Exhibit 13.1

CONTENTS ÍNDICE Popular, Inc. (NASDAQ: BPOP) is the leading financial institution by both assets and deposits in Puerto Rico and ranks among the top 50 U.S. bank holding companies by assets. Founded in 1893, Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers in Puerto Rico auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the mainland United States, Popular provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank, which has branches located in New York, New Jersey and Florida. CORPORATE INFORMATION Independent Registered Public Accounting Firm: PricewaterhouseCoopers LLP The company’s Form 10-K, proxy statement and any other financial information is available on popular.com/en/investor-relations/annual-reports/ ANNUAL MEETING The 2020 Annual Stockholders’ Meeting of Popular, Inc. will be held on Tuesday, May 12, at 9:00 a.m. at the penthouse of the Popular Center Building, San Juan, Puerto Rico. Popular, Inc. (NASDAQ: BPOP) es la institución bancaria lĺder en depósitos y activos en Puerto Rico y se encuentra entre las primeras 50 entidades tenedoras de instituciones bancarias por número de activos. Fundado en 1893, Banco Popular de Puerto Rico, la principal subsidiaria de Popular, brinda servicios de banca individual, hipotecas y banca comercial en Puerto Rico e Islas Vĺrgenes estadounidenses. Popular también ofrece en Puerto Rico servicios de financiamiento de autos y equipo, inversiones y seguros a través de subsidiarias especializadas. En Estados Unidos, Popular provee servicios de banca individual, hipotecas y banca comercial a través de su filial bancaria en Nueva York, Popular Bank, la cual cuenta con sucursales localizadas en Nueva York, Nueva Jersey y Florida. INFORMACIÓN CORPORATIVA Firma registrada de Contabilidad Pública Independiente: PricewaterhouseCoopers LLP El Formulario 10-K, el proxy y otra información financiera están disponibles en popular.com/accionistas/informe-anual/ REUNIÓN ANUAL La Reunión Anual de Accionistas 2020 de Popular, Inc., se llevará a cabo el martes, 12 de mayo, a las 9:00 a.m. en el piso PH de Popular Center, San Juan, Puerto Rico. Letter from the President & Chief Executive Officer.................................. 3 25-Year Historical Financial Summary...............................................................6 Management & Board of Directors....................................................................8 Carta del Presidente y Principal Oficial Ejecutivo...................................... 9 Resumen Financiero Histórico (25 años).......................................................12 Gerencia y Junta de Directores.........................................................................14 2 | POPULAR, INC.

POPULAR, INC. YEAR IN REVIEW DEAR SHAREHOLDERS: 2019 was an outstanding year for Popular. We achieved record core earnings, positive credit quality results, deposit and loan growth, in our Puerto Rico and United States operations, and maintained a robust capital position. Net income for 2019 was $671 million, compared to $618 million in the previous year. Our 2018 results included the benefit of $159 million, related to the early termination of the FDIC shared-loss agreements, and a $28 million expense related to the impact of the Puerto Rico tax reform on our deferred tax asset. After excluding the effects of these items, adjusted net income in 2018 was $487 million. The adjusted increase of $184 million in net income this year was driven primarily by higher net interest income and a lower provision for loan losses. During 2019 we benefitted from the full-year impact of the Reliable acquisition, loan growth in both markets and continued increases in deposit balances in Puerto Rico that, in turn, allowed us to increase the contribution from our investment portfolio. Additionally, during 2019 we recognized a $26 million income tax benefit related to exempt interest income from loans earned in prior years. We continued to experience stable credit quality metrics. Non-performing assets declined by 13%, when compared to the previous year, and the net charge-off ratio was 0.96%, compared to 1.13% in 2018. These results reflect positive performance both in Puerto Rico and the United States. While net-charge offs increased in the United States as we continued to work through the taxi medallion portfolio, this exposure was reduced to $19 million. Capital levels remained strong with year-end Tier 1 Capital and Tier 1 Common ratios of 17.8%. In 2019 we increased the quarterly common stock dividend, from $0.25 to $0.30 per share, and repurchased $250 million in common stock. We also announced several capital actions we will execute in 2020, including an increase in the quarterly common stock dividend from $0.30 to $0.40 per share and a common stock repurchase program of up to $500 million. Popular’s shares closed 2019 at $58.75, 24% higher than in 2018. This performance compares favorably against our U.S. peers and the KBW Nasdaq Regional Banking Index, both of which increased 20% in the year. 2019 WAS AN OUTSTANDING YEAR FOR POPULAR. WE ACHIEVED RECORD CORE EARNINGS, POSITIVE CREDIT QUALITY RESULTS, DEPOSIT AND LOAN GROWTH, IN OUR PUERTO RICO AND UNITED STATES OPERATIONS, AND MAINTAINED A ROBUST CAPITAL POSITION. 2019 ANNUAL REPORT | 3

Popular’s steadfast commitment to our customers, our people and our communities is an intrinsic part of how we conduct our business. That commitment inspired the founding of Popular 126 years ago, has manifested itself throughout our history and today is stronger than ever. We are proud of our tradition as a responsible corporate citizen, yet aware that local and global challenges facing our communities require more deliberate action from everyone, including the private sector. To this end, in 2019 we embarked on a process to formalize our priorities regarding environmental, social and governance (or ESG) practices. As part of this process, we will establish specific targets, track our progress and communicate our results regularly. We are convinced that continuous improvement in these areas provides the foundation for the long-term success of our company and our ability to deliver value to all our stakeholders. WE CONTINUED TO EXECUTE OUR BUSINESS STRATEGY, STRUCTURED AROUND FOUR PILLARS. SUSTAINABLE AND PROFITABLE GROWTH: In Puerto Rico, we added 45,000 customers to reach 1.8 million, 915,000 of which actively used our digital channels. We grew loans and deposits by 1.5% and 10%, respectively. Our auto loan portfolio increased by 12%, evidencing the successful integration of the Reliable acquisition. At year-end, we acquired a $74 million credit card portfolio in Puerto Rico and, in a separate transaction, acquired the rights to issue credit cards under the JetBlue co-branded loyalty program in Puerto Rico. In the United States, we grew loans and deposits each by 9%. We continued expanding our niche businesses, mainly condo association banking and health care lending. SIMPLICITY: We continued to leverage technology and process optimization to streamline our operations to achieve efficiencies, improve both the customer and employee experience and position the Corporation for future growth. Progress in 2019 included an acceleration in the deployment of robotic process automation technology and the expansion of our process efficiency program, which is based on the LEAN methodology. CUSTOMER FOCUS: We dedicated significant resources to reinforce our service culture, offering new tools and development opportunities to all our employees. We also continued the transformation of our branch network in Puerto Rico and the United States, increasingly integrating technology to enhance our customers’ experience regardless of how they choose to interact with us. For example, in Puerto Rico we launched a new branch model focused on providing banking services via digital channels and self-service technology. We sought additional opportunities to serve the underserved. We opened a branch in Virgin Gorda in the British Virgin Islands, and we are proud to serve this community as the only bank branch on the island. FIT FOR THE FUTURE: We continued to invest in our talent and risk management infrastructures. Regarding our people, we implemented initiatives related to development, compensation, leadership and recognition. While ensuring we have the necessary talent today, we are anticipating and preparing for future needs. In the area of internal controls, we focused on our compliance program, particularly on strengthening the first line of defense, and on bolstering our cybersecurity program. 4 | POPULAR, INC.

IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. I would like to acknowledge the hard work of over 8,000 colleagues in Puerto Rico, the United States and the Virgin Islands, which made possible our accomplishments in 2019. In recognition of our strong financial results and achievements during the year, our Board of Directors approved the maximum possible award under our Profit Sharing Plan for the second consecutive year. Early in 2020, our team demonstrated once again its resiliency and solidarity after a series of seismic events, including a magnitude 6.4 earthquake, impacted the southwestern region of Puerto Rico. Our employees in affected areas responded admirably, going above and beyond the call of duty to assist our clients and communities, with overwhelming support of their colleagues in other parts of the island and beyond. We also swiftly responded through our foundation, Fundación Banco Popular, to deliver immediate aid as well as longer-term support to communities in need. I take this opportunity to express, on behalf of everyone at Popular, our heartfelt appreciation to Richard L. Carrión, who in 2019 transitioned from his role of Executive Chairman to non-executive Chairman of the Board of Directors. Richard’s exemplary service in Popular spanned over four decades, including 26 years as CEO. Richard has been a truly iconic leader and a great source of support in my transition as CEO. We are fortunate to have his continued guidance as Chairman of the Board. I also wish to express my gratitude to William J. Teuber, Jr., who retired from the Board of Directors to devote greater time to other professional responsibilities. Bill was a valuable member of the Board for the past 15 years and played an important role as lead director for the last eight years. His significant contributions made Popular a better organization, and we wish him the best in his future endeavors. Finally, I would like to thank you, our shareholders, for your confidence in us. We began this year energized and positive about our prospects. Our franchise in Puerto Rico is unrivaled, with an extensive branch network, innovative digital solutions and an unmatched array of retail and commercial products and services. Puerto Rico’s economic recovery from the impact of the 2017 hurricanes and recent seismic events represent both a tremendous responsibility and opportunity. We are uniquely poised to foster the island’s economic recovery. Our operation in the mainland United States, while more focused, provides geographic diversification and potential for growth, particularly in selected niches where we have proved we can compete effectively. We look forward to 2020 with optimism, ready to face the challenges we will undoubtedly encounter and to take advantage of the opportunities that will also arise. Popular, Inc., Senior Management Team: (seated left to right) Beatriz Castellví Armas, Luis Cestero, Juan O. Guerrero, Camille Burckhart, Lidio V. Soriano, (standing left to right) Gilberto Monzón, Eduardo J. Negrón, Carlos J. Vázquez, Ignacio Alvarez, Manuel A. Chinea, Javier D. Ferrer, Eli S. Sepúlveda. 2019 ANNUAL REPORT | 5

HISTORICAL 25-YEAR FINANCIAL SUMMARY (Dollars in millions, except per share data) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Selected Financial Information Net Income (Loss) $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 Assets 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 44,401.6 48,623.7 Gross Loans 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 28,742.3 31,710.2 Deposits 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 20,593.2 22,638.0 Stockholders’ Equity 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 3,104.6 3,449.2 Market Capitalization $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 $7,685.6 $5,836.5 Return on Average Assets (ROAA) 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% Return on Average Common Equity 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% (ROACE) Per Common Share1 Net Income (Loss) - Basic $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 Net Income (Loss) - Diluted 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 17.36 17.92 19.74 Dividends (Declared) 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 5.05 6.20 6.40 Book Value 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 96.60 109.45 118.22 Market Price 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 288.30 211.50 Assets by Geographical Area Puerto Rico 75% 74% 74% 71% 71% 72% 68% 66% 62% 55% 53% United States 21% 22% 23% 25% 25% 26% 30% 32% 36% 43% 45% Caribbean and Latin America 4% 4% 3% 4% 4% 2% 2% 2% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Traditional Delivery System Banking Branches Puerto Rico 166 178 201 198 199 199 196 195 193 192 194 Virgin Islands 8 8 8 8 8 8 8 8 8 8 8 United States2 40 44 63 89 91 95 96 96 97 128 136 Subtotal 214 230 272 295 298 302 300 299 298 328 338 Non-Banking Offices Popular Financial Holdings 91 102 117 128 137 136 149 153 181 183 212 Popular Cash Express 51 102 132 154 195 129 114 4 Popular Finance 31 39 44 48 47 61 55 36 43 43 49 Popular Auto (including Reliable) 9 8 10 10 12 12 20 18 18 18 17 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 15 14 Popular Mortgage 3 3 3 11 13 21 25 29 32 30 33 Popular Securities 1 2 2 2 3 4 7 8 9 12 Popular One Popular Insurance and 2 2 2 2 2 2 Popular Risk Services Popular Insurance Agency, U.S.A. 1 1 1 1 1 Popular Insurance V.I. 1 1 1 1 E-LOAN 1 EVERTEC 4 4 4 5 5 5 5 Subtotal 134 153 183 258 327 382 427 460 431 421 351 Total 348 383 455 553 625 684 727 759 729 749 689 Electronic Delivery System ATMs Owned Puerto Rico 281 327 391 421 442 478 524 539 557 568 583 Virgin Islands 8 9 17 59 68 37 39 53 57 59 61 United States 38 53 71 94 99 109 118 131 129 163 181 Total 327 389 479 574 609 624 681 723 743 790 825 Employees (full-time equivalent) 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 6 | POPULAR, INC.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $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 $618.2 $671.1 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 47,604.6 52,115.3 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 26,559.3 27,466.1 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 39,710.0 43,758.6 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 5,435.1 6,016.8 $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 $4,719.3 $5,615.9 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% $12.41 $(2.73) $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 1.02 6.06 6.88 6.40 6.40 4.80 0.20 - - - - - 0.30 0.60 1.00 1.00 1.20 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 53.88 62.42 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 47.22 58.75 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 77% 78% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 21% 20% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 191 196 179 173 185 183 175 171 168 173 171 168 163 164 8 8 8 8 8 9 9 9 9 9 9 9 9 10 142 147 139 101 96 94 92 90 47 50 51 51 51 51 341 351 326 282 289 286 276 270 224 232 231 228 223 225 158 134 2 52 51 9 15 12 12 10 10 10 10 9 9 9 9 9 12 12 11 24 22 32 32 32 33 36 37 37 38 25 24 17 14 14 14 12 13 7 6 6 4 4 3 3 3 2 2 2 2 4 5 6 6 6 5 5 5 5 2 2 1 1 1 1 1 1 1 2 2 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 7 9 9 9 292 280 97 61 55 58 59 59 46 46 37 34 36 36 633 631 423 343 344 344 335 329 270 278 268 262 259 261 605 615 605 571 624 613 597 599 602 622 635 633 619 622 65 69 74 77 17 20 20 22 21 21 20 22 22 23 192 187 176 136 138 135 134 132 83 87 101 110 115 119 862 871 855 784 779 768 751 753 706 730 756 765 756 764 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 1 Per common share data adjusted for stock splits and reverse stock split executed in May 2012. 2 Excludes a Banco Popular de Puerto Rico branch operating in New York. 2019 ANNUAL REPORT | 7  

SENIOR MANAGEMENT TEAM POPULAR, INC. MANAGEMENT & BOARD OF DIRECTORS IGNACIO ALVAREZ President & Chief Executive Officer Popular, Inc. RICHARD L. CARRIÓN Chairman Popular, Inc. GILBERTO MONZÓN Executive Vice President Individual Credit Group Banco Popular de Puerto Rico CAMILLE BURCKHART Executive Vice President, Chief Information & Digital Strategy Officer Innovation, Technology & Operations Group, Popular, Inc. BEATRIZ CASTELLVÍ ARMAS Executive Vice President & Chief Security Officer Corporate Security Group Popular, Inc. LUIS CESTERO Executive Vice President Retail Banking Group Banco Popular de Puerto Rico IGNACIO ALVAREZ President and Chief Executive Officer Popular, Inc. EDUARDO J. NEGRÓN Executive Vice President Administration Group Popular, Inc. C. KIM GOODWIN Private Investor JOAQUÍN E. BACARDÍ, III Chairman Edmundo B. Fernández, Inc. ELI S. SEPÚLVEDA Executive Vice President Commercial Credit Group Banco Popular de Puerto Rico MANUEL A. CHINEA Executive Vice President Popular, Inc. Chief Operating Officer Popular Bank ALEJANDRO M. BALLESTER President Ballester Hermanos, Inc. ROBERT CARRADY President Caribbean Cinemas LIDIO V. SORIANO Executive Vice President & Chief Risk Officer Corporate Risk Management Group Popular, Inc. MYRNA M. SOTO Chief Operating Officer Digital Hands, LLC JAVIER D. FERRER Executive Vice President, Chief Legal Officer & Corporate Secretary General Counsel & Corporate Matters Group Popular, Inc. JOHN W. DIERCKSEN Principal Greycrest, LLC CARLOS J. VÁZQUEZ Executive Vice President & Chief Financial Officer Corporate Finance Group Popular, Inc. CARLOS A. UNANUE President Goya de Puerto Rico JUAN O. GUERRERO Executive Vice President Financial & Insurance Services Group Banco Popular de Puerto Rico MARÍA LUISA FERRÉ President & Chief Executive Officer FRG, Inc. BOARD OF DIRECTORS 8 | POPULAR, INC.

POPULAR, INC. RESUMEN DEL AÑO ESTIMADOS ACCIONISTAS: El año 2019 fue excepcional para Popular. Logramos ganancias récord, resultados positivos de calidad de crédito, crecimiento de depósitos y préstamos, en nuestras operaciones en Puerto Rico y Estados Unidos, y mantuvimos una posición sólida de capital. El ingreso neto para 2019 fue de $671 millones, en comparación con $618 millones en el año anterior. Nuestros resultados en el 2018 incluyeron el beneficio de $159 millones, relacionados con la terminación anticipada de los acuerdos de participación en pérdidas con la FDIC, y un gasto de $28 millones relacionado al impacto de la reforma contributiva en Puerto Rico en nuestro activo de contribuciones diferidas. Después de excluir los efectos de estas partidas, el ingreso neto ajustado en 2018 fue de $487 millones. El aumento ajustado de $184 millones en ingreso neto este año fue impulsado principalmente por mayor ingreso neto por intereses y una menor provisión para pérdidas en préstamos. Durante 2019 nos beneficiamos del impacto anual completo de la adquisición de Reliable, crecimiento en préstamos en ambos mercados y el aumento en depósitos en Puerto Rico que, a su vez, nos permitió aumentar la contribución de nuestra cartera de inversiones. Además, durante 2019 reconocimos un beneficio contributivo de $26 millones relacionado con ingreso exento de préstamos obtenido en años anteriores. Las métricas de calidad de crédito se mantuvieron estables. Los activos no acumulativos disminuyeron un 13%, en comparación con el año anterior, y la tasa de pérdidas netas en préstamos fue de 0.96%, comparada con 1.13% en el 2018. Estos resultados reflejan un desempeño positivo tanto en Puerto Rico como en los Estados Unidos. Si bien las pérdidas en préstamos en los Estados Unidos aumentaron por la cartera de licencias de taxi, esta exposición se redujo a $19 millones. Los niveles de capital se mantuvieron sólidos con relaciones de capital “Tier 1” y “Tier 1 Common” de 17.8% a fin de año. En el 2019 aumentamos el dividendo trimestral, de $0.25 a $0.30 por acción común, y recompramos $250 millones en acciones comunes. También anunciamos varias acciones de capital que ejecutaremos en 2020, incluyendo un aumento en el dividendo trimestral de $0.30 a $0.40 por acción común y un programa de recompra de acciones comunes de hasta $500 millones. Las acciones de Popular cerraron el 2019 en $58.75, 24% más alto que en el 2018. Este desempeño compara favorablemente con nuestros bancos pares en los Estados Unidos y el Índice Regional de Bancos de KBW Nasdaq, los cuales aumentaron 20% en el año. EL AÑO 2019 FUE EXCEPCIONAL PARA POPULAR. LOGRAMOS GANANCIAS RÉCORD, RESULTADOS POSITIVOS DE CALIDAD DE CRÉDITO, CRECIMIENTO DE DEPÓSITOS Y PRÉSTAMOS, EN NUESTRAS OPERACIONES EN PUERTO RICO Y ESTADOS UNIDOS, Y MANTUVIMOS UNA POSICIÓN SÓLIDA DE CAPITAL. INFORME ANUAL 2019 | 9

El compromiso firme de Popular con nuestros clientes, nuestra gente y nuestras comunidades es una parte intrínseca de cómo llevamos a cabo nuestro negocio. Ese compromiso inspiró la fundación de Popular hace 126 años, se ha manifestado a lo largo de nuestra historia y hoy es más fuerte que nunca. Estamos orgullosos de nuestra tradición como ciudadano corporativo responsable, pero conscientes de que los desafíos locales y globales a los que se enfrentan nuestras comunidades requieren una acción más deliberada de parte de todos, incluyendo el sector privado. Para ello, en el 2019 iniciamos un proceso para formalizar nuestras prioridades en temas de prácticas ambientales, sociales y de gobernanza (ESG). Como parte de este proceso, estableceremos objetivos específicos, daremos seguimiento a nuestro progreso y comunicaremos nuestros resultados regularmente. Estamos convencidos de que avances continuos en estas áreas apoyarán el éxito a largo plazo de nuestra organización y nuestra capacidad de añadir valor a todos los grupos con los cuales tenemos una responsabilidad. CONTINUAMOS EJECUTANDO NUESTRA ESTRATEGIA DE NEGOCIO, ESTRUCTURADA ALREDEDOR DE CUATRO PILARES. CRECIMIENTO SOSTENIBLE Y RENTABLE: En Puerto Rico, añadimos 45,000 clientes para alcanzar 1.8 millones, de los cuales 915,000 utilizaron activamente nuestros canales digitales. Crecimos los préstamos y depósitos en un 1.5% y un 10%, respectivamente. Nuestra cartera de préstamos de autos aumentó un 12%, lo que demuestra la integración exitosa de la adquisición de Reliable. A finales del año, adquirimos una cartera de tarjetas de crédito de $74 millones en Puerto Rico y, en una transacción separada, adquirimos los derechos para emitir tarjetas de crédito bajo el programa de lealtad de JetBlue en Puerto Rico. En los Estados Unidos, aumentamos los préstamos y depósitos, ambos en un 9%. Continuamos expandiendo nuestro negocio en nichos específicos, principalmente en servicios bancarios a asociaciones de condominios y préstamos en el área de salud. SENCILLEZ: Continuamos aprovechando la tecnología y la optimización de procesos para agilizar nuestras operaciones y lograr eficiencias, mejorar la experiencia de los clientes y empleados y posicionar a la corporación para crecimiento futuro. El progreso en 2019 incluyó una aceleración en el despliegue de la tecnología de automatización robótica de procesos y la expansión de nuestro programa de eficiencia de procesos, fundamentado en la metodología LEAN. ENFOQUE EN EL CLIENTE: Dedicamos recursos significativos para reforzar nuestra cultura de servicio, ofreciendo nuevas herramientas y oportunidades de desarrollo a todos nuestros empleados. También continuamos la transformación de nuestra red de sucursales en Puerto Rico y los Estados Unidos, integrando cada vez más la tecnología para mejorar la experiencia de los clientes, independientemente de cómo escojan interactuar con nosotros. Por ejemplo, en Puerto Rico lanzamos un nuevo modelo de sucursal enfocado en los servicios bancarios a través de canales digitales y tecnología de autoservicio. Buscamos oportunidades adicionales para servir a segmentos desatendidos. Abrimos una sucursal en Virgen Gorda en las Islas Vírgenes Británicas, y estamos orgullosos de servir a esta comunidad como la única sucursal bancaria en la isla. PREPARADOS PARA EL FUTURO: Continuamos invirtiendo en nuestras infraestructuras de manejo de talento y de riesgo. En cuanto a nuestra gente, implementamos iniciativas relacionadas al desarrollo, la compensación, el liderazgo y el reconocimiento. Al mismo tiempo que nos aseguramos de tener el talento necesario hoy en día, estamos anticipando y preparándonos para las necesidades futuras. En el área de los controles internos, nos enfocamos en nuestro programa de cumplimiento, particularmente en el fortalecimiento de la primera línea de defensa, y en reforzar nuestro programa de seguridad cibernética. 10 | POPULAR, INC.

Me gustarĺa reconocer el trabajo de más de 8,000 compañeros en Puerto Rico, los Estados Unidos y las Islas Vĺrgenes, que hicieron posible nuestros logros en el 2019. En reconocimiento a nuestros resultados financieros y logros durante el año, nuestra Junta de Directores aprobó el incentivo mayor posible bajo nuestro Plan de Participación en Ganancias por segundo año consecutivo. A principios del 2020, nuestro equipo demostró una vez más su resiliencia y solidaridad después de que una serie de eventos sĺsmicos, incluyendo un terremoto de magnitud 6.4, impactaran la región suroeste de Puerto Rico. Nuestros empleados en las zonas afectadas respondieron admirablemente, dando el máximo para ayudar a nuestros clientes y comunidades, recibiendo apoyo de sus colegas en otras partes de la isla y en otras geografĺas. También respondimos rápidamente a través de Fundación Banco Popular para entregar ayuda inmediata, asĺ como apoyo a más largo plazo a las comunidades necesitadas. Aprovecho esta oportunidad para expresar, en nombre de todos en Popular, nuestro sincero agradecimiento a Richard L. Carrión, quien en 2019 pasó de su cargo de Presidente Ejecutivo de la Junta de Directores a Presidente de la Junta de Directores. El servicio ejemplar de Richard en Popular abarcó más de cuatro décadas, incluyendo 26 años como Principal Oficial Ejecutivo. Richard ha sido un lĺder verdaderamente icónico y una gran fuente de apoyo en mi transición como Principal Oficial Ejecutivo. Tenemos la suerte de continuar con su apoyo como Presidente de la Junta de Directores. También deseo expresar mi gratitud a William J. Teuber, Jr., quien se retiró de la Junta de Directores para dedicar más tiempo a otras responsabilidades profesionales. Bill fue un miembro valioso de la Junta durante los últimos 15 años y desempeñó un papel importante como director principal durante los últimos ocho años. Sus contribuciones significativas hicieron de Popular una mejor organización, y le deseamos lo mejor en sus futuros proyectos. Por último, me gustarĺa darles las gracias a ustedes, nuestros accionistas, por su confianza en nosotros. Comenzamos este año con energĺa y positivos sobre lo que podemos lograr. Nuestra franquicia en Puerto Rico es inigualable, con una extensa red de sucursales, soluciones digitales innovadoras y una gama incomparable de productos y servicios para comercios e individuos. La recuperación económica de Puerto Rico del impacto de los huracanes del 2017 y los recientes eventos sĺsmicos representan una enorme responsabilidad y oportunidad. Estamos preparados para fomentar la recuperación económica de la isla. Nuestra operación en los Estados Unidos continentales, aunque más enfocada, proporciona diversificación geográfica y potencial de crecimiento, particularmente en nichos especĺficos donde hemos demostrado que podemos competir efectivamente. Nos sentimos optimistas sobre el 2020. Estamos listos para enfrentar los desafĺos que sin duda encontraremos y aprovechar las oportunidades que también surgirán. Gerencia Popular, Inc.: (sentados de izquierda a derecha) Beatriz Castellvĺ Armas, Luis Cestero, Juan O. Guerrero, Camille Burckhart, Lidio V. Soriano; (de pie de izquierda a derecha) Gilberto Monzón, Eduardo J. Negrón, Carlos J. Vázquez, Ignacio Álvarez, Manuel A. Chinea, Javier D. Ferrer, Eli S. Sepúlveda. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. INFORME ANUAL 2019 | 11

RESUMEN 25 AÑOS FINANCIERO HISTÓRICO (Dólares en millones, excepto información 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 por acción) Información Financiera Seleccionada Ingreso neto (Pérdida Neta) $146.4 $185.2 $209.6 $232.3 $257.6 $276.1 $304.5 $351.9 $470.9 $489.9 $540.7 Activos 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 44,401.6 48,623.7 Préstamos Brutos 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 28,742.3 31,710.2 Depósitos 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 20,593.2 22,638.0 Capital de Accionistas 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 3,104.6 3,449.2 Valor agregado en el mercado $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 $7,685.6 $5,836.5 Rendimiento de Activos Promedio 1.04% 1.14% 1.14% 1.14% 1.08% 1.04% 1.09% 1.11% 1.36% 1.23% 1.17% (ROAA) Rendimiento de Capital Común 14.22% 16.17% 15.83% 15.41% 15.45% 15.00% 14.84% 16.29% 19.30% 17.60% 17.12% Promedio (ROACE) Por Acción Común1 Ingreso neto (Pérdida Neta) - Básico $5.24 $6.69 $7.51 $8.26 $9.19 $9.85 $10.87 $13.05 $17.36 $17.95 $19.78 Ingreso neto (Pérdida Neta) - Diluido 5.24 6.69 7.51 8.26 9.19 9.85 10.87 13.05 17.36 17.92 19.74 Dividendos (Declarados) 1.54 1.83 2.00 2.50 3.00 3.20 3.80 4.00 5.05 6.20 6.40 Valor en los Libros 39.52 43.98 51.83 59.32 57.54 69.62 79.67 91.02 96.60 109.45 118.22 Precio en el Mercado 48.44 84.38 123.75 170.00 139.69 131.56 145.40 169.00 224.25 288.30 211.50 Activos por Área Geográfica Puerto Rico 75% 74% 74% 71% 71% 72% 68% 66% 62% 55% 53% Estados Unidos 21% 22% 23% 25% 25% 26% 30% 32% 36% 43% 45% Caribe y Latinoamérica 4% 4% 3% 4% 4% 2% 2% 2% 2% 2% 2% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Sistema de Distribución Tradicional Sucursales Bancarias Puerto Rico 166 178 201 198 199 199 196 195 193 192 194 Islas Vírgenes 8 8 8 8 8 8 8 8 8 8 8 Estados Unidos2 40 44 63 89 91 95 96 96 97 128 136 Subtotal 214 230 272 295 298 302 300 299 298 328 338 Oficinas No Bancarias Popular Financial Holdings 91 102 117 128 137 136 149 153 181 183 212 Popular Cash Express 51 102 132 154 195 129 114 4 Popular Finance 31 39 44 48 47 61 55 36 43 43 49 Popular Auto (incluyendo Reliable) 9 8 10 10 12 12 20 18 18 18 17 Popular Leasing, U.S.A. 7 8 10 11 13 13 11 15 14 Popular Mortgage 3 3 3 11 13 21 25 29 32 30 33 Popular Securities 1 2 2 2 3 4 7 8 9 12 Popular One Popular Insurance y 2 2 2 2 2 2 Popular Risk Services Popular Insurance Agency, U.S.A. 1 1 1 1 1 Popular Insurance V.I. 1 1 1 1 E-LOAN 1 EVERTEC 4 4 4 5 5 5 5 Subtotal 134 153 183 258 327 382 427 460 431 421 351 Total 348 383 455 553 625 684 727 759 729 749 689 Sistema Electrónico de Distribución Cajeros Automáticos Propios y Administrados Puerto Rico 281 327 391 421 442 478 524 539 557 568 583 Islas Vírgenes 8 9 17 59 68 37 39 53 57 59 61 Estados Unidos 38 53 71 94 99 109 118 131 129 163 181 Total 327 389 479 574 609 624 681 723 743 790 825 Empleados 7,815 7,996 8,854 10,549 11,501 10,651 11,334 11,037 11,474 12,139 13,210 (equivalente a tiempo completo) 12 | POPULAR, INC.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $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 $618.2 $671.1 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 47,604.6 52,115.3 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 26,559.3 27,466.1 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 39,710.0 43,758.6 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 5,435.1 6,016.8 $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 $4,719.3 $5,615.9 0.74% -0.14% -3.04% -1.57% 0.36% 0.40% 0.68% 1.65% -0.89% 2.54% 0.58% 0.26% 1.33% 1.33% 9.73% -2.08% -44.47% -32.95% 4.37% 4.01% 6.37% 14.43% -7.04% 19.16% 4.07% 1.96% 11.39% 11.78% $12.41 $(2.73) $(45.51) $2.39 $(0.62) $1.44 $2.36 $5.80 $(3.08) $8.66 $2.06 $1.02 $6.07 $6.89 12.41 (2.73) (45.51) 2.39 (0.62) 1.44 2.35 5.78 (3.08) 8.65 2.06 1.02 6.06 6.88 6.40 6.40 4.80 0.20 - - - - - 0.30 0.60 1.00 1.00 1.20 123.18 121.24 63.29 38.91 36.67 37.71 39.35 44.26 40.76 48.79 49.60 49.51 53.88 62.42 179.50 106.00 51.60 22.60 31.40 13.90 20.79 28.73 34.05 28.34 43.82 35.49 47.22 58.75 52% 59% 64% 65% 74% 74% 73% 72% 80% 75% 75% 76% 77% 78% 45% 38% 33% 32% 23% 23% 24% 25% 17% 22% 23% 22% 21% 20% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 191 196 179 173 185 183 175 171 168 173 171 168 163 164 8 8 8 8 8 9 9 9 9 9 9 9 9 10 142 147 139 101 96 94 92 90 47 50 51 51 51 51 341 351 326 282 289 286 276 270 224 232 231 228 223 225 158 134 2 52 51 9 15 12 12 10 10 10 10 9 9 9 9 9 12 12 11 24 22 32 32 32 33 36 37 37 38 25 24 17 14 14 14 12 13 7 6 6 4 4 3 3 3 2 2 2 2 4 5 6 6 6 5 5 5 5 2 2 1 1 1 1 1 1 1 2 2 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 7 9 9 9 292 280 97 61 55 58 59 59 46 46 37 34 36 36 633 631 423 343 344 344 335 329 270 278 268 262 259 261 605 615 605 571 624 613 597 599 602 622 635 633 619 622 65 69 74 77 17 20 20 22 21 21 20 22 22 23 192 187 176 136 138 135 134 132 83 87 101 110 115 119 862 871 855 784 779 768 751 753 706 730 756 765 756 764 12,508 12,303 10,587 9,407 8,277 8,329 8,072 8,059 7,752 7,810 7,828 7,784 8,474 8,560 1Los datos de las acciones comunes han sido ajustados por las divisiones en acciones y la división de acciones a la inversa realizada en mayo 2012. 2Excluye una sucursal de Banco Popular de Puerto Rico en Nueva York. INFORME ANUAL 2019 | 13

GERENCIA POPULAR, INC. GERENCIA Y JUNTA DE DIRECTORES JUNTA DE DIRECTORES IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. CAMILLE BURCKHART Vicepresidenta Ejecutiva, Principal Oficial de Informática y Estrategia Digital Grupo de Innovación, Tecnologĺa y Operaciones Popular, Inc. BEATRIZ CASTELLVÍ ARMAS Vicepresidenta Ejecutiva y Principal Oficial de Seguridad Grupo de Seguridad Corporativa Popular, Inc. LUIS CESTERO Vicepresidente Ejecutivo Grupo de Banca Individual Banco Popular de Puerto Rico MANUEL A. CHINEA Vicepresidente Ejecutivo Popular, Inc. Principal Oficial de Operaciones Popular Bank JAVIER D. FERRER Vicepresidente Ejecutivo, Principal Oficial Legal y Secretario Corporativo Grupo de Consejerĺa General y Asuntos Corporativos Popular, Inc. GILBERTO MONZÓN Vicepresidente Ejecutivo Grupo de Crédito a Individuo Banco Popular de Puerto Rico EDUARDO J. NEGRÓN Vicepresidente Ejecutivo Grupo de Administración Popular, Inc. ELI S. SEPÚLVEDA Vicepresidente Ejecutivo Grupo de Crédito Comercial Banco Popular de Puerto Rico LIDIO V. SORIANO Vicepresidente Ejecutivo y Principal Oficial de Riesgo Grupo Corporativo de Manejo de Riesgo Popular, Inc. CARLOS J. VÁZQUEZ Vicepresidente Ejecutivo y Principal Oficial Financiero Grupo de Finanzas Corporativas Popular, Inc. JUAN O. GUERRERO Vicepresidente Ejecutivo Grupo de Servicios Financieros y Seguros Banco Popular de Puerto Rico RICHARD L. CARRIÓN Presidente de la Junta de Directores Popular, Inc. IGNACIO ÁLVAREZ Presidente y Principal Oficial Ejecutivo Popular, Inc. JOAQUÍN E. BACARDÍ, III Presidente Edmundo B. Fernández, Inc. ALEJANDRO M. BALLESTER Presidente Ballester Hermanos, Inc. ROBERT CARRADY Presidente Caribbean Cinemas JOHN W. DIERCKSEN Principal Greycrest, LLC C. KIM GOODWIN Inversionista Privada MYRNA M. SOTO Principal Oficial de Operaciones Digital Hands, LLC CARLOS A. UNANUE Presidente Goya de Puerto Rico MARÍA LUISA FERRÉ Presidenta y Principal Oficial Ejecutiva FRG, Inc. 14 | POPULAR, INC.

Financial Review and

Supplementary Information

Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Statistical Summaries	56
Report of Management on Internal Control Over Financial Reporting	61
Report of Independent Registered Public Accounting Firm	62
Consolidated Statements of Financial Condition as of December 31, 2019 and 2018	65
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017	66
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	67
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017	68
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017	69
Notes to Consolidated Financial Statements	71

1

Management’s Discussion and

Analysis of Financial Condition

and Results of Operations

Forward-Looking Statements		3
Overview		4
Critical Accounting Policies / Estimates		8
Statement of Operations Analysis		14
	Net Interest Income	14
	Provision for Loan Losses	17
	Non-Interest Income	17
	Operating Expenses	18
	Income Taxes	19
	Fourth Quarter Results	19
Reportable Segment Result		20
Statement of Financial Condition Analysis		22
	Assets	22
	Liabilities	23
	Stockholders’ Equity	24
Regulatory Capital		25
Off-Balance Sheet Arrangements and Other Commitments		27
	Contractual Obligations and Commercial Commitments	27
Risk Management		29
	Market / Interest Rate Risk	29
	Liquidity	35
	Enterprise Risk and Operational Risk Management	54
	Adoption of New Accounting Standards and Issued but Not Yet Effective Accounting Standards	55
Adjusted net income – Non-GAAP Financial Measure		55
Statistical Summaries
	Statements of Financial Condition	56
	Statements of Operations	57
	Average Balance Sheet and Summary of Net Interest Income	58
	Quarterly Financial Data	60

2

FORWARD-LOOKING STATEMENTS

The information included in this report contains certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including, without limitation, statements about Popular Inc.’s (the “Corporation,” “Popular,” “we,” “us,” “our”) business, financial condition, results of operations, plans, objectives and future performance. These statements are not guarantees of future performance, are based on management’s current expectations and, by their nature, involve risks, uncertainties, estimates and assumptions. Potential factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Risks and uncertainties include without limitation the effect of competitive and economic factors, and our reaction to those factors, the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal and regulatory proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions are generally intended to identify forward-looking statements.

Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to, the rate of growth 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 is concentrated; the impact of the current fiscal and economic challenges of Puerto Rico and the measures taken and to be taken by the Puerto Rico Government and the Federally-appointed oversight board on the economy, our customers and our business; the impact of the pending debt restructuring proceedings under Title III of the Puerto Rico Oversight, Management and Economic Stability Act and of other actions taken or to be taken to address Puerto Rico’s fiscal challenges on the value of our portfolio of Puerto Rico government securities and loans to governmental entities and of our commercial, mortgage and consumer loan portfolios where private borrowers could be directly affected by governmental action;; changes in interest rates and market liquidity, which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; the fiscal and monetary policies of the federal government and its agencies; changes in federal bank regulatory and supervisory policies, including required levels of capital and the impact of proposed capital standards on our capital ratios; additional Federal Deposit Insurance Corporation assessments; regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions; unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics, which could cause a disruption in our operations or other adverse consequences for our business; 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; possible legislative, tax or regulatory changes; and a failure in or breach of our operational or security systems or infrastructure or those of EVERTEC, Inc., our provider of core financial transaction processing and information technology services, or of other third parties providing services to us, including as a result of cyberattacks, e-fraud, denial-of-services and computer intrusion, that might result in loss or breach of customer data, disruption of services, reputational damage or additional costs to Popular. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following:negative economic conditions that adversely affect housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense;changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations;changes in accounting standards, rules and interpretations;our ability to grow our core businesses;decisions to downsize, sell or close units or otherwise change our business mix; andmanagement’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” of the Corporation’s Form 10-K for the year ended December 31, 2019, is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and/or 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, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

3

The description of the Corporation’s business and risk factors contained in Item 1 and 1A of its Form 10-K for the year ended December 31, 2019 discusses additional information about the business of the Corporation and the material risk factors that, in addition to the other information in this report, readers should consider.

OVERVIEW

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation provides retail, mortgage and commercial banking services through its New York-chartered banking subsidiary, Popular Bank (“PB”), which has branches located in New York, New Jersey and Florida. Note 40  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 16.19% interest in EVERTEC, a 15.84% interest in Centro Financiero BHD Leon, S.A. (“BHD Leon”), among other investments in limited partnerships which mainly hold loans and investment securities. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, and also provides to the Corporation core banking and transaction processing and other services. BHD León is a diversified financial services institution operating in the Dominican Republic. For the year ended December 31, 2019, the Corporation recorded approximately $42.9 million in earnings from these investments on an aggregate basis. The carrying amounts of these investments as of December 31, 2019 were $237.1 million. Refer to Note 16 to the consolidated financial statements for additional information of the Corporation’s investments under the equity method.

SIGNIFICANT EVENTS

Accelerated share repurchase transaction

On December 12, 2019, the Corporation completed a $250 million accelerated share repurchase transaction (“ASR”) with respect to its common stock, a component of its 2019 capital plan. In connection therewith, the Corporation received an initial delivery of 3,500,000 shares of common stock during the first quarter of 2019 and received 1,165,607 additional shares of common stock on December 12, 2019. The final number of shares delivered at settlement was based on the average daily volume weighted average price of its common stock, net of a discount, during the term of the ASR, which amounted to $53.58. The Corporation accounted for the ASR as a treasury stock transaction.

Increase in quarterly common stock dividend

As part of its capital plan for 2019, on January 23, 2019, the Corporation announced an increase in its quarterly common stock dividend from $0.25 per share to $0.30 per share, payable commencing in the second quarter of 2019. On February 15, 2019, the Corporation’s Board of Directors approved the first quarterly cash dividend of $0.30 per share on its outstanding common stock, which was paid on April 1, 2019 to shareholders of record at the close of business on March 8, 2019.

Planned Capital Actions for 2020

On January 9, 2020, the Corporation announced the following actions as part of its capital plan for 2020: (i) an increase in the Corporation’s quarterly common stock dividend from $0.30 per share to $0.40 per share, commencing with the dividend payable in the second quarter of 2020, subject to the approval of the Corporation’s Board of Directors; and (ii) common stock repurchases of up to $500 million.

On February 24, 2020, the Corporation redeemed all outstanding shares of its 8.25% Non-Cumulative Monthly Income Preferred Stock, Series B (“Series B Preferred Stock”). The redemption price of the Series B Preferred Stock was $25.00 per share, plus $0.1375 in accrued and unpaid dividends on each share, for a total payment per share in the amount of $25.1375.

On January 30, 2020, the Corporation entered into a $500 million ASR with respect to its common stock, which was accounted for as a treasury stock transaction. As a result of the receipt of the initial shares, the Corporation recognized in shareholders’ equity

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approximately $400 million in treasury stock and $100 million as a reduction in capital surplus. The Corporation expects to further adjust its treasury stock and capital surplus to reflect the delivery or receipt of cash or shares upon the termination of the ASR agreement, which will depend on the average price of the Corporation’s shares during the term of the ASR.

Refer to Table 1 for selected financial data for the past five years.

Table 1 - Selected Financial Data
				Years ended December 31,
(Dollars in thousands, except per common share data)				2019		2018		2017		2016		2015
CONDENSED STATEMENTS OF OPERATIONS
	Interest income		$	2,260,793	$	2,021,848	$	1,725,944	$	1,634,573	$	1,603,014
	Interest expense			369,099		286,971		223,980		212,518		194,031
	Net interest income			1,891,694		1,734,877		1,501,964		1,422,055		1,408,983
	Provision (reversal) for loan losses:
		Non-covered loans		165,779		226,342		319,682		171,126		217,458
		Covered loans		-		1,730		5,742		(1,110)		24,020
	Non-interest income			569,883		652,494		419,167		297,936		519,541
	Operating expenses			1,477,482		1,421,562		1,257,196		1,255,635		1,288,221
	Income tax expense (benefit)			147,181		119,579		230,830		78,784		(495,172)
	Income from continuing operations			671,135		618,158		107,681		215,556		893,997
	Income from discontinued operations, net of tax			-		-		-		1,135		1,347
		Net income	$	671,135	$	618,158	$	107,681	$	216,691	$	895,344
		Net income applicable to common stock	$	667,412	$	614,435	$	103,958	$	212,968	$	891,621
PER COMMON SHARE DATA
Net income:
	Basic:
		From continuing operations	$	6.89	$	6.07	$	1.02	$	2.05	$	8.65
		From discontinued operations		-		-		-		0.01		0.01
		Total	$	6.89	$	6.07	$	1.02	$	2.06	$	8.66
	Diluted:
		From continuing operations	$	6.88	$	6.06	$	1.02	$	2.05	$	8.64
		From discontinued operations		-		-		-		0.01		0.01
		Total	$	6.88	$	6.06	$	1.02	$	2.06	$	8.65
	Dividends declared		$	1.20	$	1.00	$	1.00	$	0.60	$	0.30
	Common equity per share			62.42		53.88		49.51		49.60		48.79
	Market value per common share			58.75		47.22		35.49		43.82		28.34
	Outstanding shares:
		Average - basic		96,848,835		101,142,258		101,966,429		103,275,264		102,967,186
		Average - assuming dilution		96,997,800		101,308,643		102,045,336		103,377,283		103,124,309
		End of period		95,589,629		99,942,845		102,068,981		103,790,932		103,618,976
AVERAGE BALANCES
	Net loans[1]		$	26,806,368	$	25,062,730	$	23,511,293	$	23,062,242	$	23,045,308
	Earning assets			44,944,793		43,275,366		37,668,573		33,713,158		31,451,081
	Total assets			50,341,827		46,639,858		41,404,139		37,613,742		35,186,305
	Deposits			42,218,796		38,487,422		33,182,522		29,066,010		26,778,582
	Borrowings			1,404,459		1,879,229		2,000,840		2,339,399		2,757,334
	Total stockholders' equity			5,713,517		5,444,152		5,345,244		5,278,477		4,704,862
PERIOD END BALANCE
	Net loans[1]		$	27,466,076	$	26,559,311	$	24,942,463	$	23,435,446	$	23,129,230
	Allowance for loan losses			477,708		569,348		623,426		540,651		537,111
	Earning assets			48,674,705		44,325,489		40,680,553		34,861,193		31,717,124
	Total assets			52,115,324		47,604,577		44,277,337		38,661,609		35,761,733
	Deposits			43,758,606		39,710,039		35,453,508		30,496,224		27,209,723
	Borrowings			1,294,986		1,537,673		2,023,485		2,055,477		2,425,853
	Total stockholders' equity			6,016,779		5,435,057		5,103,905		5,197,957		5,105,324
SELECTED RATIOS
	Net interest margin (non-taxable equivalent basis)			4.03	%	4.01	%	3.99	%	4.22	%	4.48	%
	Net interest margin (taxable equivalent basis) -Non-GAAP			4.43		4.34		4.28		4.48		4.74
	Return on average total assets			1.33		1.33		0.26		0.58		2.54
	Return on average common stockholders' equity			11.78		11.39		1.96		4.07		19.16
	Tier I Capital to risk-adjusted assets			17.76		16.90		16.30		16.48		16.21
	Total Capital to risk-adjusted assets			20.31		19.54		19.22		19.48		18.78

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

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. Adjusted net income is a non-GAAP financial measure. Management believes that Adjusted net income provides meaningful information about the underlying performance of the Corporation’s ongoing operations. No adjustments to net income are reflected for the year ended December 31, 2019. Refer to Table 35 for a reconciliation of net income to Adjusted net income for the year ended December 31, 2018.

Net interest income on a taxable equivalent basis

Net interest income, on a taxable equivalent basis, is presented with its different components on Table 3 for the year ended December 31, 2019 as compared with the same period in 2018, 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 Puerto Rico tax 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, 2019

The Corporation’s net income for the year ended December 31, 2019 amounted to $671.1 million, compared to a net income of $618.2 million for 2018. The results for the year ended December 31, 2018  include  a pre-tax gain of $94.6 million resulting from the Termination Agreement with the FDIC previously disclosed; a net income tax benefit of $63.9 million resulting from the impact of the Termination Agreement and the related Tax Closing Agreement and $27.7 million non-cash income tax expense as a result of a reduction in the Corporation’s net deferred tax asset related to the Puerto Rico operations due to the reduction in tax rates as a result of an amendment to the Puerto Rico Internal Revenue Code. Excluding the impact of the above-mentioned transactions, detailed in Table 35 the Adjusted net income for the year ended December 31, 2018 was $487.3 million.

The discussion that follows provides highlights of the Corporation’s results of operations for the year ended December 31, 2019 compared to the results of operations of 2018. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table 2 presents a five-year summary of the components of net income (loss) as a percentage of

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average total assets.

Table 2 - Components of Net Income as a Percentage of Average Total Assets
	2019		2018		2017		2016		2015
Net interest income	3.76	%	3.72	%	3.63	%	3.78	%	4.00	%
Provision for loan losses	(0.33)		(0.49)		(0.79)		(0.45)		(0.69)
Mortgage banking activities	0.06		0.11		0.06		0.15		0.23
Other-than-temporary impairment losses on debt securities	-		-		(0.02)		-		(0.04)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale	-		-		-		0.02		-
Net (loss) trading account on debt securities	-		-		-		-		(0.01)
Indemnity reserve on loans sold expense	-		(0.03)		(0.05)		(0.05)		(0.05)
FDIC loss share income (expense)	-		0.20		(0.02)		(0.55)		0.06
Other non-interest income	1.07		1.12		1.05		1.22		1.29
Total net interest income and non-interest income, net of provision for loan losses	4.56		4.63		3.86		4.12		4.79
Operating expenses	(2.94)		(3.05)		(3.04)		(3.34)		(3.66)
Income before income tax	1.62		1.58		0.82		0.78		1.13
Income tax expense (benefit)	0.29		0.26		0.56		0.20		(1.41)
Net income	1.33	%	1.32	%	0.26	%	0.58	%	2.54	%

Net interest income for the year ended December 31, 2019 was $1.9 billion, an increase of $156.8 million when compared to 2018. The increase in net interest income was mainly driven by higher interest income from loans and securities, partially offset by lower interest income from money market investments and higher interest expense on deposits. Refer to the Net Interest Income section of this MD&A for additional information.

The Corporation’s total provision for loan losses totaled $165.8 million for the year ended December 31, 2019, compared with $228.1 million for 2018. The decrease was mainly related to revisions to certain loss estimates and to incremental reserves for two large commercial borrowers during 2018, coupled with credit quality improvements in the mortgage portfolio during 2019. Non-performing assets totaled $650 million at December 31, 2019, reflecting a decrease of $98 million when compared to December 31, 2018. 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, 2019 amounted to $569.9 million, a decrease of $82.6 million, when compared with 2018. Excluding the unfavorable variance in FDIC loss share income (expense) of $94.7 million as a result of the Termination Agreement, non-interest income increased by $12.1 million primarily driven by higher service charges on deposit accounts, higher other service fees and a favorable variance in adjustments to indemnity reserves, partially offset by lower income from mortgage banking activities and lower other operating income. 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 $1.5 billion for the year 2019, compared with $1.4 billion at December 31, 2018, an increase of $55.9 million. Operating expenses for 2019 were impacted by higher personnel costs by $27.6 million and higher professional fees of $34.6 million. Refer to the Operating Expenses section of this MD&A for additional information.

Income tax expense amounted to $147.2 million for the year ended December 31, 2019, compared with an income tax expense of $119.6 million for the previous year. The income tax expense for the year 2019 includes an income tax benefit of approximately $26 million related to a revision of the amount of exempt income earned in prior years and certain adjustments pertaining to tax periods for which the statute of limitations had expired. During 2018, the Corporation recorded a net income tax benefit of $63.9 million related to the impact of the FDIC Termination Agreement, and a non-cash income tax expense of $27.7 million due to a reduction in

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the Puerto Rico corporate tax rate from 39% to 37.5%. Refer to the Income Taxes section in this MD&A and Note 38 to the consolidated financial statements for additional information on income taxes.

At December 31, 2019, the Corporation’s total assets were $52.1 billion, compared with $47.6 billion at December 31, 2018, an increase of $4.5 billion, mainly driven by an increase in the Corporation’s debt securities available-for-sale portfolio by $4.3 billion and $0.9 billion in the loans held-in-portfolio. Refer to the Statement of Condition Analysis section of this MD&A for additional information.

Deposits amounted to $43.8 billion at December 31, 2019, compared with $39.7 billion at December 31, 2018. Table 7 presents a breakdown of deposits by major categories. The increase in deposits was mainly due to higher Puerto Rico public sector deposits at BPPR by $2.9 billion and an increase of $0.9 billion at Popular Bank, mainly from retail deposits gathered through its online platform. The Corporation’s borrowings totaled $1.3 billion at December 31, 2019, compared to $1.5 billion at December 31, 2018, reflecting a decrease of $0.2 billion mostly due to the maturity of Federal Home Loan Bank advances and repurchase agreements. Refer to Note 19 to the Consolidated Financial Statements for detailed information on the Corporation’s borrowings.

Refer to Table 6 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 $6.0 billion at December 31, 2019, compared with $5.4 billion at December 31, 2018. The increase was mainly due to net income of $671.1 million for the year 2019 and higher unrealized gains on debt securities available-for-sale by $266 million, partially offset by the impact of the $250 million accelerated share repurchase transaction and declared dividends of $116 million on common stock (quarterly dividends of $0.30 per share) and $3.7 million in dividends on preferred stock. The Corporation and its banking subsidiaries continue to be well-capitalized at December 31, 2019. The Common Equity Tier 1 Capital ratio at December 31, 2019 was 17.76%, compared to 16.90% at December 31, 2018.

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.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

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

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

Fair Value Measurement of Financial Instruments

The Corporation currently measures at fair value on a recurring basis its trading debt securities, debt securities available-for-sale, certain equity securities, derivatives and mortgage servicing rights. 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.

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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.

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 $8 million at December 31, 2019, of which $ 1 million were Level 3 assets and $ 7 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.

Trading Debt Securities and Debt Securities Available-for-Sale

The majority of the values for trading debt securities and debt 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, 2019, 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, 2019, none of the Corporation’s debt 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 30 to the Consolidated Financial Statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value.

Loans and Allowance for Loan Losses

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

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

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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 9.

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

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

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

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

Loans Acquired with Deteriorated Credit Quality Accounted for Under ASC 310-30

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. 

Generally, acquired loans that meet the definition for nonaccrual status fall within the Corporation’s definition of impaired loans under ASC Subtopic 310-30.  Also, for acquisitions that include a significant amount of impaired loans, an election can be made for non-impaired loans included in such transactions to apply the accretable yield method (expected cash flow model of ASC Subtopic 310-30), by analogy, to those loans. Those loans are disclosed as a loan that was acquired with credit deterioration and impairment.

Under ASC Subtopic 310-30, impaired loans are aggregated into pools based on loans that have common risk characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

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Characteristics considered in pooling loans include loan type, interest rate type, accruing status, amortization type, rate index and source type. Once the pools are defined, the Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset.

Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value of the loans, or the “accretable yield,” is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool is reasonably estimable. The non-accretable difference represents the difference between contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively as an adjustment to accretable yield over the pool’s remaining life. Decreases in expected cash flows after the acquisition date are generally recognized by recording an allowance for loan losses.

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.

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.

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 38.

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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 $10.5 million at December 31, 2019 and $9.0 million at December 31, 2018. Refer to Note 38 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 $2.1 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

12

unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangibles (including any unrecognized intangible assets, such as unrecognized core deposits and trademark) as if the reporting unit was being acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The Corporation estimates the fair values of the assets and liabilities of a reporting unit, consistent with the requirements of the fair value measurements accounting standard, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at the impairment test date. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the Consolidated Statement of Condition. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted under applicable accounting standards. BPPR and PB passed Step 1 in the annual test as of July 31, 2019. For a detailed description of the annual goodwill impairment evaluation performed by the Corporation during the third quarter of 2019, refer to Note 17.

At December 31, 2019, goodwill amounted to $671 million. Note 17 to the Consolidated Financial Statements provides the assignment of goodwill by reportable segment.

Refer to Note 3, New Accounting Pronouncements, for changes on the annual goodwill impairment test in accordance with ASU 2017-04.

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 Pension Plans”) are frozen with regards to all future benefit accruals.

The estimated benefit costs and obligations of the Pension Plans and Postretirement Health Care Benefit Plan (“OPEB Plan”) 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 Plans and OPEB Plan costs and obligations. Detailed information on the Plans and related valuation assumptions are included in Note 32 to the Consolidated Financial Statements.

The Corporation periodically reviews its assumption for the long-term expected return on Pension Plans assets. The Pension Plans’ assets fair value at December 31, 2019 was $800 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 2020 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, 8.9% for international stocks, 3.2% for aggregate fixed-income securities and 3.6% for long government/credit at January 1, 2020. 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.

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As a consequence of recent reviews, the Corporation decreased its expected return on plan assets for year 2020 to 5.0% and 5.8% for the Pension Plans. Expected rates of return of 5.3% and 6.0% had been used for 2019 and 5.5% and 6.0% had been used for 2018 for the Pension 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.

Net Periodic Benefit Cost (“pension expense”) for the Pension Plans amounted to $19.6 million in 2019. The total pension expense included a benefit of $32.4 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 2019 from 5.00% to 4.75% would increase the projected 2020 pension expense for the Banco Popular de Puerto Rico Retirement Plan, the Corporation’s largest plan, by approximately $1.9 million. 

If the projected benefit obligation exceeds the fair value of plan assets, the Corporation shall recognize a liability equal to the unfunded projected benefit obligation and vice versa, if the fair value of plan assets exceeds the projected benefit obligation, the Corporation recognizes an asset equal to the overfunded projected benefit obligation. This asset or liability may result in a taxable or deductible temporary difference and its tax effect shall be recognized as an income tax expense or benefit which shall be allocated to various components of the financial statements, including other comprehensive income.  The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s Consolidated Statement of Financial Condition. Management believes that the fair value estimates of the Pension Plans assets are reasonable given the valuation methodologies used to measure the investments at fair value as described in Note 30. 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 $52.6 million at December 31, 2019.

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 which ranged from 3.22% to 3.27% for the Pension Plans and 3.38% for the OPEB Plan to determine the benefit obligations at December 31, 2019.

A 50 basis point decrease to each of the rates in the December 31, 2019 Willis Towers Watson RATE: Link (10/90) Model as of the beginning of 2020 would increase the projected 2020 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 Pension Plans.

The OPEB Plan was unfunded (no assets were held by the plan) at December 31, 2019. The Corporation had recorded a liability for the underfunded postretirement benefit obligation of $168.7 million at December 31, 2019. 

STATEMENT OF OPERATIONS ANALYSIS

Pursuant to the Fixing America’s Surface Transportation (“FAST”) Act Modernization and Simplification of Regulation S-K, discussions related to the changes in results of operations from fiscal year 2018 to 2017 have been omitted. Such omitted discussion can be found under Item 7 of our annual Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC.

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, 2019 was $1.9 billion compared to $1.7 billion in 2018. Net interest income, on a taxable equivalent basis, for the year ended December 31, 2019 was $2.1 billion compared to $1.9 billion in 2018.

The average key index rates for the years 2019 and 2018 were as follows:

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	2019	2018
Prime rate………………………………………………………………………………………………….	5.28%	4.91%
Fed funds rate……………………………………………………………………………………………..	2.15	1.82
3-month LIBOR……………………………………………………………………………………………	2.33	2.31
3-month Treasury Bill…………………………………………………………………………………….	2.09	1.96
10-year Treasury………………………………………………………………………………………….	2.14	2.91
FNMA 30-year…………………………………………………………………………………………….	2.85	3.60

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, 2019 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC Subtopic 310-30, of $55.5 million, related to those items, compared to $47.2 million for the same period in 2018. The increase of $8.2 million is mainly due to a full year of amortization of the fair value discount related to the Reliable portfolio, acquired in the third quarter of 2018.

Table 3presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2019, as compared with the same period in 2018, segregated by major categories of interest earning assets and interest-bearing liabilities. Net interest margin increased by 2 basis points to 4.03% in 2019, compared to 4.01% in 2018. The increase in net interest margin is mainly driven by the loan portfolio acquired from Wells Fargo in 2018 (the “Reliable Transaction”) and the increase in the investments and commercial portfolio. These positive drivers were partially offset by a decrease in market interest rates, lower money market investments and higher volume and cost of interest-bearing liabilities. On a taxable equivalent basis, net interest margin was 4.43% in 2019, compared to 4.34% in 2018. Net interest income increased by $156.8 million year over year. On a taxable equivalent basis, net interest income increased by $202.5 million. The increase of $45.7 million in the taxable equivalent adjustment is directly related to a higher volume of tax-exempt investments in Puerto Rico. The main variances in net interest income on a taxable equivalent basis were:

Positive variances:

·Higher interest income from investment securities due to higher volume of U.S. Treasuries and mortgage-backed securities related to recent purchases to deploy liquidity and benefit from the Puerto Rico tax exemption of these assets and higher yield driven by the increase in market rates; and

·Higher interest income from loans:

·Commercial loans, driven by higher volume in the U.S. and loans acquired in the Reliable transaction; and

·Auto and lease portfolios in P.R. due to both the full year of the Reliable portfolio versus five-month in 2018 and the organic growth at Popular Auto.

Negative variances:

·Lower interest income from money market investments due to the use of excess liquidity to acquire the Reliable portfolio and investment securities; and

·Higher interest expense on deposits mainly due to higher volumes in most categories, predominantly the increase in deposits from the Puerto Rico government, retail and corporate deposits and higher deposit volumes in the U.S. to fund loan growth.

Due to the Corporation’s current asset sensitive position, the recent reductions of 0.25% of the Fed Funds Rate by the Federal Open Market Committee (“FOMC”) on July 31, 2019, September 18, 2019 and October 30, 2019, and further expectation of lower

15

interest rates will negatively impact our future results. See the Risk Management: Market / Interest Rate Risk section of this MD&A for additional information related to the Corporation’s interest rate risk.

Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Years ended December 31,
																					Variance
Average Volume						Average Yields / Costs								Interest							Attributable to
	2019		2018	Variance		2019		2018		Variance					2019		2018		Variance		Rate		Volume
	(In millions)														(In thousands)
$	4,166	$	5,943	$	(1,777)	2.16	%	1.87	%	0.29	%	Money market investments		$	89,824	$	111,289	$	(21,465)	$	15,157	$	(36,622)
	15,905		12,193		3,712	3.15		2.99		0.16		Investment securities			501,781		364,362		137,419		21,661		115,758
	68		76		(8)	7.55		7.55		-		Trading securities			5,103		5,772		(669)		-		(669)
												Total money market,
													investment and trading
	20,139		18,212		1,927	2.96		2.64		0.32			securities		596,708		481,423		115,285		36,818		78,467
												Loans:
	12,171		11,698		473	6.11		6.03		0.08			Commercial		743,682		705,190		38,492		9,649		28,843
	801		915		(114)	6.59		6.37		0.22			Construction		52,767		58,270		(5,503)		1,987		(7,490)
	989		867		122	6.06		5.98		0.08			Leasing		59,935		51,868		8,067		664		7,403
	7,121		7,119		2	5.36		5.30		0.06			Mortgage		381,493		377,139		4,354		4,250		104
	2,885		2,847		38	11.81		11.53		0.29			Consumer		340,848		328,165		12,683		7,298		5,385
	2,839		1,617		1,222	9.59		9.95		(0.36)			Auto		272,169		160,908		111,261		(6,123)		117,384
	26,806		25,063		1,743	6.90		6.71		0.19		Total loans			1,850,894		1,681,540		169,354		17,725		151,629
$	46,945	$	43,275	$	3,670	5.21	%	5.00	%	0.21	%	Total earning assets		$	2,447,602	$	2,162,963	$	284,639	$	54,543	$	230,096
												Interest bearing deposits:
$	15,327	$	12,688	$	2,639	0.96	%	0.64	%	0.32	%		NOW and money market [1]	$	146,684	$	80,665	$	66,019	$	44,662	$	21,357
	10,249		9,439		810	0.44		0.34		0.10			Savings		45,516		31,878		13,638		9,142		4,496
	7,770		7,570		200	1.45		1.21		0.24			Time deposits		112,658		91,722		20,936		18,990		1,946
	33,346		29,697		3,649	0.91		0.69		0.22		Total deposits			304,858		204,265		100,593		72,794		27,799
	231		358		(127)	2.64		2.01		0.63		Short-term borrowings			6,099		7,210		(1,111)		1,864		(2,975)
												Other medium and
	1,194		1,521		(327)	4.77		4.96		(0.19)			long-term debt		58,142		75,496		(17,354)		(3,424)		(13,930)
												Total interest bearing
	34,771		31,576		3,195	1.06		0.91		0.15			liabilities		369,099		286,971		82,128		71,234		10,894
	8,873		8,790		83							Demand deposits
	3,301		2,909		392							Other sources of funds
$	46,945	$	43,275	$	3,670	0.78	%	0.66	%	0.12	%	Total source of funds			369,099		286,971		82,128		71,234		10,894
						4.43	%	4.34	%	0.09	%	Net interest margin/ income on a taxable equivalent basis (Non-GAAP)			2,078,503		1,875,992		202,511	$	(16,691)	$	219,202
						4.15	%	4.09	%	0.06	%	Net interest spread
												Taxable equivalent adjustment			186,809		141,116		45,693
						4.03	%	4.01	%	0.02	%	Net interest margin/ income non-taxable equivalent basis (GAAP)		$	1,891,694	$	1,734,876	$	156,818
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
[1] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

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Provision for Loan Losses

The Corporation’s provision for loan losses was $165.8 million for the year ended December 31, 2019, compared to $228.1 million for the year ended December 31, 2018, a decrease of $62.3 million.

The provision for loan losses for Puerto Rico segment was $135.8 million, compared to $196.5 million for the year ended December 31, 2018, a decrease of $60.7 million. The decrease in the provision for the year ended December 31, 2019 was mainly related to revisions to certain loss estimates and to incremental reserves for two large impaired commercial borrowers during the same period in 2018, coupled with the continued credit quality improvements in the mortgage portfolio during 2019. These positive variances were in part offset by higher reserves for the auto loans portfolio.

The Popular U.S. segment continued to reflect strong growth and favorable credit quality metrics. The provision for loan losses for this segment amounted to $30.0 million, flat when compared to $29.9 million for the same period in 2018.

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, 2019, non-interest income decreased by $82.6 million, when compared with the previous year. Excluding the unfavorable variance in FDIC loss share income (expense) of $94.7 million as a result of the Termination Agreement, non-interest income increased by $12.1 million primarily driven by:

·Higher service charges on deposit accounts by $10.3 million, mainly at BPPR, due to higher fees on transactional cash management services;

·Higher other service fees by $27.2 million mainly due to higher credit card fees by $9.2 million as a result of higher interchange income resulting from higher transactional volumes, higher insurance fees by $8.2 million in part due to higher contingent insurance commissions by $6.0 million and higher other fees by $6.9 million in part due to retail auto loan servicing fee income;

·Higher net unrealized gains on equity securities by $4.6 million; and

·Favorable variance in adjustments to indemnity reserves of $12.6 million mainly due to a lower provision related to loans previously sold with credit recourse and a release of a $4.4 million reserve previously established in connection with a 2013 transaction at BPPR.

These favorable variances were partially offset by:

·Lower income from mortgage banking activities by $20.7 million mainly due to higher unfavorable fair value adjustments on mortgage servicing rights by $19.0 million, net of portfolio amortization, and higher realized losses on closed derivatives positions by $8.8 million; partially offset by higher gains on securitization transactions by $8.3 million; and

·Lower other operating income by $23.0 million mainly resulting from $19.0 million in insurance recoveries related to Hurricane Maria received during 2018 and lower modification fees received for the successful completion of loss mitigation alternatives by $11.2 million, partially offset by higher aggregated net earnings from investments under the equity method by $4.9 million.

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Operating Expenses

Table 4 provides a breakdown of operating expenses by major categories.

Table 4 - Operating Expenses
		Years ended December 31,
(In thousands)		2019			2018			2017			2016			2015
Personnel costs:
	Salaries	$	351,788		$	326,509		$	313,394		$	308,135		$	304,618
	Commissions, incentives and other bonuses		97,764			90,000			70,099			73,684			79,305
	Pension, postretirement and medical insurance		41,804			39,660			40,065			41,203			36,743
	Other personnel costs, including payroll taxes		99,269			106,819			53,204			54,373			49,537
	Total personnel costs		590,625			562,988			476,762			477,395			470,203
Net occupancy expenses			96,339			88,329			89,194			85,653			86,888
Equipment expenses			84,215			71,788			65,142			62,225			60,110
Other taxes			51,653			46,284			43,382			42,304			39,797
Professional fees:
	Collections, appraisals and other credit related fees		16,300			14,700			14,415			14,607			23,098
	Programming, processing and other technology services		247,332			216,128			199,873			205,466			191,895
	Legal fees, excluding collections		12,877			19,072			11,763			42,393			26,122
	Other professional fees		107,902			99,944			66,437			60,577			67,870
	Total professional fees		384,411			349,844			292,488			323,043			308,985
Communications			23,450			23,107			22,466			23,897			25,146
Business promotion			75,372			65,918			58,445			53,014			52,076
FDIC deposit insurance			18,179			27,757			26,392			24,512			27,626
Loss on early extinguishment of debt			-			12,522			-			-			-
Other real estate owned (OREO) expenses			4,298			23,338			48,540			47,119			85,568
Other operating expenses:
	Credit and debit card processing, volume, interchange and other expenses		38,059			27,979			26,201			20,796			22,854
	Operational losses		21,414			35,798			39,612			35,995			20,663
	All other		80,097			76,584			59,194			43,737			58,874
	Total other operating expenses		139,570			140,361			125,007			100,528			102,391
Amortization of intangibles			9,370			9,326			9,378			12,144			11,019
Goodwill and trademark impairment losses			-			-			-			3,801			-
Restructuring costs			-			-			-			-			18,412
Total operating expenses		$	1,477,482		$	1,421,562		$	1,257,196		$	1,255,635		$	1,288,221
Personnel costs to average assets			1.17	%		1.21	%		1.15	%		1.27	%		1.34	%
Operating expenses to average assets			2.93			3.05			3.04			3.34			3.66
Employees (full-time equivalent)			8,560			8,474			7,784			7,828			7,810
Average assets per employee (in millions)			$5.88			$5.50			$5.32			$4.81			$4.51

Operating expenses for the year ended December 31, 2019 increased by $55.9 million, when compared with the previous year, mostly due to: 

·Higher personnel cost by $27.6 million, including higher salaries by $25.3 million due to an increase in headcount, reflecting the integration of Reliable personnel during August 2018; higher commissions, incentives and other bonuses by $7.8 million and an increase of $3.2 million related to annual incentives tied to the Corporation’s financial performance, partially offset by a decrease of $7.6 million in other personnel cost mainly related with the implementation of the voluntary retirement program during prior year;

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·Higher net occupancy expense by $8.0 million due to insurance claim reimbursement received during 2018 and higher insurance cost and electricity expense;

·Higher equipment expense by $12.4 milliondue to higher purchases of furniture and equipment and higher software and maintenance expenses; 

·Higher professional fees by $34.6 million mainly due to higher programming, processing and other technology expenses by $31.2 million in part related to the Reliable system conversion; and higher advisory expense by $5.0 million related to Corporate initiatives; and

·Higher business promotions by $9.5 million mainly due to higher customer reward program expense and higher advertising cost.

These negative variances were partially offset by:

·Lower FDIC deposit insurance by $9.6 million mainly driven by the termination of the surcharge period in 2018;

·A loss of $12.5 million during the year 2018, resulting from the early extinguishment of its outstanding 7.00% Senior Notes due 2019 (the “2019 Notes”); and

·Lower OREO expenses by $19.0 million due to higher gain on sales by $9.6 million and lower write-downs on valuation of mortgage, commercial and construction properties by $7.5 million.

INCOME TAXES

For the year ended December 31, 2019, the Corporation recorded income tax expense of $147.2 million, compared to $119.6 million for the previous year. The income tax expense for the year 2019 includes an income tax benefit of approximately $26 million related to a revision of the amount of exempt income for prior years and certain adjustments pertaining to tax periods for which the statute of limitations had expired.

On December 10, 2018, the Governor of Puerto Rico signed into law Act No. 257 of 2018, which amended the Puerto Rico Internal Revenue Code to, among other things, reduce the Puerto Rico corporate income tax rate from 39% to 37.5%. The Corporation recognized a $27.7 million non-cash income tax expense as a result of a reduction in the Corporation’s net deferred tax asset (“DTA”) related to its Puerto Rico operations, due to the aforementioned reduction in tax rates at which it expects to realize the benefit of the DTA. During 2018, the Corporation also recorded a tax benefit of $108.9 million related to the Tax Closing Agreement entered into in connection with the FDIC Transaction, net of an income tax expense of $45.0 million from the gain resulting from the Termination Agreement with the FDIC recognized during 2018.

At December 31, 2019, the Corporation had a deferred tax asset amounting to $0.9 billion, net of a valuation allowance of $0.5 billion. The deferred tax asset related to the U.S. operations was $0.3 billion, net of a valuation allowance of $0.4 billion.

Refer to Note 38 to the Consolidated Financial Statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on deferred tax asset balances.

Fourth Quarter Results

The Corporation recognized net income of $166.8 million for the quarter ended December 31, 2019, compared with a net income of $106.4 million for the same quarter of 2018. The results for the fourth quarter of 2019 include an income tax benefit of approximately $18 million related to the revision of the amount of exempt income for prior years, while the results for the fourth quarter of 2018 include $27.7 million of income tax expense due to a reduction in the Corporation’s DTA, as further discussed below.

Net interest income for the fourth quarter of 2019  amounted to $467.4 million, compared with $476.2 million for the fourth quarter of 2018. The decrease in net interest income was mainly due to higher interest expense on deposits driven by higher average balance; lower interest income from the commercial loan portfolio, resulting from lower market rates in the adjustable rate portfolio and originations in a declining interest rate environment; partially offset by higher income from money market, trading and investment securities as a result of higher volume of earning assets.

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The provision for loan losses amounted to $47.2 million for the quarter ended December 31, 2019, compared to $42.6 million for the fourth quarter of 2018. The increase of $4.6 million is reflected at PB by $7.2 million, partially offset by a decrease in BPPR of $2.6 million.

Non-interest income amounted to $152.4 million for the quarter ended December 31, 2019, compared with $153.2 million for the same quarter in 2018. The decrease was mainly due to lower other operating income by $12.9 million which included $9.5 million in recoveries from hurricane related claims during the fourth quarter of 2018, lower mortgage banking activities by $5.9 million mainly due to unfavorable fair value adjustments on mortgage servicing rights; partially offset by a favorable variance in adjustments to indemnity reserves on loans sold by $7.8 million, higher other service fees by $5.3 million mainly due to higher insurance fees, higher service charges on deposits accounts by $2.7 million and higher net gain on equity securities by $2.4 million.

Operating expenses totaled $390.6 million for the quarter ended December 31, 2019, compared with $396.5 million for the same quarter in the previous year.  The decrease is mainly related to lower personnel costs by $14.7 million due to the impact of the voluntary retirement program which was effective for employees who confirmed their election to participate before the end of the year 2018 and lower incentive compensation; and the expense of $12.5 million related to the early redemption of the 2019 Notes during the fourth quarter of 2018; partially offset by higher professional fees by $14.0 million due to higher advisory expenses related to Corporate initiatives and higher credit and debit card processing, volume, interchange expenses by $5.7 million.

Income tax expense amounted to $15.3 million for the quarter ended December 31, 2019, compared with income tax expense of $84.0 million for the same quarter of 2018. During the fourth quarter of 2019, the Corporation recorded a tax benefit of approximately $18 million related to the revision of the amount of exempt income for prior years. During the fourth quarter of 2018 the Corporation recognized a $27.7 million non-cash income tax expense as a result of a reduction in the Corporation’s DTA related to its Puerto Rico operations, due to the reduction in Corporate tax rate from 39% to 37.5%.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Popular U.S. A Corporate group has been defined to support 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 40 to the Consolidated Financial Statements.

As discussed in Note 40, effective on January 1, 2019, the Corporation’s management changed the measurement basis for its reportable segments. Historically, for management reporting purposes, the Corporation had reversed the effect of the intercompany billings from itself, as holding company, to its subsidiaries for certain services or expenses incurred on their behalf. In addition, the Corporation used to reflect an income tax expense allocation for several of its subsidiaries which are Limited Liability Companies (“LLCs”) and had made an election to be treated as pass through entities for income tax purposes. The Corporation’s management has determined to discontinue making these adjustments, effective on January 1, 2019, for purposes of its management and reportable segment reporting. The Corporation reflected these changes in the measurement of the reportable segments’ results prospectively beginning on January 1, 2019.

The Corporate group reported a net income of $6.1 million for the year ended December 31, 2019, compared to a net loss of $89.7 million for the previous year. The increase in the net income was attributed to lower operating expenses by $107.0 million as a result of the change in the measurement basis of the intercompany billings from Popular Inc., holding company to its subsidiaries, as discussed above, and the early extinguishment of debt of $12.5 million related to the redemption of the 2019 Notes during 2018.

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 $609.9 million for the year ended December 31, 2019, compared with $630.3 million for the year ended December 31, 2018. The principal factors that contributed to the variance in the financial results included the following:

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·Higher net interest income by $151.8 million due to higher interest income of loans by $140.4 million, reflecting growth in the auto portfolio and higher interest income on debt securities by $106.1 million; partially offset by higher interest expense from deposits by $71.8 million due to higher volumes predominantly the increase of deposits from the Puerto Rico government.  The BPPR segment’s net interest margin was 4.30% for 2019 compared with 4.27% for the same period in 2018;

·Lower provision for loans losses by $62.9 million driven by revisions to certain loss estimates and to incremental reserves for two large impaired commercial borrowers in 2018, coupled with the continued credit quality improvements in the mortgage portfolio during 2019. These positive variances were in part offset by higher reserves for the auto loans portfolio;

·Lower non-interest income by $86.2 million mainly due to:

· Lower mortgage banking activities by $20.7 million due to unfavorable fair value adjustments on mortgage servicing rights, and higher realized losses on closed derivatives position; and

·Unfavorable variance in FDIC loss share (expense) income by $94.7 million driven by the impact of the Termination Agreement with the FDIC discussed in Note 10 to the Consolidated Financial Statements; and

· Lower other operating income by $22.3 million mainly resulting from insurance recoveries related to Hurricane Maria of $19.0 million received during 2018.

                Partially offset by:

·Higher service charges on deposit accounts by $9.3 million due to higher fees on transactional cash management services;

·Higher other service fees by $27.5 million due debit and credit card fees resulting from higher transactional volumes; higher retail auto loan servicing fee income; and

·Favorable variance in adjustments to indemnity reserves of $12.6 million related to loans previously sold with credit recourse and a release of $4.4 million reserve established in connection with a 2013 transaction.

· Higher operating expenses by $141.0 million, mainly due to:

·Higher personnel costs by $15.3 million, including higher salaries by $9.9 million due to an increase in headcount, this increase includes the integration of Reliable personnel during August 2018 and an increase of $2.5 million related to the incentive compensation tied to the Corporation’s financial performance;

·Higher equipment expense by $11.0 milliondue to higher purchases of furniture and equipment and higher software and maintenance expenses;

· Higher professional fees by $28.1 million due to higher programming, processing and other technology expenses by $29.7 million in part related to Reliable system conversion;

·Higher business promotions by $9.7 million mainly due to higher customer reward program expense and higher advertising cost; and

·Higher other operating expenses by $93.4 million mainly to the change in the measurement basis of the intercompany billings from Popular Inc., holding company to its subsidiaries, mentioned above.

Partially offset by:

· Lower OREO expense by $18.7 million due higher gain on sales by $11.1 million and lower write-downs on valuation of mortgage, commercial and construction properties by $7.5 million.

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·Higher income tax expense by $7.9 million mainly due to a net tax benefit  of $27.7 million recorded in 2018 in connection with the FDIC Termination Agreement, refer to table 35 and higher tax rate; partially offset by a tax benefit of approximately $26 million related to the revision of the amount of exempt income earned in prior years and certain adjustments pertaining to tax periods for which the statue of limitations had expired. Refer to Note 38, Income Taxes for additional information.

Popular U.S.

For the year ended December 31, 2019, the reportable segment of Popular U.S. reported net income of $55.3 million, compared with a net income of $77.5 million for the year ended December 31, 2018. The principal factors that contributed to the variance in the financial results included the following:

·Lower net interest income by $9.1 million mainly due to higher interest expense from deposits by $27.5 million driven by higher volumes to fund loan growth, partially offset by higher interest income of loans by $16.6 million driven by higher volume. The Popular U.S. reportable segment’s net interest margin was 3.32% for 2019 compared with 3.54% for the same period in 2018;

·Provision for loan losses remained flat at $30 million for both years;

· Non-interest income of $23.2 million was relatively flat when compared to $20.0 million the previous year;

·Higher operating expenses by $22.3 million driven by higher personnel costs by $8.9 million mainly due to higher salaries and commissions and higher other operating expenses by $9.3 million mainly due to the change in the measurement basis of the intercompany billings from Popular Inc., holding company to its subsidiaries, mentioned above.

· Income taxes favorable variance of $6.1 million mainly due to the decrease in pretax income.

STATEMENT OF FINANCIAL CONDITION ANALYSIS                                                  

Assets

The Corporation’s total assets were $52.1 billion at December 31, 2019, compared to $47.6 billion at December 31, 2018. Refer to the Corporation’s Consolidated Statements of Financial Condition at December 31, 2019 and 2018 included in this 2019 Annual Report. Also, refer to the Statistical Summary 2015-2019 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 $3.3 billion at December 31, 2019 compared to $4.2 billion at December 31, 2018. The decrease was mainly due to purchases of debt securities available-for-sale.

Debt securities available-for-sale increased by $4.3 billion to $17.6 billion at December 31, 2019. The increase was mainly due to purchases of U.S. Treasury securities and mortgage-backed securities at BPPR, partially offset by maturities and paydowns. Refer to Note 6 to the Consolidated Financial Statements for additional information with respect to the Corporation’s debt securities available-for-sale.

Loans

Refer to Table 5 for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Also, refer to Note 8 in the Consolidated Financial Statements for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

Loans held-in-portfolio increased by $0.9 billion to $27.4 billion at December 31, 2019 mainly driven by growth of auto loans and leases and credit cards at the BPPR segment, coupled with an increase at PB across its commercial and mortgage loan portfolios.

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Table 5 - Loans Ending Balances
	At December 31,
(in thousands)		2019		2018		2017		2016		2015
Loans not covered under FDIC loss sharing agreements:
Commercial	$	12,312,751	$	12,043,019	$	11,488,861	$	10,798,507	$	10,099,163
Construction		831,092		779,449		880,029		776,300		681,106
Legacy[1]		22,105		25,949		32,980		45,293		64,436
Lease financing		1,059,507		934,773		809,990		702,893		627,650
Mortgage		7,183,532		7,235,258		7,270,407		6,696,361		7,036,081
Consumer		5,997,886		5,489,441		3,810,527		3,754,393		3,837,679
Total non-covered loans held-in-portfolio		27,406,873		26,507,889		24,292,794		22,773,747		22,346,115
Loans covered under FDIC loss sharing agreements:
Mortgage		-		-		502,930		556,570		627,102
Consumer		-		-		14,344		16,308		19,013
Loans covered under FDIC loss sharing agreements		-		-		517,274		572,878		646,115
Total loans held-in-portfolio		27,406,873		26,507,889		24,810,068		23,346,625		22,992,230
Loans held-for-sale:
Commercial		-		-		-		-		45,074
Construction		-		-		-		-		95
Mortgage		59,203		51,422		132,395		88,821		91,831
Total loans held-for-sale		59,203		51,422		132,395		88,821		137,000
Total loans	$	27,466,076	$	26,559,311	$	24,942,463	$	23,435,446	$	23,129,230
[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 Popular U.S. reportable segment.

Other assets

Other assets increased by $0.1 billion mainly due to the recognition of right-of-use assets as a result of the implementation of the new lease accounting standard, as discussed in Note 35, which required balance sheet recognition of operating lease contracts, an increase in mortgage loan claims as a result of higher inflows impacted by the end of the foreclosure moratorium on FHA-insured mortgages and an increase in prepaid taxes, partially offset by a decrease in net deferred tax assets. Refer to Note 15 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the Consolidated Statements of Financial Condition at December 31, 2019 and 2018.

Liabilities

The Corporation’s total liabilities were $46.1 billion at December 31, 2019, an increase of $3.9 billion compared to $42.2 billion at December 31, 2018, mainly due to deposits as discussed below. 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, 2019 and 2018 is included in Table 6.

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Table 6 - Financing to Total Assets
	December 31,		December 31,		% increase (decrease)		% of total assets
(In millions)		2019		2018	from 2018 to 2019		2019		2018
Non-interest bearing deposits	$	9,160	$	9,149	0.1	%	17.6	%	19.2	%
Interest-bearing core deposits		29,610		25,714	15.2		56.8		54.0
Other interest-bearing deposits		4,988		4,847	2.9		9.6		10.2
Repurchase agreements		193		282	(31.6)		0.4		0.6
Notes payable		1,102		1,256	(12.3)		2.1		2.7
Other liabilities		1,045		922	13.3		2.0		1.9
Stockholders’ equity		6,017		5,435	10.7		11.5		11.4

Deposits

The Corporation’s deposits totaled $43.8 billion at December 31, 2019, compared to $39.7 billion at December 31, 2018.The deposits increase of $4.1 billion was mainly due to an increase of $2.9 billion in Puerto Rico public sector deposits and an increase of $0.9 billion in retail deposits at Popular Bank mainly from deposits gathered through its online platform. Refer to Table 7 for a breakdown of the Corporation’s deposits at December 31, 2019 and 2018.

Table 7 - Deposits Ending Balances
(In thousands)		2019		2018		2017		2016		2015
Demand deposits [1]	$	16,566,145	$	16,077,023	$	12,460,081	$	9,053,897	$	7,221,238
Savings, NOW and money market deposits (non-brokered)		19,169,899		15,616,247		15,054,242		13,327,298		11,440,693
Savings, NOW and money market deposits (brokered)		347,765		400,004		424,307		405,487		382,424
Time deposits (non-brokered)		7,546,621		7,500,544		7,411,140		7,486,717		7,274,157
Time deposits (brokered CDs)		128,176		116,221		103,738		222,825		891,211