5 billion from December 31, 2016 mainly driven by growth in the commercial and construction loan portfolios at BPNA by $0.7 billion and an increase of $0.8 billion in mortgage loans at BPPR due to the rebooking of loans previously pooled into GNMA securities. Under the GNMA program, issuers such as BPPR have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected on the financial statements of the Corporation with an offsetting liability. While the borrowers for our serviced GNMA portfolio benefited from the loan payment moratorium, the delinquency status of these loans continued to be reported to GNMA without considering the moratorium.

The loans held-for-sale portfolio increased by $44 million from December 31, 2016, due to lower volume of loan securitization activity during the fourth quarter of 2017 at BPPR due to operational delays caused by Hurricane Maria.

Covered loans

The covered loans portfolio amounted to $517 million at December 31, 2017, compared to $573 million at December 31, 2016. The decrease of $56 million is due to loan resolutions and the normal portfolio run-off. Refer to Table 9 for a breakdown of covered loans by major loan type categories.

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

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

	Years ended December 31,
(In thousands)	2017			2016
Beginning balance	$	1,738,329		$	1,974,501
Accretion		142,605			169,748
Collections / loan sales / charge-offs[1]		(288,013	)		(405,920	)
Ending balance[2]	$	1,592,921		$	1,738,329
Allowance for loan losses (ALLL)		(70,129	)		(68,877	)
Ending balance, net of ALLL	$	1,522,792		$	1,669,452

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

^[2]  The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $507 million as of December 31, 2017 (December 31, 2016—$563 million).

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

	Years ended December 31,
(In thousands)	2017			2016
Beginning balance	$	1,010,087		$	1,112,458
Accretion[1]		(142,605	)		(169,748	)
Change in expected cash flows		13,233			67,377
Ending balance	$	880,715		$	1,010,087
[1]   Positive to earnings, which is included in interest income.

Table 12 sets forth the activity in the FDIC loss share asset for the years ended December 31, 2017, 2016, and 2015.

Table 12 - Activity of Loss Share Asset

	Years ended December 31,
(In thousands)	2017			2016			2015
Balance at beginning of year	$	69,334		$	310,221		$	542,454
Amortization of loss share indemnification asset		(469	)		(10,201	)		(66,238	)
Credit impairment losses to be covered under loss sharing agreements		3,136			(239	)		15,658
Reimbursable expenses		2,454			8,433			73,205
Net payments from FDIC under loss sharing agreements		(22,589	)		(102,596	)		(247,976	)
Arbitration decision charge		—			(136,197	)		—
Other adjustments attributable to FDIC loss sharing agreements		(5,550	)		(87	)		(6,882	)
Balance at end of period	$	46,316		$	69,334		$	310,221
Balance due to the FDIC for recoveries on covered assets[1]		(1,124	)		(27,578	)		(5,570	)
Balance at end of period	$	45,192		$	41,756		$	304,651

^[1] Balance due to the FDIC for recoveries on covered assets for the years ended December 31, 2016 and 2015 amounting to $27.6 million and $5.6 million, respectively, was included in other liabilities in the accompanying Consolidated Statement of Condition.

FDIC loss share asset

The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to the loss share protection from the FDIC, except that the amortization / accretion terms differ. The Corporation revises its expected cash flows and estimated credit losses on a quarterly basis. Decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, as compared with the initial estimates, are recognized as a reduction to non-interest income prospectively over the life of the loss share agreements. This is because the indemnification asset balance is reduced to the expected reimbursement amount from the FDIC (amortization). In contrast, an increase to non-interest income is recognized as a result of increases in expected reimbursements due to higher loss estimates (accretion). Table 13 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount).

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

	Years ended December 31,
(In thousands)	2017			2016			2015
Balance at beginning of period[1]	$	4,812		$	26,100		$	53,095
Amortization of negative discount[2]		(469	)		(10,201	)		(66,238	)
Impact of changes in (higher) lower projected losses		(2,781	)		(11,087	)		39,243
Balance at end of period	$	1,562		$	4,812		$	26,100

[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 accretion results in a positive impact to non-interest income, particularly FDIC loss share (expense) income.

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At December 31, 2017, OREO decreased to $189 million from $213 million at December 31, 2016 mainly in residential properties at BPPR and the write-down of $2.7 million for damages associated with Hurricane Maria. Refer to Note 15 to the Consolidated Financial Statements for the activity in other real estate owned. The amounts included as “covered other real estate” are subject to the FDIC loss sharing agreement.

Accrued income receivable

Accrued income receivable increased by $76 million mainly due to interest accrued but not yet collected resulting from the loan payment moratorium.

Mortgage servicing assets

Mortgage servicing assets decreased by $29 million to $168 million principally driven by unfavorable changes in fair value and runoff of the servicing portfolio.

Other assets

Refer to Note 16 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at December 31, 2017 and 2016. Other assets decreased by $154 million from December 31, 2016 to December 31, 2017, due mostly to a reduction in the U.S. operations net deferred tax asset due to the write-down taken as a result of the impact of the Act. Refer to Note 39 to the Consolidated Financial Statements for additional information.

Liabilities

The Corporation’s total liabilities were $39.2 billion at December 31, 2017, compared to $33.5 billion at December 31, 2016. Refer to the Corporation’s Consolidated Statements of Financial Condition included in this Form 10-K.

Deposits and Borrowings

The composition of the Corporation’s financing to total assets at December 31, 2017 and 2016 is included in Table 14.

Table 14 – Financing to Total Assets

	December 31,		December 31,		% increase (decrease)			% of total assets
(In millions)	2017		2016		from 2016 to 2017			2017			2016
Non-interest bearing deposits	$	8,491	$	6,980		21.6	%		19.2	%		18.0	%
Interest-bearing core deposits		22,394		18,776		19.3			50.6			48.6
Other interest-bearing deposits		4,569		4,740		(3.6	)		10.3			12.3
Repurchase agreements		391		480		(18.5	)		0.9			1.2
Other short-term borrowings		96		1		N.M.			0.2			—
Notes payable		1,536		1,575		(2.5	)		3.5			4.1
Other liabilities		1,696		912		86.0			3.8			2.4
Stockholders’ equity		5,104		5,198		(1.8	)		11.5			13.4
N.M.—Not meaningful.

Deposits

The Corporation’s deposits totaled $35.5 billion at December 31, 2017, compared to $30.5 billion at December 31, 2016.The deposits increase of $5.0 billion was mainly due to an increase in retail and commercial savings, NOW deposits, demand deposits from the Puerto Rico public sector and retail and commercial checking accounts at BPPR. Refer to Table 15 for a breakdown of the Corporation’s deposits at December 31, 2017 and 2016.

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Table 15 - Deposits Ending Balances

(In thousands)	2017		2016		2015		2014		2013
Demand deposits [1]	$	12,460,081	$	9,053,897	$	7,221,238	$	6,606,060	$	6,590,963
Savings, NOW and money market deposits (non-brokered)		15,054,242		13,327,298		11,440,693		10,320,782		11,255,309
Savings, NOW and money market deposits (brokered)		424,307		405,487		382,424		406,248		553,521
Time deposits (non-brokered)		7,411,140		7,486,717		7,274,157		5,960,401		6,478,103
Time deposits (brokered CDs)		103,738		222,825		891,211		1,514,044		1,833,249
Total deposits	$	35,453,508	$	30,496,224	$	27,209,723	$	24,807,535	$	26,711,145

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

Borrowings

The Corporation’s borrowings remained relatively flat at $2.0 billion at December 31, 2017, compared to $2.1 billion at December 31, 2016. Refer to Note 20 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings. Also, refer to the Off-Balance Sheet Arrangements and Other Commitments section in this MD&A for additional information on the Corporation’s contractual obligations.

Other liabilities

The Corporation’s other liabilities amounted to $1.7 billion at December 31, 2017, an increase of $0.8 billion when compared to December 31, 2016. The increase was due to an increase in the liability for GNMA loans sold with a repurchase option of $0.8 billion due to an increase in delinquency resulting from the moratorium, as noted above.

Stockholders’ Equity

Stockholders’ equity totaled $5.1 billion at December 31, 2017, compared to $5.2 billion at December 31, 2016. The decrease was mainly related to the impact of the common stock repurchase plan of $75 million completed during the first quarter of 2017 and higher accumulated other comprehensive loss by $30 million principally in unrealized losses on securities available-for-sale.

Refer to the Consolidated Statements of Financial Condition, Comprehensive Income and of Changes in Stockholders’ Equity for information on the composition of stockholders’ equity. Also, refer to Note 25 for a detail of accumulated other comprehensive loss, an integral component of stockholders’ equity.

REGULATORY CAPITAL

Popular, Inc. and the Banks, BPPR and BPNA are subject to capital adequacy standards established by the Federal Reserve. The current risk-based capital standards applicable to the Corporation and the Banks are based on the final capital framework of Basel III. The capital rules of Basel III which became effective on January 1, 2015, introduced a new capital measure called “Common Equity Tier 1” (“CET1”) and specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements. Prior to January 1, 2015, the risk-based capital standards applicable to the Corporation and the Banks were based on Basel I. Table 16 presents the Corporation’s capital adequacy information for the years 2013 through 2017 under the regulatory guidance applicable during those years. Note 24 to the consolidated financial statements presents further information on the Corporation’s regulatory capital requirements, including the regulatory capital ratios of its depository institutions, BPPR and BPNA. The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations.

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Table 16 - Capital Adequacy Data                

	At December 31,
(Dollars in thousands)	2017			2016			2015			2014			2013
Risk-based capital:
Common Equity Tier 1 capital	$	4,226,519		$	4,121,208			4,049,576			(A	)		(A	)
Tier 1 capital	$	4,226,519		$	4,121,208		$	4,049,576		$	3,849,891		$	4,464,742
Supplementary (Tier 2) capital		758,746			748,007			642,833			272,347			296,813
Total capital	$	4,985,265		$	4,869,215		$	4,692,409		$	4,122,238		$	4,761,555
Total risk-weighted assets	$	25,935,696		$	25,001,334		$	24,987,144		$	21,233,902		$	23,318,674
Adjusted average quarterly assets	$	42,185,805		$	37,785,070		$	34,253,625		$	32,250,173		$	34,746,137
Ratios:
Common Equity Tier 1 capital		16.30	%		16.48	%		16.21	%		(A	)		(A	)
Tier 1 capital		16.30			16.48			16.21			18.13	%		19.15	%
Total capital		19.22			19.48			18.78			19.41			20.42
Leverage ratio		10.02			10.91			11.82			11.94			12.85
Average equity to assets		12.91			14.03			13.37			12.95			11.52
Average tangible equity to assets		11.48			12.45			11.95			11.45			9.78
Average equity to loans		22.73			22.89			20.42			19.17			16.88

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

The decrease in the CET1 capital ratio, Tier 1 capital ratio and total capital ratio on December 31, 2017 compared to December 31, 2016 was mostly due to the common stock repurchase of $75 million during the first quarter of 2017, the transition period impact on deferred tax assets and higher risk weighted assets by $0.9 billion mainly driven by an increase of $1.5 billion in loans held-in-portfolio which included growth in commercial and construction loans and higher mortgage loans due to the rebooking of loans previously pooled into GNMA securities; partially offset by this year’s earnings. The decrease in leverage ratio compared to 2016 was mainly due to the increase in average total assets driven by increases in investment balances and higher loans held-in-portfolio.

To be considered “well-capitalized” an institution had to maintain a total capital ratio of 10%, a Tier 1 capital ratio of 8%, a CET1 capital ratio of 6.5% and a leverage ratio of 5%. The Corporation’s ratios presented in Table 16 show that the Corporation was “well capitalized” for regulatory purposes, the highest classification, under Basel III for 2017, 2016 and for all other years presented under Basel I. BPPR and BPNA were also well-capitalized for all years presented.

The Basel III Capital Rules also introduce a new 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the three minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, Popular, BPPR and BPNA will be required to maintain such an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

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

Table 17 – Reconciliation Common Equity Tier 1 Capital

	At December 31,
(In thousands)	2017			2016
Common stockholders’ equity	$	5,053,745		$	5,147,797
AOCI related adjustments due to opt-out election		307,619			280,330
Goodwill, net of associated deferred tax liability (DTL)		(561,604	)		(554,614	)
Intangible assets, net of associated DTLs		(28,538	)		(25,662	)
Deferred tax assets and other deductions		(544,703	)		(726,643	)
Common equity tier 1 capital	$	4,226,519		$	4,121,208
Common equity tier 1 capital to risk-weighted assets		16.30	%		16.48	%

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Non-GAAP financial measures

The tangible common equity ratio and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method of accounting for mergers and acquisitions. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Table 18 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2017 and 2016.

Table 18 - Reconciliation Tangible Common Equity and Assets

	At December 31,
(In thousands, except share or per share information)	2017			2016
Total stockholders’ equity	$	5,103,905		$	5,197,957
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(627,294	)		(627,294	)
Less: Other intangibles		(35,672	)		(45,050	)
Total tangible common equity	$	4,390,779		$	4,475,453
Total assets	$	44,277,337		$	38,661,609
Less: Goodwill		(627,294	)		(627,294	)
Less: Other intangibles		(35,672	)		(45,050	)
Total tangible assets	$	43,614,371		$	37,989,265
Tangible common equity to tangible assets at end of period		10.07	%		11.78	%
Common shares outstanding at end of period		102,068,981			103,790,932
Tangible book value per common share	$	43.02		$	43.12

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 26 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

Contractual Obligations and Commercial Commitments

The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations.

Purchase obligations include major legal and binding contractual obligations outstanding at the end of 2017, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions.

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As previously indicated, the Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the consolidated statements of financial condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions.

At December 31, 2017, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, are presented in Table 19.

Table 19 - Contractual Obligations

	Payments Due by Period
(In thousands)	Less than 1 year		1 to 3 years		3 to 5 years		After 5 years		Total
Certificates of deposits	$	3,941,152	$	2,233,815	$	1,292,255	$	47,656	$	7,514,878
Federal funds purchased and repurchase agreements		390,921		—		—		—		390,921
Other short-term borrowings		96,208		—		—		—		96,208
Long-term debt		253,793		718,090		23,189		522,642		1,517,714
Purchase obligations		88,929		95,534		32,948		11,798		229,209
Annual rental commitments under operating leases		31,886		58,005		49,082		107,986		246,959
Capital leases		1,295		3,069		3,794		10,484		18,642
Total contractual cash obligations	$	4,804,184	$	3,108,513	$	1,401,268	$	700,566	$	10,014,531

Under the Corporation’s repurchase agreements, Popular is required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of changes in interest rates, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.

At December 31, 2017, the Corporation’s liability on its pension, restoration and postretirement benefit plans amounted to approximately $220 million, compared with $244 million at December 31, 2016. The Corporation’s expected contributions to the pension and benefit restoration plans are minimal, while the expected contributions to the postretirement benefit plan to fund current benefit payment requirements are estimated at $6.3 million for 2018. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 33 to the consolidated financial statements for further information on these plans. Management believes that the effect of the pension and postretirement plans on liquidity is not significant to the Corporation’s overall financial condition. The BPPR’s non-contributory defined pension and benefit restoration plans are frozen with regards to all future benefit accruals.

At December 31, 2017, the liability for uncertain tax positions was $7.3 million, compared with $7.4 million as of the end of 2016. This liability represents an estimate of tax positions that the Corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty. Under the statute of limitations, the liability for uncertain tax positions expires as follows: 2018 - $1.1 million, 2019 - $1.1 million, 2020 - $1.5 million, 2021 - $1.1 million, and 2022 - $1.1 million. Additionally, $1.4 million is not subject to the statute of limitations. As a result of examinations, the Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $4.6 million, including interests.

The Corporation also utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments expire without being drawn upon or a default occurring, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at December 31, 2017:

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Table 20 - Off-Balance Sheet Lending and Other Activities

	Amount of commitment - Expiration Period
(In thousands)	2018		Years 2019 - 2020		Years 2021 - 2022		Years 2023 - thereafter		Total
Commitments to extend credit	$	6,871,688	$	499,905	$	150,099	$	43,266	$	7,564,958
Commercial letters of credit		367		1,749		—		—		2,116
Standby letters of credit		6,865		26,768		—		—		33,633
Commitments to originate or fund mortgage loans		14,733		564		—		—		15,297
Total	$	6,893,653	$	528,986	$	150,099	$	43,266	$	7,616,004

RISK MANAGEMENT

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

Risk Management Framework

Popular’s risk management framework seeks to ensure that there is an effective process in place to manage risk across the organization. Popular’s risk management framework incorporates three interconnected dependencies: risk appetite, stress testing, and capital planning. The stress testing process incorporates key risks within the context of the Risk Appetite Statement (RAS) defined in our Risk Management Policy. The process analyzes and delineates how much risk Popular is prepared to assume in pursuit of its business strategy and how much capital Popular’s activities will consume in light of a forward-looking assessment of the potential impact of adverse economic conditions. The RAS includes risk tolerance, limits, and types of risks the Corporation is willing to accept, as well as processes to maintain compliance with those limits.

Principal Risk Types

• Credit Risk – Potential for default or loss resulting from an obligor’s failure to meet the terms of any contract with the Corporation or any of its subsidiaries, or failure otherwise to perform as agreed. Credit risk arises from all activities where success depends on counterparty, issuer, or borrower performance.

• Interest Rate Risk (“IRR”) – The risk to earnings or capital arising from changes in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting bank lending and borrowing activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest related options embedded in bank products (options risk).

• Market Risk – Potential for economic loss resulting from changes in market prices of the assets or liabilities in the Corporation’s or in any of its subsidiaries’ portfolios.

• Liquidity Risk – Potential for loss resulting from the Corporation or its subsidiaries not being able to meet their financial obligations when they come due. This could be a result of market conditions, the ability of the Corporation to liquidate assets or manage or diversify various funding sources. This risk also encompasses the possibility that an instrument cannot be closed out or sold at its economic value, which might be a result of stress in the market or in a specific security type given its credit, volume and maturity.

• Operational Risk – Possibility that inadequate or failed systems and internal controls or procedures, human error, fraud or external influences such as disasters, can cause losses. It includes the risk for those processes that have been outsourced to third parties and the risk of the inadequate use of models.

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

• Regulatory and Legal Risk—Risk of negative impact to business activities, earnings or capital, regulatory relationships or reputation as a result of failure to comply with or a failure to adapt to current and changing regulations, law, rules, regulatory expectations, existing contracts or ethical standards.

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

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

Risk Governance

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

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The RMC, as an oversight body, monitors and approves corporate policies to identify measure, monitor and control risks while maintaining the effectiveness and efficiency of the business and operational processes. As an approval body for the Corporation, the RMC reviews and approves relevant risk management policies and critical processes. Also, it periodically reports to the Board about its activities.

The Board and RMC have delegated to the Corporation’s management the implementation of the risk management processes. This implementation is split into two separate but coordinated efforts that include (i) business and / or operational units who identify, manage and control the risks resulting from their activities, and (ii) a Risk Management Group (“RMG”). In general, the RMG is mandated with responsibilities such as assessing and reporting to the Corporation’s management and RMC the risk positions of the Corporation; developing and implementing mechanisms, policies and procedures to identify, measure and monitor risks; implementing measurement mechanisms and infrastructure to achieve effective risk monitoring; developing and implementing the necessary management information and reporting mechanisms; and monitoring and testing the adequacy of the Corporation’s policies, strategies and guidelines.

The RMG is responsible for the overall coordination of risk management efforts throughout the Corporation and is composed of three reporting divisions: (i) Credit Risk Management, (ii) Compliance Management, and (iii) Financial and Operational Risk Management. The latter includes an Enterprise Risk Management function that facilitates, among other aspects, the identification, coordination, and management of multiple and cross-enterprise risks. The Corporation’s Model Validation and Loan Review group, which reports directly to the RMC and administratively to the Chief Risk Officer, also provides important risk management functions by validating critical models used in the Corporation and by assessing the adequacy of the Corporation’s lending risk function.

Additionally, the Internal Auditing Division provides an independent assessment of the Corporation’s internal control structure and related systems and processes. The Internal Audit Division also provides an assessment of the effectiveness of the Corporation’s risk management function.

Moreover, management oversight of the Corporation’s risk-taking and risk management activities is conducted through management committees:

• CRESCO (Credit Strategy Committee) – Manages the Corporation’s overall credit exposure and approves credit policies, standards and guidelines that define, quantify, and monitor credit risk. Through this committee, management reviews asset quality ratios, trends and forecasts, problem loans, establishes the provision for loan losses and assesses the methodology and adequacy of the allowance for loan losses on a quarterly basis.

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

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

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

• ERM (Enterprise Management Committee) – Monitors Market, Interest, Liquidity, Compliance, Regulatory, Legal, Strategic, Operational (including Information Security & Cyber), and Reputational risks in the Risk Appetite Statement (RAS) and within the Corporation’s ERM framework.

There are other management committees such as the Fair Lending, Section 23A & B, New Products, Fiduciary Risk, and the BSA/Anti-Money Laundering Committees, among others, which provide oversight of specific business risks.

Market / Interest Rate Risk

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

Market risk refers to the risk of a reduction in the Corporation’s capital due to changes in the market valuation of its assets and/or liabilities.

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Most of the assets subject to market valuation risk are securities in the investment portfolio classified as available-for-sale. Refer to Notes 7 and 8 for further information on the investment portfolio. Investment securities classified as available-for-sale amounted to $10.2 billion as of December 31, 2017. Other assets subject to market risk include loans held-for-sale, which amounted to $132 million, mortgage servicing rights (“MSRs”) which amounted to $168 million and securities classified as “trading”, which amounted to $43 million, as of December 31, 2017.

Liabilities subject to market risk include the FDIC clawback obligation, which amounted to $ 165 million at December 31, 2017.

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

Interest Rate Risk (“IRR’)

The Corporation’s net interest income is subject to various categories of interest rate risk, including repricing, basis, yield curve and option risks. In managing interest rate risk, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate rate risk position given line of business forecasts, management objectives, market expectations and policy constraints.

Management utilizes various tools to assess IRR, including simulation modeling, static gap analysis, and Economic Value of Equity (EVE). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. Simulation modeling is prepared for a five-year period, which in conjunction with the EVE analysis, provides Management a better view of long term IRR.

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

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

The asset and liability management group performs validation procedures on various assumptions used as part of the sensitivity analysis as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to independent validations according to the guidelines established in the Model Governance and Validation policy.

The Corporation processes net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline by the same amount. The rate scenarios considered in these market risk simulations reflect parallel changes of -200, +200 and +400 basis points during the succeeding twelve-month period. Simulation analyses are based on many assumptions, including relative levels of market interest rates across all yield curve points and indexes, interest rate spreads, loan prepayments and deposit elasticity. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future. The following table presents the results of the simulations at December 31, 2017 and December 31, 2016, assuming a static balance sheet and parallel changes over flat spot rates over a one-year time horizon:

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

	December 31, 2017						December 31, 2016
(Dollars in thousands)	Amount Change			Percent Change			Amount Change			Percent Change
Change in interest rate											—
+400 basis points	$	409,924			25.57	%	$	236,945			16.52	%
+200 basis points		205,011			12.79			121,181			8.45
-200 basis points		(169,126	)		(10.55	)		(35,314	)		(2.46	)

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At December 31, 2017, the simulations showed that the Corporation maintains an asset-sensitive position. This is primarily due to (i) a high level of money market investments that are highly sensitive to changes in interest rates, (ii) approximately 36% of the Corporation’s loan portfolio being comprised of Prime and Libor-based loans, and (iii) low elasticity of the Corporation’s core deposit base. The increase in sensitivity from December 31, 2016 in the +200 and +400 scenarios is mainly driven by an increase in money market investments of $2.4 billion, from $2.9 billion at December 31, 2016 to $5.3 billion at December 31, 2017, that was due to growth in public fund deposits. The increase in sensitivity in the -200 scenario is also driven by the increase in money market investments that reflect full changes in rates across all scenarios, combined with the increases in the Federal Funds Target Rate in March, June and December of 2017 by the Federal Reserve, which led to an increase in the magnitude of the -200 basis points scenario.

Table 22 - Interest Rate Sensitivity

										At December 31, 2017
										By repricing dates
(Dollars in thousands)	0-30 days			Within 31 - 90 days			After three months but within six months			After six months but within nine months			After nine months but within one year			After one year but within two years			After two years			Non-interest bearing funds			Total
Assets:
Money market investments	$	5,253,880		$	1,095		$	—		$	144		$	—		$	—		$	—		$	—		$	5,255,119
Investment and trading securities		350,910			561,495			443,103			492,766			454,022			1,784,665			6,352,412			43,598			10,482,971
Loans		6,108,555			1,927,714			1,066,908			895,105			864,266			2,802,305			10,435,687			841,923			24,942,463
Other assets		—			—			—			—			—			—			—			3,596,784			3,596,784
Total		11,713,345			2,490,304			1,510,011			1,388,015			1,318,288			4,586,970			16,788,099			4,482,305			44,277,337
Liabilities and stockholders’ equity:
Savings, NOW and money market and other interest bearing demand deposits		1,838,755			698,716			977,758			900,376			830,141			2,737,789			11,464,150			—			19,447,685
Certificates of deposit		1,244,174			533,993			938,105			773,633			632,216			1,287,174			2,105,583			—			7,514,878
Federal funds purchased and assets sold under agreements to repurchase		210,555			106,820			59,437			—			—			—			14,109			—			390,921
Other short-term borrowings		—			35,000			60,000			—			—			—			1,208			—			96,208
Notes payable		1,000			11,026			102,857			56,164			82,749			607,564			674,996			—			1,536,356
Non-interest bearing deposits		—			—			—			—			—			—			—			8,490,945			8,490,945
Other non-interest bearing liabilities		—			—			—			—			—			—			—			1,696,439			1,696,439
Stockholders’ equity		—			—			—			—			—			—			—			5,103,905			5,103,905
Total	$	3,294,484		$	1,385,555		$	2,138,157		$	1,730,173		$	1,545,106		$	4,632,527		$	14,260,046		$	15,291,289		$	44,277,337
Interest rate sensitive gap		8,418,861			1,104,749			(628,146	)		(342,158	)		(226,818	)		(45,557	)		2,528,053			(10,808,984	)		—
Cumulative interest rate sensitive gap		8,418,861			9,523,610			8,895,464			8,553,306			8,326,488			8,280,931			10,808,984			—			—
Cumulative interest rate sensitive gap to earning assets		21.16	%		23.93	%		22.35	%		21.49	%		20.92	%		20.81	%		27.16	%		—			—

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject 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.

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Table 23, which presents the maturity distribution of earning assets, takes into consideration prepayment assumptions.

Table 23 - Maturity Distribution of Earning Assets

			As of December 31, 2017
			Maturities
			After one year
			through five years				After five years
(In thousands)	One year or less		Fixed interest rates		Variable interest rates		Fixed interest rates		Variable interest rates		Total
Money market securities	$	5,255,119		—		—		—		—	$	5,255,119
Investment and trading securities		2,231,726	$	5,764,403	$	35,044	$	2,250,573	$	32,185		10,313,931
Loans:
Commercial		3,268,192		1,977,853		2,029,730		1,350,617		1,864,269		10,490,661
Construction		673,750		35,920		165,292		3,579		1,318		879,859
Lease financing		327,166		482,824		—		—		—		809,990
Consumer		1,142,910		1,502,551		314,923		195,928		735,114		3,891,426
Mortgage		1,322,623		2,128,257		61,173		3,630,558		21,776		7,164,387
Subtotal loans		6,734,641		6,127,405		2,571,118		5,180,682		2,622,477		23,236,323
Westernbank loans		792,433		243,502		244,595		262,437		163,173		1,706,140
Total earning assets	$	15,013,919	$	12,135,310	$	2,850,757	$	7,693,692	$	2,817,835	$	40,511,513

Note:  Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the Corporation, are not included in this table.

Loans held-for-sale have been allocated according to the expected sale date.

Covered loans

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

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. BPPR’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be-announced) market transactions. The objective is to derive spread income from the portfolio and not to benefit from short-term market movements. In addition, BPPR uses forward contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility are hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

At December 31, 2017, the Corporation held trading securities with a fair value of $43 million, representing approximately 0.1% of the Corporation’s total assets, compared with $60 million and 0.2%, respectively, at December 31, 2016. As shown in Table 24 the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at December 31, 2017 were investment grade securities. As of December 31, 2017, the trading portfolio also included $1.3 million in Puerto Rico government obligations and shares of closed-end funds that invest primarily in Puerto Rico government obligations ($2.6 million as of December 31, 2016). Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account loss of $0.8 million for the years ended December 31, 2017 and December 31, 2016, respectively. Table 24 provides the composition of the trading portfolio at December 31, 2017 and December 31, 2016.

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Table 24 - Trading Portfolio

	December 31, 2017					December 31, 2016
(Dollars in thousands)	Amount		Weighted Average Yield [1]			Amount		Weighted Average Yield [1]
Mortgage-backed securities	$	29,280		5.40	%	$	42,746		4.85	%
Collateralized mortgage obligations		529		5.74			1,321		5.27
Puerto Rico government obligations		159		0.28			1,164		5.51
Interest-only strips		529		12.58			602		12.35
Other (includes related trading derivatives)		12,690		3.25			13,972		3.03
Total	$	43,187		4.84	%	$	59,805		4.52	%

[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 $0.2 million for the last week in December 31, 2017. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

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

Derivatives

Derivatives may be used by the Corporation as part of its overall interest rate risk management strategy to minimize significant unexpected fluctuations in earnings and cash flows that are caused by fluctuations in interest rates. Derivative instruments that the Corporation may use include, among others, interest rate swaps, caps, floors, indexed options, and forward contracts. The Corporation does not use highly leveraged derivative instruments in its interest rate risk management strategy. The Corporation enters into interest rate swaps, interest rate caps and foreign exchange contracts for the benefit of commercial customers. Credit risk embedded in these transactions is reduced by requiring appropriate collateral from counterparties and entering into netting agreements whenever possible. All outstanding derivatives are recognized in the Corporation’s consolidated statement of condition at their fair value. Refer to Note 29 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities.

The Corporation’s derivative activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these hedges is monitored to ascertain that the Corporation is reducing market risk as expected. Derivative transactions are generally executed with instruments with a high correlation to the hedged asset or liability. The underlying index or instrument of the derivatives used by the Corporation is selected based on its similarity to the asset or liability being hedged. As a result of interest rate fluctuations, fixed and variable interest rate hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Management will assess if circumstances warrant liquidating or replacing the derivatives position in the hypothetical event that high correlation is reduced. Based on the Corporation’s derivative instruments outstanding at December 31, 2017, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations.

Certain derivative contracts also present credit risk and liquidity risk because the counterparties may not comply with the terms of the contract, or the collateral obtained might be illiquid or become so. The Corporation controls credit risk through approvals, limits and monitoring procedures, and through master netting and collateral agreements whenever possible. Further, as applicable under the terms of the master agreements, the Corporation may obtain collateral, where appropriate, to reduce credit risk. The credit risk attributed to the counterparty’s nonperformance risk is incorporated in the fair value of the derivatives. Additionally, as required by the fair value measurements guidance, the fair value of the Corporation’s own credit standing is considered in the fair value of the derivative liabilities. During the year ended December 31, 2017, inclusion of the credit risk in the fair value of the derivatives resulted in a net gain of $0.1 million (2016 – net loss of $0.5 million; 2015 – net loss of $0.5 million), which consisted of a gain of $0.2 million (2016 – loss of $ 0.9

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million; 2015 – loss of $ 0.8 million) resulting from the Corporation’s credit standing adjustment and a loss of $0.1 million (2016 – gain of $ 0.4 million; 2015 – gain of $0.3 million) from the assessment of the counterparties’ credit risk. At December 31, 2017, the Corporation had $94 thousand (2016 – $ 4 million) recognized for the right to reclaim cash collateral posted. On the other hand, the Corporation did not have any obligation to return cash collateral received at December 31, 2017 and 2016.

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

Cash Flow Hedges

The Corporation manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives designated as cash flow hedges and that are linked to specified hedged assets and liabilities. The cash flow hedges relate to forward contracts or TBA mortgage-backed securities that are sold and bought for future settlement to hedge mortgage-backed securities and loans prior to securitization. The seller agrees to deliver on a specified future date a specified instrument at a specified price or yield. These securities are hedging a forecasted transaction and are designated for cash flow hedge accounting. The notional amount of derivatives designated as cash flow hedges at December 31, 2017 amounted to $ 99 million (2016—$ 105 million).

Refer to Note 29 to the consolidated financial statements for additional quantitative information on these derivative contracts.

Fair Value Hedges

The Corporation did not have any derivatives designated as fair value hedges during the years ended December 31, 2017 and 2016.

Trading and Non-Hedging Derivative Activities

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

Following is a description of the most significant of the Corporation’s derivative activities that are not designated for hedge accounting. Refer to Note 29 to the consolidated financial statements for additional quantitative and qualitative information on these derivative instruments.

At December 31, 2017, the Corporation had outstanding $ 2 million (2016 - $ 113 million) in notional amount of interest rate swap agreements, which were not designated as accounting hedges. These swaps were entered in the Corporation’s capacity as an intermediary on behalf of its customers and their offsetting swap position. For the year ended December 31, 2017, the impact of the mark-to-market of interest rate swaps not designated as accounting hedges was a net increase in earnings of approximately $ 0.1 million, recorded in the other operating income category of the consolidated statement of operations, compared with an earnings increase of approximately $ 0.3 million, in 2016 and 2015.

At December 31, 2017, the Corporation had $71 million (2016 - $0.7 million) in notional amount of forward contracts outstanding not designated as accounting hedges with a positive fair value of $ 161 thousand (2016 - $9 thousand). For the year ended December 31, 2017, the impact of the mark-to-market of the forward contracts not designated as accounting hedges was a reduction to non-interest income of $ 1.5 million (2016 - loss of $ 0.2 million; 2015 - loss of $ 0.4 million), which was included in the category of mortgage banking activities in the consolidated statement of operations.

Furthermore, the Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation offers certificates of deposit with returns linked to these indexes to its retail customers, principally in connection with individual retirement accounts (IRAs), and certificates of deposit. At December 31, 2017, these deposits amounted to $ 66 million (2016 - $ 70 million), or less than 1% (2016 – less than 1%) of the Corporation’s total deposits. In these certificates, the customer’s principal is guaranteed by the Corporation and insured by the FDIC to the maximum extent permitted by law. The instruments pay a return based on the increase of these indexes, as applicable, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested but allows the customer the potential to earn a return based on the performance of the indexes.

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

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

The purchased indexed options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify for hedge accounting, and therefore, cannot be designated as accounting hedges. At December 31, 2017, the notional amount of the indexed options on deposits approximated $ 70 million (2016 - $ 73 million) with a fair value of $ 16 million (asset) (2016 - $ 13 million) while the embedded options had a notional value of $ 66 million (2016 - $ 70 million) with a fair value of $ 14 million (liability) (2016 - $ 11 million).

Refer to Note 29 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2017 and 2016.

Foreign Exchange

The Corporation holds an interest in BHD León in the Dominican Republic, which is an investment accounted for under the equity method. The Corporation’s carrying value of the equity interest in BHD León approximated $135 million at December 31, 2017. This business is conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly-inflationary environments in which the effects would be included in the consolidated statements of operations. At December 31, 2017, the Corporation had approximately $43 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, compared with an unfavorable adjustment of $40 million at December 31, 2016 and $36 million at December 31, 2015.

Liquidity

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

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

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also managed at the level of the banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s liquidity position and that of the banking subsidiaries. Additionally, contingency funding plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

On January 23, 2017, the Corporation’s Board of Directors approved an increase in the Company’s quarterly common stock dividend from $0.15 per share to $0.25 per share. During the year ended December 31, 2017, the Corporation declared dividends on its common stock of $ 102.1 million and completed a $75 million privately negotiated accelerated share repurchase transaction. Refer to additional information on Note 23 – Stockholder’s equity.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 80% of the Corporation’s total assets at December 31, 2017 and 79% at December 31, 2016. The ratio of total ending loans to deposits was 70% at December 31, 2017, compared to 77% at December 31, 2016. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At December 31, 2017, these borrowings consisted primarily of $ 391 million in assets sold under agreement to repurchase, $726 million in advances with the FHLB, $439 million in junior subordinated deferrable interest debentures (net of debt issuance cost) related to trust preferred securities and $446 million in term notes (net of debt issuance cost) issued to partially fund the repayment of TARP funds. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 20 to the Consolidated Financial Statements. Also, the Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements provide information on the Corporation’s cash inflows and outflows.

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Given the widespread level of disruption to basic infrastructure and commercial activity in the regions impacted by the passage of hurricanes Irma and Maria, BPPR decided to adopt certain measures to assist its customers in affected areas. These measures include the waiver of certain fees and charges, such as late payment charges and ATM transaction fees, and a temporary payment moratorium to eligible borrowers across most loan portfolios during which BPPR will continue to accrue interest on the loans.

These measures, while important to assist in the recovery of our customers post-hurricane, will negatively impact our results of operations and liquidity. For example, the waiver of fees and other charges negatively impacted the Corporation’s revenues for the third quarter and fourth quarters of 2017. The moratorium impacts our liquid