BPOP 10-Q Quarterly Report Sept. 30, 2010

POPULAR INC

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended March 31, 2013
10-K	Fiscal year ended Dec. 31, 2012
10-Q	Quarter ended Sept. 30, 2012
10-Q	Quarter ended June 30, 2012
10-Q	Quarter ended March 31, 2012
10-K	Fiscal year ended Dec. 31, 2011
10-Q	Quarter ended Sept. 30, 2011
10-Q	Quarter ended June 30, 2011
10-Q	Quarter ended March 31, 2011
10-K	Fiscal year ended Dec. 31, 2010
10-Q	Quarter ended Sept. 30, 2010
10-Q	Quarter ended June 30, 2010
10-Q	Quarter ended March 31, 2010
10-K	Fiscal year ended Dec. 31, 2009

PROXIES

DEF 14A	Filed on May 8, 2025
DEF 14A	Filed on March 25, 2025
DEF 14A	Filed on May 9, 2024
DEF 14A	Filed on March 27, 2024
DEF 14A	Filed on March 29, 2023
DEF 14A	Filed on May 12, 2022
DEF 14A	Filed on March 30, 2022
DEF 14A	Filed on March 25, 2021
DEF 14A	Filed on March 31, 2020
DEF 14A	Filed on March 20, 2019
DEF 14A	Filed on March 21, 2018
DEF 14A	Filed on March 9, 2017
DEF 14A	Filed on March 9, 2016
DEF 14A	Filed on March 12, 2015
DEF 14A	Filed on March 20, 2014
DEF 14A	Filed on March 15, 2013
DEF 14A	Filed on March 12, 2012
DEF 14A	Filed on March 11, 2011
DEF 14A	Filed on March 15, 2010

10-Q 1 g24991e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended September 30, 2010

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0667416
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)


Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes o No

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

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $0.01 par value, 1,022,682,796 shares outstanding as of November 2, 2010.

POPULAR, INC.
INDEX


	Page
Part I — Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition as of September 30, 2010, December 31, 2009 and September 30, 2009		4

Unaudited Consolidated Statements of Operations for the quarters and nine months ended September 30, 2010 and 2009		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2010 and 2009		6

Unaudited Consolidated Statements of Comprehensive (Loss) Income for the quarters and nine months ended September 30, 2010 and 2009		8

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		9

Notes to Unaudited Consolidated Financial Statements		11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		91

Item 3. Quantitative and Qualitative Disclosures about Market Risk		148

Item 4. Controls and Procedures		156

Part II — Other Information

Item 1. Legal Proceedings		156

Item 1A. Risk Factors		158

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		160

Item 6. Exhibits		161

Signatures		162
EX-10.1
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.’s (the “Corporation”) financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

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

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

	•		the rate of growth in the economy and employment levels, as well as general business and economic conditions;

	•		difficulties in combining the operations of acquired entities, including in connection with our acquisition of certain assets and assumption of certain liabilities of Westernbank Puerto Rico from the Federal Deposit Insurance Corporation (“FDIC”);

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

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

	•		changes in federal bank regulatory and supervisory policies, including required levels of capital;

	•		the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act) on the Corporation’s businesses, business practices and costs of operations;

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

	•		the performance of the stock and bond markets;

	•		competition in the financial services industry;

	•		additional FDIC assessments; and

	•		possible legislative, tax or regulatory changes.

Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.

All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, 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.

ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)


	September 30,			December 31,			September 30,
(In thousands, except share information)	2010			2009			2009

ASSETS
Cash and due from banks	$	580,811		$	677,330		$	606,861

Money market investments:
Federal funds sold		—			159,807			140,635
Securities purchased under agreements to resell		290,456			293,125			325,178
Time deposits with other banks		1,733,493			549,865			633,010

Total money market investments		2,023,949			1,002,797			1,098,823

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		434,637			415,653			386,478
Other trading securities		48,555			46,783			59,890
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		2,048,258			2,330,441			2,432,720
Other investment securities available-for-sale		3,693,225			4,364,273			4,560,571
Investment securities held-to-maturity, at amortized cost (fair value as of September 30, 2010 — $214,803; December 31, 2009 — $213,146; September 30, 2009 — $210,913)		214,152			212,962			212,950
Other investment securities, at lower of cost or realizable value (realizable value as of September 30, 2010 — $159,622; December 31, 2009 — $165,497; September 30, 2009 — $176,286)		158,309			164,149			174,943
Loans held-for-sale measured at lower of cost or fair value		115,088			90,796			75,447

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		22,249,167			23,827,263			24,512,966
Loans covered under loss sharing agreements with the FDIC		4,006,227			—			—
Less — Unearned income		106,685			114,150			116,897
Allowance for loan losses		1,243,994			1,261,204			1,207,401

Total loans held-in-portfolio, net		24,904,715			22,451,909			23,188,668

FDIC loss share indemnification asset		3,308,959			—			—
Premises and equipment, net		531,849			584,853			589,592
Other real estate not covered under loss sharing agreements with the FDIC		168,823			125,483			129,485
Other real estate covered under loss sharing agreements with the FDIC		77,516			—			—
Accrued income receivable		160,167			126,080			131,745
Mortgage servicing assets, at fair value		165,947			169,747			180,335
Other assets (See Note 13)		1,459,985			1,324,917			1,156,721
Goodwill		665,333			604,349			606,508
Other intangible assets		60,438			43,803			46,067

Total assets	$	40,820,716		$	34,736,325		$	35,637,804

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	5,371,439		$	4,495,301		$	4,281,817
Interest bearing		22,368,605			21,429,593			22,101,081

Total deposits		27,740,044			25,924,894			26,382,898
Federal funds purchased and assets sold under agreements to repurchase		2,358,139			2,632,790			2,807,891
Other short-term borrowings		191,342			7,326			3,077
Notes payable		5,143,388			2,648,632			2,649,821
Other liabilities		1,278,603			983,866			1,051,661

Total liabilities		36,711,516			32,197,508			32,895,348

Commitments and contingencies (See Note 19)

Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding at September 30, 2010, December 31, 2009 and September 30, 2009 (aggregate liquidation preference — $50,160)		50,160			50,160			50,160
Common stock, $0.01 par value; 1,700,000,000 shares authorized as of September 30, 2010 (December 31, 2009 and September 30, 2009 — 700,000,000); 1,022,878,228 shares issued as of September 30, 2010 (December 31,2009 and September 30, 2009 — 639,544,895) and 1,022,686,418 outstanding as of September 30, 2010 (December 31, 2009 — 639,540,105; September 30, 2009 — 639,541,515)		10,229			6,395			6,395
Surplus		4,094,302			2,804,238			2,794,660
Accumulated deficit		(130,808	)		(292,752	)		(69,525	)
Treasury stock — at cost, 191,810 shares as of September 30, 2010 (December 31, 2009 — 4,790 shares; September 30, 2009 — 3,380)		(545	)		(15	)		(11	)
Accumulated other comprehensive income (loss), net of tax expense of $16,856 (December 31, 2009 — $33,964; September 30, 2009 — $57,302)		85,862			(29,209	)		(39,223	)

Total stockholders’ equity		4,109,200			2,538,817			2,742,456

Total liabilities and stockholders’ equity	$	40,820,716		$	34,736,325		$	35,637,804

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

POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands, except per share information)	2010			2009			2010			2009

INTEREST INCOME:
Loans	$	484,883		$	371,366		$	1,224,846		$	1,155,378
Money market investments		1,391			1,510			4,326			7,024
Investment securities		57,277			74,360			185,118			223,661
Trading account securities		7,136			7,227			20,313			28,638

Total interest income		550,687			454,463			1,434,603			1,414,701

INTEREST EXPENSE:
Deposits		86,330			118,941			269,919			395,432
Short-term borrowings		14,945			16,142			45,756			53,476
Long-term debt		62,494			42,991			184,117			133,858

Total interest expense		163,769			178,074			499,792			582,766

Net interest income		386,918			276,389			934,811			831,935
Provision for loan losses		215,013			331,063			657,471			1,053,036

Net interest income after provision for loan losses		171,905			(54,674	)		277,340			(221,101	)

Service charges on deposit accounts		48,608			54,208			149,865			161,412
Other service fees (See Note 24)		100,822			97,614			305,867			298,584
Net gain (loss) on sale and valuation adjustments of investment securities		3,732			(9,059	)		4,210			220,792
Trading account profit		5,860			7,579			8,101			31,241
Loss on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale		(1,573	)		(8,728	)		(23,106	)		(35,994	)
FDIC loss share expense		(36,936	)		—			(13,602	)		—
Fair value change in equity appreciation instrument		10,641			—			35,035			—
Gain on sale of processing and technology business		640,802			—			640,802			—
Other operating income		24,568			18,430			63,076			44,579

Total non-interest income		796,524			160,044			1,170,248			720,614

OPERATING EXPENSES:
Personnel costs:
Salaries		116,426			102,822			321,423			315,224
Pension and other benefits		24,779			27,725			78,746			96,820

Total personnel costs		141,205			130,547			400,169			412,044
Net occupancy expenses		28,425			28,269			86,359			80,734
Equipment expenses		25,432			24,983			74,231			76,289
Other taxes		13,872			13,109			38,635			39,369
Professional fees		48,224			28,694			109,498			80,643
Communications		9,514			11,902			31,628			36,115
Business promotion		11,260			8,905			29,759			26,761
Printing and supplies		2,876			2,857			7,898			8,664
FDIC deposit insurance		17,183			16,506			49,894			61,954
Loss (gain) on early extinguishment of debt		25,448			(79,304	)		26,426			(79,304	)
Other operating expenses		45,697			31,753			119,464			104,955
Amortization of intangibles		2,411			2,379			6,915			7,218

Total operating expenses		371,547			220,600			980,876			855,442

Income (loss) from continuing operations before income tax		596,882			(115,230	)		466,712			(355,929	)
Income tax expense (benefit)		102,388			6,331			113,101			(15,209	)

Income (loss) from continuing operations		494,494			(121,561	)		353,611			(340,720	)
Loss from discontinued operations, net of income tax		—			(3,427	)		—			(19,972	)

NET INCOME (LOSS)	$	494,494			($124,988	)	$	353,611			($360,692	)

NET INCOME APPLICABLE TO COMMON STOCK	$	494,494		$	595,614		$	161,944		$	310,604

NET INCOME PER COMMON SHARE — BASIC
Net income from continuing operations	$	0.48		$	1.41		$	0.19		$	1.00
Net loss from discontinued operations		—			(0.01	)		—			(0.06	)

Net income per common share — basic	$	0.48		$	1.40		$	0.19		$	0.94

NET INCOME PER COMMON SHARE — DILUTED
Net income from continuing operations	$	0.48		$	1.41		$	0.19		$	1.00
Net loss from discontinued operations		—			(0.01	)		—			(0.06	)

Net income per common share — diluted	$	0.48		$	1.40		$	0.19		$	0.94

DIVIDENDS DECLARED PER COMMON SHARE		—			—			—		$	0.02

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

POPULAR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Common stock,												Accumulated other
	including												comprehensive
(In thousands)	treasury stock			Preferred stock			Surplus			Accumulated deficit			(loss) income			Total

Balance as of December 31, 2008	$	1,566,277		$	1,483,525		$	621,879			($374,488	)		($28,829	)	$	3,268,364
Net loss											(360,692	)					(360,692	)
Accretion of discount					4,515	[3]					(4,515)	[3]
Exchange of preferred stock for trust preferred securities issued					(901,165	)					485,280	[1]					(415,885	)
Issuance of common stock in exchange of preferred stock		1,717			(536,715	)		291,974			230,388	[1]					(12,636	)
Issuance of common stock in connection with early extinguishment of debt		1,858						315,794									317,652
Issuance costs								1,018	[2]								1,018
Stock options expense on unexercised options, net of forfeitures								162									162
Change in par value		(1,689,389)	[4]					1,689,389	[4]
Cash dividends declared:
Common stock											(5,641	)					(5,641	)
Preferred stock											(39,857	)					(39,857	)
Common stock reissuance		378															378
Common stock purchases		(13	)														(13	)
Treasury stock retired		125,556						(125,556	)
Other comprehensive loss, net of tax														(10,394	)		(10,394	)

Balance as of September
30, 2009	$	6,384		$	50,160		$	2,794,660			($69,525	)		($39,223	)	$	2,742,456

Balance as of December
31, 2009	$	6,380		$	50,160		$	2,804,238			($292,752	)		($29,209	)	$	2,538,817
Net income											353,611						353,611
Issuance of stocks					1,150,000	[5]											1,150,000
Issuance of common stock upon conversion of preferred stock		3,834	[5]		(1,150,000)	[5]		1,337,833	[5]								191,667
Issuance costs								(47,769)	[6]								(47,769	)
Deemed dividend on preferred stock											(191,667	)					(191,667	)
Common stock purchases		(530	)														(530	)
Other comprehensive income, net of tax														115,071			115,071

Balance as of September
30, 2010	$	9,684		$	50,160		$	4,094,302			($130,808	)	$	85,862		$	4,109,200


[1]		Excess of carrying amount of preferred stock exchanged over fair value of new trust preferred securities and common stock issued

[2]		Net of issuance costs of preferred stock exchanged and issuance costs related to exchange and issuance of new common stock

[3]		Accretion of preferred stock discount 2008 Series C preferred stock

[4]		Change in par value from $6.00 to $0.01 (not in thousands)

[5]		Issuance and subsequent conversion of depositary shares representing interests in shares of contingent convertible non-cumulative preferred stock Series D into common stock

[6]		Issuance costs related to issuance and conversion of depositary shares (Preferred stock — Series D)

Disclosure of changes in number of shares:


	September 30,			December 31,			September 30,
	2010			2009			2009

Preferred Stock:
Balance at beginning of period (January 1)		2,006,391			24,410,000			24,410,000
Issuance of stocks		1,150,000	[1]
Exchange of stocks					(22,403,609	) [2]		(22,403,609	) [2]
Conversion of stocks		(1,150,000	) [1]		—

Balance at end of period		2,006,391			2,006,391			2,006,391

Common Stock — Issued:
Balance at beginning of period		639,544,895			295,632,080			295,632,080
Issuance of stocks		383,333,333	[1]		357,510,076	[3]		357,510,076	[3]
Treasury stock retired		—			(13,597,261	)		(13,597,261	)

Balance at end of period		1,022,878,228			639,544,895			639,544,895

Treasury Stock		(191,810	)		(4,790	)		(3,380	)

Common Stock — Outstanding		1,022,686,418			639,540,105			639,541,515


[1]		Issuance of 46,000,000 in depositary shares; converted into 383,333,333 common shares (full conversion of depositary shares, each representing a 1/40 ^th interest in shares of contingent convertible perpetual non-cumulative preferred stock, into common stock).

[2]		Exchange of 21,468,609 preferred stock Series A and B for common shares, and exchange of 935,000 preferred stock Series C for trust preferred securities.

[3]		Shares issued in exchange of Series A and B preferred stock and early extinguishment of debt (exchange of trust preferred securities for common stock).

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

POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands)	2010			2009			2010			2009

Net income (loss)	$	494,494			($124,988	)	$	353,611			($360,692	)

Other comprehensive income (loss) before tax:
Foreign currency translation adjustment		1,017			(1,360	)		440			(2,117	)
Reclassification adjustment for losses included in net income (loss)		4,967			—			4,967			—
Adjustment of pension and postretirement benefit plans		1,709			3,128			7,945			66,223
Unrealized holding gains on securities available-for-sale arising during the period		7,438			82,934			124,350			63,535
Reclassification adjustment for (gains) losses included in net income (loss)		(3,717	)		3,688			(3,701	)		(173,868	)
Unrealized net losses on cash flow hedges		(623	)		(995	)		(2,163	)		(2,618	)
Reclassification adjustment for losses included in net income (loss)		1,509			37			341			5,920

Other comprehensive income (loss) before tax:		12,300			87,432			132,179			(42,925	)
Income tax (expense) benefit		(888	)		(9,955	)		(17,108	)		32,531

Total other comprehensive income (loss), net of tax		11,412			77,477			115,071			(10,394	)

Comprehensive income (loss), net of tax	$	505,906			($47,511	)	$	468,682			($371,086	)

Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss):


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands)	2010			2009			2010			2009

Underfunding of pension and postretirement benefit plans		($882	)		($1,272	)		($2,647	)		($24,055	)
Unrealized holding gains on securities available-for-sale arising during the period		(217	)		(9,137	)		(15,724	)		(5,844	)
Reclassification adjustment for (gains) losses included in net income (loss)		556			81			552			62,790
Unrealized net losses on cash flows hedges		244			388			844			1,021
Reclassification adjustment for losses included in net income (loss)		(589	)		(15	)		(133	)		(1,381	)

Income tax (expense) benefit		($888	)		($9,955	)		($17,108	)	$	32,531

Disclosure of accumulated other comprehensive income (loss):


	September 30,			December 31,			September 30,
(In thousands)	2010			2009			2009

Foreign currency translation adjustment		($35,269	)		($40,676	)		($41,185	)

Underfunding of pension and postretirement benefit plans		(119,841	)		(127,786	)		(193,986	)
Tax effect		45,919			48,566			75,586

Underfunding of pension and postretirement benefit plans, net of tax		(73,922	)		(79,220	)		(118,400	)

Unrealized holding gains on securities available-for-sale		224,739			104,090			139,641
Tax effect		(29,306	)		(14,134	)		(18,672	)

Unrealized holding gains on securities available-for-sale, net of tax		195,433			89,956			120,969

Unrealized (losses) gains on cash flows hedges		(623	)		1,199			(995	)
Tax effect		243			(468	)		388

Unrealized (losses) gains on cash flows hedges, net of tax		(380	)		731			(607	)

Accumulated other comprehensive income (loss)	$	85,862			($29,209	)		($39,223	)

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

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended
	September 30,
(In thousands)	2010			2009

Cash flows from operating activities:
Net income (loss)	$	353,611			($360,692	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		47,084			49,033
Provision for loan losses		657,471			1,053,036
Amortization of intangibles		6,915			7,218
Fair value adjustments of mortgage servicing rights		19,959			17,598
Net (accretion of discounts) amortization of premiums and deferred fees		(150,577	)		50,613
Net gain on sale and valuation adjustments of investment securities		(4,210	)		(220,792	)
Fair value change in equity appreciation instrument		(35,035	)		—
FDIC loss share expense		13,602			—
Gains from changes in fair value related to instruments measured at fair value pursuant to the fair value option		—			(1,674	)
Net (gain) loss on disposition of premises and equipment		(1,993	)		1,696
Net loss on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale		23,106			41,202
Loss (gain) on early extinguishment of debt		26,426			(79,304	)
Gain on sale of processing and technology business, net of transaction costs		(616,186	)		—
Earnings from investments under the equity method		(16,144	)		(14,307	)
Stock options expense		—			162
Deferred income taxes, net of valuation		2,458			(76,444	)
Net disbursements on loans held-for-sale		(494,312	)		(919,719	)
Acquisitions of loans held-for-sale		(213,897	)		(280,243	)
Proceeds from sale of loans held-for-sale		57,831			65,258
Net decrease in trading securities		565,611			1,302,093
Net decrease in accrued income receivable		1,806			24,935
Net decrease in other assets		5,521			26,935
Net decrease in interest payable		(34,559	)		(57,763	)
Net increase in postretirement benefit obligation		1,825			3,652
Net increase in other liabilities		95,902			65,431

Total adjustments		(41,396	)		1,058,616

Net cash provided by operating activities		312,215			697,924

Cash flows from investing activities:
Net increase in money market investments		(924,913	)		(304,169	)
Purchases of investment securities:
Available-for-sale		(688,678	)		(4,105,915	)
Held-to-maturity		(52,198	)		(54,562	)
Other		(44,021	)		(36,601	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,329,390			1,261,801
Held-to-maturity		51,067			136,535
Other		108,470			62,480
Proceeds from sale of investment securities available-for-sale		396,676			3,825,502
Proceeds from sale of other investment securities		—			52,294
Net repayments on loans		1,292,935			666,618
Proceeds from sale of loans		15,908			325,414
Acquisition of loan portfolios		(130,488	)		(37,965	)
Cash received from acquisitions		261,311			—
Net proceeds from sale of processing and technology businesses		642,322			—
Mortgage servicing rights purchased		(598	)		(1,029	)
Acquisition of premises and equipment		(40,336	)		(55,625	)
Proceeds from sale of premises and equipment		13,503			36,105
Proceeds from sale of foreclosed assets		120,412			107,720

Net cash provided by investing activities		2,350,762			1,878,603

Cash flows from financing activities:
Net decrease in deposits		(574,739	)		(1,167,108	)
Net decrease in assets sold under agreements to repurchase		(274,651	)		(743,717	)
Net increase (decrease) in other short-term borrowings		184,016			(1,857	)
Payments of notes payable		(3,281,449	)		(807,002	)
Proceeds from issuance of notes payable		111,101			61,100
Prepayment penalties paid on cancellation of debt		(25,475	)		—
Net proceeds from issuance of depositary shares		1,102,231			—
Dividends paid		—			(71,438	)
Issuance costs and fees paid on exchange of preferred stock and trust preferred securities		—			(24,618	)
Treasury stock acquired		(530	)		(13	)

Net cash used in financing activities		(2,759,496	)		(2,754,653	)

Net decrease in cash and due from banks		(96,519	)		(178,126	)
Cash and due from banks at beginning of period		677,330			784,987

Cash and due from banks at end of period	$	580,811		$	606,861


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

Note: The Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

Notes to Unaudited Consolidated Financial Statements


Note 1	—	Nature of Operations
Note 2	—	Business Combination
Note 3	—	Sale of Processing and Technology Business
Note 4	—	Basis of Presentation and Summary of Significant Accounting Policies
Note 5	—	Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards
Note 6	—	Discontinued Operations
Note 7	—	Restrictions on Cash and Due from Banks and Certain Securities
Note 8	—	Pledged Assets
Note 9	—	Investment Securities Available-For-Sale
Note 10	—	Investment Securities Held-to-Maturity
Note 11	—	Loans Held-in-Portfolio and Allowance for Loan Losses
Note 12	—	Transfers of Financial Assets and Mortgage Servicing Rights
Note 13	—	Other Assets
Note 14	—	Goodwill and Other Intangible Assets
Note 15	—	Deposits
Note 16	—	Borrowings
Note 17	—	Trust Preferred Securities
Note 18	—	Stockholders’ Equity
Note 19	—	Commitments, Contingencies and Guarantees
Note 20	—	Non-consolidated Variable Interest Entities
Note 21	—	Fair Value Measurement
Note 22	—	Fair Value of Financial Instruments
Note 23	—	Net Income per Common Share
Note 24	—	Other Service Fees
Note 25	—	Pension and Postretirement Benefits
Note 26	—	Stock-Based Compensation
Note 27	—	Income Taxes
Note 28	—	Supplemental Disclosure on the Consolidated Statements of Cash Flows
Note 29	—	Segment Reporting
Note 30	—	Subsequent Events
Note 31	—	Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States, the Caribbean and Latin America. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. The sections that follow provide a description of two significant transactions that impacted the Corporation’s operations during 2010.

Westernbank FDIC-Assisted Transaction

On April 30, 2010, BPPR entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (the “FDIC”) to acquire certain assets and assume certain deposits and liabilities of Westernbank Puerto Rico, a Puerto Rico state-chartered bank headquartered in Mayaguez, Puerto Rico (“Westernbank”)(herein the “Westernbank FDIC-assisted transaction”). Westernbank was a wholly-owned commercial bank subsidiary of W Holding Company, Inc. and operated through a network of 44 branches located throughout Puerto Rico. In August 2010, Popular successfully completed the Westernbank’s systems and branch conversions. All retail and commercial accounts were converted to Popular’s applications. Furthermore, out of the estimated 1,440 full-time equivalent employees (“FTEs”) that Westernbank had at the time of acquisition, the Corporation has hired to date close to 816 FTEs. The Corporation retained a limited number of the branches, some of which were consolidated with other existing branches of BPPR. Refer to Note 2 to the consolidated financial statements for detailed information on the Westernbank FDIC-assisted transaction. Refer to the Corporation’s Form 8-K/A filed on July 16, 2010 for additional information with respect to this FDIC-assisted transaction.

EVERTEC

On September 30, 2010, the Corporation completed the sale of a 51% interest in EVERTEC, including the Corporation’s merchant acquiring and processing and technology businesses (the “EVERTEC transaction”), and continues to hold the remaining 49% interest in the company. Refer to Note 3 to the consolidated financial statements for a description of the EVERTEC transaction. EVERTEC provides transaction processing services throughout the Caribbean and Latin America, and continues to provide processing and technology services to many of Popular’s subsidiaries.

Note 2 — Business Combination

As indicated in Note 1 to the consolidated financial statements, on April 30, 2010, the Corporation’s banking subsidiary, BPPR, acquired certain assets and assumed certain deposits of Westernbank Puerto Rico from the FDIC, as receiver for Westernbank, in an assisted transaction. BPPR acquired approximately $9.1 billion in assets and assumed approximately $2.4 billion in deposits, excluding the effects of purchase accounting adjustments. As part of the transaction, on April 30, 2010, BPPR issued a five-year $5.8 billion note payable to the FDIC bearing an annual interest rate of 2.50%. The note is secured by a substantial amount of the assets, including loans and foreclosed other real estate properties acquired by BPPR from the FDIC in the Westernbank FDIC-assisted transaction, and which are subject to the loss sharing agreements. In addition, as part of the consideration for the transaction, the FDIC received a cash-settled equity appreciation instrument, which is described in detail below.

Loss Sharing Agreements

In connection with the acquisition, BPPR entered into loss sharing agreements with the FDIC with respect to approximately $8.6 billion of loans and other real estate (the “covered assets”) acquired in the Westernbank FDIC-assisted transaction. Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC will reimburse BPPR

for 80% of losses with respect to covered assets, and BPPR will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid BPPR 80% reimbursement under the loss sharing agreements. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years. The loss sharing agreement applicable to commercial and consumer loans provides for FDIC loss sharing for five years and BPPR reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

In addition, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (the “True-Up Measurement Date”) of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated fair value of such true-up payment is recorded as a reduction in the fair value of the FDIC loss share indemnification asset. Under the loss sharing agreements, BPPR shall pay to the FDIC, 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $4.6 billion (or $925 million)(as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-Up Measurement Date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%).

Covered loans under loss sharing agreements with the FDIC (the “covered loans”) are reported in loans exclusive of the estimated FDIC loss share indemnification asset. The covered loans acquired in the Westernbank transaction are, and will continue to be, reviewed for collectability. Under ASC Subtopic 310-30, if there is a decrease in the expected cash flows on loans due to an increase in estimated credit losses compared to the estimate made at the April 30, 2010 acquisition date, the Corporation will record a charge to the provision for loan losses and an allowance for loan losses will be established. If there is an increase in inherent losses on the loans accounted for under ASC Subtopic 310-20, an allowance for loan losses will be established to record the loans at their net realizable value. A related credit to income and an increase in the FDIC loss share indemnification asset will be recognized at the same time, measured based on the loss share percentages described above, for ASC Subtopic 310-20 and 310-30 loans.

The operating results of the Corporation for the quarter and nine months ended September 30, 2010 include the operating results produced by the acquired assets and liabilities assumed for the period of May 1, 2010 to September 30, 2010. The Corporation believes that given the nature of assets and liabilities assumed, the significant amount of fair value adjustments, the nature of additional consideration provided to the FDIC (note payable and equity appreciation instrument) and the FDIC loss sharing agreements now in place, historical results of Westernbank are not meaningful to Popular’s results, and thus no pro forma information is presented.

The following table presents balances recorded by the Corporation at the time of the Westernbank FDIC-assisted transaction on April 30, 2010.


	Book value prior
	to purchase							As recorded by
	accounting		Fair value			Additional		Popular, Inc. on
(In thousands)	adjustments		adjustments			consideration		April 30, 2010
Assets:
Cash and money market investments	$	358,132		—			—	$	358,132
Investment in Federal Home Loan Bank stock		58,610		—			—		58,610
Covered loans		8,503,839		($4,286,847	)		—		4,216,992
Non-covered loans		50,905		(6,909	)		—		43,996
FDIC loss share indemnification asset		—		3,322,561			—		3,322,561
Covered other real estate owned		125,947		(52,712	)		—		73,235
Core deposit intangible		—		24,415			—		24,415
Receivable from FDIC (associated to the note issued to the FDIC)		—		—		$	111,101		111,101
Other assets		44,926		—			—		44,926

Total assets	$	9,142,359		($999,492	)	$	111,101	$	8,253,968


Liabilities:
Deposits	$	2,380,170	$	11,465			—	$	2,391,635
Note issued to the FDIC (including a premium of $11,612 resulting from the fair value adjustment)		—		—		$	5,769,696		5,769,696
Equity appreciation instrument		—		—			52,500		52,500
Contingent liability on unfunded loan commitments		—		132,442			—		132,442
Accrued expenses and other liabilities		13,925		—			—		13,925

Total liabilities	$	2,394,095	$	143,907		$	5,822,196	$	8,360,198

Excess of assets acquired over liabilities assumed	$	6,748,264

Aggregate fair value adjustments				($1,143,399	)

Aggregate additional consideration, net						$	5,711,095

Goodwill on acquisition								$	106,230

As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Because of the size of the transaction and delays in the receipt of certain information, the Corporation continues to analyze its estimates of fair value on loans acquired, FDIC loss share indemnification asset recorded and the note issued to the FDIC. As the Corporation finalizes its analyses of these assets and liabilities, there may be adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease.

The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed in the Westernbank FDIC-assisted transaction:

Loans

Fair values for loans were based on a discounted cash flow methodology. Certain loans were valued individually, while other loans were valued as pools. Aggregation into pools considered characteristics such as loan type, payment term, rate type and accruing status. Principal and interest projections considered prepayment rates and credit loss expectations. The discount rates were developed based on the relative risk of the cash flows, taking into account principally the loan type, market rates as of the valuation date, liquidity expectations, and the expected life of the loans.

FDIC loss share indemnification asset

Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses, including consideration of the true up payment and the applicable loss sharing percentages. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. The estimates of expected losses used in valuation of this asset are consistent with the loss estimates used in the valuation of the covered assets. These cash flows were discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC and the value of any true-up payment due to the FDIC at the end of the loss sharing agreements, to the extent applicable. The discount rate used in this calculation was

determined using a yield of an A-rated corporate security with a term based on the weighted average life of the recovery of cash flows plus a risk premium reflecting the uncertainty related to the timing of cash flows and the potential rejection of claims by the FDIC. Due to the increased uncertainty of the true-up payment, an additional risk premium was added to the discount rate.

As of September 30, 2010, the Corporation has not made any claims to the FDIC associated with losses incurred on covered loans or covered other real estate owned.

Receivable from the FDIC

The note issued to the FDIC as of the April 30, 2010 transaction date was determined based on a pro-forma statement of assets acquired and liabilities assumed as of February 24, 2010, the bid transaction date. The receivable from the FDIC represents an adjustment to reconcile the consideration paid based on the assets acquired and liabilities assumed as of April 30, 2010 compared with the pro-forma statement as of February 24, 2010. The carrying amount of this receivable was a reasonable estimate of fair value based on its short-term nature. The receivable from the FDIC was collected by BPPR in June 2010 and is reflected as a cash inflow from financing activities in the consolidated statement of cash flows for the nine months ended September 30, 2010. The proceeds were remitted to the FDIC in July 2010 as a payment on the note.

Other real estate covered under loss sharing agreements with the FDIC (“OREO”)

OREO includes real estate acquired in settlement of loans. OREO properties were recorded at estimated fair values less costs to sell at the date acquired based on management’s assessments of existing appraisals or broker price opinions. The estimated costs to sell are based on past experience with similar property types and terms customary for real estate transactions.

Goodwill

The amount of goodwill is the residual difference in the fair value of liabilities assumed and net consideration paid to the FDIC over the fair value of the assets acquired. The goodwill is deductible for income tax purposes. The goodwill from the Westernbank FDIC-assisted transaction was assigned to the BPPR reportable segment.

Core deposit intangible

This intangible asset represents the value of the relationships that Westernbank had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the core deposit base, interest costs, and the net maintenance cost attributable to customer deposits, and the cost of alternative funds.

Deposits

The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow calculation that applies interest rates currently offered to comparable time deposits with similar maturities.

Contingent liability on unfunded loan commitments

Unfunded loan commitments are contractual obligations to provide future funding. The fair value of a liability associated to unfunded loan commitments is principally based on the expected utilization rate or likelihood that the commitment will be exercised. The estimated value of the unfunded commitments was equal to the expected loss associated with the balance expected to be funded. The expected loss is comprised of both credit and non-credit components; therefore, the discounts derived from the loan valuation were applied to the expected balance to be funded to derive the fair value. The unfunded loan commitments outstanding as of the April 30, 2010 transaction date, which approximated $227 million, relate principally to commercial and construction loans and commercial revolving lines of credit. Losses incurred on loan disbursements made under these unfunded loan commitments are covered by the FDIC loss sharing agreements provided that the Corporation complies with specific requirements under such agreements. The contingent liability on unfunded loan commitments is included as part of “other liabilities” in the consolidated statement of condition.

Deferred taxes

Deferred taxes relate to a difference between the financial statement and tax basis of the assets acquired and liabilities assumed in the transaction. Deferred taxes are reported based upon the principles in ASC Topic 740 “Income Taxes”, and are measured using the enacted statutory income tax rate to be in effect for BPPR at the time the deferred tax is expected to reverse, which is 39%.

For income tax purposes, the Westernbank transaction was accounted for as an asset purchase and the tax bases of assets acquired were allocated based on fair values using a modified residual method. Under this method, the purchase price was allocated among the assets in order of liquidity (the most liquid first) up to its fair market value.

Note issued to the FDIC

The fair value of the note issued to the FDIC was determined using discounted cash flows based on market rates currently available for debt with similar terms, including consideration that the debt is collateralized by the assets covered under the loss sharing agreements. The principal source of cash flows to pay down the note derives from the cash flows collected from the covered assets, as well as payments from the FDIC on claimed credit losses associated to the covered assets. The Corporation is required under the agreements with the FDIC to use those proceeds to repay the note and remit payments on a monthly basis.

Equity appreciation instrument

As part of the consideration for the acquisition of Westernbank assets, BPPR also issued an equity appreciation instrument to the FDIC. Under the terms of the equity appreciation instrument, the FDIC has the opportunity to obtain a cash payment with a value equal to the product of (a) 50 million units and (b) the difference between (i) Popular, Inc.’s “average volume weighted price” over the two NASDAQ trading days immediately prior to the exercise date and (ii) the exercise price of $3.43. The equity appreciation instrument is exercisable by the holder thereof, in whole or in part, up to May 7, 2011. The fair value of the equity appreciation instrument was estimated by determining a call option value using the Black-Scholes Option Pricing Model. The equity appreciation instrument is recorded as a liability and any subsequent changes in its estimated fair value will be recognized in earnings. The Corporation recognized non-interest income of $10.6 million and $35.0 million during the quarter and nine-month periods ended September 30, 2010, respectively, as a result of a decrease in the fair value of the equity appreciation instrument. These amounts are separately disclosed in the consolidated statement of operations within the non-interest income category.

Note 3 — Sale of Processing and Technology Business

On June 30, 2010, Popular and its subsidiaries BPPR, Popular International Bank, Inc. (“PIBI”) and EVERTEC completed an internal reorganization transferring certain intellectual property assets and interests in certain of the Corporation’s foreign subsidiaries to EVERTEC. Commencing on June 30, 2010, PIBI’s wholly-owned subsidiaries ATH Costa Rica S.A. and T.I.I. Smart Solutions Inc. became wholly-owned subsidiaries of EVERTEC. Also, in connection with the reorganization, BPPR’s Merchant Business and TicketPop divisions were transferred to EVERTEC. On September 30, 2010, EVERTEC DE VENEZUELA, C.A. became a subsidiary of PIBI and EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA was transferred from PIBI to EVERTEC.

On September 30, 2010, the Corporation completed the sale of a majority interest in its processing and technology business EVERTEC, including the businesses transferred in the internal reorganization discussed above. The Corporation retained EVERTEC’s operations in Venezuela and certain related contracts. Under the terms of the sale, an unrelated third party acquired a 51% interest in EVERTEC for cash under a leverage buyout. The Corporation retained the remaining 49% interest. The Corporation’s investment in EVERTEC, which is accounted for under the equity method, amounted to $177 million as of September 30, 2010, and is included as part of “other assets” in the consolidated statement of condition. The Corporation’s proportionate share of income or loss from EVERTEC will be included in other operating income in the consolidated statements of operations commencing on October 1, 2010.

As a result of the sale, the Corporation recognized a pre-tax gain, net of transaction costs, of approximately $616.2 million ($531.0 million after-tax), of which $640.8 million was separately disclosed within non-interest income in the consolidated statement of operations and $24.6 million are included as operating expenses (transaction costs) for the quarter and nine months ended September 30, 2010. Approximately $94.0 million of the pre-tax gain was the result of marking the Corporation’s retained interest in the EVERTEC business at fair value. This portion of the gain was non-cash. The equity value of the Corporation’s retained interest in the former subsidiary takes into consideration the buyer’s enterprise value of EVERTEC reduced by the leverage financing, net of debt issue costs, utilized as part of the sale transaction. This leverage financing significantly impacts the resulting fair value of the retained interest.

In connection with the leverage transaction, EVERTEC issued financing in the form of unsecured senior notes and a syndicated loan (senior secured credit facility). The Corporation invested $35 million in senior unsecured notes issued by EVERTEC ($17.85 million, net of the intercompany elimination related to the 49% ownership interest maintained by Popular), which bear interest at an annual fixed rate of 11% and mature in October 2018. Also, the Corporation provided financing to EVERTEC by acquiring $58.2 million of the syndicated loan ($29.7 million, net of intercompany eliminations).

Also, as part of the sale, Popular entered into various agreements including a master services agreement pursuant to which EVERTEC will continue providing various processing and information technology services to Popular, BPPR, and their respective subsidiaries. These service costs will be included prospectively in operating expenses on the Corporation’s consolidated statements of operations, net of elimination entries that are required due to Popular holding a 49% ownership interest in EVERTEC. Also, as part of the agreement, BPPR commits to support the ATH debit cards as well as the ATH network, owned and operated by EVERTEC.

The equity investments in the processing businesses of Servicios Financieros, S.A. de C.V. (“Serfinsa”) and Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) continued to be held by the Corporation as of September 30, 2010. Under the terms of the merger agreement, the Corporation is required for a period of twelve months following the merger to continue to seek to sell its equity interests in such entities to EVERTEC, subject to complying with certain rights of first refusal in favor of the Serfinsa and CONTADO shareholders. The Corporation’s investments in Serfinsa and Contado, accounted for under the equity method, amounted to $1.3 million and $15.9 million, respectively, as of September 30, 2010.

Note 4 — Basis of Presentation and Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated interim financial statements have been prepared without audit. The statement of condition data as of December 31, 2009 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2009, included in the Corporation’s Annual Report on Form 10-K filed on March 1, 2010 (the “2009 Annual Report”). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated statement of condition.

Management exercised significant judgment regarding assumptions about discount rates, future expected cash flows including prepayments, default rates, market conditions and other future events that are highly subjective in nature, and subject to change, and all of which affected the estimation of the fair values of the net assets acquired in the Westernbank FDIC-assisted transaction. Actual results could differ from those estimates; others provided with the same information could draw different reasonable conclusions and calculate different fair values. Changes that may vary significantly from our assumptions include loan prepayments, credit losses, the estimated market values of collateral at disposition, the timing of such disposition, and deposit attrition.

Reclassifications

Servicing rights related to commercial loans (Small Business Administration), which are accounted for under the amortization method, have been reclassified to other assets in all periods presented, while mortgage servicing rights, which are accounted for at fair value, are presented separately in the consolidated statements of condition. Amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.

Business Acquisition

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

Loans acquired in an FDIC-assisted transaction

Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

Loans accounted for under ASC Subtopic 310-30 represent loans showing evidence of credit deterioration and that it is probable, at the date of acquisition, that the Corporation will not collect all contractually required principal and interest payments. 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, based on the fair value determined for the acquired portfolio, acquired loans that did not meet the definition of nonaccrual status also resulted in the recognition of a significant discount attributable to credit quality. Accordingly, an election was made by the Corporation to apply the accretable yield method (expected cash flow model of ASC Subtopic 310-30), as a loan with credit deterioration and impairment, instead of the standard loan discount accretion guidance of ASC Subtopic 310-20. These loans are disclosed as a loan that was acquired with credit deterioration and impairment.

The Corporation applied the guidance of ASC Subtopic 310-30 to all loans acquired in the transaction (including loans that do not meet scope of ASC Subtopic 310-30), except for credit cards and revolving lines of credit that were expressly scoped out from the application of this guidance since they continued to have revolving privileges after acquisition. Management used its judgment in evaluating factors impacting expected cash flows and probable loss assumptions, including the quality of the loan portfolio, portfolio concentrations, distressed economic conditions in Puerto Rico, quality of underwriting standards of the acquired institution, reductions in collateral real estate values, among other considerations that could also impact the expected cash inflows on the loans.

Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into pools based on loans that had 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. Characteristics considered in pooling loans in the FDIC-assisted transaction included loan type, interest rate type, accruing status, and amortization 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 in 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. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses.

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

Covered Assets

Assets subject to loss sharing agreements with the FDIC are labeled “covered” on the consolidated statement of condition and include certain loans and other real estate properties. Loans acquired in the Westernbank FDIC-assisted transaction, except for credit cards, are considered “covered loans” because the Corporation will be reimbursed for 80% of any future losses on these loans subject to the terms of the FDIC loss sharing agreements.

FDIC Loss Share Indemnification Asset

The acquisition date fair value of the reimbursement that the Corporation expects to receive from the FDIC under the loss sharing agreements was recorded as an FDIC loss share indemnification asset on the consolidated statement of condition. Fair value was estimated using projected cash flows related to the loss sharing agreements. Refer to Note 2 for additional information on the valuation methodology.

The impact of the FDIC loss share indemnification on the Corporation’s results of operations is included in non-interest income, particularly in the category of “FDIC loss share expense”, and considers the accretion due to discounting and the changes in expected loss sharing reimbursements.

The indemnification asset is recognized on the same basis as the assets subject to loss share protection. As such, for covered loans accounted pursuant to ASC Subtopic 310-30, decreases in expected reimbursements will be recognized in income prospectively consistent with the approach taken to recognize increases in cash flows on covered loans. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date is accreted into income, a reduction of the corresponding indemnification asset is recorded as a reduction in non-interest income.

Increases in expected reimbursements will be recognized in income in the same period that the allowance for credit losses for the related loans is recognized.

Equity Appreciation Instrument

The equity appreciation instrument is recorded as an “other liability” in the consolidated statement of condition and any subsequent change in its estimated fair value is recognized in earnings on each quarterly reporting date. Refer to Note 2 to the consolidated financial statements for additional information on the equity appreciation instrument issued to the FDIC.

Note 5 — Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards

FASB Accounting Standards Update 2009-16, Transfers and Servicing (Accounting Standards Codification (“ASC”) Topic 860) — Accounting for Transfers of Financial Assets (“ASU 2009-16”)

existing qualifying special-purpose entities have been evaluated for consolidation in accordance with the applicable consolidation guidance in the Codification. The Corporation adopted this new authoritative accounting guidance effective January 1, 2010. The Corporation evaluated transfers of financial assets executed during the nine months ended September 30, 2010 pursuant to the new accounting guidance, principally consisting of guaranteed mortgage securitizations (Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”) mortgage-backed securities), and determined that the adoption of ASU 2009-16 did not have a significant impact on the Corporation’s accounting for such transactions or results of operations or financial condition for such period.

A securitization of a financial asset, a participating interest in a financial asset, or a pool of financial assets in which the Corporation (and its consolidated affiliates) (a) surrenders control over the transferred assets and (b) receives cash or other proceeds is accounted for as a sale. Control is considered to be surrendered only if all three of the following conditions are met: (1) the assets have been legally isolated; (2) the transferee has the ability to pledge or exchange the assets; and (3) the transferor no longer maintains effective control over the assets. When the Corporation transfers financial assets and the transfer fails any one of the above criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing.

The Corporation recognizes and initially measures at fair value a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in either of the following situations: (1) a transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset that meets the requirements for sale accounting; or (2) an acquisition or assumption of a servicing obligation of financial assets that do not pertain to the Corporation or its consolidated subsidiaries. Upon adoption of ASU 2009-16, the Corporation does not recognize either a servicing asset or a servicing liability if it transfers or securitizes financial assets in a transaction that does not meet the requirements for sale accounting and is accounted for as a secured borrowing.

Refer to Note 12 to the consolidated financial statements for disclosures on transfers of financial assets and servicing assets retained as part of guaranteed mortgage securitizations.

FASB Accounting Standards Update 2009-17, Consolidations (ASC Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”) and FASB Accounting Standards Update 2010-10, Consolidation (ASC Topic 810): Amendments for Certain Investment Funds (“ASU 2010-10”)

ASU 2009-17 amends the guidance applicable to variable interest entities (“VIEs”) and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance replaces a quantitative-based risks and rewards calculation for determining which entity, if any, has both (a) a controlling financial interest in a VIE with an approach focused on identifying which entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This guidance requires reconsideration of whether an entity is a VIE when any changes in facts or circumstances occur such that the holders of the equity investment at risk, as a group, lose the power to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether a variable interest holder is the primary beneficiary of a VIE. The amendments to the consolidated guidance affect all entities that were within the scope of the original guidance, as well as qualifying special-purpose entities (“QSPEs”) that were previously excluded from the guidance. ASU 2009-17 requires a reporting entity to provide additional disclosures about its involvement with VIEs and any significant changes in risk exposure due to that involvement. The Corporation adopted this new authoritative accounting guidance effective January 1, 2010. The new accounting guidance on VIEs did not have an effect on the Corporation’s consolidated statement of condition or results of operations upon adoption.

The principal VIEs evaluated by the Corporation during the nine months ended September 30, 2010 included: (1) GNMA and FNMA guaranteed mortgage securitizations and for which management has concluded that the Corporation is not the primary beneficiary (refer to Note 20 to the consolidated financial statements) and (2) the trust preferred securities for which management believes that the Corporation does not possess a significant variable interest on the trusts (refer to Note 17 to the consolidated financial statements).

Additionally, the Corporation has variable interests in certain investments that have the attributes of investment companies, as well as limited partnership investments in venture capital companies. However, in January 2010, the FASB issued ASU 2010-10, Consolidation (ASC Topic 810), Amendments for Certain Investment Funds , which deferred the effective date of the provisions of ASU 2009-17 for a reporting entity’s interest in an entity that has all the attributes of an investment company; or for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral allows asset managers that have no obligation to fund potentially significant losses of an investment entity to continue to apply the previous accounting guidance to investment entities that have the attributes of entities subject to ASC Topic 946 (the “Investment Company Guide”). The FASB also decided to defer the application of ASU 2009-17 for money market funds subject to Rule 2a-7 of the Investment Company Act of 1940. Asset managers would continue to apply the applicable existing guidance to those entities that qualify for the deferral. ASU 2010-10 did not defer the disclosure requirements in ASU 2009-17.

The Corporation was not required to consolidate existing VIEs for which it has a variable interest as of September 30, 2010. Refer to Note 20 to the consolidated financial statements for required disclosures associated with the guaranteed mortgage securitizations in which the Corporation holds a variable interest.

FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”)

ASU 2010-06, issued in January 2010, revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. ASU 2010-06 has been effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. This guidance impacts disclosures only and will not have an effect on the Corporation’s consolidated statements of condition or results of operations. The Corporation’s disclosures about fair value measurements are presented in Note 21 to the consolidated financial statements.

FASB Accounting Standards Update 2010-11, Derivatives and Hedging (ASC Topic 815): Scope Exception Related to Embedded Credit Derivatives (“ASU 2010-11”)

ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. The type of credit derivative that qualifies for the exemption is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in ASU 2010-11 are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. The adoption of this standard in the third quarter of 2010 did not have a significant impact on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2010-18, Receivables (ASC Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset (“ASU 2010-18”)

accounted for individually under ASC Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The amendments in ASU 2010-18 are effective for modifications of loans accounted for within pools under ASC Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted. Upon initial adoption of the guidance in ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under ASC Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Corporation elected to early adopt the provisions of this statement, effective with the closing of the Westernbank FDIC-assisted transaction on April 30, 2010. As a result, the accounting for modified loans follows the guidelines of ASU 2010-18; however, the adoption of these provisions did not have a significant impact on the Corporation’s result of operations or financial position as of September 30, 2010.

FASB Accounting Standards Update 2010-20, Receivables (ASC Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”)

ASU 2010-20, issued in July 2010, expands disclosure requirements about the credit quality of financing receivables and allowance for credit losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following: (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. Disclosures should be provided on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU 2010-20 makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including: the credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; the aging of past due financing receivables at the end of the reporting period by class of financing receivables; and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The disclosure requirements as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This guidance impacts disclosures only and will not have an effect on the Corporation’s consolidated statements of condition or results of operations.

Note 6 — Discontinued Operations

In 2008, the Corporation discontinued the operations of Popular Financial Holdings (“PFH”) by selling assets and closing service branches and other units. The loss from discontinued operations for the quarter and nine months ended September 30, 2009 was $3.4 million and $20.0 million, respectively, net of taxes. This loss was primarily related to salary and other expenses incurred in providing loan portfolio servicing to affiliated companies and other costs for FTEs that were retained for a transition period, as well as adjustments to indemnity reserves on loans previously sold.

Note 7 — Restrictions on Cash and Due from Banks and Certain Securities

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or other banks. Those required average reserve balances were $828 million as of September 30, 2010 (December 31, 2009 — $721 million; September 30, 2009 — $705 million). Cash and due from banks as well as other short-term, highly-liquid securities are used to cover the required average reserve balances.

As required by the Puerto Rico International Banking Center Regulatory Act, as of September 30, 2010, December 31, 2009, and September 30, 2009, the Corporation maintained separately for its two international banking entities (“IBEs”), $0.6 million in time deposits, equally divided for the two IBEs, which were considered restricted assets.

As part of a line of credit facility with a financial institution, as of December 31, 2009 and September 30, 2009, the Corporation maintained restricted cash of $2 million as collateral for the line of credit. This restriction expired on July 2010.

As of September 30, 2010, the Corporation maintained restricted cash of $6 million to support letters of credit (December 31, 2009 — $4 million; September 30, 2009 — $5 million).

As of September 30, 2010, the Corporation maintained restricted cash of $2 million that represents funds deposited in an escrow account which are guaranteeing possible liens or encumbrances over the title of insured properties.

As of September 30, 2010, the Corporation maintained restricted cash of $12 million to comply with the requirements of the credit card networks.

Note 8 — Pledged Assets

Certain securities, loans and other real estate owned were pledged principally to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, loan servicing agreements and the loss sharing agreement with the FDIC.

The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Investment securities available-for-sale, at fair value	$	2,102,699	$	1,923,338	$	2,183,586
Investment securities held-to-maturity, at amortized cost		125,770		125,769		25,769
Loans held-for-sale measured at lower of cost or fair value		2,291		2,254		2,636
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		3,966,574		—		—
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		9,646,035		8,993,967		8,406,876
Other real estate covered under loss sharing agreements with the FDIC		77,516		—		—

Total pledged assets	$	15,920,885	$	11,045,328	$	10,618,867

Pledged investment securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

As of September 30, 2010, investment securities available-for-sale and held-to-maturity totaling $1.7 billion, and loans of $0.2 billion, served as collateral to secure public funds.

The Corporation’s banking subsidiaries have the ability to borrow funds from the Federal Home Loan Bank of New York (“FHLB) and from the Federal Reserve Bank of New York (“Fed”). As of September 30, 2010, the banking subsidiaries had short-term and long-term credit facilities authorized with the FHLB aggregating $1.7 billion. Refer to Note 16 to the consolidated financial statements for borrowings outstanding under these credit facilities. As of September 30, 2010, the credit facilities authorized with the FHLB were collateralized by $3.7 billion in loans held-in-portfolio. Also, the Corporation’s banking subsidiaries had a borrowing capacity at the Fed discount window of $2.7 billion, which remained unused as of such date. The amount available under this credit facility is dependent upon the balance of loans and securities pledged as collateral. As of September 30, 2010, the credit facilities with the Fed discount window were collateralized by $5.7 billion in loans held-in-portfolio. These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statement of condition as of September 30, 2010.

Loans held-in-portfolio and other real estate owned that are covered by loss sharing agreements with the FDIC amounting to $4.0 billion as of September 30, 2010, serve as collateral to secure the note issued to the FDIC. Refer to Note 2 to the consolidated financial statements for descriptive information on the note issued to the FDIC.

Note 9 — Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of investment securities available-for-sale as of September 30, 2010, December 31, 2009 and September 30, 2009 were as follows:


	AS OF SEPTEMBER 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
After 1 to 5 years	$	6,998	$	166		—	$	7,164		1.50	%
After 5 to 10 years		28,850		3,409		—		32,259		3.81

Total U.S. Treasury securities		35,848		3,575		—		39,423		3.36

Obligations of U.S. Government sponsored entities
Within 1 year		288,588		2,980		—		291,568		3.45
After 1 to 5 years		1,011,751		65,003		—		1,076,754		3.77
After 5 to 10 years		1,518		51		—		1,569		6.26
After 10 years		26,890		179		—		27,069		5.68

Total obligations of U.S. Government sponsored entities		1,328,747		68,213		—		1,396,960		3.74

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,140		18		—		10,158		3.90
After 1 to 5 years		15,858		375	$	6		16,227		4.52
After 5 to 10 years		21,225		70		71		21,224		5.07
After 10 years		5,560		155		—		5,715		5.29

Total obligations of Puerto Rico, States and political subdivisions		52,783		618		77		53,324		4.70

Collateralized mortgage obligations — federal agencies
Within 1 year		118		2		—		120		4.24
After 1 to 5 years		3,020		105		—		3,125		5.56
After 5 to 10 years		87,668		1,643		—		89,311		2.56
After 10 years		1,215,779		38,744		38		1,254,485		2.89

Total collateralized mortgage obligations — federal agencies		1,306,585		40,494		38		1,347,041		2.87

Collateralized mortgage obligations — private label
After 5 to 10 years		13,612		86		444		13,254		1.71
After 10 years		85,796		202		3,862		82,136		2.32

Total collateralized mortgage obligations — private label		99,408		288		4,306		95,390		2.24

Mortgage-backed securities — agencies
Within 1 year		3,494		75		—		3,569		3.78
After 1 to 5 years		18,557		719		—		19,276		4.02
After 5 to 10 years		182,930		12,349		2		195,277		4.71
After 10 years		2,461,567		103,118		156		2,564,529		4.29

Total mortgage-backed securities — agencies		2,666,548		116,261		158		2,782,651		4.32

Equity securities		8,975		379		510		8,844		3.47

Others
After 5 to 10 years		17,850		—		—		17,850		11.00

Total investment securities available-for-sale	$	5,516,744	$	229,828	$	5,089	$	5,741,483		3.82	%


	AS OF DECEMBER 31, 2009
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
After 5 to 10 years	$	29,359	$	1,093		—	$	30,452		3.80	%

Obligations of U.S. Government sponsored entities
Within 1 year		349,424		7,491		—		356,915		3.67
After 1 to 5 years		1,177,318		58,151		—		1,235,469		3.79
After 5 to 10 years		27,812		680		—		28,492		4.96
After 10 years		26,884		176		—		27,060		5.68

Total obligations of U.S. Government sponsored entities		1,581,438		66,498		—		1,647,936		3.82

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		22,311		7	$	15		22,303		6.92
After 5 to 10 years		50,910		249		632		50,527		5.08
After 10 years		7,840		—		61		7,779		5.26

Total obligations of Puerto Rico, States and political subdivisions		81,061		256		708		80,609		5.60

Collateralized mortgage obligations — federal agencies
Within 1 year		41		—		—		41		3.78
After 1 to 5 years		4,875		120		—		4,995		4.44
After 5 to 10 years		125,397		2,105		404		127,098		2.85
After 10 years		1,454,833		19,060		5,837		1,468,056		3.03

Total collateralized mortgage obligations — federal agencies		1,585,146		21,285		6,241		1,600,190		3.02

Collateralized mortgage obligations — private label
After 5 to 10 years		20,885		—		653		20,232		2.00
After 10 years		105,669		109		8,452		97,326		2.59

Total collateralized mortgage obligations — private label		126,554		109		9,105		117,558		2.50

Mortgage-backed securities — agencies
Within 1 year		26,878		512		—		27,390		3.61
After 1 to 5 years		30,117		823		—		30,940		3.94
After 5 to 10 years		205,480		8,781		—		214,261		4.80
After 10 years		2,915,689		32,102		10,203		2,937,588		4.40

Total mortgage-backed securities — agencies		3,178,164		42,218		10,203		3,210,179		4.42

Equity securities		8,902		233		1,345		7,790		3.65

Total investment securities available-for-sale	$	6,590,624	$	131,692	$	27,602	$	6,694,714		3.91	%


	AS OF SEPTEMBER 30, 2009
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
After 5 to 10 years	$	29,528	$	1,608		—	$	31,136		3.80	%

Obligations of U.S. Government sponsored entities
Within 1 year		184,261		4,176		—		188,437		3.81
After 1 to 5 years		1,377,705		71,690		—		1,449,395		3.73
After 5 to 10 years		27,812		952		—		28,764		5.01
After 10 years		26,882		800		—		27,682		5.68

Total obligations of U.S. Government sponsored entities		1,616,660		77,618		—		1,694,278		3.79

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		5		—		—		5		3.88
After 1 to 5 years		12,375		10	$	108		12,277		3.40
After 5 to 10 years		50,969		292		2,264		48,997		5.08
After 10 years		27,905		—		201		27,704		5.26

Total obligations of Puerto Rico, States and political subdivisions		91,254		302		2,573		88,983		4.91

Collateralized mortgage obligations — federal agencies
Within 1 year		154		1		—		155		4.08
After 1 to 5 years		3,578		109		—		3,687		4.43
After 5 to 10 years		138,044		2,578		408		140,214		2.94
After 10 years		1,438,743		26,787		11,623		1,453,907		2.98

Total collateralized mortgage obligations — federal agencies		1,580,519		29,475		12,031		1,597,963		2.98

Collateralized mortgage obligations — private label
Within 1 year		106		—		—		106		3.39
After 5 to 10 years		23,481		14		580		22,915		2.10
After 10 years		115,763		—		11,988		103,775		2.65

Total collateralized mortgage obligations — private label		139,350		14		12,568		126,796		2.56

Mortgage-backed securities — agencies
Within 1 year		9,072		118		21		9,169		3.07
After 1 to 5 years		62,462		1,431		—		63,893		3.92
After 5 to 10 years		178,392		9,283		—		187,675		4.86
After 10 years		3,136,807		47,982		231		3,184,558		4.48

Total mortgage-backed securities — agencies		3,386,733		58,814		252		3,445,295		4.49

Equity securities		9,606		171		937		8,840		3.39

Total investment securities available-for-sale	$	6,853,650	$	168,002	$	28,361	$	6,993,291		3.94	%

The following table shows the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2010, December 31, 2009 and September 30, 2009.


	AS OF SEPTEMBER 30, 2010
	Less than 12 months				12 months or more				Total

			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

Obligations of Puerto Rico, States and political subdivisions	$	18,234	$	71	$	302	$	6	$	18,536	$	77
Collateralized mortgage obligations — federal agencies		13,880		35		6,402		3		20,282		38
Collateralized mortgage obligations — private label		1,551		94		68,032		4,212		69,583		4,306
Mortgage-backed securities — agencies		8,915		123		1,240		35		10,155		158
Equity securities		3		8		3,846		502		3,849		510

Total investment securities available-for-sale in an unrealized loss position	$	42,583	$	331	$	79,822	$	4,758	$	122,405	$	5,089


	AS OF DECEMBER 31, 2009
	Less than 12 months				12 months or more				Total

			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

Obligations of Puerto Rico, States and political subdivisions	$	2,387	$	8	$	63,429	$	700	$	65,816	$	708
Collateralized mortgage obligations — federal agencies		298,917		3,667		359,214		2,574		658,131		6,241
Collateralized mortgage obligations — private label		6,716		18		97,904		9,087		104,620		9,105
Mortgage-backed securities — agencies		905,028		10,130		3,566		73		908,594		10,203
Equity securities		2,347		981		3,898		364		6,245		1,345

Total investment securities available-for-sale in an unrealized loss position	$	1,215,395	$	14,804	$	528,011	$	12,798	$	1,743,406	$	27,602


	AS OF SEPTEMBER 30, 2009
	Less than 12 months				12 months or more				Total

			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

Obligations of Puerto Rico, States and political subdivisions	$	26,299	$	166	$	58,123	$	2,407	$	84,422	$	2,573
Collateralized mortgage obligations — federal agencies		137,288		3,902		486,652		8,129		623,940		12,031
Collateralized mortgage obligations — private label		3,935		331		114,635		12,237		118,570		12,568
Mortgage-backed securities — agencies		51,648		71		11,949		181		63,597		252
Equity securities		2,749		579		3,839		358		6,588		937

Total investment securities available-for-sale in an unrealized loss position	$	221,919	$	5,049	$	675,198	$	23,312	$	897,117	$	28,361

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

As of September 30, 2010, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. As of September 30, 2010, the Corporation does not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis. Also, management evaluated the Corporation’s portfolio of equity securities as of September 30, 2010. During the quarter ended September 30, 2010, the Corporation did not record any other-than-temporary impairment losses on equity securities. Management has the intent and ability to hold the investments in equity securities that are at a loss position as of September 30, 2010 for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized losses associated with “Collateralized mortgage obligations — private label” are primarily related to securities backed by residential mortgages. In addition to verifying the credit ratings for the private-label CMOs, management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in the securities. As of September 30, 2010, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses as of September 30, 2010, credit impairment was assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows through the current period and then projects the expected cash flows using a number of assumptions, including default rates, loss severity and prepayment rates. Management’s assessment also considered tests using more stressful parameters. Based on the assessments, management concluded that the tranches of the private-label CMOs held by the Corporation were not other-than-temporarily impaired as of September 30, 2010, thus management expects to recover the amortized cost basis of the securities.

Proceeds from the sale of investment securities available-for-sale during the quarter and nine months ended September 30, 2010 amounted to $377.2 million and $396.7 million; respectively. Gains of $3.7 million were realized during the quarter and year-to-date periods ended September 30, 2010 related to the sale during this quarter of investment securities available-for-sale. This compares with proceeds of $77.9 million and $3.8 billion respectively, and realized net gains of $198 thousand and $184.3 million respectively, for the quarter and nine months ended September 30, 2009.

The following table states the names of issuers and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a State of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.


	September 30, 2010				December 31, 2009				September 30, 2009
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value

FNMA	$	792,291	$	826,042	$	970,744	$	991,825	$	1,067,001	$	1,089,443
FHLB		1,173,877		1,238,487		1,385,535		1,449,454		1,395,778		1,469,493
Freddie Mac		602,440		620,384		959,316		971,556		997,716		1,012,276

Note 10 — Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of investment securities held-to-maturity as of September 30, 2010, December 31, 2009 and September 30, 2009 were as follows:


	AS OF SEPTEMBER 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
Within 1 year	$	25,812	$	2		—	$	25,814		0.21	%

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		7,150		14		—		7,164		2.15
After 1 to 5 years		110,528		620		—		111,148		5.52
After 5 to 10 years		17,595		506	$	52		18,049		5.96
After 10 years		49,300		231		652		48,879		4.20

Total obligations of Puerto Rico, States and political subdivisions		184,573		1,371		704		185,240		5.08

Collateralized mortgage obligations — private label
After 10 years		192		—		11		181		5.21

Others
Within 1 year		3,075		—		—		3,075		1.33
After 1 to 5 years		500		—		7		493		1.00

Total others		3,575		—		7		3,568		1.28

Total investment securities held-to-maturity	$	214,152	$	1,373	$	722	$	214,803		4.43	%


	AS OF DECEMBER 31, 2009
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
Within 1 year	$	25,777	$	4		—	$	25,781		0.11	%

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		7,015		6		—		7,021		2.04
After 1 to 5 years		109,415		3,157	$	6		112,566		5.51
After 5 to 10 years		17,112		39		452		16,699		5.79
After 10 years		48,600		—		2,552		46,048		4.00

Total obligations of Puerto Rico, States and political subdivisions		182,142		3,202		3,010		182,334		5.00

Collateralized mortgage obligations — private label
After 10 years		220		—		12		208		5.45

Others
Within 1 year		3,573		—		—		3,573		3.77
After 1 to 5 years		1,250		—		—		1,250		1.66

Total others		4,823		—		—		4,823		3.22

Total investment securities held-to-maturity	$	212,962	$	3,206	$	3,022	$	213,146		4.37	%


	AS OF SEPTEMBER 30, 2009
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
(In thousands)	Cost		Gains		Losses		Value		Yield

U.S. Treasury securities
Within 1 year	$	25,769		—	$	6	$	25,763		0.11	%

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		7,015	$	7		—		7,022		4.30
After 1 to 5 years		109,415		2,349		47		111,717		5.51
After 5 to 10 years		17,107		52		878		16,281		5.79
After 10 years		48,600		—		3,502		45,098		4.12

Total obligations of Puerto Rico, States and political subdivisions		182,137		2,408		4,427		180,118		5.12

Collateralized mortgage obligations — private label
After 10 years		222		—		12		210		5.45

Others
Within 1 year		3,572		—		—		3,572		3.11
After 1 to 5 years		1,250		—		—		1,250		1.66

Total others		4,822		—		—		4,822		2.73

Total investment securities held-to-maturity	$	212,950	$	2,408	$	4,445	$	210,913		4.46	%

The following table shows the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2010, December 31, 2009 and September 30, 2009:


	AS OF SEPTEMBER 30, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

Obligations of Puerto Rico, States and political subdivisions		—		—	$	31,126	$	704	$	31,126	$	704
Collateralized mortgage obligations — private label		—		—		181		11		181		11
Others	$	243	$	7		—		—		243		7

Total investment securities held-to-maturity in an unrealized loss position	$	243	$	7	$	31,307	$	715	$	31,550	$	722


	AS OF DECEMBER 31, 2009
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

Obligations of Puerto Rico, States and political subdivisions	$	21,187	$	1,908	$	37,718	$	1,102	$	58,905	$	3,010
Collateralized mortgage obligations — private label		—		—		208		12		208		12

Total investment securities held-to-maturity in an unrealized loss position	$	21,187	$	1,908	$	37,926	$	1,114	$	59,113	$	3,022


	AS OF SEPTEMBER 30, 2009
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized		Fair		Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Value		Losses		Fair Value		Losses

U.S. Treasury securities	$	25,763	$	6		—		—	$	25,763	$	6
Obligations of Puerto Rico, States and political subdivisions		42,995		3,990	$	19,493	$	437		62,488		4,427
Collateralized mortgage obligations — private label		—		—		210		12		210		12
Others		—		—		250		—		250		—

Total investment securities held-to-maturity in an unrealized loss position	$	68,758	$	3,996	$	19,953	$	449	$	88,711	$	4,445

As indicated in Note 9 to these consolidated financial statements, management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity as of September 30, 2010 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. The Corporation performs periodic credit quality reviews on these issuers. The decline in fair value as of September 30, 2010 was attributable to changes in interest rates and not credit quality; thus no other-than-temporary decline in value was recorded in these held-to-maturity securities. As of September 30, 2010, the Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that the Corporation will have to sell these investment securities prior to recovery of their amortized cost basis.

Note 11 — Loans Held-in-Portfolio and Allowance for Loan Losses

Because of the loss protection provided by the FDIC, the risks of the Westernbank FDIC-assisted transaction acquired loans are significantly different from those loans not covered under the FDIC loss sharing agreements. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”.

The composition of loans held-in-portfolio (“HIP”) as of September 30, 2010, December 31, 2009, and September 30, 2009 was as follows:


	Non-covered		Covered		Total loans HIP
	loans as of		loans as of		as of September 30,		December 31,		September 30,
(In thousands)	September 30, 2010		September 30, 2010		2010		2009		2009

Commercial	$	11,719,127	$	2,382,102	$	14,101,229	$	12,664,059	$	13,075,868
Construction		1,299,929		287,159		1,587,088		1,724,373		1,882,069
Lease financing		613,560		—		613,560		675,629		699,350
Mortgage		4,750,068		1,166,837		5,916,905		4,603,245		4,547,372
Consumer		3,759,798		170,129		3,929,927		4,045,807		4,191,410

Total loans HIP	$	22,142,482	$	4,006,227	$	26,148,709	$	23,713,113	$	24,396,069

The following table presents acquired loans accounted for pursuant to ASC Subtopic 310-30 as of the April 30, 2010 acquisition date:


(In thousands)

Contractually-required principal and interest	$	10,995,387
Non-accretable difference		5,789,480

Cash flows expected to be collected		5,205,907
Accretable yield		1,303,908

Fair value of loans accounted for under ASC Subtopic 310-30	$	3,901,999	[1]


[1]		Reflects a difference of $11.4 million compared with the amounts disclosed in the Form 8-K/A filed on July 16, 2010, which included the financial statements and exhibits pertaining to the Westernbank FDIC-assisted transaction at the acquisition date. The Corporation reassessed the classification of certain acquired loans and, due to their revolving characteristics, reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the fair value of the loans.

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments. The unpaid principal balance of the acquired loans from the Westernbank FDIC-assisted transaction that are accounted under ASC Subtopic 310-30 amounted to $7.8 billion as of the April 30, 2010 transaction date.

Changes in the carrying amount and the accretable yield for the acquired loans in the Westernbank FDIC-assisted transaction as of and for the nine-month period ended September 30, 2010, and which are accounted pursuant to the ASC Subtopic 310-30, were as follows:


				Carrying amount
(In thousands)	Accretable yield			of loans

Balance as of January 1, 2010		—			—
Additions [1]	$	1,303,908		$	3,901,999
Accretion		(95,506	)		95,506
Payments received					(338,308	)

Balance as of September 30, 2010	$	1,208,402		$	3,659,197


[1]		Represents the estimated fair value of the loans at the date of acquisition. There were no reclassifications from non-accretable difference to accretable yield from April 30, 2010 to September 30, 2010.

As of September 30, 2010, none of the acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

As indicated in Note 4 to the consolidated financial statements, the Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loan, if the loan is accruing interest. The following table presents acquired loans accounted for under ASC Subtopic 310-20 as of the April 30, 2010 acquisition date:


(In thousands)

Fair value of loans accounted under ASC Subtopic 310-20	$	358,989	[1]

Gross contractual amounts receivable (principal and interest)	$	1,007,880

Estimate of contractual cash flows not expected to be collected	$	614,653


[1]		Reflects a difference of $11.4 million compared with the amounts disclosed in the Form 8-K/A filed on July 16, 2010, which included the financial statements and exhibits pertaining to the Westernbank FDIC-assisted transaction at the acquisition date. The Corporation reassessed the classification of certain acquired loans and, due to their revolving characteristics, reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the fair value of the loans.

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments. The unpaid principal balance of the acquired loans from the Westernbank FDIC-assisted transaction that are accounted pursuant to ASC Subtopic 310-20 amounted to $739 million as of the April 30, 2010 transaction date.

There was no need to record an allowance for loan losses related to the covered loans as of September 30, 2010.

The activity in the allowance for loan losses for the nine-month period ended September 30, 2010 and 2009 is summarized as follows:


(In thousands)	2010			2009

Balance as of January 1	$	1,261,204		$	882,807
Provision for loan losses		657,471			1,053,036
Loan charge-offs		(750,609	)		(776,119	)
Loan recoveries		75,928			47,677

Balance as of September 30	$	1,243,994		$	1,207,401

Note 12 — Transfers of Financial Assets and Mortgage Servicing Rights

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/servicer agreements the Corporation is required to service the loans in accordance with the agencies’ servicing guidelines and standards. Substantially all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and

warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 19 to the consolidated financial statements for a description of such arrangements.

During the nine months ended September 30, 2010, the Corporation retained servicing rights on guaranteed mortgage securitizations (FNMA and GNMA) and whole loan sales involving approximately $697 million in principal balance outstanding (September 30, 2009 — $1.2 billion). During the quarter and nine months ended September 30, 2010, the Corporation recognized net gains of approximately $3.8 million and $12.6 million, respectively, on these transactions (September 30, 2009 — $6.4 million for the quarter and $32.8 million for the nine-month period). All loan sales or securitizations performed during the nine months ended September 30, 2010 were without credit recourse arrangements.

During the quarter ended September 30, 2010, the Corporation obtained as proceeds $227 million of assets as a result of securitization transactions with FNMA and GNMA, consisting of $223 million in mortgage-backed securities and $4 million in servicing rights. During the nine months ended September 30, 2010, the Corporation obtained as proceeds $645 million of assets as a result of securitization transactions with FNMA and GNMA, consisting of $634 million in mortgage-backed securities and $11 million in servicing rights. No liabilities were incurred as a result of these transfers during the quarter and nine month-period ended September 30, 2010 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $3.0 million and $13.2 million, respectively, during the quarter and nine months ended September 30, 2010 related to these residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the quarter and nine months ended September 30, 2010.


	Proceeds Obtained During the Quarter Ended September 30, 2010
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value

Assets
Investment securities available-for-sale:
Mortgage-backed securities — GNMA		—		—		—		—
Mortgage-backed securities — FNMA		—						—

Total investment securities available-for-sale		—		—		—		—

Trading account securities:
Mortgage-backed securities — GNMA		—	$	168,622		—	$	168,622
Mortgage-backed securities — FNMA		—		54,136		—		54,136

Total trading account securities		—	$	222,758		—	$	222,758

Mortgage servicing rights		—		—	$	3,932	$	3,932

Total		—	$	222,758	$	3,932	$	226,690


	Proceeds Obtained During the Nine Months Ended September 30, 2010
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value

Assets
Investment securities available-for-sale:
Mortgage-backed securities — GNMA		—	$	2,810		—	$	2,810
Mortgage-backed securities — FNMA		—		—		—		—

Total investment securities available-for-sale		—	$	2,810		—	$	2,810

Trading account securities:
Mortgage-backed securities — GNMA		—	$	496,223	$	4,147	$	500,370
Mortgage-backed securities — FNMA		—		130,641		—		130,641

Total trading account securities		—	$	626,864	$	4,147	$	631,011

Mortgage servicing rights		—		—	$	11,467	$	11,467

Total		—	$	629,674	$	15,614	$	645,288

Refer to Note 21 to the consolidated financial statements for key inputs, assumptions, and valuation techniques used to measure the fair value of these mortgage-backed securities and mortgage servicing rights.

Mortgage servicing rights

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations.

Classes of mortgage servicing rights were determined based on the different markets or types of assets being serviced. The Corporation recognizes the servicing rights of its banking subsidiaries that are related to residential mortgage loans as a class of servicing rights. These mortgage servicing rights (“MSRs”) are measured at fair value. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served.

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

The following table presents the changes in residential MSRs measured using the fair value method for the nine months ended September 30, 2010 and September 30, 2009.


(In thousands)	2010			2009

Fair value as of January 1	$	169,747		$	176,034
Purchases		4,250			1,029
Servicing from securitizations or asset transfers		11,909			19,640
Changes due to payments on loans [1]		(11,990	)		(10,750	)
Changes in fair value due to changes in valuation model inputs or assumptions		(7,969	)		(5,618	)

Fair value as of September 30	$	165,947		$	180,335


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

Residential mortgage loans serviced for others were $18.0 billion as of September 30, 2010 (December 31, 2009 — $17.7 billion; September 30, 2009 — $17.7 billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter and nine months ended September 30, 2010 amounted to $11.7 million and $35.4 million, respectively (September 30, 2009 — $11.7 million and $34.7 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. As of September 30, 2010, those weighted average mortgage servicing fees were 0.27% (September 30, 2009 — 0.26%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The discussion that follows includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights retained at the date of the residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during the quarter ended September 30, 2010 and year ended December 31, 2009 were as follows:


	September 30, 2010			December 31, 2009

Prepayment speed		5.0	%		7.8	%
Weighted average life	20.1 years			12.8 years
Discount rate (annual rate)		11.5	%		11.0	%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions as of September 30, 2010 and December 31, 2009 were as follows:


	Originated MSRs
(In thousands)	September 30, 2010			December 31, 2009

Fair value of retained interests	$	98,966		$	97,870
Weighted average life	11.2 years			8.8 years
Weighted average prepayment speed (annual rate)		9.0	%		11.4	%
Impact on fair value of 10% adverse change		($3,386	)		($3,182	)
Impact on fair value of 20% adverse change		($6,684	)		($7,173	)
Weighted average discount rate (annual rate)		12.80	%		12.41	%
Impact on fair value of 10% adverse change		($4,062	)		($2,715	)
Impact on fair value of 20% adverse change		($7,911	)		($6,240	)

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


	Purchased MSRs
(In thousands)	September 30, 2010			December 31, 2009

Fair value of retained interests	$	66,981		$	71,877
Weighted average life	12.1 years			9.9 years
Weighted average prepayment speed (annual rate)		8.3	%		10.1	%
Impact on fair value of 10% adverse change		($2,636	)		($2,697	)
Impact on fair value of 20% adverse change		($4,655	)		($5,406	)
Weighted average discount rate (annual rate)		11.6	%		11.1	%
Impact on fair value of 10% adverse change		($2,923	)		($2,331	)
Impact on fair value of 20% adverse change		($5,180	)		($4,681	)

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

As of September 30, 2010, the Corporation serviced $4.1 billion (December 31, 2009 and September 30, 2009 — $4.5 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation has the right to repurchase, at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans. As of September 30, 2010, the Corporation had recorded $163 million in mortgage loans on its financial statements related to this buy-back option program (December 31, 2009 — $124 million; September 30, 2009 — $112 million).

Note 13 — Other Assets

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


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Net deferred tax assets (net of valuation allowance)	$	336,661	$	363,967	$	380,596
Investments under the equity method		292,493		99,772		97,817
Bank-owned life insurance program		236,824		232,387		230,579
Prepaid FDIC insurance assessment		164,190		206,308		—
Other prepaid expenses		91,193		130,762		144,949
Derivative assets		85,180		71,822		81,249
Trade receivables from brokers and counterparties		37,996		1,104		8,275
Others		215,448		218,795		213,256

Total other assets	$	1,459,985	$	1,324,917	$	1,156,721

Note 14 — Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2010 and 2009, allocated by reportable segments and corporate group, were as follows (refer to Note 29 for the definition of the Corporation’s reportable segments):


2010
	Balance as of		Goodwill		Purchase accounting					Balance as of
(In thousands)	January 1, 2010		on acquisition		adjustments		Other			September 30, 2010

Banco Popular de Puerto Rico	$	157,025	$	106,230		—		—		$	263,255
Banco Popular North America		402,078		—		—		—			402,078
Corporate		45,246		—		—		($45,246	)		—

Total Popular, Inc.	$	604,349	$	106,230		—		($45,246	)	$	665,333


2009
	Balance as of		Goodwill		Purchase accounting					Balance as of
(In thousands)	January 1, 2009		on acquisition		adjustments			Other		September 30, 2009

Banco Popular de Puerto Rico	$	157,059		—		($34	)		—	$	157,025
Banco Popular North America		404,237		—		—			—		404,237
Corporate		44,496		—		750			—		45,246

Total Popular, Inc.	$	605,792		—	$	716			—	$	606,508

The goodwill recognized in the BPPR reportable segment during 2010 relates to the Westernbank FDIC-assisted transaction. Refer to Note 2 to the consolidated financial statements for further information on the accounting for the transaction and the resulting goodwill recognition. The fair values initially assigned to the assets acquired and liabilities assumed in the Westernbank FDIC-assisted transaction are subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Any changes in such fair value estimates may impact the goodwill initially recorded.

On September 30, 2010, the Corporation completed the sale of the processing and technology business, which resulted in a $45 million reduction of goodwill for the Corporation. See Note 3 to the consolidated financial statements for further information regarding the sale. The goodwill from EVERTEC was included in the Corporate group since EVERTEC is no longer considered a reportable segment as discussed in Note 29 to the consolidated financial statements.

The gross amount of goodwill and accumulated impairment losses at the beginning and the end of the quarter by reportable segment and Corporate group were as follows:


2010
	Balance at January				Balance at January		Balance at				Balance at
	1, 2010 (Gross		Accumulated		1, 2010 (Net		September 30, 2010		Accumulated		September 30, 2010
(In thousands)	amounts)		Impairment Losses		amounts)		(Gross amounts)		Impairment Losses		(Net amounts)

Banco Popular de Puerto Rico	$	157,025		—	$	157,025	$	263,255		—	$	263,255
Banco Popular North America		566,489	$	164,411		402,078		566,489	$	164,411		402,078
Corporate		45,429		183		45,246		—		—		—

Total Popular, Inc.	$	768,943	$	164,594	$	604,349	$	829,744	$	164,411	$	665,333


2009
	Balance at January				Balance at January		Balance at				Balance at
	1, 2009 (Gross		Accumulated		1, 2009 (Net		September 30, 2009		Accumulated		September 30, 2009
(In thousands)	amounts)		Impairment Losses		amounts)		(Gross amounts)		Impairment Losses		(Net amounts)

Banco Popular de Puerto Rico	$	157,059		—	$	157,059	$	157,025		—	$	157,025
Banco Popular North America		568,648	$	164,411		404,237		568,648	$	164,411		404,237
Corporate		44,679		183		44,496		45,429		183		45,246

Total Popular, Inc.	$	770,386	$	164,594	$	605,792	$	771,102	$	164,594	$	606,508

The accumulated impairment losses in the BPNA reportable segment are associated with E-LOAN.

As of September 30, 2010, December 31, 2009 and September 30, 2009, the Corporation had $6 million of identifiable intangible assets, other than goodwill, with indefinite useful lives.

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


	September 30, 2010				December 31, 2009				September 30, 2009
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposits	$	80,591	$	27,721	$	65,379	$	30,991	$	65,379	$	29,276
Other customer relationships		4,719		3,291		8,816		5,804		8,816		5,478
Other intangibles		125		99		125		71		2,787		2,509

Total	$	85,435	$	31,111	$	74,320	$	36,866	$	76,982	$	37,263

During the nine months ended September 30, 2010, the Corporation recognized $24 million in a core deposit intangible asset associated with the Westernbank FDIC-assisted transaction. This core deposit intangible asset is to be amortized to operating expenses ratably on a monthly basis over a 10-year period.

Certain core deposits and other customer relationships intangibles with a gross amount of $9 million and $0.8 million respectively, became fully amortized during the nine months ended September 30, 2010, and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above. The decrease in other customer relationships category was associated to the sale of the ownership interest in EVERTEC described in Note 3 to the consolidated financial statements.

During the quarter and nine months ended September 30, 2010, the Corporation recognized $2.4 million and $6.9 million, respectively, in amortization related to other intangible assets with definite useful lives (September 30, 2009 — $2.4 million and $7.2 million, respectively).

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


(In thousands)

Remaining 2010	$	2,242
Year 2011		8,936
Year 2012		8,409
Year 2013		8,225
Year 2014		7,587
Year 2015		5,478

Results of the Goodwill Impairment Test

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

Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not 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.

The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2010 using July 31, 2010 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodwill is assigned to the reporting units when carrying out a business combination.

In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units.

The computations require management to make estimates and assumptions. Critical assumptions that are used as part

of these evaluations include:

	•		a selection of comparable publicly traded companies, based on nature of business, location and size;

	•		a selection of comparable acquisition and capital raising transactions;

	•		the discount rate applied to future earnings, based on an estimate of the cost of equity;

	•		the potential future earnings of the reporting unit; and

	•		the market growth and new business assumptions.

For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no control premium adjustment is made to the comparable companies market multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment.

For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 8.42% to 23.24% for the 2010 analysis. The Ibbottson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (10-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium, and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary.

For BPNA, the only reporting unit that failed Step 1, the Corporation determined the fair value of Step 1 utilizing a market value approach based on a combination of price multiples from comparable companies and multiples from capital raising transactions of comparable companies. The market multiples used included “price to book” and “price to tangible book”. Additionally, the Corporation determined the reporting unit fair value using a DCF analysis based on BPNA’s financial projections, but assigned no weight to it given that the current market approaches provide a more meaningful measure of fair value considering the reporting unit’s financial performance and current market conditions. The Step 1 fair value for BPNA under both valuation approaches (market and DCF) was below the carrying amount of its equity book value as of the valuation date (July 31), requiring the completion of Step 2. In accordance with accounting standards, the Corporation performed a valuation of all assets and liabilities of BPNA, including any recognized and unrecognized intangible assets, to determine the fair value of BPNA’s net assets. To complete Step 2, the Corporation subtracted from BPNA’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 indicated that the implied fair value of goodwill exceeded the goodwill carrying value of $402 million at July 31, 2010, resulting in no goodwill impairment. The reduction in BPNA’s Step 1 fair value was offset by a reduction in the fair value of its net assets, resulting in an implied fair value of goodwill that exceeds the recorded book value of goodwill.

The analysis of the results for Step 2 indicates that the reduction in the fair value of the reporting unit was mainly attributed to the deteriorated fair value of the loan portfolios and not to the fair value of the reporting unit as a going concern entity. The current negative performance of the reporting unit is principally related to deteriorated credit quality in its loan portfolio, which agrees with the results of the Step 2 analysis. The fair value determined for BPNA’s loan portfolio in the July 31, 2010 annual test represented a discount of 23.6%, compared with 20.2% at December 31, 2009. The discount is mainly attributed to market participant’s expected rate of returns, which affected the market discount on the commercial and construction loan portfolios and deteriorated credit quality of the consumer and mortgage loan portfolios of BPNA. Refer to Note 29 to the consolidated financial statements, which provides highlights of BPNA’s reportable segment financial performance for the quarter and nine-month periods ended September 30, 2010. BPNA’s provision for loan losses, as a stand-alone legal entity, which is the reporting unit level used for the goodwill impairment analysis, amounted to $226 million for nine months ended September 30, 2010, which represented 144% of BPNA legal entity’s net loss of $157 million for that period.

If the Step 1 fair value of BPNA declines further in the future without a corresponding decrease in the fair value of its net assets or if loan discounts improve without a corresponding increase in the Step 1 fair value, the Corporation may be required to record a goodwill impairment charge. The Corporation engaged a third-party valuator to assist management in the annual evaluation of BPNA’s goodwill (including Step 1 and Step 2) as well as BPNA’s loan portfolios as of the July 31, 2010 valuation date. Management discussed the methodologies, assumptions and results supporting the relevant values for conclusions and determined they were reasonable.

Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of Popular, Inc. concluding that the fair value results determined for the reporting units in the July 31, 2010 annual assessment were reasonable.

The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill is recorded. Declines in the Corporation’s market capitalization increase the risk of goodwill impairment in the future.

Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. As indicated in this MD&A, the economic situation in the United States and Puerto Rico, including deterioration in the housing market and credit market, continued to negatively impact the financial results of the Corporation during 2010.

Note 15 — Deposits

Total interest bearing deposits as of September 30, 2010 and December 31, 2009, consisted of the following:


	September 30,			December 31,
(In thousands)	2010			2009

Savings deposits	$	6,126,358		$	5,480,124
NOW, money market and other interest bearing demand deposits		4,854,392			4,726,204

Total savings, NOW, money market and other interest bearing demand deposits		10,980,750			10,206,328


Certificates of deposits:
Under $100,000		6,609,544	[1]		6,553,022	[1]
$100,000 and over		4,778,311			4,670,243

Total certificates of deposits		11,387,855			11,223,265

Total interest bearing deposits	$	22,368,605		$	21,429,593


[1]		Includes brokered certificates of deposit amounting to $2.5 billion as of September 30, 2010 and $2.7 billion as of December 31, 2009.

A summary of certificates of deposit by maturity as of September 30, 2010 follows:


(In thousands)

Remaining 2010	$	3,332,971
2011		4,775,554
2012		1,360,520
2013		655,948
2014		398,443
2015 and thereafter		864,419

Total	$	11,387,855

Note 16 — Borrowings

Assets sold under agreements to repurchase were as follows:


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Assets sold under agreements to repurchase	$	2,358,139	$	2,632,790	$	2,807,891

The repurchase agreements outstanding as of September 30, 2010 were collateralized by $2.1 billion in investment securities available-for-sale, $435 million in trading securities and $39 million in other assets. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of condition.

In addition, there were repurchase agreements outstanding collateralized by $170 million in securities purchased underlying agreements to resell to which the Corporation has the right to repledge. It is the Corporation’s policy to take possession of securities purchased under agreements to resell. However, the counterparties to such agreements maintain effective control over such securities, and accordingly are not reflected in the Corporation’s consolidated statements of condition.

Other short-term borrowings consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Secured borrowing with clearing broker with an interest rate of 1.50%		—	$	6,000		—
Advances with the FHLB maturing in October 2010 paying interest at maturity at fixed rates ranging from 0.41% to 0.43%	$	125,000		—		—
Unsecured borrowings with private investors paying interest at a fixed rate of 0.45%		—		—	$	1,750
Term funds purchased maturing in 2010 paying interest at maturity at fixed rates ranging from 0.65% to 1.15%		65,079		—		—
Others		1,263		1,326		1,327

Total other short-term borrowings	$	191,342	$	7,326	$	3,077

Notes payable consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Advances with the FHLB:
-with maturities ranging from 2011 through 2015 paying interest at monthly fixed rates ranging from 3.31% to 5.02% (September 30, 2009 — 1.48% to 5.06%)	$	568,423	$	1,103,627	$	1,105,429
-maturing in 2010 paying interest quarterly at a fixed rate of 5.10%		—		20,000		20,000

Note issued to the FDIC, including unamortized premium of $2,242; paying interest monthly at an annual fixed rate of 2.50%; maturing on April 30, 2015 or such earlier date as such amount may become due and payable pursuant to the terms of the note		3,288,219		—		—

Term notes paying interest monthly at fixed rates ranging from 3.00% to 6.00%		—		—		3,100

Term notes with maturities ranging from 2011 to 2013 paying interest semiannually at fixed rates ranging from 5.25% to 13.00% (September 30, 2009 — 5.20% to 9.75%)		381,064		382,858		383,289

Term notes with maturities ranging from 2010 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate		1,112		1,528		2,111

Term notes paying interest quarterly at a floating rate of 6.00% to 7.50% over the 3-month LIBOR rate		—		250,000		250,000

Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Note 17)		439,800		439,800		439,800

Junior subordinated deferrable interest debentures (related to trust preferred securities) ($936,000 less discount of $496,678 as of September 30, 2010) with no stated maturity and a fixed interest rate of 5.00% until, but excluding December 5, 2013 and 9.00% thereafter (Refer to Note 17)		439,322		423,650		418,833

Others		25,448		27,169		27,259

Total notes payable	$	5,143,388	$	2,648,632	$	2,649,821

Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2009, for rates and maturity information corresponding to the borrowings outstanding as of such date. Key index rates as of September 30, 2010 and September 30, 2009, respectively, were as follows: 3-month LIBOR rate = 0.29% and 0.29%; 10-year U.S. Treasury note = 2.51% and 3.31%.

In consideration for the excess assets acquired over liabilities assumed as part of the Westernbank FDIC-assisted transaction, BPPR issued to the FDIC a secured note (the “note issued to the FDIC”) in the amount of $5.8 billion as of April 30, 2010 bearing an annual interest rate of 2.50%, which has full recourse to BPPR. As indicated in Notes 2 and 8 to the consolidated financial statements, the note issued to the FDIC is collateralized by the loans (other than certain consumer loans) and other real estate acquired in the agreement with the FDIC and all proceeds derived from such assets, including cash inflows from claims to the FDIC under the loss sharing agreements. Proceeds received from such sources are used to pay the note under the conditions stipulated in the agreement. The entire outstanding principal balance of the note issued to the FDIC is due five years from issuance (April 30, 2015), or such date as such amount may become due and payable pursuant to the terms of the note. Borrowings under the note bear interest at a fixed annual rate of 2.50% and is paid monthly. If the Corporation fails to pay any interest as and when due, such interest shall accrue interest at the note interest rate plus 2.00% per annum. The Corporation may repay the note in whole or in part without any penalty subject to certain notification requirements indicated in the agreement. During the third quarter of 2010, the Corporation prepaid $2.1 billion of the note issued to the FDIC from funds unrelated to the assets securing the note.

A breakdown of borrowings by contractual maturities as of September 30, 2010 is included in the table below. Given its nature, the maturity of the note issued to the FDIC was based on expected repayment dates and not on its April 30, 2015 contractual maturity date. The expected repayments consider the timing of expected cash inflows on the loans, OREO and claims on the loss sharing agreements that will be applied to repay the note during the period that the note payable to the FDIC is outstanding.


	Federal funds sold
	and repurchase		Short-term
(In thousands)	agreements		borrowings		Notes payable			Total

Year
2010	$	1,195,949	$	191,342	$	633,071		$	2,020,362
2011		50,000		—		2,835,637			2,885,637
2012		75,000		—		631,835			706,835
2013		49,000		—		126,322			175,322
2014		350,000		—		10,824			360,824
Later years		638,190		—		466,377			1,104,567
No stated maturity		—		—		936,000			936,000

Subtotal	$	2,358,139	$	191,342	$	5,640,066		$	8,189,547
Less: Discount		—		—		(496,678	)		(496,678	)

Total borrowings	$	2,358,139	$	191,342	$	5,143,388		$	7,692,869

Note 17 — Trust Preferred Securities

As of September 30, 2010, December 31, 2009 and September 30, 2009, the Corporation had established four trusts (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) for the purpose of issuing trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. In August 2009, the Corporation established the Popular Capital Trust III for the purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury at the time for trust preferred securities issued by this trust. In connection with this exchange, the trust used the Series C preferred stock, together with the proceeds of issuance and sale of common securities of the trust, to purchase junior subordinated debentures issued by the Corporation.

The sole assets of the five trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation.

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.

Financial data pertaining to the trusts as of September 30, 2010, December 31, 2009 and September 30, 2009 were as follows:

(In thousands)


							Popular North
	BanPonce			Popular Capital			America Capital			Popular Capital			Popular Capital
Issuer	Trust I			Trust I			Trust I			Trust II			Trust III

Capital securities	$	52,865		$	181,063		$	91,651		$	101,023		$	935,000
Distribution rate		8.327	%		6.700	%		6.564	%		6.125	%	5.000% until,
													but excluding
													December 5, 2013
													and 9.000%
													thereafter
Common securities	$	1,637		$	5,601		$	2,835		$	3,125		$	1,000
Junior subordinated debentures aggregate liquidation amount	$	54,502		$	186,664		$	94,486		$	104,148		$	936,000
Stated maturity date	February 2027			November 2033			September 2034			December 2034			Perpetual
Reference notes		(a),(c),(f),	(g)		(b),(d),	(e)		(a),(c),	(f)		(b),(d),	(f)		(b),(d),(h),	(i)



[a]		Statutory business trust that is wholly-owned by Popular North America (“PNA”) and indirectly wholly-owned by the Corporation.

[b]		Statutory business trust that is wholly-owned by the Corporation.

[c]		The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

[d]		These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

[e]		The original issuance was for $150 million. The Corporation had reacquired $6 million of the 8.327% capital securities at December 31, 2008.

[f]		The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval.

[g]		Same as [f] above, except that the investment company event does not apply for early redemption.

[h]		The debentures are perpetual and may be redeemed by Popular at any time, subject to the consent of the Board of Governors of the Federal Reserve System.

[i]		Carrying value of junior subordinates debentures of $439 million as of September 30, 2010 ($936 million aggregate liquidation amount, net of $497 million discount); $424 million as of December 31, 2009 ($936 million aggregate liquidation amount, net of $512 million discount), and $419 million as of September 30, 2009 ($936 million aggregate liquidation amount, net of $517 million discount).

In accordance with the Federal Reserve Board guidance, the trust preferred securities represent restricted core capital elements and qualify as Tier 1 Capital, subject to quantitative limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1 Capital of a banking organization must not exceed 25% of the sum of all core capital elements (including cumulative perpetual preferred stock and trust preferred securities). As of September 30, 2010, the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed as Tier 1 capital. As of December 31, 2009, there were $7 million of the outstanding trust preferred securities which were disallowed as Tier 1 capital. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital, subject to further limitations. The Federal Reserve Board revised the quantitative limit which would limit restricted core capital elements included in the Tier 1 capital of a bank holding company to 25% of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. The new limit would be effective on March 31, 2011. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act, recently passed in July 2010, has a provision to effectively phase out the use of trust preferred securities as Tier 1 capital throughout a

five-year period. As of September 30, 2010, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. As of September 30, 2010, the remaining trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008, and were issued prior to October 4, 2010 and thus, are exempt from the Dodd-Frank banking bill provision.

Note 18 — Stockholders’ Equity

Increase in authorized shares of common stock

On May 4, 2010, following stockholder approval, the Corporation amended its certificate of incorporation to provide for an increase in the number of shares of the Corporation’s common stock authorized for issuance from 700 million shares to 1.7 billion shares.

Issuance of depositary shares representing preferred stock and conversion to shares of common stock

In April 2010, the Corporation raised $1.15 billion through the sale of 46,000,000 depositary shares, each representing a 1/40th interest in a share of Contingent Convertible Perpetual Non-Cumulative Preferred Stock, Series D, no par value, $1,000 liquidation preference per share. The preferred stock represented by depositary shares automatically converted into shares of Popular, Inc.’s common stock at a conversion rate of 8.3333 shares of common stock for each depositary share on May 11, 2010, which was the 5 ^th business day after the Corporation’s common shareholders approved the amendment to the Corporation’s restated certificate of incorporation to increase the number of authorized shares of common stock. The conversion of the depositary shares of preferred stock resulted in the issuance of 383,333,333 additional shares of common stock. The net proceeds from the public offering amounted to approximately $1.1 billion, after deducting the underwriting discount and estimated offering expenses. Note 23 to the consolidated financial statements provides information on the impact of the conversion on net income per common share.

BPPR statutory reserve

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $402 million as of September 30, 2010 (December 31, 2009 — $402 million; September 30, 2009 — $392 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters and nine months ended September 30, 2010 and 2009.

Note 19 — Commitments, Contingencies and Guarantees

Commercial letters of credit and standby letters of credit amounted to $19 million and $116 million, respectively, as of September 30, 2010 (December 31, 2009 — $13 million and $134 million, respectively; and September 30, 2009 — $18 million and $162 million, respectively). In addition, the Corporation has commitments to originate mortgage loans amounting to $64 million as of September 30, 2010 (December 31, 2009 — $48 million; September 30, 2009 — $55 million).

As of September 30, 2010, the Corporation recorded a liability of $0.5 million (December 31, 2009 - $0.7 million and September 30, 2009 — $0.6 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. The Corporation recognizes at fair value the obligation at inception of the standby letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and recognized over the commitment period. This liability is included as part of other liabilities in the consolidated statements of condition. The contract amounts in standby letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. In the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, if any, which

normally includes cash and marketable securities, real estate, receivables, among others. Management does not anticipate any material losses related to these instruments.

Commitments to extend credit, which include credit card lines, commercial lines of credit, and other unused credit commitments, amounted to $6.2 billion as of September 30, 2010 (December 31, 2009 — $7.0 billion; September 30, 2009 — $7.0 billion), excluding the commitments to extend credit that pertain to the lending relationships of the Westernbank operations.

As of September 30, 2010, the Corporation maintained a reserve of approximately $8 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit unrelated to the acquired lending relationships from the Westernbank FDIC-assisted transaction (December 31, 2009 — $15 million; September 30, 2009 — $18 million). The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the Corporation’s allowance for loan losses methodology. This reserve for unfunded exposures remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of condition.

As of September 30, 2010, the commitments to extend credit related to the Westernbank acquired lending relationships approximated $176 million. The acquired commitments to extend credit are covered under the loss sharing agreements with the FDIC, subject to FDIC approvals, limitations on the timing for such disbursements, and servicing guidelines, among various considerations. As indicated in Note 2 to the consolidated financial statements, on the April 30, 2010 acquisition date, the Corporation recorded a contingent liability for such commitments at fair value. As of September 30, 2010, that contingent liability amounted to $120 million and is recorded as part of other liabilities in the consolidated statement of condition.

The Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. Also, from time to time, the Corporation may have sold, in bulk sale transactions, residential mortgage loans subject to credit recourse or to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or for breach of representations and warranties.

As of September 30, 2010, the Corporation serviced $4.1 billion (December 31, 2009 — $4.5 billion; September 30, 2009 — $4.5 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and Freddie Mac programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation may be required to repurchase the loan or reimburse for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the nine months ended September 30, 2010, the Corporation repurchased approximately $93 million in mortgage loans subject to the credit recourse provisions. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing of the related property. Most claims associated with the residential mortgage loans subject to credit recourse provisions are settled by repurchases of delinquent loans. As of September 30, 2010, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $38 million (December 31, 2009 — $16 million; September 30, 2009 — $16 million).

The probable losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item“gain (loss) on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale” in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate,

estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations.The expected loss, which represents the amount expected to be lost on a given loan over a twelve-month period, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value rates, loan aging, among others.

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or may sell the loans directly to FNMA or other private investors for cash. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. The Corporation has not recorded any specific contingent liability in the consolidated financial statements for these customary representation and warranties related to loans sold by the Corporation’s mortgage operations in Puerto Rico, and management believes that, based on historical data, the probability of payments and expected losses under these representations and warranty arrangements is not significant.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. As of September 30, 2010, the Corporation serviced $18.0 billion in mortgage loans, including the loans serviced with credit recourse (December 31, 2009 — $17.7 billion; September 30, 2009 — $17.7 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds from mortgage loans foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantee programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. As of September 30, 2010, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $25 million (December 31, 2009 — $14 million; September 30, 2009 — $14 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

As of September 30, 2010, the Corporation established reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN. Loans had been sold to investors on a servicing released basis subject to certain representations and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation is required to make certain representations relating to borrower creditworthiness, loan documentation and collateral, which if not complied, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. The loans had been sold prior to 2009. As of September 30, 2010, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $35 million, which was included as part of other liabilities in the consolidated statement of condition (December 31, 2009 — $33 million; September 30, 2009 — $21 million). E-LOAN is no longer originating and selling loans, since the subsidiary ceased these activities during 2008. On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to E-LOAN’s customary representation and warranty arrangements. The analysis incorporates expectations on future disbursements based on quarterly repurchases and make-whole events. The analysis also considers factors such as the average length-time between the loan’s funding date and the loan repurchase date as observed in the historical loan data. During the nine months ended September 30, 2010, E-LOAN charged-off approximately $8.8 million against this representation and warranty reserve associated with loan repurchases and indemnification or make-whole events (nine months ended September 30, 2009 — $13.2 million). Make-whole events are typically defaulted loans in which the investor attempts to recover through the collateral or guarantees, and the seller is obligated to cover any impaired or unrecovered

portion of the loan. Claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation.

During 2008, the Corporation provided indemnifications for the breach of certain representations or warranties in connection with various sales of assets by the discontinued operations of PFH. These sales were on a non-credit recourse basis. The agreements primarily include indemnification for breaches of certain key representations and warranties, some of which expire within a definite time period; others survive until the expiration of the applicable statute of limitations, and others do not expire. Certain of the indemnifications are subject to a cap or maximum aggregate liability defined as a percentage of the purchase price. The indemnifications agreements outstanding as of September 30, 2010 are related principally to make-whole arrangements. As of September 30, 2010, the Corporation’s reserve related to PFH’s indemnity arrangements amounted to $4 million (December 31, 2009 — $9 million; September 30, 2009 — $19 million). During the nine months ended September 30, 2010, the Corporation recorded charge-offs with respect to the PFH’s representation and warranty arrangements amounting to approximately $2.3 million (nine months ended September 30, 2009 - $1.2 million). The reserve balance as of September 30, 2010 contemplates historical indemnity payments. Certain indemnification provisions, which included, for example, reimbursement of premiums on early loan payoffs and repurchase obligations for defaulted loans within a short-term period, expired during 2009. Popular, Inc. Holding Company and Popular North America have agreed to guarantee certain obligations of PFH with respect to the indemnification obligations.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $0.6 billion as of September 30, 2010 (December 31, 2009 — $0.6 billion; September 30, 2009 — $0.7 billion). In addition, as of September 30, 2010, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4 billion of capital securities (trust preferred securities) (December 31, 2009 — $1.4 billion; September 30, 2009 — $1.4 billion) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 17 to the consolidated financial statements for further information on the trust preferred securities.

As described in Note 2 to the consolidated financial statements, as part of the Westernbank FDIC-assisted transaction, BPPR has agreed to make a true-up payment to the FDIC on the true up measurement date of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated fair value of such true up payment is recorded as a reduction in the fair value of the FDIC loss share indemnification asset.

Legal Proceedings

The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters, except for the matters described below which are each in early stages and management cannot currently predict their outcome, will not have a material adverse effect on the Corporation’s business, results of operations, financial condition and liquidity.

Between May 14, 2009 and September 9, 2009, five putative class actions and two derivative claims were filed in the United States District Court for the District of Puerto Rico and the Puerto Rico Court of First Instance, San Juan Part, against Popular, Inc., certain of its directors and officers, among others. The five class actions have now been consolidated into two separate actions: a securities class action captioned Hoff v. Popular, Inc., et al. (consolidated with Otero v. Popular, Inc., et al. ) and an Employee Retirement Income Security Act (ERISA) class action entitled In re Popular, Inc. ERISA Litigation (comprised of the consolidated cases of Walsh v. Popular, Inc. et al. ; Montañez v. Popular, Inc., et al. ; and Dougan v. Popular, Inc., et al. ).

necessary to make statements made by the Corporation not false and misleading in connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities class action complaint seeks class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. On January 11, 2010, Popular, the underwriter defendants and the individual defendants moved to dismiss the consolidated securities class action complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court also dismissed the Section 11 claim brought against Popular’s directors on statute of limitations grounds and the Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing. The Court declined to dismiss the claims brought against Popular and certain of its officers under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder), Section 20(a) of the Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately alleged that defendants made materially false and misleading statements with the requisite state of mind.

On November 30, 2009, plaintiffs in the ERISA case filed a consolidated class action complaint. The consolidated complaint purports to be on behalf of employees participating in the Popular, Inc. U.S.A. 401(k) Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment Plan from January 24, 2008 to the date of the Complaint to recover losses pursuant to Sections 409 and 502(a)(2) of ERISA against Popular, certain directors, officers and members of plan committees, each of whom is alleged to be a plan fiduciary. The consolidated complaint alleges that the defendants breached their alleged fiduciary obligations by, among other things, failing to eliminate Popular stock as an investment alternative in the plans. The complaint seeks to recover alleged losses to the plans and equitable relief, including injunctive relief and a constructive trust, along with costs and attorneys’ fees. On December 21, 2009, and in compliance with a scheduling order issued by the Court, Popular and the individual defendants submitted an answer to the amended complaint. Shortly thereafter, on December 31, 2009, Popular and the individual defendants filed a motion to dismiss the consolidated class action complaint or, in the alternative, for judgment on the pleadings. On May 5, 2010, a magistrate judge issued a report and recommendation in which he recommended that the motion to dismiss be denied except with respect to Banco Popular de Puerto Rico, as to which he recommended that the motion be granted. On May 19, 2010, Popular filed objections to the magistrate judge’s report and recommendation. On June 21, 2010, plaintiffs filed a response to these objections. On July 9, 2010, with leave of the Court, Popular filed a reply to plaintiffs’ response. On September 30, 2010, the Court issued an order without opinion granting in part and denying in part the motion to dismiss and providing that the Court would issue an opinion and order explaining its decision. To date, no opinion has been issued. Discovery is ongoing in the ERISA case, and the parties have agreed to coordinate discovery with respect to common issues with discovery in the García and Hoff cases.

The derivative actions ( García v. Carrión, et al. and Díaz v. Carrión, et al. ) have been brought purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers and directors and allege breaches of fiduciary duty, waste of assets and abuse of control in connection with our issuance of allegedly false and misleading financial statements and financial reports and the offering of the Series B Preferred Stock. The derivative complaints seek a judgment that the action is a proper derivative action, an award of damages and restitution, and costs and disbursements, including reasonable attorneys’ fees, costs and expenses. On October 9, 2009, the Court coordinated for purposes of discovery the García action and the consolidated securities class action. On October 15, 2009, Popular and the individual defendants moved to dismiss the García complaint for failure to make a demand on the Board of Directors prior to initiating litigation. On November 20, 2009, plaintiffs filed an amended complaint, and on December 21, 2009, Popular and the individual defendants moved to dismiss the García amended complaint. At a scheduling conference held on January 14, 2010, the Court stayed discovery in both the Hoff and García matters pending resolution of their respective motions to dismiss. On August 11, 2010, the Court granted in part and denied in part the motion to dismiss the Garcia action. The Court dismissed the gross mismanagement and corporate waste claims, but declined to dismiss the breach of fiduciary duty claim. Discovery has now commenced in the Hoff and Garcia actions and is to proceed in coordinated fashion. At the Court’s request, the parties to the Hoff and Garcia cases discussed the prospect of mediation and have agreed to nonbinding mediation in an attempt to determine whether the cases can be settled.

September 30, 2010, the Court issued an order without opinion remanding the Diaz case to the Puerto Rico Court of First Instance. On October 13, 2010, the Court issued a Statement of Reasons In Support of Remand Order. On October 28, 2010, Popular and the individual defendants moved for reconsideration of the remand order. The reconsideration motion is pending.

On April 13, 2010, the Puerto Rico Court of First Instance in San Juan granted summary judgment dismissing a separate complaint brought by plaintiff in the García action that sought to enforce an alleged right to inspect the books and records of the Corporation in support of the pending derivative action. The Court held that the plaintiff had not propounded a “proper purpose” under Puerto Rico law for such inspection. On April 28, 2010, the plaintiff in that action moved for reconsideration of the Court’s dismissal. On May 4, 2010, the Court denied plaintiff’s request for reconsideration. On June 7, 2010, plaintiff filed an appeal before the Puerto Rico Court of Appeals. On June 11, 2010, Popular and the individual defendants moved to dismiss the appeal. On June 22, 2010, the Court of Appeals dismissed the appeal. On July 6, 2010, plaintiff moved for reconsideration of the Court’s dismissal. On July 16, 2010, the Court of Appeals denied plaintiff’s request for reconsideration.

On October 7, 2010, a new putative class action suit for breach of contract and damages, captioned Almeyda-Santiago v. Banco Popular de Puerto Rico, was filed in the Puerto Rico Court of First Instance against Banco Popular de Puerto Rico. The complaint essentially asserts that plaintiff has suffered damages because of Banco Popular’s alleged fraudulent overdraft fee practices in connection with debit card transactions. Such practices allegedly consist of: (a) the reorganization of electronic debit transactions in high-to-low order so as to multiply the number of overdraft fees assessed on its customers; (b) the assessment of overdraft fees even when clients have not overdrawn their accounts; (c) the failure to disclose, or to adequately disclose, its overdraft policy to its customers; and (d) the provision of false and fraudulent information regarding its clients’ account balances at point of sale transactions and on its website. Plaintiff seeks damages, restitution and provisional remedies against Banco Popular for breach of contract, abuse of trust, illegal conversion and unjust enrichment. The Corporation intends to contend vigorously these claims.

At this early stage, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss. It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation’s results of operations.

Note 20 —Non-Consolidated Variable Interest Entities

The Corporation transfers residential mortgage loans in guaranteed loan securitizations. The Corporation’s continuing involvement in these transfers includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statement of condition as available-for-sale or trading securities.

The Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions. These special purpose entities are deemed to be variable interest entities (“VIEs”) since they lack equity investments at risk. As part of the adoption of ASU 2009-17, during the first quarter of 2010, the Corporation evaluated these guaranteed mortgage securitization structures in which it participates, including GNMA and FNMA, and concluded that the Corporation is not the primary beneficiary of these VIEs, and therefore, are not required to be consolidated in the Corporation’s financial statements. The Corporation qualitatively assessed whether it held a controlling financial interest in these VIEs, which included analyzing if it had both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE. The Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of the VIE, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE. The conclusion on the assessment of these guaranteed mortgage securitization transactions did not change during the third quarter of 2010.

The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 21 to the consolidated financial statements for additional information on the debt securities outstanding as of September 30, 2010, December 31, 2009 and September 30, 2009, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statement of condition. In addition, the Corporation may retain the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. Pursuant to ASC Subtopic 810-10, the servicing fees that the Corporation receives for its servicing role are considered variable interests in the VIEs because the servicing fees are

subordinated to the principal and interest that first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies.

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer with non-consolidated VIEs as of September 30, 2010 and December 31, 2009.


(In thousands)	September 30, 2010		December 31, 2009

Assets
Servicing assets:
Mortgage servicing rights	$	104,978	$	104,984

Total servicing assets	$	104,978	$	104,984

Other assets:
Servicing advances	$	3,339	$	2,029

Total other assets	$	3,339	$	2,029

Total	$	108,317	$	107,013

Maximum exposure to loss	$	108,317	$	107,013

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $9.4 billion as of September 30, 2010 and $9.3 billion as of December 31, 2009.

Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances as of September 30, 2010 and December 31, 2009 will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

Note 21 — Fair Value Measurement

ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

	•		Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.

	•		Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.

	•		Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability.

The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently.

The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant

judgment for certain financial instruments. Changes in the underlying assumptions used in calculating the fair value could significantly affect the results.

Fair Value on a Recurring Basis

The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, December 31, 2009 and September 30, 2009:


	As of September 30, 2010
								Balance as of
								September 30,
(In millions)	Level 1		Level 2			Level 3		2010

Assets
Continuing Operations
Investment securities available-for-sale:
U.S. Treasury securities		—	$	40			—	$	40
Obligations of U.S. Government sponsored entities		—		1,397			—		1,397
Obligations of Puerto Rico, States and political subdivisions		—		53			—		53
Collateralized mortgage obligations — federal agencies		—		1,347			—		1,347
Collateralized mortgage obligations — private label		—		95			—		95
Residential mortgage-backed securities — agencies		—		2,775		$	8		2,783
Equity securities	$	3		5					8
Other		—		18			—		18

Total investment securities available-for-sale	$	3	$	5,730		$	8	$	5,741

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions		—	$	17			—	$	17
Collateralized mortgage obligations		—		1		$	3		4
Residential mortgage-backed securities — agencies		—		426			24		450
Other		—		9			3		12

Total trading account securities		—	$	453		$	30	$	483

Mortgage servicing rights		—		—		$	166	$	166
Derivatives		—	$	86			—	$	86

Total	$	3	$	6,269		$	204	$	6,476


Liabilities
Continuing Operations
Derivatives		—		($91	)		—		($91	)
Equity appreciation instrument		—		($18	)		—		($18	)

Total		—		($109	)		—		($109	)


	As of December 31, 2009
								Balance as of
								December 31,
(In millions)	Level 1		Level 2			Level 3		2009

Assets
Continuing Operations
Investment securities available-for-sale:
U.S. Treasury securities		—	$	30			—	$	30
Obligations of U.S. Government sponsored entities		—		1,648			—		1,648
Obligations of Puerto Rico, States and political subdivisions		—		81			—		81
Collateralized mortgage obligations — federal agencies		—		1,600			—		1,600
Collateralized mortgage obligations — private label		—		118			—		118
Residential mortgage-backed securities — agencies		—		3,176		$	34		3,210
Equity securities	$	3		5			—		8

Total investment securities available-for-sale	$	3	$	6,658		$	34	$	6,695

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions		—	$	13			—	$	13
Collateralized mortgage obligations		—		1		$	3		4
Residential mortgage-backed securities — agencies		—		208			224		432
Other		—		9			3		12

Total trading account securities		—	$	231		$	230	$	461

Mortgage servicing rights		—		—		$	170	$	170
Derivatives		—	$	73			—	$	73

Total	$	3	$	6,962		$	434	$	7,399


Liabilities
Continuing Operations
Derivatives		—		($73	)		—		($73	)

Total		—		($73	)		—		($73	)


	As of September 30, 2009
								Balance as of
								September 30,
(In millions)	Level 1		Level 2			Level 3		2009

Assets
Continuing Operations
Investment securities available-for-sale:
U.S. Treasury securities		—	$	31			—	$	31
Obligations of U.S. Government sponsored entities		—		1,694			—		1,694
Obligations of Puerto Rico, States and political subdivisions		—		89			—		89
Corporate bonds		—		1,598			—		1,598
Collateralized mortgage obligations — federal agencies		—		127			—		127
Residential mortgage-backed securities — agencies		—		3,411		$	34		3,445
Equity securities	$	4		5			—		9

Total investment securities available-for-sale	$	4	$	6,955		$	34	$	6,993

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions		—	$	3			—	$	3
Collateralized mortgage obligations		—		1		$	4		5
Residential mortgage-backed securities — agencies		—		180			233		413
Other		—		22			4		26

Total trading account securities		—	$	206		$	241	$	447

Mortgage servicing rights		—		—		$	180	$	180
Derivatives		—	$	81			—	$	81

Total	$	4	$	7,242		$	455	$	7,701


Liabilities
Continuing Operations
Derivatives		—		($89	)		—		($89	)

Total		—		($89	)		—		($89	)

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2010 and 2009:


Quarter ended September 30, 2010
														Changes in
														unrealized
														gains (losses)
														included in
						Purchases,								earnings/OCI
						sales,								related to
						issuances,								assets and
			Gains			settlements,			Transfers			Balance as		liabilities still
	Balance		(losses)			and			in (out)			of		held as of
	as of June		included in			paydowns			of Level			September		September
(In millions)	30, 2010		earnings/OCI			(net)			3			30, 2010		30, 2010

Assets

Continuing Operations
Investment securities available-for-sale:
Residential mortgage- backed securities — agencies	$	32		—		$	1			($25	)	$	8		—

Total investment securities available-for-sale	$	32		—		$	1			($25	)	$	8		—

Trading account securities:
Collateralized mortgage obligations	$	3		—			—			—		$	3		—
Residential mortgage- backed securities — agencies		114	$	1			($3	)		($88	)		24		—
Other		3		—			—			—			3		—

Total trading account securities	$	120	$	1			($3	)		($88	)	$	30		—		[a]

Mortgage servicing rights	$	172		($10	)	$	4			—		$	166		($6	)	[b]

Total	$	324		($9	)	$	2			($113	)	$	204		($6	)


[a]		Gains (losses) are included in “Trading account profit” in the statement of operations

[b]		Gains (losses) are included in “Other service fees” in the statement of operations


Nine months ended September 30, 2010
														Changes in
														unrealized
														gains (losses)
														included in
						Purchases,								earnings/OCI
						sales,								related to
						issuances,								assets and
	Balance		Gains			settlements,			Transfers			Balance as		liabilities still
	as of		(losses)			and			in (out)			of		held as of
	January 1,		included in			paydowns			of Level			September		September
(In millions)	2010		earnings/OCI			(net)			3			30, 2010		30, 2010

Assets

Continuing Operations
Investment securities available-for-sale:
Residential mortgage- backed securities — agencies	$	34	$	1			—			($27	)	$	8		—

Total investment securities available-for-sale	$	34	$	1			—			($27	)	$	8		—		[a]

Trading account securities:
Collateralized mortgage obligations	$	3		—			—			—		$	3		—
Residential mortgage- backed securities— agencies		224	$	4			($34	)		($170	)		24		—
Other		3		—			—			—			3		—

Total trading account securities	$	230	$	4			($34	)		($170	)	$	30		—		[b]

Mortgage servicing rights	$	170		($20	)	$	16			—		$	166		($12	)	[c]

Total	$	434		($15	)		($18	)		($197	)	$	204		($12	)


[a]		Gains are included in OCI

[b]		Gains (losses) are included in “Trading account profit” in the statement of operations

[c]		Gains (losses) are included in “Other service fees” in the statement of operations


Quarter ended September 30, 2009
													Changes in
													unrealized
													gains (losses)
													included in
								Purchases,					earnings/OCI
								sales,					related to
						Increase		issuances,					assets and
	Balance					(decrease)		settlements,			Balance as		liabilities still
	as of		Gains (losses)			in accrued		and			of		held as of
	June 30,		included in			interest		paydowns			September		September 30,
(In millions)	2009		earnings/OCI			receivable		(net)			30, 2009		2009

Assets

Continuing Operations
Investment securities available-for-sale:
Residential mortgage- backed securities — agencies	$	35		—			—		($1	)	$	34		—

Total investment securities available-for-sale	$	35		—			—		($1	)	$	34		—

Trading account securities:
Collateralized mortgage obligations	$	5		—			—		($1	)	$	4		—
Residential mortgage- backed securities— agencies		284	$	1			—		(52	)		233	$	1		[a]
Other		5		(1	)		—		—			4		—

Total trading account securities	$	294		—			—		($53	)	$	241	$	1

Mortgage servicing rights	$	181		($7	)		—	$	6		$	180		($4	)	[b]

Discontinued Operations
Loans measured at fair value pursuant to fair value option	$	1		—			—		($1	)		—		—		[c]

Total	$	511		($7	)		—		($49	)	$	455		($3	)


[a]		Gains (losses) are included in “Trading account profit” in the statement of operations

[b]		Gains (losses) are included in “Other service fees” in the statement of operations

[c]		Gains (losses) are included in “Loss from discontinued operations, net of tax” in the statement of operations


Nine months ended September 30, 2009
													Changes in
													unrealized
													gains (losses)
													included in
								Purchases,					earnings/OCI
								sales,					related to
						Increase		issuances,					assets and
	Balance		Gains			(decrease)		settlements,					liabilities still
	as of		(losses)			in accrued		and			Balance as of		held as of
	January 1,		included in			interest		paydowns			September		September 30,
(In millions)	2009		earnings/OCI			receivable		(net)			30, 2009		2009

Assets
Continuing Operations
Investment securities available-for-sale:
Mortgage-backed securities— agencies	$	37		—			—		($3	)	$	34		—

Total investment securities available-for-sale	$	37		—			—		($3	)	$	34		—

Trading account securities:
Collateralized mortgage obligations	$	3		—			—	$	1		$	4		—
Residential mortgage- backed securities— agencies		292	$	2			—		(61	)		233	$	5
Other		5		(1	)		—		—			4		—

Total trading account securities	$	300	$	1			—		($60	)	$	241	$	5		[a]

Mortgage servicing rights	$	176		($16	)		—	$	20		$	180		($6	)	[b]

Discontinued Operations
Loans measured at fair value pursuant to fair value option	$	5	$	1			—		($6	)		—		—		[c]

Total	$	518		($14	)		—		($49	)	$	455		($1	)


[a]		Gains (losses) are included in “Trading account profit” in the statement of operations

[b]		Gains (losses) are included in “Other service fees” in the statement of operations

[c]		Gains (losses) are included in “Loss from discontinued operations, net of tax” in the statement of operations

During the quarter and nine months ended September 30, 2010, there were $113 million and $197 million, respectively, in transfers out of Level 3 for financial instruments measured at fair value on a recurring basis. These transfers resulted from exempt FNMA and GNMA mortgage-backed securities, which were transferred out of Level 3 and into Level 2, as a result of a change in valuation methodology from an internally-developed pricing matrix to pricing them based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. Pursuant to the Corporation’s policy, these transfers were recognized as of the end of the reporting period. There were no transfers in and / or out of Level 1 during the quarter and nine months ended September 30, 2010.

There were no transfers in and / or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarter and nine months ended September 30, 2009. There were no transfers in and / or out of Level 1 and Level 2 during the quarter and nine months ended September 30, 2009.

Gains and losses (realized and unrealized) included in earnings for the quarters and nine months ended September 30, 2010 and 2009 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:


	Quarter ended September 30, 2010						Nine months ended September 30, 2010
				Changes in						Changes in
				unrealized gains						unrealized gains
				(losses) relating to						(losses) relating to
	Total gains (losses)			assets / liabilities			Total gains (losses)			assets / liabilities
	included in			still held at			included in			still held at
(In millions)	earnings/OCI			reporting date			earnings/OCI			reporting date

Continuing Operations
OCI		—			—		$	1			—
Other service fees		($10	)		($6	)		(20	)		($12	)
Trading account profit		1			—			4			—

Total		($9	)		($6	)		($15	)		($12	)


	Quarter ended September 30, 2009						Nine months ended September 30, 2009
				Changes in						Changes in
				unrealized gains						unrealized gains
				(losses) relating to						(losses) relating to
	Total gains (losses)			assets / liabilities			Total gains (losses)			assets / liabilities
	included in			still held at			included in			still held at
(In millions)	earnings/OCI			reporting date			earnings/OCI			reporting date

Continuing Operations
Other service fees		($7	)		($4	)		($16	)		($6	)
Trading account profit		—			1			1			5
Discontinued Operations
Loss from discontinued operations, net of tax		—			—			1			—

Total		($7	)		($3	)		($14	)		($1	)

Additionally, in accordance with generally accepted accounting principles, the Corporation may be required to measure certain assets at fair value on a nonrecurring basis in periods subsequent to their initial recognition. The adjustments to fair value usually result from the application of lower of cost or fair value accounting, identification of impaired loans requiring specific reserves under ASC Section 310-10-35 “Accounting by Creditors for Impairment of a Loan”, or write-downs of individual assets. The following tables present financial and non-financial assets that were subject to a fair value measurement on a nonrecurring basis during the nine months ended September 30, 2010 and 2009, and which were still included in the consolidated statement of condition as of such dates. The amounts disclosed represent the aggregate fair value measurements of those assets as of the end of the reporting period.


Carrying value as of September 30, 2010
(In millions)	Level 1		Level 2		Level 3		Total

Assets

Continuing Operations
Loans [1]		—		—	$	649	$	649
Loans held-for-sale [2]		—		—		2		2
Other real estate owned [3]		—		—		55		55

Total					$	706	$	706


[1]		Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35.

[2]		Relates to lower of cost or fair value adjustments of loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. These adjustments were principally determined based on negotiated price terms for the loans.

[3]		Represents the fair value of foreclosed real estate owned that were measured at fair value.


Carrying value as of September 30, 2009
(In millions)	Level 1		Level 2		Level 3		Total

Assets

Continuing Operations
Loans (1)		—		—	$	743	$	743
Other real estate owned (2)		—		—		27		27
Other foreclosed assets (2)		—		—		6		6

Total		—		—	$	776	$	776


[1]		Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35.

[2]		Represents the fair value of foreclosed real estate and other collateral owned that were measured at fair value.

Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and non-financial instruments. Accordingly, the aggregate fair value of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation.

Trading Account Securities and Investment Securities Available-for-Sale

	•		U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2.

	•		Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2.

	•		Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as MSRB, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2.

	•		Mortgage-backed securities — agencies: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally-developed pricing matrix with quoted prices from local broker dealers. These particular MBS are classified as Level 3.

	•		Collateralized mortgage obligations: Agency and private collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as broker quotes, executed trades, credit information and cash flows.

	•		Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1. Other equity securities that do not trade in highly liquid markets are classified as Level 2.

	•		Corporate note (included as “other” in the “available-for-sale” category): The corporate note is priced based on a spread to the U.S. Treasury market and adjustments may apply based on observable market inputs such as sector, maturity, credit standing and reported trade frequencies. This corporate note is

			classified as Level 2.

	•		Corporate securities and mutual funds (included as “other” in the “trading account securities” category): Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, the corporate securities and mutual funds are classified as Level 2. The important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently or are in distress are classified as Level 3.

Mortgage servicing rights

Mortgage servicing rights (“ MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3.

Derivatives

Interest rate swaps, interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally-developed data related to current spreads that denote their probability of default.

Equity appreciation instrument

Refer to Note 2 to the consolidated financial statements for a description of the terms of the equity appreciation instrument. The fair value of the equity appreciation instrument was estimated by determining a call option value using the Black-Scholes Option Pricing Model. The principal variables in determining the fair value of the equity appreciation instrument include the implied volatility determined based on the historical daily volatility of the Corporation’s common stock, the exercise price of the instrument, the price of the call option, and the risk-free rate. The equity appreciation instrument is classified as Level 2.

Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent

The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Currently, the associated loans considered impaired are classified as Level 3.

Loans measured at fair value pursuant to lower of cost or fair value adjustments

Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on bids received from potential buyers, secondary market prices, and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3.

Other real estate owned and other foreclosed assets

Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Note 22 — Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items.

Derivatives are considered financial instruments and their carrying value equals fair value.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions.

The fair values reflected herein have been determined based on the prevailing interest rate environment as of September 30, 2010 and December 31, 2009, respectively. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The methods and assumptions used to estimate the fair values of significant financial instruments as of September 30, 2010 and December 31, 2009 are described in the paragraphs below.

Short-term financial assets and liabilities have relatively short maturities, or no defined maturities, and little or no credit risk. The carrying amounts of other liabilities reported in the consolidated statements of condition approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Included in this category are: cash and due from banks, federal funds sold and securities purchased under agreements to resell, time deposits with other banks, bankers acceptances and assets sold under agreements to repurchase and short-term borrowings. The equity appreciation instrument is included in other liabilities and is accounted at fair value. Note 21 to the consolidated financial statements provides a description of the valuation methodology for the equity appreciation instrument. Resell and repurchase agreements with long-term maturities are valued using discounted cash flows based on market rates currently available for agreements with similar terms and remaining maturities.

Trading and investment securities, except for investments classified as other investment securities in the consolidated statement of condition, are financial instruments that regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to-market for accounting purposes.

The estimated fair value for loans held-for-sale was based on secondary market prices, bids received from potential buyers and discounted cash flow models. The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting scheduled cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair valuation of the lease financing portfolio, therefore it is included in the loans total at its carrying amount.

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW, and money market accounts was, for purposes of this disclosure, equal to the amount payable on demand as of the

respective dates. The fair value of certificates of deposit was based on the discounted value of contractual cash flows using interest rates being offered on certificates with similar maturities. The value of these deposits in a transaction between willing parties is in part dependent of the buyer’s ability to reduce the servicing cost and the attrition that sometimes occurs. Therefore, the amount a buyer would be willing to pay for these deposits could vary significantly from the presented fair value.

Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments as of September 30, 2010 and December 31, 2009.

As part of the fair value estimation procedures of certain liabilities, including repurchase agreements (regular and structured) and FHLB advances, the Corporation considered, where applicable, the collateralization levels as part of its evaluation of non-performance risk. Also, for certificates of deposit, the non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution.

Refer to Note 2 to the consolidated financial statements for a description of the FDIC loss share indemnification asset, equity appreciation instrument issued to the FDIC and the contingent liability on unfunded loan commitments, which are separately disclosed in the table below and all relate to the Westernbank FDIC-assisted transaction. The latter two items are included as other liabilities in the consolidated statement of condition.

Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. The fair value of letters of credit was based on fees currently charged on similar agreements.

Carrying or notional amounts, as applicable, and estimated fair values for financial instruments were:


	September 30, 2010				December 31, 2009

	Carrying		Fair		Carrying		Fair
(In thousands)	amount		value		amount		value

Financial Assets:
Cash and money market investments	$	2,604,760	$	2,604,760	$	1,680,127	$	1,680,127
Trading securities		483,192		483,192		462,436		462,436
Investment securities available-for-sale		5,741,483		5,741,483		6,694,714		6,694,714
Investment securities held-to-maturity		214,152		214,803		212,962		213,146
Other investment securities		158,309		159,622		164,149		165,497
Loans held-for-sale		115,088		120,916		90,796		91,542
Loans held-in-portfolio, net		24,904,715		22,181,399		22,451,909		20,021,224
FDIC loss share indemnification asset		3,308,959		3,371,118		—		—

Financial Liabilities:
Deposits	$	27,740,045	$	27,867,432	$	25,924,894	$	26,076,515
Assets sold under agreements to repurchase		2,358,139		2,523,779		2,632,790		2,759,438
Short-term borrowings		191,342		191,342		7,326		7,326
Notes payable		5,143,388		5,090,470		2,648,632		2,453,037
Contingent liability on unfunded loan commitments		120,162		120,162		—		—
Equity appreciation instrument		17,465		17,465		—		—


	Notional		Fair		Notional		Fair
(In thousands)	Amount		Value		Amount		Value

Commitments to extend credit	$	6,297,380	$	1,016	$	7,013,148	$	882
Letters of credit		134,663		1,296		147,647		1,565

Note 23 — Net Income per Common Share

The computation of net income per common share (“EPS”) follows:


	Quarter ended					Nine months ended
	September 30,					September 30,

(In thousands, except share information)	2010		2009			2010			2009

Net income (loss) from continuing operations	$	494,494		($121,561	)	$	353,611			($340,720	)
Net loss from discontinued operations		—		(3,427	)		—			(19,972	)
Deemed dividend on preferred stock [1]		—		—			(191,667	)		—
Preferred stock dividends [2]		—		5,974			—			(39,857	)
Preferred stock discount accretion		—		(1,040	)		—			(4,515	)
Favorable impact from exchange of shares of Series A and B preferred stock for common stock, net of issuance costs		—		230,388			—			230,388
Favorable impact from exchange of Series C preferred stock for trust preferred securities		—		485,280			—			485,280

Net income applicable to common stock	$	494,494	$	595,614		$	161,944		$	310,604

Average common shares outstanding		1,021,374,014		425,672,578			839,196,564			330,325,348
Average potential common shares		—		—			312,961			—

Average common shares outstanding — assuming dilution		1,021,374,014		425,672,578			839,509,525			330,325,348


Basic and diluted EPS from continuing operations	$	0.48	$	1.41		$	0.19		$	1.00
Basic and diluted EPS from discontinued operations		—		(0.01	)		—			(0.06	)

Basic and diluted EPS	$	0.48	$	1.40		$	0.19		$	0.94


[1]		Deemed dividend related to the issuance of depositary shares and the conversion of the preferred stock into shares of common stock in the second quarter of 2010.

[2]		Amount presented for the quarter ended September 30, 2009 represents the reversal of dividends on Series C preferred stock considered accrued as of June 30, 2009 for EPS purposes only. These cumulative dividends were not paid as dividends to the Series C preferred stockholders given the terms of the exchange agreement to New Trust Preferred Securities, which was effected in August 2009.

The conversion of contingently convertible perpetual non-cumulative preferred stock into shares of the Corporation’s common stock during the second quarter of 2010, resulted in a non-cash beneficial conversion of $191.7 million, representing the intrinsic value between the conversion rate of $3.00 and the common stock closing price of $3.50 on April 13, 2010, the date the preferred shares were offered. The beneficial conversion was recorded as a deemed dividend to the preferred stockholders reducing retained earnings, with a corresponding offset to surplus (paid in capital), and thus did not affect total stockholders’ equity or the book value of the common stock. However, the deemed dividend decreased the net income applicable to common stock and affected the calculation of basic and diluted EPS for the nine months ended September 30, 2010. Moreover, in computing diluted EPS, dilutive convertible securities that remained outstanding for the period prior to actual conversion were not included as average potential common shares because the effect would have been antidilutive. In computing both basic and diluted EPS, the common shares issued upon actual conversion were included in the weighted average calculation of common shares, after the date of conversion, provided that they remained outstanding.

Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options and restricted stock awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share.

For the quarter and nine-month period ended September 30, 2010, there were 2,530,137 and 2,537,563 weighted average antidilutive stock options outstanding, respectively (September 30, 2009 — 2,674,505 and 2,770,846). Additionally, the Corporation has outstanding a warrant to purchase 20,932,836 shares of common stock, which has an antidilutive effect as of September 30, 2010.

Note 24 — Other Service Fees

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


	Quarter ended				Nine months ended
	September 30,				September 30,
(In thousands)	2010		2009		2010		2009

Debit card fees	$	27,711	$	26,986	$	83,480	$	80,867
Credit card fees and discounts		24,382		23,497		73,692		70,951
Processing fees		15,258		13,638		43,390		40,773
Insurance fees		11,855		11,463		34,929		36,014
Sale and administration of investment products		11,379		8,181		28,791		25,204
Other fees		10,237		13,849		41,585		44,775

Total other service fees	$	100,822	$	97,614	$	305,867	$	298,584

Note 25 — Pension and Postretirement Benefits

The Corporation has noncontributory defined benefit pension plans (the “retirement plans”) and supplementary benefit pension plans for regular employees of certain of its subsidiaries. Effective May 1, 2009, the accrual of the benefits under the BPPR retirement plan was frozen to all participants. Pursuant to the amendment, the retirement plan participants will not receive any additional credit for compensation earned and service performed after April 30, 2009 for purposes of calculating benefits under the retirement plans.

During the third quarter of 2010, the Corporation amended the pension and postretirement benefits as a result of the EVERTEC sale. The amendment to the pension plan increased the pension plan liability by approximately $6.3 million, which will be amortized as pension cost in future periods.

During the second quarter of 2010, the Corporation settled its U.S. retirement plan, which had been frozen in 2007. The U.S. retirement plan assets are expected to be distributed to plan participants during the fourth quarter of 2010.

The components of net periodic pension cost for the quarters and nine months ended September 30, 2010 and 2009 were as follows:


							Benefit Restoration												Benefit Restoration
	Pension Plans						Plans						Pension Plans						Plans

	Quarters ended						Quarters ended						Nine months ended						Nine months ended
	September 30,						September 30,						September 30,						September 30,
(In thousands)	2010			2009			2010			2009			2010			2009			2010			2009

Service cost		—			—			—			—			—		$	3,330			—		$	341
Interest cost	$	7,804		$	8,041		$	384		$	391		$	23,710			24,630		$	1,153			1,225
Expected return on plan assets		(7,655	)		(6,221	)		(403	)		(307	)		(23,208	)		(19,320	)		(1,210	)		(932	)
Amortization of prior service cost (credit)		—			—			—			—			—			44			—			(8	)
Amortization of net loss		2,167			3,203			99			185			6,579			10,590			297			683

Net periodic cost	$	2,316		$	5,023		$	80		$	269		$	7,081		$	19,274		$	240		$	1,309
Curtailment loss (gain)		—			—			—			—			—			820			—			(341	)
Settlement loss		—			—			—			—			3,380			—			—			—

Total cost	$	2,316		$	5,023		$	80		$	269		$	10,461		$	20,094		$	240		$	968

During the nine months ended September 30, 2010, the Corporation made contributions to the pension and benefit restoration plans amounting to $23.5 million. The total contributions expected to be paid during the year 2010 for the pension and benefit restoration plans amount to approximately $25.8 million.

The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and nine months ended September 30, 2010 and 2009 were as follows:


	Quarters ended						Nine months ended
	September 30,						September 30,
(In thousands)	2010			2009			2010			2009

Service cost	$	432		$	549		$	1,296		$	1,647
Interest cost		1,609			2,026			4,826			6,078
Amortization of prior service cost		(262	)		(261	)		(785	)		(784	)
Amortization of net gain		(294	)		—			(882	)		—

Net periodic cost	$	1,485		$	2,314		$	4,455		$	6,941
Termination benefit cost		671			—			671			—

Total cost	$	2,156		$	2,314		$	5,126		$	6,941

Contributions made to the postretirement benefit plan for the nine months ended September 30, 2010 amounted to approximately $3.9 million. The total contributions expected to be paid during the year 2010 for the postretirement benefit plan amount to approximately $5.2 million.

Note 26 — Stock-Based Compensation

The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

The following table presents information on stock options outstanding as of September 30, 2010:


(Not in thousands)
					Weighted-Average
			Weighted-Average		Remaining Life of		Options		Weighted-Average
Exercise Price	Options		Exercise Price of		Options Outstanding		Exercisable		Exercise Price of
Range per Share	Outstanding		Options Outstanding		In Years		(fully vested)		Options Exercisable

$14.39 - $18.50		1,231,412	$	15.84		1.99		1,231,412	$	15.84
$19.25 - $27.20		1,298,725	$	25.21		3.74		1,298,725	$	25.21

$14.39 - $27.20		2,530,137	$	20.65		2.89		2,530,137	$	20.65

There was no intrinsic value of options outstanding as of September 30, 2010 (September 30, 2009 — $0.3 million). There was no intrinsic value of options exercisable as of September 30, 2010 and 2009.

The following table summarizes the stock option activity and related information:



	Options			Weighted-Average
(Not in thousands)	Outstanding			Exercise Price

Outstanding as of January 1, 2009		2,965,843		$	20.59
Granted		—			—
Exercised		—			—
Forfeited		(59,631	)		26.42
Expired		(353,549	)		19.25

Outstanding as of December 31, 2009		2,552,663		$	20.64
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(22,526	)		19.56

Outstanding as of September 30, 2010		2,530,137		$	20.65

The stock options exercisable as of September 30, 2010 totaled 2,530,137 (September 30, 2009 — 2,585,523). There were no stock options exercised during the quarters and nine-month periods ended September 30, 2010 and 2009. Thus, there was no intrinsic value of options exercised during the quarters and nine month-periods ended September 30, 2010 and 2009.

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2009 and 2010.

For the quarter ended September 30, 2010, there was no stock option expense recognized (September 30, 2009 — $0.1 million, with a tax benefit of $40 thousand). For the nine months ended September 30, 2010, there was no stock option expense recognized (September 30, 2009 — $162 thousand, with a tax benefit of $45 thousand).

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.

Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.

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



	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested as of January 1, 2009		248,339		$	22.83
Granted		—			—
Vested		(104,791	)		21.93
Forfeited		(5,036	)		19.95

Non-vested as of December 31, 2009		138,512		$	23.62
Granted		1,525,416			2.70
Vested		(314,284	)		8.34
Forfeited		(185,844	)		3.21

Non-vested as of September 30, 2010		1,163,800		$	3.58

During the quarter ended September 30, 2010, no shares of restricted stock were awarded to management under the Incentive Plan. During the nine-month period ended September 30, 2010, 1,525,416 shares of restricted stock were awarded to management under the Incentive Plan, from which 1,253,551 shares of restricted stock were awarded to management consistent with the requirements of the TARP Interim Final Rule. The shares of restricted stock, which were awarded to management consistent with the requirements of the TARP Interim Final Rule, were determined upon consideration of management’s execution of critical 2009 initiatives to manage the Corporation’s liquidity and capitalization, strategically reposition its United States operations, and improve management effectiveness and cost control. The shares will vest on the secondary anniversary of the grant date, and they may become payable in 25% increments as the Corporation repays each 25% portion of the aggregate financial assistance received under the United States Treasury Department’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008. In addition, the grants are also subject to further performance criteria as the Corporation must achieve profitability for at least one fiscal year for awards to be payable. During the quarter and nine-month period ended September 30, 2009, no shares of restricted stock were awarded to management under the Incentive Plan.

Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards consist of the opportunity to receive shares of Popular, Inc.’s common stock provided that the Corporation achieves certain performance goals during a three-year performance cycle. The compensation cost associated with the performance shares is recorded ratably over a three-year performance period. The performance shares are granted at the end of the three-year period and vest at grant date, except when the participant’s employment is terminated by the Corporation without cause. In such case, the participant would receive a pro-rata amount of shares calculated as if the Corporation would have met the performance goal for the performance period. During the nine months ended September 30, 2010, 41,710 shares have been granted under this plan (September 30, 2009 — 35,397).

During the quarter ended September 30, 2010, the Corporation recognized $0.6 million of restricted stock expense related to management incentive awards, with tax benefit of $0.2 million (September 30, 2009 — $0.6 million, with a tax benefit of $0.2 million). For the nine-month period ended September 30, 2010, the Corporation recognized $0.7 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.3 million (September 30, 2009 — $1.4 million, with a tax benefit of $0.5 million). The fair market value of the restricted stock vested was $3.2 million at grant date and $0.9 million at vesting date. This triggers a shortfall, net of windfalls, of $2.3 million that was recorded as an additional income tax expense at the applicable income tax rate, net of the deferred tax asset valuation allowance. During the quarter ended September 30, 2010, the Corporation recognized $0.3 million of performance shares expense, with a tax benefit of $0.1 million (September 30, 2009 —$0.3 million, with a tax benefit of $107 thousand). During the nine-month period ended September 30, 2010, the Corporation recognized $0.5 million of performance share expense, with a tax benefit of $0.2 million (September 30, 2009 — $0.6 million, with a tax benefit of $129 thousand). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management as of September 30, 2010 was $2.2 million and is expected to be recognized over a weighted-average period of 3 years.

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


	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested as of January 1, 2009		—			—
Granted		270,515		$	2.62
Vested		(270,515	)		2.62
Forfeited		—			—

Non-vested as of December 31, 2009		—			—
Granted		272,828		$	2.97
Vested		(272,828	)		2.97
Forfeited		—			—

Non-vested as of September 30, 2010		—			—

During the quarter ended September 30, 2010, the Corporation granted 30,434 shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (September 30, 2009 — 78,070). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $48 thousand (September 30, 2009 — $0.1 million, with a tax benefit of $47 thousand). For the nine-month period ended September 30, 2010, the Corporation granted 272,828 shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (September 30, 2009 — 251,993). During this period, the Corporation recognized $0.4 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $0.2 million (September 30, 2009 — $0.3 million, with a tax benefit of $141 thousand). The fair value at vesting date of the restricted stock vested during 2010 for directors was $0.8 million.

Note 27 — Income Taxes

The reconciliation of unrecognized tax benefits was as follows:


(In millions)	2010			2009

Balance as of January 1	$	41.8		$	40.5
Additions for tax positions — January through March		0.4			1.0
Reduction as a result of settlements — January through March		(14.3	)		(0.6	)

Balance as of March 31		27.9		$	40.9
Additions for tax positions — April through June		0.2			1.3
Reduction for tax positions — April through June		(1.6	)		—

Balance as of June 30		26.5		$	42.2
Additions for tax positions — July through September		3.7			0.7
Additions for tax positions taken in prior years — July through September		3.5			—
Reduction as a result of lapse of statute of limitations — July through September		(3.7	)		—
Reduction for tax positions — July through September		(1.2	)		(1.8	)

Balance as of September 30	$	28.8		$	41.1

As of September 30, 2010, the related accrued interest approximated $6.5 million (September 30, 2009 — $6.3 million). Management determined that as of September 30, 2010 and 2009 there was no need to accrue for the payment of penalties.

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 $33.8 million as of September 30, 2010 (September 30, 2009 — $45.7 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of September 30, 2010, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008 and thereafter; and in the Puerto Rico jurisdiction, 2006 and thereafter. During 2010, the U.S. Internal Revenue Service (“IRS”) completed an examination of the Corporation’s U.S. operations tax return for 2007, and as a result, the Corporation recognized a tax benefit of $14.3 million during the first quarter of 2010.

The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

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


	September 30,		December 31,
(In thousands)	2010		2009

Deferred tax assets:
Tax credits available for carryforward	$	8,310	$	11,026
Net operating loss and donation carryforward available		972,397		843,968
Postretirement and pension benefits		95,621		103,979
Deferred loan origination fees		7,797		7,880
Allowance for loan losses		533,611		536,277
Deferred gains		13,163		14,040
Accelerated depreciation		2,329		2,418
Intercompany deferred gains		4,818		7,015
Other temporary differences		20,969		39,096

Total gross deferred tax assets	$	1,659,015	$	1,565,699

Deferred tax liabilities:
Differences between assigned values and the tax basis of the assets and liabilities recognized in purchase business combinations	$	63,977	$	25,896
Difference in outside basis between financial and tax reporting on sale of a business		11,057		—
Deferred loan origination costs		8,280		9,708
Unrealized net gain on trading and available-for-sale securities		56,954		30,323
Other temporary differences		1,195		5,923

Total gross deferred tax liabilities	$	141,463	$	71,850

Gross deferred tax assets less liabilities	$	1,517,552	$	1,493,849
Less: Valuation allowance		1,191,951		1,129,882

Net deferred tax assets	$	325,601	$	363,967

The net deferred tax asset shown in the table above as of September 30, 2010 is reflected in the consolidated statement of condition as $336.7 million in deferred tax assets (in the “other assets” caption) and $11.1 million in deferred tax liabilities (in the “other liabilities” caption), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

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

differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

The Corporation’s U.S. mainland operations are in a cumulative loss position for the three-year period ended September 30, 2010. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland, this cumulative taxable loss position is considered significant negative evidence and has caused management to conclude that the Corporation will not be able to realize the associated deferred tax assets in the future. As of September 30, 2010, the Corporation recorded a valuation allowance of $1.2 billion on the deferred tax asset of its U.S. operations. As of September 30, 2010, the Corporation’s deferred tax assets (net of deferred tax liability) related to its Puerto Rico operations amounted to $345.8 million and the deferred tax liability, net of the valuation allowance, of its U.S. operations amounted to $20.2 million. The Corporation assessed the realization of the Puerto Rico portion of the net deferred tax asset and based on the weighting of all available evidence has concluded that it is more likely than not that such net deferred tax assets will be realized.

Note 28 — Supplemental Disclosure on the Consolidated Statements of Cash Flows

Additional disclosures on non-cash activities for the nine-month period are listed in the following table:


(In thousands)	September 30, 2010			September 30, 2009

Non-cash activities:
Loans transferred to other real estate	$	147,577		$	116,200
Loans transferred to other property		28,785			29,331

Total loans transferred to foreclosed assets		176,362			145,531
Transfers from loans held-in-portfolio to loans held-for-sale		24,458			32,270
Transfers from loans held-for-sale to loans held-in-portfolio		9,679			175,043
Loans securitized into investment securities [a]		633,821			1,112,061
Recognition of mortgage servicing rights on securitizations or asset transfers		11,909			19,640
Treasury stock retired		—			207,139
Change in par value of common stock		—			1,689,389
Conversion of preferred stock to common stock:
Preferred stock converted		(1,150,000	)		—
Common stock issued		1,341,667			—
Trust preferred securities exchanged for new common stock issued:
Trust preferred securities exchanged		—			(397,911	)
New common stock issued		—			317,652
Preferred stock exchanged for new common stock issued:
Preferred stock exchanged (Series A and B)		—			(524,079	)
New common stock issued		—			293,691
Preferred stock exchanged for new trust preferred securities issued:
Preferred stock exchanged (Series C)		—			(901,165	)
New trust preferred securities issued (junior subordinated debentures)		—			415,885


[a]		Includes loans securitized into investment securities and subsequently sold before quarter end.

For the nine months ended September 30, 2010 the changes in operating assets and liabilities included in the reconciliation of net income to net cash provided by operating activities, as well as the changes in assets and liabilities presented in the investing and financing sections are net of the effect of the assets acquired and liabilities assumed from the Westernbank FDIC-assisted transaction. Refer to Note 2 to the consolidated financial statements for the composition and balances of the assets and liabilities recorded at fair value by the Corporation on April 30, 2010.

The cash received in the transaction, which amounted to $261 million, is presented in the investing activities section of the Consolidated Statement of Cash Flows as “Cash received from acquisition”.

Note 29 — Segment Reporting

The Corporation’s corporate structure consists of two reportable segments — Banco Popular de Puerto Rico and Banco Popular North America.

As discussed in Note 3 to the consolidated financial statements, on September 30, 2010, the Corporation completed the sale of a 51% ownership interest in EVERTEC, which included the merchant acquiring business of BPPR. EVERTEC was reported as a reportable segment prior to September 30, 2010, while the merchant acquiring business was originally included in the BPPR reportable segment through June 30, 2010. As a result of the sale, the Corporation no longer presents EVERTEC as a reportable segment and therefore, historical financial information for the processing and merchant acquiring businesses has been reclassified under Corporate group for all periods presented. Additionally, the Corporation retained EVERTEC DE VENEZUELA, C.A. and its equity investments in CONTADO and Serfinsa, which were included in the EVERTEC reportable segment through June 30, 2010, and are now also included in the Corporate group for all periods presented. Revenue from the remaining ownership interest in EVERTEC will be prospectively reported as non-interest income in the Corporate group.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets as of September 30, 2010, additional disclosures are provided for the business areas included in this reportable segment, as described below:

•

Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

•

Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally in residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

•

Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during the fourth quarter of 2008. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network.

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, including the equity investments in CONTADO and Serfinsa. Also, as discussed previously, it includes the results of EVERTEC for all periods presented. The Corporate group also includes the expenses of certain corporate areas that are identified as critical to the organization: Finance, Risk Management and Legal.

The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

The results of operations included in the tables below for the quarter ended September 30, 2009 exclude the results of operations of the discontinued business of PFH. Segment assets as of September 30, 2009 also exclude the assets of the discontinued operations.

2010

For the quarter ended September 30, 2010


										Total
	Banco Popular de			Banco Popular			Intersegment			Reportable
(In thousands)	Puerto Rico			North America			Eliminations			Segments

Net interest income	$	336,580		$	77,465			—		$	414,045
Provision for loan losses		182,153			32,860			—			215,013
Non-interest income		92,937			13,161			—			106,098
Amortization of intangibles		1,561			681			—			2,242
Depreciation expense		10,024			2,160			—			12,184
(Gain) loss on early extinguishment of debt		(27	)		9,725			—			9,698
Other operating expenses		210,264			58,024			—			268,288
Income tax expense		12,996			1,798			—			14,794

Net income (loss)	$	12,546			($14,622	)		—			($2,076	)

Segment Assets	$	31,129,147		$	9,328,402			($34,485	)	$	40,423,064

For the quarter ended September 30, 2010


(In thousands)	Corporate			Eliminations			Popular, Inc.

Net interest (expense) income		($27,289	)	$	162		$	386,918
Provision for loan losses		—			—			215,013
Non-interest income		730,583			(40,157	)		796,524
Amortization of intangibles		169			—			2,411
Depreciation expense		4,141			—			16,325
Loss on early extinguishment of debt		15,750			—			25,448
Other operating expenses		99,399			(40,324	)		327,363
Income tax expense		87,382			212			102,388

Net income	$	496,453		$	117		$	494,494

Segment Assets	$	5,580,042			($5,182,390	)	$	40,820,716

For the nine months ended September 30, 2010


								Total
	Banco Popular de		Banco Popular			Intersegment		Reportable
(In thousands)	Puerto Rico		North America			Eliminations		Segments

Net interest income	$	787,923	$	231,642			—	$	1,019,565
Provision for loan losses		412,792		244,679			—		657,471
Non-interest income		327,920		45,646			—		373,566
Amortization of intangibles		3,870		2,501			—		6,371
Depreciation expense		29,097		7,041			—		36,138
Loss on early extinguishment of debt		951		9,725			—		10,676
Other operating expenses		584,283		186,575			—		770,858
Income tax expense		26,304		3,382			—		29,686

Net income (loss)	$	58,546		($176,615	)		—		($118,069	)

For the nine months ended September 30, 2010


(In thousands)	Corporate			Eliminations			Popular, Inc.

Net interest (expense) income		($85,241	)	$	487		$	934,811
Provision for loan losses		—			—			657,471
Non-interest income		905,146			(108,464	)		1,170,248
Amortization of intangibles		544			—			6,915
Depreciation expense		10,946			—			47,084
Loss on early extinguishment of debt		15,750			—			26,426
Other operating expenses		237,082			(107,489	)		900,451
Income tax expense		82,983			432			113,101

Net income	$	472,600			($920	)	$	353,611

2009

For the quarter ended September 30, 2009


										Total
	Banco Popular de			Banco Popular			Intersegment			Reportable
(In thousands)	Puerto Rico			North America			Eliminations			Segments

Net interest income	$	217,750		$	77,588			—		$	295,338
Provision for loan losses		153,350			177,713			—			331,063
Non-interest income		109,083			6,395			—			115,478
Amortization of intangibles		1,270			910			—			2,180
Depreciation expense		9,316			2,679			—			11,995
Loss on early extinguishment of debt		955			—			—			955
Other operating expenses		175,412			70,045			—			245,457
Income tax expense		77			2,553			—			2,630

Net loss		($13,547	)		($169,917	)		—			($183,464	)

Segment Assets	$	23,868,954		$	11,443,083			($29,284	)	$	35,282,753

For the quarter ended September 30, 2009


(In thousands)	Corporate			Eliminations			Popular, Inc.

Net interest (expense) income		($19,232	)	$	283		$	276,389
Provision for loan losses		—			—			331,063
Non-interest income		83,201			(38,635	)		160,044
Amortization of intangibles		199			—			2,379
Depreciation expense		3,435			—			15,430
Gain on early extinguishment of debt		(78,337	)		(1,922	)		(79,304	)
Other operating expenses		69,767			(33,129	)		282,095
Income tax expense		2,976			725			6,331

Net income (loss)	$	65,929			($4,026	)		($121,561	)

Segment Assets	$	5,523,711			($5,168,660	)	$	35,637,804

For the nine months ended September 30, 2009


										Total
	Banco Popular de			Banco Popular			Intersegment			Reportable
(In thousands)	Puerto Rico			North America			Eliminations			Segments

Net interest income	$	650,679		$	234,929			—		$	885,608
Provision for loan losses		486,343			566,693			—			1,053,036
Non-interest income		562,466			15,892			—			578,358
Amortization of intangibles		3,869			2,731			—			6,600
Depreciation expense		28,463			8,258			($22	)		36,699
Loss on early extinguishment of debt		955			—			—			955
Other operating expenses		530,174			236,453			(5	)		766,622
Income tax benefit		(4,239	)		(5,692	)		11			(9,920	)

Net income (loss)	$	167,580			($557,622	)	$	16			($390,026	)

For the nine months ended September 30, 2009


(In thousands)	Corporate			Eliminations			Popular, Inc.

Net interest (expense) income		($54,489	)	$	816		$	831,935
Provision for loan losses		—			—			1,053,036
Non-interest income		246,245			(103,989	)		720,614
Amortization of intangibles		618			—			7,218
Depreciation expense		12,334			—			49,033
Gain on early extinguishment of debt		(78,337	)		(1,922	)		(79,304	)
Other operating expenses		210,136			(98,263	)		878,495
Income tax benefit		(6,120	)		831			(15,209	)

Net income (loss)	$	53,125			($3,819	)		($340,720	)

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

2010

For the quarter ended September 30, 2010


						Other					Total Banco
	Commercial			Consumer and		Financial					Popular de
(In thousands)	Banking			Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	164,890		$	169,401	$	2,240	$	49		$	336,580
Provision for loan losses		155,561			26,592		—		—			182,153
Non-interest income		891			65,951		26,321		(226	)		92,937
Amortization of intangibles		178			1,244		139		—			1,561
Depreciation expense		4,482			5,245		297		—			10,024
Gain on early extinguishment of debt		(27	)		—		—		—			(27	)
Other operating expenses		71,588			121,229		17,543		(96	)		210,264
Income tax (benefit) expense		(25,120	)		33,993		4,165		(42	)		12,996

Net (loss) income		($40,881	)	$	47,049	$	6,417		($39	)	$	12,546

Segment Assets	$	16,242,839		$	22,081,935	$	974,816		($8,170,443	)	$	31,129,147

For the nine months ended September 30, 2010


						Other					Total Banco
	Commercial			Consumer and		Financial					Popular de
(In thousands)	Banking			Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	309,391		$	471,221	$	7,130	$	181		$	787,923
Provision for loan losses		306,278			106,514		—		—			412,792
Non-interest income		78,922			174,319		74,796		(117	)		327,920
Amortization of intangibles		378			3,072		420		—			3,870
Depreciation expense		12,525			15,668		904		—			29,097
Loss on early extinguishment of debt		951			—		—		—			951
Other operating expenses		189,590			346,553		48,377		(237	)		584,283
Income tax (benefit) expense		(49,300	)		63,435		12,055		114			26,304

Net (loss) income		($72,109	)	$	110,298	$	20,170	$	187		$	58,546

2009

For the quarter ended September 30, 2009


						Other					Total Banco
	Commercial			Consumer and		Financial					Popular de
(In thousands)	Banking			Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	77,277		$	137,340	$	3,010	$	123		$	217,750
Provision for loan losses		98,536			54,814		—		—			153,350
Non-interest income		26,565			55,468		27,049		1			109,083
Amortization of intangibles		28			1,079		163		—			1,270
Depreciation expense		3,785			5,222		309		—			9,316
Loss on early extinguishment of debt		955			—		—		—			955
Other operating expenses		51,928			107,151		16,405		(72	)		175,412
Income tax (benefit) expense		(20,892	)		15,970		4,919		80			77

Net (loss) income		($30,498	)	$	8,572	$	8,263	$	116			($13,547	)

Segment Assets	$	10,111,972		$	17,189,724	$	513,411		($3,946,153	)	$	23,868,954

For the nine months ended September 30, 2009


						Other					Total Banco
	Commercial			Consumer and		Financial					Popular de
(In thousands)	Banking			Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	225,595		$	415,427	$	9,195	$	462		$	650,679
Provision for loan losses		316,005			170,338		—		—			486,343
Non-interest income		131,192			357,404		74,313		(443	)		562,466
Amortization of intangibles		131			3,190		548		—			3,869
Depreciation expense		12,518			14,993		952		—			28,463
Loss on early extinguishment of debt		955			—		—		—			955
Other operating expenses		155,500			327,486		47,393		(205	)		530,174
Income tax (benefit) expense		(77,061	)		60,739		11,986		97			(4,239	)

Net (loss) income		($51,261	)	$	196,085	$	22,629	$	127		$	167,580

Additional disclosures with respect to the Banco Popular North America reportable segment are as follows:

2010

For the quarter ended September 30, 2010


										Total
	Banco Popular									Banco Popular
(In thousands)	North America			E-LOAN			Eliminations			North America

Net interest income	$	76,166		$	1,299			—		$	77,465
Provision for loan losses		42,637			(9,777	)		—			32,860
Non-interest income (loss)		16,703			(3,542	)		—			13,161
Amortization of intangibles		681			—			—			681
Depreciation expense		2,129			31			—			2,160
Loss on early extinguishment of debt		9,725			—			—			9,725
Other operating expenses		56,458			1,566			—			58,024
Income tax (benefit) expense		(931	)		2,729			—			1,798

Net (loss) income		($17,830	)	$	3,208			—			($14,622	)

Segment Assets	$	9,985,407		$	486,850			($1,143,855	)	$	9,328,402

For the nine months ended September 30, 2010


										Total
	Banco Popular									Banco Popular
(In thousands)	North America			E-LOAN			Eliminations			North America

Net interest income	$	228,206		$	3,492			($56	)	$	231,642
Provision for loan losses		228,628			16,051			—			244,679
Non-interest income (loss)		55,770			(10,124	)		—			45,646
Amortization of intangibles		2,501			—			—			2,501
Depreciation expense		6,483			558			—			7,041
Loss on early extinguishment of debt		9,725			—			—			9,725
Other operating expenses		181,526			5,049			—			186,575
Income tax expense		653			2,729			—			3,382

Net loss		($145,540	)		($31,019	)		($56	)		($176,615	)

2009

For the quarter ended September 30, 2009


										Total
	Banco Popular									Banco Popular
(In thousands)	North America			E-LOAN			Eliminations			North America

Net interest income	$	76,833		$	482		$	273		$	77,588
Provision for loan losses		143,879			33,834			—			177,713
Non-interest income (loss)		16,573			(10,129	)		(49	)		6,395
Amortization of intangibles		910			—			—			910
Depreciation expense		2,387			292			—			2,679
Other operating expenses		67,743			2,302			—			70,045
Income tax expense		785			1,768			—			2,553

Net loss		($122,298	)		($47,843	)	$	224			($169,917	)

Segment Assets	$	12,076,358		$	626,462			($1,259,737	)	$	11,443,083

For the nine months ended September 30, 2009


										Total
	Banco Popular									Banco Popular
(In thousands)	North America			E-LOAN			Eliminations			North America

Net interest income	$	226,564		$	7,453		$	912		$	234,929
Provision for loan losses		462,254			104,439			—			566,693
Non-interest income (loss)		43,376			(27,397	)		(87	)		15,892
Amortization of intangibles		2,731			—			—			2,731
Depreciation expense		7,359			899			—			8,258
Other operating expenses		221,011			15,440			2			236,453
Income tax expense (benefit)		163			(5,855	)		—			(5,692	)

Net loss		($423,578	)		($134,867	)	$	823			($557,622	)

A breakdown of revenues and selected balance sheet information by geographical area follows:

Geographic Information


	Quarter ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
(In thousands)	2010		2009		2010		2009

Revenues [1]
Puerto Rico	$	1,074,833	$	331,364	$	1,761,912	$	1,244,649
United States		85,225		79,782		262,197		208,780
Other		23,384		25,287		80,950		99,120

Total consolidated revenues from continuing operations	$	1,183,442	$	436,433	$	2,105,059	$	1,552,549


[1]		Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain (loss) on sale of loans and valuation adjustments on loans held-for-sale, FDIC loss share income (expense), fair value change in equity appreciation instrument, gain on sale of processing and technology business and other operating income.


	September 30,		December 31,		September 30,
(In thousands)	2010		2009		2009

Selected Balance Sheet Information: [1]
Puerto Rico
Total assets	$	30,214,685	$	22,480,832	$	22,802,274
Loans		17,924,662		14,176,793		14,537,544
Deposits		19,886,771		16,634,123		16,570,569
Mainland United States
Total assets	$	9,466,115	$	11,033,114	$	11,669,207
Loans		7,586,414		8,825,559		9,156,724
Deposits		6,807,054		8,242,604		8,792,328
Other
Total assets	$	1,139,916	$	1,222,379	$	1,166,323
Loans		752,721		801,557		777,248
Deposits [2]		1,046,219		1,048,167		1,020,001


[1]		Does not include balance sheet information of the discontinued operations for the period ended September 30, 2009.

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

Note 30 — Subsequent Events

Subsequent events are events and transactions that occur after the balance sheet date but before financial statements are issued. The effects of subsequent events and transactions are recognized in the financial statements when they provide additional evidence about conditions that existed at the balance sheet date. The Corporation has evaluated events and transactions occurring subsequent to September 30, 2010. Such evaluation resulted in no adjustments or additional disclosures in the consolidated financial statements for the quarter and nine months ended September 30, 2010.

Note 31 — Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of September 30, 2010, December 31, 2009 and September 30, 2009, and the results of their operations and cash flows for periods ended September 30, 2010 and 2009.

PIBI is an operating subsidiary of PIHC and, as of September 30, 2010, is the holding company of its wholly-owned subsidiaries: Popular Insurance V.I., Inc.; EVERTEC DE VENEZUELA, C.A.; and PNA. Prior to the internal reorganization and sale of the ownership interest in EVERTEC discussed in Note 3 to the consolidated financial statements, ATH Costa Rica S.A., and T.I.I. Smart Solutions Inc. were also wholly-owned subsidiaries of PIBI.

PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:

	•		Equity One, Inc.; and

	•		Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.

PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.

The principal source of income for the PIHC consists of dividends from BPPR. As members subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by each entity during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. As of September 30, 2010, BPPR could have declared a dividend of approximately $100 million (September 30, 2009 — $56 million) without the approval of the Federal Reserve Board. As of December 31, 2009, BPPR was required to obtain the approval of the Federal Reserve Board to declare a dividend. As of September 30, 2010, December 31, 2009 and September 30, 2009, BPNA was required to obtain the approval of the Federal Reserve Board to declare a dividend. The Corporation has never received dividend payments from its U.S. subsidiaries. Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2009 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR and BPNA.

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2010
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

ASSETS
Cash and due from banks	$	1,652		$	368		$	734		$	580,530			($2,473	)	$	580,811
Money market investments		164,852			5,907			306			2,023,840			(170,956	)		2,023,949
Trading account securities, at fair value											483,192						483,192
Investment securities available-for-sale, at fair value		35,000			3,487						5,721,445			(18,449	)		5,741,483
Investment securities held-to-maturity, at amortized cost		210,812			1,000						187,340			(185,000	)		214,152
Other investment securities, at lower of cost or realizable value		10,850			1			4,492			142,966						158,309
Investment in subsidiaries		3,868,350			1,033,087			1,507,550						(6,408,987	)
Loans held-for-sale measured at lower of cost or fair value											115,088						115,088

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with FDIC		590,826			1,516						22,212,059			(555,234	)		22,249,167
Loans covered under loss sharing agreements with FDIC											4,006,227						4,006,227
Less — Unearned income											106,685						106,685
Allowance for loan losses		60									1,243,934						1,243,994

Total loans held-in-portfolio, net		590,766			1,516						24,867,667			(555,234	)		24,904,715

FDIC loss share indemnification asset											3,308,959						3,308,959
Premises and equipment, net		3,076						122			528,651						531,849
Other real estate not covered under loss sharing agreements with the FDIC											168,823						168,823
Other real estate covered under loss sharing agreements with the FDIC											77,516						77,516
Accrued income receivable		179			8			31			160,016			(67	)		160,167
Mortgage servicing assets, at fair value											165,947						165,947
Other assets		208,317			81,142			15,533			1,179,288			(24,295	)		1,459,985
Goodwill											665,333						665,333
Other intangible assets		554									59,884						60,438

Total assets	$	5,094,408		$	1,126,516		$	1,528,768		$	40,436,485			($7,365,461	)	$	40,820,716


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	5,397,313			($25,874	)	$	5,371,439
Interest bearing											22,374,886			(6,281	)		22,368,605

Total deposits											27,772,199			(32,155	)		27,740,044
Federal funds purchased and assets sold under agreements to repurchase											2,522,939			(164,800	)		2,358,139
Other short-term borrowings							$	25,200			691,342			(525,200	)		191,342
Notes payable at cost	$	830,134						430,052			3,884,718			(1,516	)		5,143,388
Subordinated notes											185,000			(185,000	)
Other liabilities		155,074		$	3,183			45,886			1,121,902			(47,442	)		1,278,603

Total liabilities		985,208			3,183			501,138			36,178,100			(956,113	)		36,711,516

Stockholders’ equity:
Preferred stock		50,160															50,160
Common stock		10,229			4,066			2			51,633			(55,701	)		10,229
Surplus		4,085,775			3,908,157			3,816,208			5,612,091			(13,327,929	)		4,094,302
Accumulated deficit		(122,281	)		(2,786,574	)		(2,821,556	)		(1,526,865	)		7,126,468			(130,808	)
Treasury stock, at cost		(545	)														(545	)
Accumulated other comprehensive income (loss), net of tax		85,862			(2,316	)		32,976			121,526			(152,186	)		85,862

Total stockholders’ equity		4,109,200			1,123,333			1,027,630			4,258,385			(6,409,348	)		4,109,200

Total liabilities and stockholders’ equity	$	5,094,408		$	1,126,516		$	1,528,768		$	40,436,485			($7,365,461	)	$	40,820,716

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2009
(UNAUDITED)


										All other
										subsidiaries
	Popular, Inc.			PIBI			PNA			and			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			eliminations			entries			Consolidated

ASSETS
Cash and due from banks	$	1,174		$	300		$	738		$	677,606			($2,488	)	$	677,330
Money market investments		51			56,144			238			1,002,702			(56,338	)		1,002,797
Trading account securities, at fair value											462,436						462,436
Investment securities available-for-sale, at fair value					2,448						6,694,053			(1,787	)		6,694,714
Investment securities held-to-maturity, at amortized cost		455,777			1,250						185,935			(430,000	)		212,962
Other investment securities, at lower of cost or realizable value		10,850			1			4,492			148,806						164,149
Investment in subsidiaries		3,046,342			733,737			1,156,680						(4,936,759	)
Loans held-for-sale measured at lower of cost or fair value											90,796						90,796

Loans held-in-portfolio		109,632									23,844,455			(126,824	)		23,827,263
Less — Unearned income											114,150						114,150
Allowance for loan losses		60									1,261,144						1,261,204

Total loans held-in-portfolio, net		109,572									22,469,161			(126,824	)		22,451,909

Premises and equipment, net		2,907						125			581,821						584,853
Other real estate		74									125,409						125,483
Accrued income receivable		120			127			132			125,857			(156	)		126,080
Mortgage servicing assets, at fair value											169,747						169,747
Other assets		33,828			73,308			21,162			1,244,857			(48,238	)		1,324,917
Goodwill											604,349						604,349
Other intangible assets		554									43,249						43,803

Total assets	$	3,661,249		$	867,315		$	1,183,567		$	34,626,784			($5,602,590	)	$	34,736,325


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,497,730			($2,429	)	$	4,495,301
Interest bearing											21,485,931			(56,338	)		21,429,593

Total deposits											25,983,661			(58,767	)		25,924,894
Assets sold under agreements to repurchase											2,632,790						2,632,790
Other short-term borrowings	$	24,225					$	700			107,226			(124,825	)		7,326
Notes payable at cost		1,064,462						433,846			1,152,324			(2,000	)		2,648,632
Subordinated notes											430,000			(430,000	)
Other liabilities		33,745		$	40			45,547			954,525			(49,991	)		983,866

Total liabilities		1,122,432			40			480,093			31,260,526			(665,583	)		32,197,508

Stockholders’ equity:
Preferred stock		50,160															50,160
Common stock		6,395			3,961			2			52,322			(56,285	)		6,395
Surplus		2,797,328			3,437,437			3,321,208			4,637,181			(11,388,916	)		2,804,238
Accumulated deficit		(285,842	)		(2,541,802	)		(2,627,520	)		(1,329,311	)		6,491,723			(292,752	)
Treasury stock, at cost		(15	)														(15	)
Accumulated other comprehensive (loss) income, net of tax		(29,209	)		(32,321	)		9,784			6,066			16,471			(29,209	)

Total stockholders’ equity		2,538,817			867,275			703,474			3,366,258			(4,937,007	)		2,538,817

Total liabilities and stockholders’ equity	$	3,661,249		$	867,315		$	1,183,567		$	34,626,784			($5,602,590	)	$	34,736,325

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2009
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

ASSETS
Cash and due from banks	$	958		$	7,688		$	381		$	607,134			($9,300	)	$	606,861
Money market investments		10,050			47,439			411			1,098,734			(57,811	)		1,098,823
Trading account securities, at fair value											446,368						446,368
Investment securities available-for-sale, at fair value					3,643						6,991,597			(1,949	)		6,993,291
Investment securities held-to-maturity, at amortized cost		455,769			1,250						185,931			(430,000	)		212,950
Other investment securities, at lower of cost or realizable value		10,850			1			4,492			159,600						174,943
Investment in subsidiaries		3,182,664			782,962			1,195,929						(5,161,555	)
Loans held-for-sale measured at lower of cost or fair value											75,447						75,447

Loans held-in-portfolio		171,906						4,600			24,528,725			(192,265	)		24,512,966
Less — Unearned income											116,897						116,897
Allowance for loan losses		60									1,207,341						1,207,401

Total loans held-in-portfolio, net		171,846						4,600			23,204,487			(192,265	)		23,188,668

Premises and equipment, net		3,074						125			586,393						589,592
Other real estate		74									129,411						129,485
Accrued income receivable		143			178			52			131,568			(196	)		131,745
Mortgage servicing assets, at fair value											180,335						180,335
Other assets		42,384			70,624			20,336			1,053,602			(30,225	)		1,156,721
Goodwill											606,508						606,508
Other intangible assets		554									45,513						46,067

Total assets	$	3,878,366		$	913,785		$	1,226,326		$	35,502,628			($5,883,301	)	$	35,637,804


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,291,058			($9,241	)	$	4,281,817
Interest bearing											22,158,892			(57,811	)		22,101,081

Total deposits											26,449,950			(67,052	)		26,382,898
Federal funds purchased and assets sold under agreements to repurchase											2,807,891						2,807,891
Other short-term borrowings	$	26,215									167,127			(190,265	)		3,077
Notes payable at cost		1,059,645					$	434,277			1,157,899			(2,000	)		2,649,821
Subordinated notes											430,000			(430,000	)
Other liabilities		50,050		$	78			37,878			996,043			(32,388	)		1,051,661

Total liabilities		1,135,910			78			472,155			32,008,910			(721,705	)		32,895,348

Stockholders’ equity:
Preferred stock		50,160															50,160
Common stock		6,395			3,961			2			52,322			(56,285	)		6,395
Surplus		2,787,750			3,292,438			3,176,208			4,495,509			(10,957,245	)		2,794,660
Accumulated deficit		(62,615	)		(2,353,525	)		(2,435,062	)		(1,062,519	)		5,844,196			(69,525	)
Treasury stock, at cost		(11	)														(11	)
Accumulated other comprehensive (loss) income, net of tax		(39,223	)		(29,167	)		13,023			8,406			7,738			(39,223	)

Total stockholders’ equity		2,742,456			913,707			754,171			3,493,718			(5,161,596	)		2,742,456

Total liabilities and stockholders’ equity	$	3,878,366		$	913,785		$	1,226,326		$	35,502,628			($5,883,301	)	$	35,637,804

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2010
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries	$	80,700												($80,700	)
Loans		1,217								$	484,729			(1,063	)	$	484,883
Money market investments		2		$	15						1,391			(17	)		1,391
Investment securities		5,673			7		$	81			56,848			(5,332	)		57,277
Trading account securities											7,136						7,136

Total interest and dividend income		87,592			22			81			550,104			(87,112	)		550,687

INTEREST EXPENSE:
Deposits											86,346			(16	)		86,330
Short-term borrowings		8						185			15,816			(1,064	)		14,945
Long-term debt		26,485						7,635			33,868			(5,494	)		62,494

Total interest expense		26,493						7,820			136,030			(6,574	)		163,769

Net interest income (expense)		61,099			22			(7,739	)		414,074			(80,538	)		386,918
Provision for loan losses											215,013						215,013

Net interest income (expense) after provision for loan losses		61,099			22			(7,739	)		199,061			(80,538	)		171,905

Service charges on deposit accounts											48,608						48,608
Other service fees											100,029			793			100,822
Net gain on sale and valuation adjustments of investment securities											3,732						3,732
Trading account profit											5,860						5,860
Loss on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale											(1,573	)					(1,573	)
FDIC loss share expense											(36,936	)					(36,936	)
Fair value change in equity appreciation instrument											10,641						10,641
Gain on sale of processing and technology business		640,802															640,802
Other operating (loss) income		(18	)		3,370			(2,166	)		25,772			(2,390	)		24,568

Total non-interest income (loss)		640,784			3,370			(2,166	)		156,133			(1,597	)		796,524

OPERATING EXPENSES:
Personnel costs:
Salaries		2,843			91						113,492						116,426
Pension and other benefits		704			11						24,064						24,779

Total personnel costs		3,547			102						137,556						141,205
Net occupancy expenses		689			8			1			27,727						28,425
Equipment expenses		708			1						24,723						25,432
Other taxes		513									13,359						13,872
Professional fees		19,151			3			3			29,645			(578	)		48,224
Communications		127			5			5			9,377						9,514
Business promotion		221									11,039						11,260
Printing and supplies		18									2,858						2,876
FDIC deposit insurance											17,183						17,183
Loss on early extinguishment of debt		15,750									9,698						25,448
Other operating expenses		(2,926	)		(100	)		108			49,024			(409	)		45,697
Amortization of intangibles											2,411						2,411

Total operating expenses		37,798			19			117			334,600			(987	)		371,547

Income (loss) before income tax and equity in losses of subsidiaries		664,085			3,373			(10,022	)		20,594			(81,148	)		596,882
Income tax expense (benefit)		84,664			1,335			(297	)		16,495			191			102,388

Income (loss) before equity in losses of subsidiaries		579,421			2,038			(9,725	)		4,099			(81,339	)		494,494
Equity in undistributed losses of subsidiaries		(84,927	)		(24,235	)		(14,330	)					123,492

NET INCOME (LOSS)	$	494,494			($22,197	)		($24,055	)	$	4,099		$	42,153		$	494,494

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries				$	7,500		$	15,000						($22,500	)
Loans	$	1,995						2		$	371,173			(1,804	)	$	371,366
Money market investments		14			331						1,511			(346	)		1,510
Investment securities		8,469			11			175			72,613			(6,908	)		74,360
Trading account securities											7,227						7,227

Total interest and dividend income		10,478			7,842			15,177			452,524			(31,558	)		454,463

INTEREST EXPENSE:
Deposits											119,280			(339	)		118,941
Short-term borrowings		28						15			17,892			(1,793	)		16,142
Long-term debt		19,917						10,524			19,757			(7,207	)		42,991

Total interest expense		19,945						10,539			156,929			(9,339	)		178,074

Net interest (expense) income		(9,467	)		7,842			4,638			295,595			(22,219	)		276,389
Provision for loan losses											331,063						331,063

Net interest (expense) income after provision for loan losses		(9,467	)		7,842			4,638			(35,468	)		(22,219	)		(54,674	)

Service charges on deposit accounts											54,208						54,208
Other service fees											101,240			(3,626	)		97,614
Net gain (loss) on sale and valuation adjustments of investment securities		2,058			(3,574	)					(5,485	)		(2,058	)		(9,059	)
Trading account profit											7,579						7,579
Loss on sale of loans and valuation adjustments on loans held-for-sale											(8,728	)					(8,728	)
Other operating (loss) income		(7	)		4,440			3,076			13,471			(2,550	)		18,430

Total non-interest income		2,051			866			3,076			162,285			(8,234	)		160,044

OPERATING EXPENSES:
Personnel costs:
Salaries		6,543			83						97,190			(994	)		102,822
Pension and other benefits		2,109			11						25,629			(24	)		27,725

Total personnel costs		8,652			94						122,819			(1,018	)		130,547
Net occupancy expenses		659			7						27,603						28,269
Equipment expenses		1,178									23,805						24,983
Other taxes		855									12,254						13,109
Professional fees		4,034			3			3			25,868			(1,214	)		28,694
Communications		115			6			5			11,776						11,902
Business promotion		222									8,683						8,905
Printing and supplies		19									2,838						2,857
FDIC deposit insurance											16,506						16,506
Gain on early extinguishment of debt											(77,381	)		(1,923	)		(79,304	)
Other operating expenses		(41,604	)		(100	)		(51,786	)		125,664			(421	)		31,753
Amortization of intangibles											2,379						2,379

Total operating expenses		(25,870	)		10			(51,778	)		302,814			(4,576	)		220,600

Income (loss) before income tax and equity in losses of subsidiaries		18,454			8,698			59,492			(175,997	)		(25,877	)		(115,230	)
Income tax expense (benefit)		350			17			(32	)		5,303			693			6,331

Income (loss) before equity in losses of subsidiaries		18,104			8,681			59,524			(181,300	)		(26,570	)		(121,561	)
Equity in undistributed losses of subsidiaries		(139,665	)		(135,566	)		(188,234	)					463,465

Loss from continuing operations		(121,561	)		(126,885	)		(128,710	)		(181,300	)		436,895			(121,561	)
Loss from discontinued operations, net of income tax											(3,427	)					(3,427	)
Equity in undistributed losses of discontinued operations		(3,427	)		(3,427	)		(3,427	)					10,281

NET LOSS		($124,988	)		($130,312	)		($132,137	)		($184,727	)	$	447,176			($124,988	)

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries	$	168,100		$	7,500									($175,600	)
Loans		4,301								$	1,224,330			(3,785	)	$	1,224,846
Money market investments		52			237		$	1			4,326			(290	)		4,326
Investment securities		19,113			24			242			183,761			(18,022	)		185,118
Trading account securities											20,313						20,313

Total interest and dividend income		191,566			7,761			243			1,432,730			(197,697	)		1,434,603

INTEREST EXPENSE:
Deposits											270,157			(238	)		269,919
Short-term borrowings		46						307			49,225			(3,822	)		45,756
Long-term debt		86,231						22,960			93,450			(18,524	)		184,117

Total interest expense		86,277						23,267			412,832			(22,584	)		499,792

Net interest income (expense)		105,289			7,761			(23,024	)		1,019,898			(175,113	)		934,811
Provision for loan losses											657,471						657,471

Net interest income (expense) after provision for loan losses		105,289			7,761			(23,024	)		362,427			(175,113	)		277,340

Service charges on deposit accounts											149,865						149,865
Other service fees											307,677			(1,810	)		305,867
Net gain on sale and valuation adjustments of investment securities											4,210						4,210
Trading account profit											8,101						8,101
Loss on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale											(23,106	)					(23,106	)
FDIC loss share expense											(13,602	)					(13,602	)
Fair value change in equity appreciation instrument											35,035						35,035
Gain on sale of processing and technology business		640,802															640,802
Other operating income (loss)		1,198			14,931			(3,640	)		54,199			(3,612	)		63,076

Total non-interest income (loss)		642,000			14,931			(3,640	)		522,379			(5,422	)		1,170,248

OPERATING EXPENSES:
Personnel costs:
Salaries		13,806			282						307,716			(381	)		321,423
Pension and other benefits		2,274			39						76,451			(18	)		78,746

Total personnel costs		16,080			321						384,167			(399	)		400,169
Net occupancy expenses		2,096			26			2			84,235						86,359
Equipment expenses		2,148			1						72,082						74,231
Other taxes		1,337									37,298						38,635
Professional fees		26,103			10			9			85,194			(1,818	)		109,498
Communications		360			16			10			31,242						31,628
Business promotion		663									29,096						29,759
Printing and supplies		58									7,840						7,898
FDIC deposit insurance											49,894						49,894
Loss on early extinguishment of debt		15,750									10,676						26,426
Other operating expenses		(26,014	)		(299	)		324			146,812			(1,359	)		119,464
Amortization of intangibles											6,915						6,915

Total operating expenses		38,581			75			345			945,451			(3,576	)		980,876

Income (loss) before income tax and equity in losses of subsidiaries		708,708			22,617			(27,009	)		(60,645	)		(176,959	)		466,712
Income tax expense (benefit)		83,025			3,136			(297	)		26,864			373			113,101

Income (loss) before equity in losses of subsidiaries		625,683			19,481			(26,712	)		(87,509	)		(177,332	)		353,611
Equity in undistributed losses of subsidiaries		(272,072	)		(200,353	)		(167,324	)					639,749

NET INCOME (LOSS)	$	353,611			($180,872	)		($194,036	)		($87,509	)	$	462,417		$	353,611

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries	$	73,625		$	7,500		$	15,000						($96,125	)
Loans		7,756						41		$	1,154,719			(7,138	)	$	1,155,378
Money market investments		105			923			2,156			7,026			(3,186	)		7,024
Investment securities		29,943			59			622			213,976			(20,939	)		223,661
Trading account securities											28,638						28,638

Total interest and dividend income		111,429			8,482			17,819			1,404,359			(127,388	)		1,414,701

INTEREST EXPENSE:
Deposits											398,515			(3,083	)		395,432
Short-term borrowings		125						42			60,496			(7,187	)		53,476
Long-term debt		45,867						50,880			58,919			(21,808	)		133,858

Total interest expense		45,992						50,922			517,930			(32,078	)		582,766

Net interest income (expense)		65,437			8,482			(33,103	)		886,429			(95,310	)		831,935
Provision for loan losses											1,053,036						1,053,036

Net interest income (expense) after provision for loan losses		65,437			8,482			(33,103	)		(166,607	)		(95,310	)		(221,101	)

Service charges on deposit accounts											161,412						161,412
Other service fees											304,544			(5,960	)		298,584
Net gain (loss) on sale and valuation adjustments of investment securities		3,008			(10,163	)					230,005			(2,058	)		220,792
Trading account profit											31,241						31,241
Loss on sale of loans and valuation adjustments on loans held-for-sale											(35,994	)					(35,994	)
Other operating income (loss)		676			12,799			(423	)		35,197			(3,670	)		44,579

Total non-interest income (loss)		3,684			2,636			(423	)		726,405			(11,688	)		720,614

OPERATING EXPENSES:
Personnel costs:
Salaries		18,255			272						297,691			(994	)		315,224
Pension and other benefits		6,404			46						90,394			(24	)		96,820

Total personnel costs		24,659			318						388,085			(1,018	)		412,044
Net occupancy expenses		1,947			22			2			78,763						80,734
Equipment expenses		2,752						3			73,534						76,289
Other taxes		2,698									36,671						39,369
Professional fees		11,025			10			(58	)		73,547			(3,881	)		80,643
Communications		331			15			18			35,751						36,115
Business promotion		728									26,033						26,761
Printing and supplies		54									8,610						8,664
FDIC deposit insurance											61,954						61,954
Gain on early extinguishment of debt											(77,381	)		(1,923	)		(79,304	)
Other operating expenses		(65,059	)		(300	)		(51,768	)		223,341			(1,259	)		104,955
Amortization of intangibles											7,218						7,218

Total operating expenses		(20,865	)		65			(51,803	)		936,126			(8,081	)		855,442

Income (loss) before income tax and equity in losses of subsidiaries		89,986			11,053			18,277			(376,328	)		(98,917	)		(355,929	)
Income tax (benefit) expense		(876	)		46			324			(15,611	)		908			(15,209	)

Income (loss) before equity in losses of subsidiaries		90,862			11,007			17,953			(360,717	)		(99,825	)		(340,720	)
Equity in undistributed losses of subsidiaries		(431,582	)		(547,385	)		(567,624	)					1,546,591

Loss from continuing operations		(340,720	)		(536,378	)		(549,671	)		(360,717	)		1,446,766			(340,720	)
Loss from discontinued operations, net of income tax											(19,972	)					(19,972	)
Equity in undistributed losses of discontinued operations		(19,972	)		(19,972	)		(19,972	)					59,916

NET LOSS		($360,692	)		($556,350	)		($569,643	)		($380,689	)	$	1,506,682			($360,692	)

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

Cash flows from operating activities:
Net income (loss)	$	353,611			($180,872	)		($194,036	)		($87,509	)	$	462,417		$	353,611

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in undistributed losses of subsidiaries		272,072			200,353			167,324						(639,749	)
Depreciation and amortization of premises and equipment		587						2			46,495						47,084
Provision for loan losses											657,471						657,471
Amortization of intangibles											6,915						6,915
Fair value adjustment of mortgage servicing rights											19,959						19,959
Net amortization of premiums and deferred fees (accretion of discounts)		15,636						206			(165,932	)		(487	)		(150,577	)
Net gain on sale and valuation adjustment of investment securities											(4,210	)					(4,210	)
Fair value change in equity appreciation instrument											(35,035	)					(35,035	)
FDIC loss share expense											13,602						13,602
Net loss (gain) on disposition of premises and equipment		8									(2,001	)					(1,993	)
Net loss on sale of loans and valuation adjustments on loans held-for-sale											23,106						23,106
Loss on early extinguishment of debt		15,750									10,676						26,426
Gain on sale of processing and technology businesses, net of transaction costs		(616,186	)														(616,186	)
(Earnings) losses from investments under the equity method		(1,198	)		(14,931	)		3,640			(2,354	)		(1,301	)		(16,144	)
Deferred income taxes, net of valuation		11,411									(11,363	)		2,410			2,458
Net disbursements on loans held-for-sale											(494,312	)					(494,312	)
Acquisitions of loans held-for-sale											(213,897	)					(213,897	)
Proceeds from sale of loans held-for-sale											57,831						57,831
Net decrease in trading securities											565,611						565,611
Net (increase) decrease in accrued income receivable		(59	)		118			102			1,733			(88	)		1,806
Net decrease in other assets		2,918			5,669			1,987			19,999			(25,052	)		5,521
Net (decrease) increase in interest payable		(3,778	)					2,082			(32,951	)		88			(34,559	)
Net increase in postretirement benefit obligation											1,825						1,825
Net increase (decrease) in other liabilities		52,804			3,144			(1,743	)		39,235			2,462			95,902

Total adjustments		(250,035	)		194,353			173,600			502,403			(661,717	)		(41,396	)

Net cash provided by (used in) operating activities		103,576			13,481			(20,436	)		414,894			(199,300	)		312,215

Cash flows from investing activities:
Net (increase) decrease in money market investments		(164,801	)		50,237			(68	)		(924,899	)		114,618			(924,913	)
Purchases of investment securities:
Available-for-sale		(34,500	)								(671,328	)		17,150			(688,678	)
Held-to-maturity		(26,927	)								(25,271	)					(52,198	)
Other											(44,021	)					(44,021	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											1,329,390						1,329,390
Held-to-maturity		271,928			250						23,889			(245,000	)		51,067
Other											108,470						108,470
Proceeds from sale of investment securities available-for-sale											396,676						396,676
Net (disbursements) repayments on loans		(481,194	)								1,347,236			426,893			1,292,935
Proceeds from sale of loans											15,908						15,908
Acquisition of loan portfolios											(130,488	)					(130,488	)
Capital contribution to subsidiary		(1,095,000	)		(495,000	)		(495,000	)					2,085,000
Cash received from acquisitions											261,311						261,311
Net proceeds from sale of processing and technology businesses		617,976									24,346						642,322
Mortgage servicing rights purchased											(598	)					(598	)
Acquisition of premises and equipment		(878	)								(39,458	)					(40,336	)
Proceeds from sale of premises and equipment		116									13,387						13,503
Proceeds from sale of foreclosed assets		74									120,338						120,412

Net cash (used in) provided by investing activities		(913,206	)		(444,513	)		(495,068	)		1,804,888			2,398,661			2,350,762

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS — CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)


										All other			All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

Cash flows from financing activities :
Net decrease in deposits											(601,350	)		26,611			(574,739	)
Net decrease in assets sold under agreements to repurchase											(109,851	)		(164,800	)		(274,651	)
Net (decrease) increase in other short-term borrowings		(24,225	)					24,500			584,116			(400,375	)		184,016
Payments of notes payable and subordinated notes		(250,000	)					(4,000	)		(3,274,449	)		247,000			(3,281,449	)
Proceeds from issuance of notes payable											111,101						111,101
Prepayment penalties paid on cancellation of debt		(15,750	)								(9,725	)					(25,475	)
Net proceeds from issuance of depository shares		1,100,613												1,618			1,102,231
Dividends paid to parent company					(63,900	)					(111,700	)		175,600
Treasury stock acquired		(530	)														(530	)
Capital contribution from parent					495,000			495,000			1,095,000			(2,085,000	)

Net cash provided by (used in) financing activities		810,108			431,100			515,500			(2,316,858	)		(2,199,346	)		(2,759,496	)

Net increase (decrease) in cash and due from banks		478			68			(4	)		(97,076	)		15			(96,519	)
Cash and due from banks at beginning of period		1,174			300			738			677,606			(2,488	)		677,330

Cash and due from banks at end of period	$	1,652		$	368		$	734		$	580,530			($2,473	)	$	580,811

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)


										All other
	Popular, Inc.			PIBI			PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			and eliminations			entries			Consolidated

Cash flows from operating activities:
Net loss		($360,692	)		($556,350	)		($569,643	)		($380,689	)	$	1,506,682			($360,692	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Equity in undistributed losses of subsidiaries		451,554			567,357			587,596						(1,606,507	)
Depreciation and amortization of premises and equipment		1,369						2			47,662						49,033
Provision for loan losses											1,053,036						1,053,036
Amortization of intangibles											7,218						7,218
Amortization and fair value adjustment of servicing assets											17,598						17,598
Net (accretion of discounts) amortization of premiums and deferred fees		2,291									48,430			(108	)		50,613
Net (gain) loss on sale and valuation adjustment of investment securities		(3,008	)		10,163						(230,005	)		2,058			(220,792	)
Gains from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159											(1,674	)					(1,674	)
Net loss (gain) on disposition of premises and equipment		2,943									(1,247	)					1,696
Net loss on sale of loans and valuation adjustments on loans held-for-sale											41,202						41,202
(Gain) loss on early extinguishment of debt		(26,439	)					(51,898	)		955			(1,922	)		(79,304	)
(Earnings) losses from investments under the equity method		(676	)		(12,799	)		423			47			(1,302	)		(14,307	)
Stock options expense		69									93						162
Deferred income taxes, net of valuation		(876	)					31			(76,800	)		1,201			(76,444	)
Net disbursements on loans held-for-sale											(919,719	)					(919,719	)
Acquisitions of loans held-for-sale											(280,243	)					(280,243	)
Proceeds from sale of loans held-for-sale											65,258						65,258
Net decrease in trading securities											1,302,093						1,302,093
Net decrease in accrued income receivable		890			296			1,809			23,839			(1,899	)		24,935
Net decrease in other assets		7,799			5,796			976			58,671			(46,307	)		26,935
Net increase (decrease) in interest payable		2,374						(9,497	)		(52,539	)		1,899			(57,763	)
Net increase in postretirement benefit obligation											3,652						3,652
Net increase (decrease) in other liabilities		5,633			(39	)		(20,311	)		33,972			46,176			65,431

Total adjustments		443,923			570,774			509,131			1,141,499			(1,606,711	)		1,058,616

Net cash provided by (used in) operating activities		83,231			14,424			(60,512	)		760,810			(100,029	)		697,924

Cash flows from investing activities:
Net decrease (increase) in money market investments		79,643			(6,825	)		449,835			(304,212	)		(522,610	)		(304,169	)
Purchases of investment securities:
Available-for-sale		(249,603	)								(4,047,796	)		191,484			(4,105,915	)
Held-to-maturity		(51,539	)								(3,023	)					(54,562	)
Other											(36,601	)					(36,601	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		14,226									1,247,575						1,261,801
Held-to-maturity		27,318									109,217						136,535
Other											62,480						62,480
Proceeds from sale of investment securities available-for-sale		426,666									3,590,320			(191,484	)		3,825,502
Proceeds from sale of other investment securities											52,294						52,294
Net repayments on loans		655,305						8,200			679,468			(676,355	)		666,618
Proceeds from sale of loans											325,414						325,414
Acquisition of loan portfolios											(37,965	)					(37,965	)
Capital contribution to subsidiary		(795,000	)		(795,000	)		(445,000	)					2,035,000
Transfer of shares of a subsidiary		(42,971	)					42,971
Mortgage servicing rights purchased											(1,029	)					(1,029	)
Acquisition of premises and equipment		(268	)								(55,357	)					(55,625	)
Proceeds from sale of premises and equipment		14,938									21,167						36,105
Proceeds from sale of foreclosed assets		47									107,673						107,720

Net cash provided by (used in) investing activities		78,762			(801,825	)		56,006			1,709,625			836,035			1,878,603

POPULAR, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS — CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)


									All other
	Popular, Inc.			PIBI		PNA			subsidiaries			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.		Holding Co.			and eliminations			entries			Consolidated

Cash flows from financing activities :
Net decrease in deposits										(1,591,464	)		424,356			(1,167,108	)
Net decrease in federal funds purchased and assets sold under agreements to repurchase		(44,471	)							(788,926	)		89,680			(743,717	)
Net decrease in other short-term borrowings		(16,553	)				(500	)		(661,159	)		676,355			(1,857	)
Payments of notes payable							(798,380	)		(8,622	)					(807,002	)
Proceeds from issuance of notes payable							1,099			60,001						61,100
Dividends paid to parent company										(96,125	)		96,125
Dividends paid		(71,438	)													(71,438	)
Issuance costs and fees paid on exchange of preferred stock and trust preferred securities		(28,562	)										3,944			(24,618	)
Treasury stock acquired		(13	)													(13	)
Capital contribution from parent					795,000		795,000			445,000		(	2,035,000	)

Net cash (used in) provided by financing activities		(161,037	)		795,000		(2,781	)		(2,641,295	)		(744,540	)		(2,754,653	)

Net increase (decrease) in cash and due from banks		956			7,599		(7,287	)		(170,860	)		(8,534	)		(178,126	)
Cash and due from banks at beginning of period		2			89		7,668			777,994			(766	)		784,987

Cash and due from banks at end of period	$	958		$	7,688	$	381		$	607,134			($9,300	)	$	606,861


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

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, the Caribbean and Latin America. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. The Corporation has a 49% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America.

The Overview section that follows provides a description of two significant transactions that impacted the Corporation’s operations during 2010, namely the Westernbank FDIC-assisted transaction in the second quarter of 2010 and the sale of 51% interest in its former subsidiary EVERTEC in the third quarter of 2010.

The Corporation reported net income of $494.5 million for the quarter ended September 30, 2010, compared with a net loss of $125.0 million for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, the Corporation’s net income totaled $353.6 million, compared to a net loss of $360.7 million for the same period in 2009. Table A provides selected financial data and performance indicators for the quarters ended September 30, 2010 and 2009.

As discussed in further detail below, the financial results for the third quarter were mostly impacted by the following factors:

	•		An after-tax gain of $531.0 million, net of transaction costs, on the sale of a 51% interest in EVERTEC;

	•		Net interest income reflects a $78.5 million discount accretion on covered loans acquired in the Westernbank FDIC-assisted transaction that are accounted for under ASC Subtopic 310-20 due to their revolving characteristics. This was offset in part by a reduction in non-interest income resulting from the reduction of the FDIC indemnification asset for approximately 80% of the discount accreted on ASC Subtopic 310-20 covered loans. Also, net interest income for the quarter ended September 30, 2010 included $56.5 million of discount accretion on covered loans accounted for under ASC Subtopic 310-30;

	•		Operating expenses reflect $25.4 million of prepayment penalties or premiums mostly to extinguish high cost debt;

	•		While net charge-offs and the provision for loan losses decreased significantly as compared to the third quarter of 2009, they increased from the second quarter of 2010. Net charge-offs and the provision for loan losses in the Corporation’s U.S. mainland operations declined when compared to the second quarter reflecting continued improvement in credit quality for the Corporation’s U.S. operations. The Corporation’s Puerto Rico operations reflected increased net charge-offs and provision for loan losses, primarily related to continued losses in the construction and commercial loan portfolios.

Key Events and Third Quarter Milestones:

On September 30, 2010, the Corporation completed the sale of a majority interest in its processing and technology business EVERTEC, including the businesses transferred in an internal reorganization as discussed in Note 3 to the

consolidated financial statements. Under the terms of the sale, an unrelated third party acquired a 51% interest in EVERTEC for cash under a leverage buy-out. The Corporation retained the remaining 49% interest. The Corporation’s investment in EVERTEC is currently accounted for under the equity method and the investment amounted to $177 million as of September 30, 2010, which is included in other assets in the consolidated statement of condition. As a result of the sale, the Corporation recognized a pre-tax gain, net of transaction costs, of approximately $616.2 million ($531.0 million after-tax), of which $640.8 million was separately disclosed within non-interest income in the consolidated statement of operations and $24.6 million are included as operating expenses (transaction costs). In connection with the sale, Popular entered into various agreements including a master services agreement pursuant to which EVERTEC will continue providing various processing and information technology services to Popular, BPPR, and their respective subsidiaries. The net cash proceeds received by the Corporation after transaction costs and taxes were approximately $528.6 million. The sale had a positive impact of approximately 2.19% on Tier 1 Common, 2.31% on Tier 1 Capital and Total Capital ratios, and of approximately 1.20% on Popular’s Tier 1 Leverage ratio. This transaction completes the Corporation’s capital plan. The capital raise was agreed with the Corporation’s regulators as a condition to be eligible to participate in the FDIC-assisted transaction. In April 2010, Popular raised $1.1 billion in a public equity offering, which when combined with the gain in the EVERTEC transaction, resulted in $1.6 billion in additional capital. Refer to Tables A and J of this MD&A for information on the Corporation’s capital ratios.

Also, in August 2010, Popular successfully completed the Westernbank’s systems and branch conversions. All retail and commercial accounts were converted to Popular’s applications. Refer to the Westernbank FDIC-assisted Transaction section in this Overview section for a description of the assets acquired and liabilities assumed. Out of the estimated 1,440 full-time equivalent employees (“FTEs”) that Westernbank had at the time of acquisition, the Corporation has hired to date close to 816 FTEs. The Corporation retained a limited number of the branches, some of which were consolidated with existing branches of BPPR.

The Corporation’s operations in Puerto Rico continue to experience high level of charge-offs in the commercial and construction loan portfolios principally due to reductions in real estate collateral values. Credit management has remained a primary area of focus in the BPPR reportable segment, principally in the commercial and construction lending areas. The BPPR reportable segment reported net income of $12.5 million for the quarter ended September 30, 2010, compared with a net loss of $13.5 million for the same quarter of 2009. The provision for loan losses of the BPPR reportable segment amounted to $182.2 million for the quarter ended September 30, 2010, compared with $153.4 million in the third quarter of 2009. As compared with the quarter ended June 30, 2010, the provision for loan losses for the quarter ended September 30, 2010 increased by $59.9 million.

Given the challenging economic environment in Puerto Rico, the Corporation’s credit metrics for its Puerto Rico operations will remain under pressure for the rest of 2010, particularly with respect to mortgage related assets. The economy on the Island has remained sluggish during 2010 and job creation continues to be a challenge. The government administration has taken a pragmatic approach toward a turnaround, reducing the budget deficit by close to 60% through difficult yet necessary cost-cutting initiatives. In September 2010, the Puerto Rico government signed into law an aggressive housing incentive package, providing a much needed jolt to the residential housing market. The whole package is generous, targets primarily new homes but also benefits existing ones, and has a ten-month sunset, which should create a sense of urgency. The program reduces cash outlays at closing and grants significant tax exemptions, such as no capital gain tax in the future sale of an acquired new home, no tax on rental income for 10 years and no property taxes for 5 years on new homes. Following the enactment of this new law, the Corporation has seen an increase in interest among potential buyers, evidenced by a significant increase in the signing of new options agreements, which are indicative of future sales activity.

In the U.S. mainland, management remains focused on managing legacy assets and improving the performance of BPNA’s core banking business. The credit performance of BPNA has improved, resulting in a reduction in the provision for loan losses for the third quarter of 2010 of $144.9 million compared with the third quarter of 2009 and $47.1 million compared with the second quarter of 2010. BPNA’s reportable segment reported a net loss of $14.6 million in the quarter ended September 30, 2010, compared with net losses of $169.9 million in the same quarter of 2009. Net charge-offs in the U.S. operations for the third quarter of 2010 fell below $100 million for the first time since the third quarter of 2008 and marked the third consecutive quarter in which loan losses have declined.

The U.S. operations have followed the general credit trends on the mainland demonstrating progressive improvement; nonetheless, credit quality continues to be closely monitored. BPNA’s provision for loan losses in the

third quarter of 2009 was more than five times larger than what it was in the quarter ended September 30, 2010. BPNA’s top line income has remained steady. Management is working on increasing BPNA’s customer base as it moves from being mainly a Hispanic bank to a more broad-based community bank. To that end, in July 2010, the Corporation launched a rebranding pilot program in Illinois changing the name of the bank from Banco Popular North America to Popular Community Bank in order to appeal to a broader demographic group.

The discussion that follows provides highlights of the Corporation’s results of operations for the quarter ended September 30, 2010 compared to the results of operations for the same quarter in 2009. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity.

Financial highlights:

	•		Net interest income for the third quarter of 2010 increased $110.5 million, compared with the third quarter of 2009. The net interest margin on a taxable equivalent basis increased from 3.51% for the quarter ended September 30, 2009 to 4.52% for the quarter ended September 30, 2010. The improvement in the net interest margin was mainly influenced by the discount accretion on the Westernbank acquired loan portfolio, which totaled $135.0 million for the third quarter of 2010. The higher yield in earning assets was accompanied with a reduction in the cost of deposits. The favorable variance from the acquired covered loans was partially offset by a decline in the average volume of non-covered loans, principally in the commercial and consumer portfolios, and in investment securities.

	•		The provision for loan losses for the quarter ended September 30, 2010 decreased by $116.1 million compared with the same quarter in the previous year. This decrease was mainly the result of higher amounts provisioned during 2009, particularly for commercial and construction loans, U.S. mainland non-conventional residential mortgage loans and home equity lines of credit, combined with specific reserves recorded for loans considered impaired. The deteriorated conditions of the Puerto Rico and U.S. economies that prevailed during 2009, declines in property values, and slowdown in consumer spending, negatively impacted the Corporation’s net charge-offs and non-performing assets levels, thus requiring substantial reserve increases in 2009. Since September 30, 2009, loans held-in-portfolio, excluding covered loans, decreased by approximately $2.3 billion, particularly in the commercial, construction and consumer loan portfolios. This decrease in the loan portfolio balance also contributed to the lower level of provision for loan losses for the third quarter of 2010. The ratio of allowance for loan losses to loans held-in-portfolio, excluding covered loans, was 5.62% as of September 30, 2010, compared with 5.32% as of December 31, 2009, and 4.95% as of September 30, 2009.

			During the nine months ended September 30, 2010, the Corporation experienced improved delinquency levels in certain portfolios, such as home equity lines of credit and closed-end second mortgages at E-LOAN and some consumer loan portfolios in Puerto Rico. Management recognizes that the Puerto Rico and U.S. mainland economies remain fragile, unemployment is still elevated and real estate markets continue to be unstable. Therefore, it may be early to expect that this recent favorable experience on non-performing loans in certain portfolios is indicative of a sustainable longer-term trend. Management continues reinforcing loan management and workout teams.

	•		Non-interest income for the quarter ended September 30, 2010 increased $636.5 million, compared with the quarter ended September 30, 2009, mainly associated with the $640.8 million gain recognized, before tax and transaction costs, on the sale of an ownership interest in EVERTEC.

	•		Operating expenses for the quarter ended September 30, 2010 increased by $150.9 million compared with the same quarter of the previous year mainly due to transaction costs on the EVERTEC sale, higher personnel costs principally related to Westerbank and losses on the early extinguishment of debt. Also, influencing the increase in operating expenses is the fact that operating expenses for the third quarter of 2009 included a gain on extinguishment of debt of $79.3 million, principally associated to the exchange of trust preferred securities for common stock.

	•		Income tax expense amounted to $102.4 million for the quarter ended September 30, 2010, compared with

income tax expense of $6.3 million for the quarter ended September 30, 2009. The increase was primarily the result of the gain on the EVERTEC transaction and higher taxable income from the Puerto Rico operations. Refer to the Income Taxes section in this MD&A for a discussion of the tax variance and a reconciliation of the effective tax rate for the quarters ended September 30, 2010 and 2009.

	•		Total assets amounted to $40.8 billion as of September 30, 2010, compared with $34.7 billion as of December 31, 2009 and $35.6 billion as of September 30, 2009. The increase in total assets, when compared to December 31, 2009, was principally in loans held-in-portfolio by $2.4 billion, due to the loan portfolio acquired in the Westernbank FDIC-assisted transaction, partially offset by reductions in the Corporation’s non-covered loan portfolio. Also, the increase in total assets was related to the $3.3 billion FDIC loss share indemnification asset and a $1.0 billion increase in money market investments, principally related to the proceeds from the EVERTEC sale, partially offset by a decline in investment securities available-for-sale by $953 million. The decline in the Corporation’s loan portfolio, excluding the impact of the increase due to the covered loans acquired, was influenced by high levels of loan charge-offs and the impact of exiting origination channels at BPNA as part of the restructuring activities undertaken during 2009. Also, the decline in loan originations reflects low demand in a weak economic environment.

	•		Refer to Table Q in the Financial Condition section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. Deposits totaled $27.7 billion as of September 30, 2010, compared with $25.9 billion as of December 31, 2009 and $26.4 billion as of September 30, 2009. The increase in deposits was associated with the Westernbank FDIC-assisted transaction, partially offset by lower volume of brokered certificates of deposits and reductions due to the effect of closure, sale and consolidation of branches in the U.S. mainland operations, and the attrition impact due to the reduction in the pricing of deposits, including internet deposits. Borrowed funds amounted to $7.7 billion as of September 30, 2010, compared with $5.3 billion as of December 31, 2009 and $5.5 billion as of September 30, 2009. The increase in borrowings from December 31, 2009 to September 30, 2010 was related to the note issued to the FDIC in the Westernbank FDIC-assisted transaction, which had a carrying amount of $3.3 billion as of September 30, 2010, partially offset by the impact of deleveraging strategies.

In late 2008, the Corporation discontinued the operations of Popular Financial Holdings (“PFH”) by selling assets and closing service branches and other units. The loss from discontinued operations, net of taxes, for the quarter and nine months ended September 30, 2009 was $3.4 million and $20.0 million, respectively. This loss was primarily related to salary and other expenses incurred in providing loan portfolio servicing to affiliated companies and other costs for employees that were retained for a transition period, as well as adjustments to indemnity reserves on loans sold in prior periods. The results of PFH are presented as part of “Loss from discontinued operations, net of income tax” in Table A. The discussions in this MD&A pertain to Popular, Inc.’s continuing operations, unless otherwise indicated.

TABLE A
Financial Highlights


Financial Condition Highlights	As of September 30,							Average for the nine months
(In thousands)	2010		2009		Variance			2010		2009*		Variance

Money market investments	$	2,023,949	$	1,098,823	$	925,126		$	1,558,383	$	1,194,107	$	364,276
Investment and trading securities		6,597,136		7,827,552		(1,230,416	)		7,002,398		8,237,875		(1,235,477	)
Loans		26,263,797		24,471,516		1,792,281			24,951,632		25,102,124		(150,492	)
Earning assets		34,884,882		33,397,891		1,486,991			33,512,413		34,534,106		(1,021,693	)
Total assets		40,820,716		35,637,804		5,182,912			38,027,298		37,089,769		937,529
Deposits		27,740,044		26,382,898		1,357,146			26,482,395		27,028,450		(546,055	)
Borrowings		7,692,869		5,460,789		2,232,080			7,522,719		6,021,727		1,500,992
Stockholders’ equity		4,109,200		2,742,456		1,366,744			3,041,119		2,960,735		80,384


Operating Highlights	Third Quarter								Nine months ended September 30,
(In thousands, except per share information)	2010		2009			Variance			2010		2009			Variance

Net interest income	$	386,918	$	276,389		$	110,529		$	934,811	$	831,935		$	102,876
Provision for loan losses		215,013		331,063			(116,050	)		657,471		1,053,036			(395,565	)
Non-interest income		796,524		160,044			636,480			1,170,248		720,614			449,634
Operating expenses		371,547		220,600			150,947			980,876		855,442			125,434

Income (loss) from continuing operations before income tax		596,882		(115,230	)		712,112			466,712		(355,929	)		822,641
Income tax expense (benefit)		102,388		6,331			96,057			113,101		(15,209	)		128,310

Income (loss) from continuing operations, net of income tax		494,494		(121,561	)		616,055			353,611		(340,720	)		694,331
Loss from discontinued operations, net of income tax		—		(3,427	)		3,427			—		(19,972	)		19,972

Net income (loss)	$	494,494		($124,988	)	$	619,482		$	353,611		($360,692	)		$714,303

Net income applicable to common stock	$	494,494	$	595,614			($101,120	)	$	161,944	$	310,604		$	43,007

Net income (loss) per common share:
Net income from continuing operations — basic and diluted	$	0.48	$	1.41			($0.93	)	$	0.19	$	1.00			($0.81	)
Net loss from discontinued operations — basic and diluted		—		(0.01	)		0.01			—		(0.06	)		0.06

Total net income per common share — basic and diluted	$	0.48	$	1.40			($0.92	)	$	0.19	$	0.94			($0.75	)


	Third Quarter						Nine months ended September 30,
Selected Statistical Information	2010			2009			2010			2009

Common Stock Data
Market price
High	$	2.95		$	2.83		$	4.02		$	5.52
Low		2.45			1.04			1.75			1.04
End		2.90			2.83			2.90			2.83
Book value per common share at period end		3.97			4.21			3.97			4.21
Dividends declared per common share		—			—			—			0.02

Profitability Ratios
Return on assets		4.87	%		(1.38	%)		1.24	%		(1.30	%)
Return on common equity		57.27			(26.24	)		16.31			(31.48	)
Net interest spread (taxable equivalent)		4.32			3.07			3.47			3.00
Net interest margin (taxable equivalent)		4.52			3.51			3.75			3.45

Capitalization Ratios
Average equity to average assets		8.63	%		7.74	%		8.00	%		7.98	%
Tier I capital to risk-weighted assets		14.87			10.23			14.87			10.23
Total capital to risk-weighted assets		16.16			11.53			16.16			11.53
Leverage ratio		9.99			7.93			9.99			7.93


*		Excludes discontinued operations.

As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems

efficiencies, revenue enhancements and changes in the regulation of financial services companies. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for the year ended December 31, 2009, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, including Item 1A of Part II, readers should consider.

The Corporation’s common stock is traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) system under the symbol BPOP.

Reconciliation of net income per common share:

The following table provides a reconciliation of net income per common share for the quarters and nine months ended September 30, 2010 and September 30, 2009:


	Quarter ended					Nine months ended
	September 30,		September 30,			September 30,			September 30,
(In thousands, except per share information)	2010		2009			2010			2009

Net income (loss) from continuing operations	$	494,494		($121,561	)	$	353,611			($340,720	)
Net loss from discontinued operations		—		(3,427	)		—			(19,972	)
Deemed dividend on preferred stock [1]		—		—			(191,667	)		—
Preferred stock dividends [2]		—		5,974			—			(39,857	)
Preferred stock discount accretion		—		(1,040	)		—			(4,515	)
Favorable impact from exchange of shares of Series A and B preferred stock for common stock, net of issuance costs		—		230,388			—			230,388
Favorable impact from exchange of Series C preferred stock for trust preferred securities		—		485,280			—			485,280

Net income applicable to common stock	$	494,494	$	595,614		$	161,944		$	310,604


Average common shares outstanding		1,021,374,014		425,672,578			839,196,564			330,325,348
Average potential dilutive common shares		—		—			312,961			—

Average common shares outstanding — assuming dilution		1,021,374,014		425,672,578			839,509,525			330,325,348

Basic and diluted net income per common share from continuing operations	$	0.48	$	1.41		$	0.19		$	1.00
Basic and diluted net loss per common share from discontinued operations		—		(0.01	)		—			(0.06	)

Total basic and diluted net income per common share	$	0.48	$	1.40		$	0.19		$	0.94

[1]		Deemed dividend related to the issuance of depositary shares and the conversion of the preferred stock into shares of common stock in the second quarter of 2010.
[2]		Amount presented for the quarter ended September 30, 2009 represents the reversal of dividends on Series C preferred stock considered accrued as of June 30, 2009 for EPS purposes only. These cumulative dividends were not paid as dividends to the Series C preferred stockholders given the terms of the exchange agreement to new trust preferred securities, which was effected in August 2009.

Westernbank FDIC-Assisted Transaction:

On April 30, 2010, BPPR entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain deposits and liabilities of Westernbank Puerto Rico, a Puerto Rico state-chartered bank headquartered in Mayaguez, Puerto Rico (“Westernbank”).

The following table presents balances recorded by the Corporation at the time of the Westernbank FDIC-assisted transaction on April 30, 2010.


	Book value prior
	to purchase							As recorded by
	accounting		Fair value			Additional		Popular, Inc. on
(In thousands)	adjustments		adjustments			consideration		April 30, 2010

Assets:
Cash and money market investments	$	358,132		—			—	$	358,132
Investment in Federal Home Loan Bank stock		58,610		—			—		58,610
Covered loans		8,503,839		($4,286,847	)		—		4,216,992
Non-covered loans		50,905		(6,909	)		—		43,996
FDIC loss share indemnification asset		—		3,322,561			—		3,322,561
Covered other real estate owned		125,947		(52,712	)		—		73,235
Core deposit intangible		—		24,415			—		24,415
Receivable from FDIC (associated to the note issued to the FDIC)		—		—		$	111,101		111,101
Other assets		44,926		—			—		44,926

Total assets	$	9,142,359		($999,492	)	$	111,101	$	8,253,968


Liabilities:
Deposits	$	2,380,170	$	11,465			—	$	2,391,635
Note issued to the FDIC (including a premium of $11,612 resulting from the fair value adjustment)		—		—		$	5,769,696		5,769,696
Equity appreciation instrument		—		—			52,500		52,500
Contingent liability on unfunded loan commitments		—		132,442			—		132,442
Accrued expenses and other liabilities		13,925		—			—		13,925

Total liabilities	$	2,394,095	$	143,907		$	5,822,196	$	8,360,198

Excess of assets acquired over liabilities assumed	$	6,748,264

Aggregate fair value adjustments				($1,143,399	)

Aggregate additional consideration, net						$	5,711,095

Goodwill on acquisition								$	106,230

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the April 30, 2010 transaction date. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values may become available.

The Corporation refers to the loans acquired in the Westernbank FDIC-assisted transaction, except credit cards, as “covered loans” as the Corporation will be reimbursed by the FDIC for a substantial portion of any future losses on such loans under the terms of the loss sharing agreements. Foreclosed other real estate properties are also covered under the loss sharing agreements. Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to assets covered by such agreements (collectively, “covered assets”) begins with the first dollar of loss incurred. On a combined basis, the FDIC will reimburse BPPR for 80% of all qualifying losses with respect to the covered assets. BPPR will reimburse the FDIC for 80% of qualifying recoveries with respect to losses for which the FDIC reimbursed BPPR. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and BPPR reimbursement to the FDIC to last for ten years, and the loss sharing agreement applicable to commercial and other assets provides for FDIC loss sharing and BPPR reimbursement to the FDIC to last for five years, with additional recovery sharing for three years thereafter.

In June 2020, approximately ten years following the acquisition date, BPPR may be required to make a payment to the FDIC in the event that losses on covered assets under the loss sharing agreements have been less than originally

estimated as determined pursuant to a formula established under the agreements that is described in Note 2 to the accompanying consolidated financial statements.

The FDIC has certain rights to withhold loss sharing payments if BPPR does not perform its obligations under the loss sharing agreements in accordance with their terms and to withdraw the loss share protection if certain significant transactions are effected without FDIC consent.

Covered loans under loss sharing agreements with the FDIC are reported in loans exclusive of the estimated FDIC loss share indemnification asset. The covered loans acquired in the Westernbank transaction are, and will continue to be, reviewed for collectability. Refer to the Critical Accounting Policies / Estimates section of this MD&A for the Corporation’s accounting policy on acquired loans and related indemnification assets.

As part of the consideration for the transaction, the FDIC received an equity appreciation instrument in which BPPR agreed to make a cash payment to the holder thereof equal to the product of (a) 50 million and (b) the amount by which the average volume weighted price of the Corporation’s common stock over the two NASDAQ trading days immediately prior to the date on which the equity appreciation instrument is exercised exceeds $3.43 (Popular, Inc.’s 20-day trailing average common stock price on April 27, 2010). The equity appreciation instrument is exercisable by the holder thereof, in whole or in part, up to May 7, 2011. As of April 30, 2010, the fair value of the equity appreciation instrument was estimated at $52.5 million, compared with $17.5 million as of September 30, 2010. The equity appreciation instrument is recorded as a liability and any subsequent changes in its estimated fair value are recognized in earnings, adding volatility to the Corporation’s results of operations.

SUBSEQUENT EVENTS

REGULATORY REFORM

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act implements sweeping changes in the regulation of financial institutions and will fundamentally change the system of oversight described under “Item 1. Business—Regulation and Supervision” in our Annual Report on Form 10-K for the year ended December 31, 2009. The implications for our business practices, the regulatory and competitive environment in which we operate and our financial performance will depend to a large extent on the content of required future rulemaking by the Federal Reserve Board, the SEC and other agencies under the Dodd-Frank Act, as well as the development of market practices and structures under the regime established by the legislation. Among the numerous provisions of the Dodd-Frank Act that could have an effect on us are:

•

Heightened supervision of systemically important financial institutions and financial market utilities. The Dodd-Frank Act creates a new systemic risk oversight body, the Financial Stability Oversight Council, that will, among other things, make recommendations to the Federal Reserve Board as to supervisory requirements and prudential standards applicable to systemically important financial institutions and entities that are designated as “financial market utilities” (defined to include persons that manage or operate a multilateral system for the purpose of transferring, clearing or settling payments, securities or other transactions among financial institutions, including repurchase agreements). The legislation will also subject these institutions to heightened risk-based capital, leverage, liquidity and risk-management requirements, including periodic stress tests, as well as limitations on credit exposures.

	•		Increased fees to banking regulators. The Dodd-Frank Act requires the Federal Reserve Board to assess fees against large banking entities such as us to cover the cost of examining and supervising these entities. The FDIC will also collect fees from entities it examines to cover the cost of the examination. In addition, the FDIC is required to amend its regulations regarding the assessment for federal deposit insurance to base such assessments on the average total consolidated assets of the insured depository institution (rather than on the amount of its deposits) during the assessment period, less the average tangible equity of the institution during the assessment period. The Dodd-Frank Act also eliminates the ceiling on the size of the Deposit Insurance Fund (currently 1.5% of estimated insured deposits), and raises the statutorily required floor for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, or a comparable percentage of the revised assessment base required by the Act. These provisions generally will require an increase in the level of assessments for institutions such as the Corporation with assets exceeding $10 billion.

	•		Increased capital requirements. The “Collins Amendment” provisions of the Dodd-Frank Act will subject us at a company-wide level to the same leverage and risk-based capital requirements that apply to depository institutions specifically, and direct banking regulators to develop enhanced capital requirements. In addition, these provisions will exclude trust preferred securities and cumulative preferred stock from Tier 1 capital, subject to phase-out from Tier 1 qualification for securities issued before May 19, 2010, with the phase-out commencing on January 1, 2013 and to be implemented “incrementally” over a three-year period commencing on that date. Debt or equity instruments issued to the Federal government or any agency before the end of the Treasury’s authority to invest via TARP on October 4, 2010, are exempt from the Collins Amendment. A number of other governments and regulators, including the U.S. Treasury and the Basel Committee on Banking Supervision, have also called for increased capital requirements and increased quality of capital.

	•		Interest on deposits . The Dodd-Frank Act repeals the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

	•		Derivatives regulation . The Dodd-Frank Act contains provisions designed to increase transparency in over-the-counter derivatives markets by requiring that all “swaps” (except those with non-financial end users) be executed and cleared through regulated facilities. In addition, the “derivatives push-out” provisions of the Dodd-Frank Act will essentially prevent us from conducting significant swaps-related activities through the Corporation or another insured depository institution subsidiary, subject to exceptions for certain interest rate and currency swaps and for hedging or risk mitigation activities directly related to the bank’s business. These activities may be conducted elsewhere within the Corporation, subject to compliance with Sections 23A and 23B of the Federal Reserve Act and any other requirements imposed by the SEC, CFTC or Federal Reserve Board.

	•		Increased costs for consumer lending activities . The Dodd-Frank Act includes a number of provisions that may reduce the revenues generated by, or increase the cost of conducting, our consumer lending businesses. These include provisions which: (1) amend the Truth-in-Lending Act with respect to mortgage originations, including originator compensation, minimum repayment standards and prepayment considerations; (2) restrict variable-rate lending by requiring the borrower’s ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and (3) direct the Federal Reserve Board to issue rules which are expected to limit debit card interchange fees.

	•		Executive compensation. The Dodd-Frank Act requires the SEC, the Federal Reserve Board and other agencies to jointly issue rules requiring enhanced reporting and regulation of incentive-based compensation structures at regulated entities, including bank holding companies, banks, registered broker-dealers and registered investment advisors. In addition, the Federal Reserve Board has issued guidance designed to ensure that incentive compensation at banking institutions does not encourage excessive risk-taking.

	•		Transactions with affiliates. The Dodd-Frank Act significantly expands the coverage and scope of the regulations that limit affiliate transactions within a banking organization, including coverage of the credit

			exposure on derivative transactions, repurchase and reverse repurchase agreements, securities borrowing and lending transactions and transactions with sponsored hedge funds and private equity funds.

	•		Expanded standards of care. The Dodd-Frank Act provides for expanded standards of care by market participants in dealing with clients and customers, including by providing the SEC with authority to adopt rules establishing fiduciary duties for broker-dealers and directing the SEC to examine and improve sales practices and disclosure by broker-dealers and investment advisers.

The specific impact of the Dodd-Frank Act on our businesses and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. We anticipate that the process of rulemaking and the development of related market practices and structures will take several years. Although we cannot predict how regulatory implementation of the Dodd-Frank Act will occur, the related findings of various regulatory and commission studies, the interpretations issued as part of the rulemaking process and the final regulations that are issued with respect to various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices, and could expose us to additional costs (including increased compliance costs). These changes may also require us to invest significant management attention and resources to make any necessary changes.

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

FASB Accounting Standards Update 2009-16, Transfers and Servicing (Accounting Standards Codification (“ASC”) Topic 860) — Accounting for Transfers of Financial Assets (“ASU 2009-16”)

ASU 2009-16 amends previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special-purpose entity, removes the exception for guaranteed mortgage securitizations when a transferor has not surrendered control over the transferred financial assets, changes the requirements for derecognizing financial assets, and includes additional disclosures requiring more information about transfers of financial assets in which entities have continuing exposure to the risks related to the transferred financial assets. Among the most significant amendments and additions to this guidance are changes to the conditions for sales of financial assets which objective is to determine whether a transferor and its consolidated affiliates included in the financial statements have surrendered control over transferred financial assets or third-party beneficial interests, and the addition of the meaning of the term participating interest which represents a proportionate (pro rata) ownership interest in an entire financial asset. The requirements for sale accounting must be applied only to a financial asset in its entirety, a pool of financial assets in its entirety, or participating interests as defined in ASC paragraph 860-10-40-6A. This guidance has been applied as of the beginning of the first annual reporting period that began after November 15, 2009, for interim periods within that first annual reporting period and will be applied for interim and annual reporting periods thereafter. Earlier application was prohibited. The recognition and measurement provisions have been applied to transfers that have occurred on or after the effective date. On and after the effective date, existing qualifying special-purpose entities have been evaluated for consolidation in accordance with the applicable consolidation guidance in the Codification. The Corporation adopted this new authoritative accounting guidance effective January 1, 2010. The Corporation evaluated transfers of financial assets executed during the nine months ended September 30, 2010 pursuant to the new accounting guidance, principally consisting of guaranteed mortgage securitizations (Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”) mortgage-backed securities), and determined that the adoption of ASU 2009-16 did not have a significant impact on the Corporation’s accounting for such transactions or results of operations or financial condition for such period.

100

Refer to Note 12 to the consolidated financial statements for disclosures on transfers of financial assets and servicing assets retained as part of guaranteed mortgage securitizations.

101

FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures about Fair Value Measurements (“ASU 2010-06”)

FASB Accounting Standards Update 2010-11, Derivatives and Hedging (ASC Topic 815): Scope Exception Related to Embedded Credit Derivatives (“ASU 2010-11”)

FASB Accounting Standards Update 2010-18, Receivables (ASC Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset (“ASU 2010-18”)

The amendments in ASU 2010-18, issued in April 2010, affect any entity that acquires loans subject to ASC Subtopic 310-30, that accounts for some or all of those loans within pools, and that subsequently modifies one or more of those loans after acquisition. ASC Subtopic 310-30 provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition. As a result of the amendments in ASU 2010-18, modifications of loans that are accounted for within a pool under ASC Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in ASU 2010-18 do not affect the accounting for loans under the scope of ASC Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under ASC Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The amendments in ASU 2010-18 are effective for modifications of loans accounted for within pools under ASC Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted. Upon initial adoption of the guidance in ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under ASC Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Corporation elected to early adopt the provisions of this statement, effective with the closing of the Westernbank FDIC-assisted transaction on April 30, 2010. As a result, the accounting for modified loans follows the guidelines of ASU 2010-18; however, the adoption of these provisions did not have a significant impact on the Corporation’s result of operations or financial position as of September 30, 2010.

102

FASB Accounting Standards Update 2010-20, Receivables (ASC Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”)

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to Fair Value Measurement of Financial Instruments, Loans and Allowance for Loan Losses, Income Taxes, Goodwill and Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2009 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2009 Annual Report for a summary of the Corporation’s significant accounting policies. As a result of the Westernbank FDIC-assisted transaction, during the quarter ended September 30, 2010, management determined to incorporate “Acquisition Accounting for Loans and Related Indemnification Asset” as part of the Corporation’s critical accounting policies / estimates due to the significance of the assets involved and significant judgment to various accounting, reporting and disclosure matters.

Acquisition Accounting for Loans and Related Indemnification Asset

Beginning in 2009, the Corporation accounts for its acquisitions under ASC Topic No. 805, Business Combinations , which requires the use of the purchase method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. These fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Because the FDIC has agreed to reimburse the Corporation for losses related to the acquired loans in the Westernbank FDIC-assisted transaction, an indemnification asset was recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The loss share indemnification asset on the acquisition date

103

reflects the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

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

Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into pools based on loans that had 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. Characteristics considered in pooling loans in the Westernbank FDIC-assisted transaction included loan type, interest rate type, accruing status, and amortization type. Once the pools are defined, the Corporation maintains the integrity of the pool of multiple loans accounted for as a single asset.

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

The FDIC loss share indemnification asset for loss share agreements is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. The indemnification asset is recognized on the same basis as the assets subject to loss share protection. As such, for covered loans accounted pursuant to ASC Subtopic 310-30, decreases in expected reimbursements will be recognized in income prospectively consistent with the approach taken to recognize increases in cash flows on covered loans. For covered loans accounted for under ASC Subtopic 310-20, as the loan discount recorded as of the acquisition date is accreted into income, a reversal of the corresponding indemnification asset is recorded as a reduction in non-interest income.

Increases in expected reimbursements will be recognized in income in the same period that the allowance for credit losses for the related loans is recognized.

104

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 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 condition. For any increases in cash flows expected to be collected, the Corporation adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

Loss assumptions used in the basis of the indemnified loans are consistent with the loss assumptions used to measure the indemnification asset. Fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the shared loss agreements. Upon the determination of an incurred loss, the loss share indemnification asset will be reduced by the amount owed by the FDIC. A corresponding claim receivable is recorded until cash is received from the FDIC.

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

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

Refer to Notes 2, 4 and 11 to the accompanying consolidated financial statements for further discussions on the Westernbank FDIC-assisted transaction and loans acquired.

Goodwill

105

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.

As of September 30, 2010, goodwill totaled $665 million. Note 14 to the consolidated financial statements provides an allocation of goodwill by business segment.

The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include:

	•		a selection of comparable publicly traded companies, based on nature of business, location and size;

	•		a selection of comparable acquisition and capital raising transactions;

	•		the discount rate applied to future earnings, based on an estimate of the cost of equity;

	•		the potential future earnings of the reporting unit; and

	•		the market growth and new business assumptions.

For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 8.42% to 23.24% for the 2010 analysis. The Ibbottson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (10-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary.

106

more meaningful measure of fair value considering the reporting unit’s financial performance and current market conditions. The Step 1 fair value for BPNA under both valuation approaches (market and DCF) was below the carrying amount of its equity book value as of the valuation date (July 31), requiring the completion of Step 2. In accordance with accounting standards, the Corporation performed a valuation of all assets and liabilities of BPNA, including any recognized and unrecognized intangible assets, to determine the fair value of BPNA’s net assets. To complete Step 2, the Corporation subtracted from BPNA’s Step 1 fair value the determined fair value of the net assets to arrive at the implied fair value of goodwill. The results of the Step 2 indicated that the implied fair value of goodwill exceeded the goodwill carrying value of $402 million at July 31, 2010, resulting in no goodwill impairment. The reduction in BPNA’s Step 1 fair value was offset by a reduction in the fair value of its net assets, resulting in an implied fair value of goodwill that exceeds the recorded book value of goodwill.

The analysis of the results for Step 2 indicates that the reduction in the fair value of the reporting unit was mainly attributed to the deteriorated fair value of the loan portfolios and not to the fair value of the reporting unit as a going concern entity. The current negative performance of the reporting unit is principally related to deteriorated credit quality in its loan portfolio, which agrees with the results of the Step 2 analysis. The fair value determined for BPNA’s loan portfolio in the July 31, 2010 annual test represented a discount of 23.6%, compared with 20.2% at December 31, 2009. The discount is mainly attributed to market participant’s expected rate of returns, which affected the market discount on the commercial and construction loan portfolios and deteriorated credit quality of the consumer and mortgage loan portfolios of BPNA. Refer to the Reportable Segments Results section of this MD&A, which provides highlights of BPNA’s reportable segment financial performance for the quarter and nine-month periods ended September 30, 2010. BPNA’s provision for loan losses, as a stand-alone legal entity, which is the reporting unit level used for the goodwill impairment analysis, amounted to $226 million for nine months ended September 30, 2010, which represented 144% of BPNA legal entity’s net loss of $157 million for that period.

For the BPPR reporting unit, had the average reporting unit estimated fair value calculated in Step 1 using all valuation methodologies been approximately 16% lower, there would still be no requirement to perform a Step 2 analysis, thus there would be no indication of impairment on the goodwill recorded in BPPR at July 31, 2010. For the BPNA reporting unit, had the estimated implied fair value of goodwill calculated in Step 2 been approximately 63% lower, there would still be no impairment of the goodwill recorded in BPNA at July 31, 2010. The goodwill balance of BPPR and BPNA, as legal entities, represented approximately 91% of the Corporation’s total goodwill balance as of the July 31, 2010 valuation date.

107

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables B and C for the quarter and nine months ended September 30, 2010 as compared with the same periods in 2009, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include the 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. Assets held by the Corporation’s international banking entities, which previously were tax exempt under Puerto Rico law, have a temporary 5% tax rate. 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 at each quarter, in the subsidiaries that have the benefit. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law. Under this law, the exempt interest can be deducted up to the amount of taxable income. BPPR’s current tax position changed in the third quarter of 2010 and the benefit previously obtained from exempt investments is, for now, not applicable, therefore no adjustments were made to BPPR’s net interest income since its current tax is the marginal tax rate.

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 quarter and nine months ended September 30, 2010 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC 310-20 and ASC 310-30, of $5.9 million and $14.6 million, respectively, related to those items, compared to a favorable impact of $4.8 million and $17.1 million for the quarter and nine months ended September 30, 2009, respectively. The discount accretion on covered loans accounted for under ASC 310-20 and 310-30, as described below, was $78.5 million and $56.5 million, respectively for the quarter ended September 30, 2010.

108

TABLE B

Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations

Quarter ended September 30,


																									Variance
Average Volume								Average Yields / Costs										Interest							Attributable to
2010				2009	Variance			2010			2009			Variance				2010		2009		Variance			Rate			Volume

($ in millions)																		(In thousands)
$	1,560		$	936	$	624			0.35	%		0.64	%		(0.29	%)	Money market investments	$	1,391	$	1,510		($119	)		($310	)	$	191
	6,139			7,551		(1,412	)		3.74			4.53			(0.79	)	Investment securities		57,393		85,459		(28,066	)		(12,900	)		(15,166	)
	500			517		(17	)		6.56			6.79			(0.23	)	Trading securities		8,262		8,857		(595	)		(300	)		(295	)

	8,199			9,004		(805	)		3.27			4.25			(0.98	)	Total money market, investment and trading securities		67,046		95,826		(28,780	)		(13,510	)		(15,270	)

																	Loans:
	12,955			15,034		(2,079	)		4.81			4.93			(0.12	)	Commercial		157,214		186,969		(29,755	)		(4,439	)		(25,316	)
	618			707		(89	)		8.74			8.29			0.45		Leasing		13,506		14,665		(1,159	)		762			(1,921	)
	4,627			4,443		184			6.02			6.35			(0.33	)	Mortgage		69,685		70,564		(879	)		(3,747	)		2,868
	3,814			4,269		(455	)		10.40			9.75			0.65		Consumer		99,946		104,597		(4,651	)		4,905			(9,556	)

	22,014			24,453		(2,439	)		6.15			6.13			0.02		Sub-total loans		340,351		376,795		(36,444	)		(2,519	)		(33,925	)
	4,036			—		4,036			14.33			—			14.33		Covered loans		145,560		—		145,560			—			145,560

	26,050			24,453		1,597			7.41			6.13			1.28		Total loans		485,911		376,795		109,116			(2,519	)		111,635

$	34,249			$33,457	$	792			6.42	%		5.62	%		0.80	%	Total earning assets	$	552,957	$	472,621	$	80,336			($16,029	)	$	96,365

																	Interest bearing deposits:
$	4,986			$4,768	$	218			0.80	%		1.02	%		(0.22	%)	NOW and money market*	$	10,047	$	12,284		($2,237	)		($2,748	)	$	511
	6,139			5,496		643			0.92			0.92			—		Savings		14,297		12,733		1,564			(59	)		1,623
	11,077			12,109		(1,032	)		2.22			3.08			(0.86	)	Time deposits		61,986		93,924		(31,938	)		(23,749	)		(8,189	)

	22,202			22,373		(171	)		1.54			2.11			(0.57	)	Total deposits		86,330		118,941		(32,611	)		(26,556	)		(6,055	)

	2,419			2,685		(266	)		2.45			2.39			0.06		Short-term borrowings		14,945		16,142		(1,197	)		548			(1,745	)
	6,309			2,676		3,633			3.94			6.37			(2.43	)	Medium and long-term debt		62,494		42,991		19,503			9,658			9,845

	30,930			27,734		3,196			2.10			2.55			(0.45	)	Total interest bearing liabilities		163,769		178,074		(14,305	)		(16,350	)		2,045
	4,908			4,309		599											Non-interest bearing demand deposits
	(1,589	)		1,414		(3,003	)										Other sources of funds

$	34,249			$33,457	$	792			1.90	%		2.11	%		(0.21	%)	Total source of funds

									4.52	%		3.51	%		1.01	%	Net interest margin

																	Net interest income on a taxable equivalent basis		389,188		294,547		94,641		$	321		$	94,320

									4.32	%		3.07	%		1.25	%	Net interest spread

																	Taxable equivalent adjustment		2,270		18,158		(15,888	)

																	Net interest income	$	386,918	$	276,389	$	110,529

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.


*		Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

The increase in net interest margin for the quarter ended September 30, 2010 compared with the same period in 2009 was driven mostly by:

•

$78.5 million discount accretion on covered loans acquired from the Westernbank FDIC-assisted transaction that are accounted for under ASC Subtopic 310-20 due to their revolving characteristics. Also, the discount accretion on covered loans accounted for under ASC Subtopic 310-30 amounted to $56.5 million for the quarter ended September 30, 2010. This impact is included in the line item “Covered loans” in Table A.

109

	•		a decrease in deposit costs associated to both a low interest rate scenario and management actions to reduce deposits costs, principally in certificates of deposits and money market accounts, as well as lower costs on brokered certificates of deposit; and

	•		higher yield in consumer loans mainly reflected in the credit cards portfolio, in part due to revisions made to the spread charged over the prime rate for different risk categories.

The above variances were partially offset by the following factors which affected negatively the Corporation’s net interest margin:

	•		the excess liquidity from the capital issuance described in the Overview section, the proceeds of which were temporarily invested in money market investments with the Federal Reserve earning a very low interest rate, which reduced the yield on earning assets;

	•		the FDIC loss share indemnification asset of $3.3 billion, which is a non-interest earning asset being funded with interest bearing liabilities, mainly through the FDIC note at a 2.50% annual fixed interest rate. The accretion or amortization of the FDIC loss share indemnification asset goes through non-interest income;

	•		the conversion of $935 million of Series C preferred stock to trust preferred securities in August 2009 contributed to an increase of $10.5 million in interest expense for the quarter ended September 30, 2010, when compared with the same quarter in the previous year (these payments were characterized as dividends prior to the exchange). This negative effect was partially offset by the conversion of certain trust preferred securities into common stock, also in August 2009, which reduced the quarterly interest expense by $1.7 million; and

	•		increase in non-performing loans throughout the different loan portfolios, which balances are depicted in Table K of this MD&A.

Most loan categories decreased in volume, especially commercial and construction loan portfolios, due to lower origination activity and loan charge-offs. The consumer loan portfolio shows a decrease due to the slowdown in the auto and consumer loan origination activity in Puerto Rico, and the run-off of E-LOAN’s home equity lines of credit (“HELOCs”) and closed-end second mortgages. On the positive side, the covered loans acquired in the Westernbank FDIC-assisted transaction, that contributed $4.0 billion in average loan volume during the third quarter of 2010, net of fair value adjustments, mitigated the decrease in the volume of earning assets. The covered loans, which are segregated in Table B, contributed $145.6 million to the Corporation’s interest income during the quarter ended September 30, 2010. Investment securities decreased in average volume as a result of maturities and prepayments of mortgage-related investment securities, which funds were not reinvested due in part to deleveraging strategies, and to the sale of certain investment securities during the quarter ended September 30, 2010, which resulted in a net gain of $3.7 million before taxes for the quarter.

Also affecting net interest income is the increase in the volume of medium and long-term debt, particularly the note payable issued to the FDIC. Despite the deposits acquired on the FDIC-assisted transaction, the Corporation’s deposit volume has declined, mainly time deposits, including brokered certificates of deposits, due to deleveraging in the U.S. mainland operations, which was driven by a reduction in the earning assets funded by such deposits.

As shown in Table C, net interest income on a taxable equivalent basis for the nine months ended September 30, 2010 had a positive variance of 47 basis points mostly due to the interest income on covered loans and a lower cost of funds, mainly deposits associated to both a lower interest rate scenario and management actions to reduce the cost of deposits, partially offset by the decrease in volume of earning assets, mainly commercial loans. The decrease in the taxable equivalent adjustment for the nine months ended September 30, 2010, compared with the previous year, relates to the fact that there were no benefits associated to BPPR’s tax-exempt assets during the nine months ended September 30, 2010 as explained above.

110

TABLE C

Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations

Nine months ended September 30,


																									Variance
Average Volume								Average Yields / Costs										Interest							Attributable to
2010				2009	Variance			2010			2009			Variance				2010		2009		Variance			Rate			Volume

($ in millions)																		(In thousands)
$	1,558		$	1,194	$	364			0.37	%		0.79	%		(0.42	%)	Money market investments	$	4,326	$	7,027		($2,701	)		($2,476	)		($225	)
	6,541			7,578		(1,037	)		3.78			4.66			(0.88	)	Investment securities		185,436		264,553		(79,117	)		(44,078	)		(35,039	)
	462			660		(198	)		6.81			6.75			0.06		Trading securities		23,556		33,362		(9,806	)		288			(10,094	)

	8,561			9,432		(871	)		3.32			4.31			(0.99	)	Total money market, investments and trading securities		213,318		304,942		(91,624	)		(46,266	)		(45,358	)

																	Loans:
	13,551			15,395		(1,844	)		4.84			4.97			(0.13	)	Commercial		490,346		572,368		(82,022	)		(21,568	)		(60,454	)
	638			798		(160	)		8.71			8.37			0.34		Leasing		41,705		50,041		(8,336	)		2,007			(10,343	)
	4,588			4,491		97			6.02			6.58			(0.56	)	Mortgage		207,139		221,490		(14,351	)		(19,054	)		4,703
	3,898			4,418		(520	)		10.34			9.88			0.46		Consumer		301,401		326,904		(25,503	)		7,300			(32,803	)

	22,675			25,102		(2,427	)		6.13			6.23			(0.10	)	Sub-total loans		1,040,591		1,170,803		(130,212	)		(31,315	)		(98,897	)
	2,276			—		2,276			10.99			—			10.99		Covered loans		187,279		—		187,279			—			187,279

	24,951			25,102		(151	)		6.58			6.23			0.35		Total loans		1,227,870		1,170,803		57,067			(31,315	)		88,382

$	33,512			$34,534		($1,022	)		5.74	%		5.71	%		0.03	%	Total earning assets	$	1,441,188	$	1,475,745		($34,557	)		($77,581	)	$	43,024

																	Interest bearing deposits:
$	4,998			$4,809	$	189			0.82	%		1.15	%		(0.33	%)	NOW and money market*	$	30,628	$	41,437		($10,809	)		($11,998	)	$	1,189
	5,881			5,545		336			0.92			0.99			(0.07	)	Savings		40,273		40,979		(706	)		(3,079	)		2,373
	10,967			12,405		(1,438	)		2.43			3.37			(0.94	)	Time deposits		199,018		313,016		(113,998	)		(78,777	)		(35,221	)

	21,846			22,759		(913	)		1.65			2.32			(0.67	)	Total deposits		269,919		395,432		(125,513	)		(93,854	)		(31,659	)

	2,414			2,976		(562	)		2.53			2.40			0.13		Short-term borrowings		45,756		53,476		(7,720	)		2,168			(9,888	)
	5,109			3,046		2,063			4.82			5.88			(1.06	)	Medium and long-term debt		184,117		133,858		50,259			39,692			10,567

	29,369			28,781		588			2.27			2.71			(0.44	)	Total interest bearing liabilities		499,792		582,766		(82,974	)		(51,994	)		(30,980	)
	4,638			4,269		369											Non-interest bearing demand deposits
	(495	)		1,484		(1,979	)										Other sources of funds

$	33,512			$34,534		($1,022	)		1.99	%		2.26	%		(0.27	%)	Total source of funds

									3.75	%		3.45	%		0.30	%	Net interest margin

																	Net interest income on a taxable equivalent basis		941,396		892,979		48,417			($25,587	)	$	74,004

									3.47	%		3.00	%		0.47	%	Net interest spread

																	Taxable equivalent adjustment		6,585		61,044		(54,459	)

																	Net interest income	$	934,811	$	831,935	$	102,876

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.


*		Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

111

PROVISION FOR LOAN LOSSES

The provision for loan losses totaled $215.0 million, or 87% of net charge-offs, for the quarter ended September 30, 2010, compared with $331.1 million, or 123% of net charge-offs, for the third quarter of 2009. For the nine months ended September 30, 2010, the provision for loan losses totaled $657.5 million, or 97% of net charge-offs, compared with $1.1 billion, or 145% of net charge-offs, for the nine months ended September 30, 2009.

As indicated in the Overview section, the decrease in the provision for loan losses for the quarter and nine months ended September 30, 2010, as compared with the quarter and nine months ended September 30, 2009, was mainly the result of higher amounts provisioned during 2009, particularly for commercial and construction loans, U.S. mainland non-conventional residential mortgage loans and home equity lines of credit, combined with specific reserves recorded for loans considered impaired. The deteriorated conditions of the Puerto Rico and U.S. economies that prevailed during 2009, declines in property values, and the slowdown in consumer spending, negatively impacted the Corporation’s net charge-offs and non-performing assets levels, thus requiring substantial reserve increases in 2009. Since September 30, 2009, loans held-in-portfolio, excluding the covered loans of the Westernbank FDIC-assisted transaction, decreased by approximately $2.3 billion, particularly commercial, construction and consumer loan portfolios. This decrease in the loan portfolio also contributed to the lower level of provision for loan losses for the third quarter of 2010.

As indicated previously, the covered loans were recognized at fair value upon acquisition. Based on management’s analysis, there was no need to establish an allowance for loan losses for the covered loans from the acquisition date to September 30, 2010. Refer to the Credit Risk Management and Loan Quality section of this MD&A for a discussion on net charge-offs, non-performing assets and the allowance for loan losses.

NON-INTEREST INCOME

Refer to Table D for a breakdown on non-interest income by major categories for the quarters and nine months ended September 30, 2010 and 2009.

TABLE D

Non-Interest Income


	Quarters ended September 30,									Nine months ended September 30,
(In thousands)	2010			2009			Variance			2010			2009			Variance

Service charges on deposit accounts	$	48,608		$	54,208			($5,600	)	$	149,865		$	161,412			($11,547	)

Other service fees:
Debit card fees		27,711			26,986			725			83,480			80,867			2,613
Credit card fees and discounts		24,382			23,497			885			73,692			70,951			2,741
Processing fees		15,258			13,638			1,620			43,390			40,773			2,617
Insurance fees		11,855			11,463			392			34,929			36,014			(1,085	)
Sale and administration of investment products		11,379			8,181			3,198			28,791			25,204			3,587
Mortgage servicing fees, net of fair value adjustments		1,306			4,869			(3,563	)		15,487			18,301			(2,814	)
Trust fees		3,534			3,260			274			10,168			9,364			804
Other fees		5,397			5,720			(323	)		15,930			17,110			(1,180	)

Total other service fees		100,822			97,614			3,208			305,867			298,584			7,283

Net gain (loss) on sale and valuation adjustments of investment securities		3,732			(9,059	)		12,791			4,210			220,792			(216,582	)
Trading account profit		5,860			7,579			(1,719	)		8,101			31,241			(23,140	)
Loss on sale of loans, including adjustments to indemnity reserves, and valuation adjustments on loans held-for-sale		(1,573	)		(8,728	)		7,155			(23,106	)		(35,994	)		12,888
FDIC loss share expense		(36,936	)		—			(36,936	)		(13,602	)		—			(13,602	)
Fair value change in equity appreciation instrument		10,641			—			10,641			35,035			—			35,035
Gain on sale of processing and technology business		640,802			—			640,802			640,802			—			640,802
Other operating income		24,568			18,430			6,138			63,076			44,579			18,497

Total non-interest income	$	796,524		$	160,044		$	636,480		$	1,170,248		$	720,614		$	449,634

112

The increase in non-interest income for the quarter and nine months ended September 30, 2010, when compared with the same periods of the previous year, was principally due to the gain of $640.8 million, before tax and transaction costs, recognized on the sale of the 51% ownership interest in the Corporation’s processing and technology business, EVERTEC.

Also impacting the favorable variance in non-interest income for the quarter ended September 30, 2010, when compared with the same quarter of the previous year, were higher gains on sales of investment securities by $3.5 million. Also, results for the quarter ended September 30, 2009 included $9.3 million in write-downs on equity securities available-for-sale and tax credit investments classified as other investment securities in the consolidated statement of condition.

Moreover, there were $10.6 million and $35.0 million in favorable changes in the fair value of the equity appreciation instrument issued to the FDIC during the quarter and nine months ended September 30, 2010, respectively, due to a decline in value in the Corporation’s common stock since the equity appreciation instrument was issued to September 30, 2010, a reduction in the assumption of volatility related to the Corporation’s stock price and a shorter period remaining for the expiration of the instrument.

In addition, there were lower losses on sales of loans, net of lower of cost of market valuation adjustment on loans held-for-sale, by $7.2 million and $12.9 million for the quarter and nine-month periods ended September 30, 2010, respectively, compared with the same periods in 2009. Contributing to the favorable variance for the quarter were higher gains of $3.0 million recorded by the Corporation’s mortgage banking business related to residential mortgage loans securitized and $8.8 million in lower indemnity reserve adjustments in the BPNA reportable segment and PFH, partially offset by higher indemnity reserve adjustments in the BPPR reportable segment by $4.2 million. Contributing to the favorable variance for the nine-month period were higher gains of $13.2 million recorded by the Corporation’s mortgage banking business related to residential mortgage loans securitized, $35.1 million in lower indemnity reserve adjustments in the BPNA reportable segment and PFH, partially offset by higher indemnity reserve adjustments in the BPPR reportable segment by $31.9 million.

The increase in provisioning for the indemnity reserve in the BPPR reportable segment for the quarter and nine months ended September 30, 2010 was associated to mortgage loans that had been previously sold with credit recourse by the BPPR reportable segment. This indemnity reserve adjustment was driven by increased foreclosure rates, repurchases, delinquency trends and loss severity levels experienced during 2010. The decrease in provisioning for the indemnity reserves at the BPNA reportable segment corresponded principally to lower volume of disbursements, reduced loss severities and the expiration of indemnification terms under standard representation and warranty arrangements, including a reduction of $18.8 million related to loans previously sold by E-LOAN and $16.1 million related to loans sold by Popular Equipment Finance during 2009.

These favorable variances were partially offset by $36.9 million and $13.6 million in losses in the caption of FDIC loss share expense for the quarter and nine months ended September 30, 2010, respectively. These losses resulted from a reduction in the indemnification asset by $71.6 million resulting principally from the Corporation’s application of reciprocal accounting for covered loans accounted for under ASC Subtopic 310-20 due to their revolving characteristics, for which 80% of the losses are covered by the FDIC under loss share agreements. By accreting into interest income the discount on accruing loans accounted pursuant to ASC Subtopic 310-20, the carrying basis increases. With reciprocal accounting, the Corporation was required to reduce the indemnification asset by approximately 80% of the loan discount accreted, and thus record a reduction in non-interest income. The above $71.6 million decrease was partially offset by higher accretion of the indemnification asset, which amounted to $34.7 million for the quarter ended September 30, 2010 and $58.0 million for the period from April 30, 2010 through September 30, 2010. The time value of money incorporated into the present value computation of the indemnification asset is accreted into earnings over the life of the loss sharing agreements.

In addition, service charges on deposit accounts for the quarter and nine-month period ended September 30, 2010 decreased by $5.6 million and $11.5 million, respectively, when compared with the same periods in 2009, mostly in the BPNA reportable segment related to lower non-sufficient funds fees and reduced fees from money services clients.

113

Also offsetting the favorable variances during the nine-month period ended September 30, 2010 were $182.7 million in gains derived from the sale of $3.4 billion in U.S. Treasury notes and U.S. agencies during the first quarter of 2009 by BPPR and $52.3 million in gains from the sale of equity securities in the second quarter of 2009 by BPPR and EVERTEC. The impact of these 2009 events, were partially offset by $15.8 million in write-downs on equity securities available-for-sale and tax credit investments classified as other investment securities during the nine-month period ended September 30, 2009.

The decrease in trading account profit by $23.1 million for the nine months ended September 30, 2010, when compared with the same period of the previous year, was mostly related to $43.7 million in lower realized gains as a result of a lower volume of mortgage-backed securities sold, partially offset by $16.4 million in higher unrealized gains of outstanding mortgage-backed securities.

OPERATING EXPENSES

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

TABLE E

Operating Expenses


	Quarters ended September 30,								Nine months ended September 30,
(In thousands)	2010		2009			Variance			2010		2009			Variance

Personnel costs:
Salaries	$	116,426	$	102,822		$	13,604		$	321,423	$	315,224		$	6,199
Pension and other benefits		24,779		27,725			(2,946	)		78,746		96,820			(18,074	)

Total personnel costs		141,205		130,547			10,658			400,169		412,044			(11,875	)
Net occupancy expenses		28,425		28,269			156			86,359		80,734			5,625
Equipment expenses		25,432		24,983			449			74,231		76,289			(2,058	)
Other taxes		13,872		13,109			763			38,635		39,369			(734	)
Professional fees		48,224		28,694			19,530			109,498		80,643			28,855
Communications		9,514		11,902			(2,388	)		31,628		36,115			(4,487	)
Business promotion		11,260		8,905			2,355			29,759		26,761			2,998
Printing and supplies		2,876		2,857			19			7,898		8,664			(766	)
FDIC deposit insurance		17,183		16,506			677			49,894		61,954			(12,060	)
Loss (gain) on early extinguishment of debt		25,448		(79,304	)		104,752			26,426		(79,304	)		105,730
Other operating expenses		45,697		31,753			13,944			119,464		104,955			14,509
Amortization of intangibles		2,411		2,379			32			6,915		7,218			(303	)

Total operating expenses	$	371,547	$	220,600		$	150,947		$	980,876	$	855,442		$	125,434

Other operating expenses for the quarter and nine months ended included a $15.8 million prepayment penalty on the repurchase and cancellation of $175 million in term notes in July 2010. Also, the Corporation incurred $9.7 million in prepayment penalties during the quarter ended September 30, 2010 on the cancellation of $180 million of FHLB advances and $54 million in public fund certificates of deposit as part of BPNA’s deployment of excess liquidity and as part of a strategy to increase margin in future periods. The third quarter of 2009 included a gain on extinguishment of debt of $79.3 million, principally derived from the exchange of trust preferred securities for common stock.

Also, the increase in operating expenses was due to approximately $24.6 million in transaction costs related to the EVERTEC transaction.

Furthermore, salaries from full time equivalent employees retained from Westernbank operations, as discussed in the Overview section, as well as headcount retained on a temporary basis, was the principal contributor to the increase in personnel costs for the quarter September 30, 2010 when compared with the same quarter in 2009. The decrease in personnel costs for the nine months ended September 30, 2010, compared with the same period in 2009 was due to a reduction in salaries in the BPNA reportable segment due to restructuring and staff reductions during 2009 and a decrease in pension costs due to the plan freeze, partially offset by the salaries from Westernbank employees. Refer to Note 25 to the consolidated financial statements for a breakdown of the pension and postretirement costs.

114

INCOME TAXES

Income tax expense amounted to $102.4 million for the quarter ended September 30, 2010, compared with income tax expense of $6.3 million for the same quarter of 2009. The increase in income tax expense was primarily due to higher income before tax on the Puerto Rico operations, lower exempt interest income net of disallowance of expenses attributed to such exempt income and an increase in non-deductible interest expense related to the Trust Preferred issued to the US Treasury in August 2009, as to which the Corporation agreed with the US Treasury not to deduct interest payments for tax purposes. These trust preferred securities are described in Note 17 to the consolidated financial statements. This increase was partially offset by an increase in income subject to preferential tax rate mainly driven by the gain on the sale of EVERTEC.

The components of income tax for the quarter ended September 30, 2010 and 2009 were as follows:


	Quarter ended
	September 30, 2010						September 30, 2009
				% of pre-tax						% of pre-tax
(In thousands)	Amount			income			Amount			income

Computed income tax at statutory rates	$	244,423			40.95	%		($47,186	)		40.95	%
Net reversal (benefit) of net tax exempt interest income		6,317			1.06			(11,895	)		10.32
Effect of income subject to preferential tax rate		(149,325	)		(25.02	)		(25	)		0.02
Deferred tax asset valuation allowance		9,746			1.63			58,480			(50.75	)
Non-deductible expenses		7,076			1.19			2,788			(2.42	)
Difference in tax rates due to multiple jurisdictions		97			0.01			8,579			(7.44	)
State taxes and others		(15,946	)		(2.67	)		(4,410	)		3.83

Income tax expense	$	102,388			17.15	%	$	6,331			(5.49	%)

Although the Corporation reported a net income before income tax of $596.9 million, it recognized an income tax expense for the quarter ended September 30, 2010 of $102.4 million. This is in part the result of calculating the tax on the sale of EVERTEC at a preferential tax rate.

Income tax expense amounted to $113.1 million for the nine-month period ended September 30, 2010, compared with an income tax benefit of $15.2 million for the same period in 2009. The increase was principally due to higher income before tax in the Puerto Rico operations, lower net exempt interest income and an increase in non-deductible interest expense related to the trust preferred securities issued to the U.S. Treasury as compared to the same period of 2009.

Also, in 2009 a temporary five-percent special surtax was imposed on all corporations doing business in Puerto Rico, resulting in an income tax benefit as a consequence of adjusting the deferred tax assets to reflect the increase in tax rate.

115

The components of income tax for the nine months ended September 30, 2010 and 2009 were as follows:


	Nine months ended
	September 30, 2010						September 30, 2009
				% of pre-tax						% of pre-tax
(In thousands)	Amount			income			Amount			income

Computed income tax at statutory rates	$	191,118			40.95	%		($145,752	)		40.95	%
Benefits of net tax exempt interest income		(5,828	)		(1.25	)		(38,751	)		10.89
Effect of income subject to preferential tax rate		(150,431	)		(32.23	)		(59,298	)		16.66
Deferred tax asset valuation allowance		71,582			15.34			203,709			(57.23	)
Non-deductible expenses		20,958			4.48			2,788			(0.79	)
Difference in tax rates due to multiple jurisdictions		6,371			1.37			31,252			(8.78	)
State taxes and others		(20,669	)		(4.43	)		(9,157	)		2.57

Income tax expense (benefit)	$	113,101			24.23	%		($15,209	)		4.27	%

Refer to Note 27 to the consolidated financial statements for a breakdown of the Corporation’s deferred tax assets as of September 30, 2010.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America (as defined in Note 29 to the consolidated financial statements). A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the reportable segments.

As a result of the sale of a 51% interest in EVERTEC described in the Overview section, the Corporation no longer presents EVERTEC as a reportable segment and therefore, historical financial information for EVERTEC, including the merchant acquiring business that was part of the BPPR reportable segment, has been reclassified under Corporate for all periods discussed.

For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 29 to the consolidated financial statements.

The Corporate group had net income of $496.5 million for the third quarter of 2010, compared with net income of $65.9 million for the quarter ended September 30, 2009, and net income of $472.6 million for the nine months ended September 30, 2010 compared with $53.1 million for the same period in the previous year. The variance in the year-to-date results for the corporate group was principally due to:

	•		higher non-interest income by $658.9 million, principally due to the gain on sale of the processing and technology business in the third quarter of 2010;

	•		higher operating expenses by $119.6 million which were impacted by $15.8 million in losses on early extinguishment of debt related to the cancellation of $175 million in medium term notes of the bank holding company and $24.6 million in transaction costs related to the EVERTEC sale during the third quarter of 2010, compared with gains of $78.3 million associated to the extinguishment of junior subordinated debentures during the third quarter of 2009 as part of the exchange of trust preferred securities for shares of common stock of the Corporation; and

	•		higher income tax expense by $89.1 million principally due to higher taxable income resulting from the gain on the sale of the processing and technology business.

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 reported net income of $12.5 million for the quarter ended September 30, 2010, compared with a net loss of $13.5 million for the same quarter of 2009. The principal factors that contributed to the variance in the financial results for the third quarter of 2010, when compared with the same

116

quarter of the previous year, included the following:

	•		higher net interest income by $118.8 million, or 55%, mainly as a result of the $78.5 million discount accretion on covered loans acquired from the Westernbank FDIC-assisted transaction that are accounted for under ASC Subtopic 310-20 due to their revolving characteristics and the $56.5 million discount accretion on covered loans accounted for under ASC Subtopic 310-30. The BPPR reportable segment’s net interest yield was adversely impacted by funding the FDIC loss share indemnification asset, a non-interest earning asset, with interest bearing liabilities, mainly through the note issued to the FDIC. The BPPR reportable segment had a net interest margin of 5.32% for the quarter ended September 30, 2010, compared with 3.88% for the same quarter in 2009;

	•		higher provision for loan losses by $28.8 million, or 19%. The provision for loan losses represented 120% of net charge-offs for the third quarter of 2010, compared with 109% of net charge-offs for the same quarter of 2009. The ratio of allowance for loan losses to loans held-in-portfolio, excluding covered loans, for the BPPR reportable segment was 4.89% as of September 30, 2010, when compared with 4.31% as of the same date in 2009. Non-performing loans, excluding covered loans, in this reportable segment totaled $1.7 billion as of September 30, 2010, compared with $1.4 billion at the same date in 2009, mainly related to construction and mortgage loans. Refer to the Credit Risk Management and Loan Quality section of this MD&A for certain credit quality indicators corresponding to the BPPR reportable segment;

	•		lower non-interest income by $16.1 million, or 15%, mainly due to $36.9 million in losses in the caption of FDIC loss share expense, partially offset by $10.6 million in favorable changes in the fair value of the equity appreciation instrument issued to the FDIC, which is explained in the Non-Interest Income section of this MD&A;

	•		higher operating expenses by $34.9 million, or 19%, mainly due to higher personnel costs, professional fees and other operating expenses. The increase in personnel costs was mainly due to the new hires from Westernbank while the increase in other operating expenses was mostly due to losses associated with write-downs in other real estate property; and

	•		higher income tax expense by $12.9 million, primarily due to higher income before tax on the Puerto Rico operations, lower exempt interest income net of disallowance of expenses attributed to such exempt income and an increase in non-deductible interest expense related to the trust preferred securities issued to the U.S. Treasury in August 2009, which the Corporation agreed with the U.S. Treasury not to deduct interest payments for tax purposes.

Net income for the nine months ended September 30, 2010 totaled $58.5 million, compared with $167.6 million for the same period in the previous year. These results reflected:

	•		higher net interest income by $137.2 million, or 21%;

	•		lower provision for loan losses by $73.6 million, or 15%;

	•		lower non-interest income by $234.5 million, or 42%, which was mainly due to $227.2 million in gains from the sale of U.S. Treasury notes, U.S. agencies, and equity securities during 2009; a reduction in the indemnification asset of $71.6 million resulting principally from the Corporation’s application of reciprocal accounting for covered loans accounted for under ASC Subtopic 310-20 due to their revolving characteristics; higher adjustments to indemnity reserves by $31.9 million; and lower trading account profit by $23.1 million mainly in the mortgage banking business, partially offset by higher accretion of the indemnification asset by $58.0 million; $35.0 million in favorable changes in the fair value of the equity appreciation instrument issued to the FDIC; and higher gains of $13.2 million recorded by the Corporation’s mortgage banking business related to residential mortgage loans securitized during 2010;

	•		higher operating expenses by $54.7 million, or 10%, principally related to the Westernbank FDIC-assisted transaction; and

	•		income tax expense of $26.3 million for the nine months ended September 30, 2010, compared to an income tax benefit of $4.2 million for the same period in the previous year, mostly as a result of the same factors discussed for the quarter. The income tax benefit in 2009 was due to a temporary five-percent special surtax imposed on all corporations doing business in Puerto Rico, which resulted in an income tax benefit as a consequence of adjusting the deferred tax assets to reflect the increase in tax rate.

117

Banco Popular North America

Banco Popular North America reportable segment, which includes the operations of E-LOAN, reported a net loss of $14.6 million for the third quarter of 2010, a decrease of $155.3 million, or 91%, when compared with a net loss of $169.9 million for the quarter ended September 30, 2009. The principal factors that contributed to the variance in results for the quarter ended September 30, 2010, when compared with the same quarter in the previous year, included:

	•		lower provision for loan losses by $144.9 million, or 82%, prompted by credit quality indicators that reflect signs of stabilization in the U.S. operations. This decrease in the provision for loan losses was mainly the result of higher amounts provisioned during 2009 particularly for commercial and construction loans, U.S. mainland non-conventional residential mortgage loans, home equity lines of credit and closed-end second mortgages, combined with specific reserves recorded for loans considered impaired. Substantial reserve increases were recorded during 2009 as a result of the deteriorated conditions of the U.S. economy, declines in property values, and the slowdown in consumer spending. The U.S. real estate market has shown some improvement and stabilization in collateral values during 2010. The decrease of approximately $1.5 billion in loans held-in-portfolio since September 30, 2009, particularly in the commercial, construction, consumer and mortgage loan portfolios, also contributed to the lower level of provision for loan losses for the quarter ended September 30, 2010. Net charge-offs for the BPNA reportable segment for the third quarter of 2010 decreased $33.3 million, or 26%, compared with the quarter ended September 30, 2009, primarily in the construction, consumer, and mortgage loan portfolio. The provision for loan losses represented 34% of net charge-offs for the quarter ended September 30, 2010, compared with 137% of net charge-offs for the same period of the previous year. The allowance for loan losses to loans held-in-portfolio in this reportable segment was 7.07% as of September 30, 2010, compared with 6.05% as of September 30, 2009. Refer to the Credit Risk Management and Loan Quality section of this MD&A for certain credit quality indicators corresponding to the BPNA reportable segment;

	•		higher non-interest income by $6.8 million, mainly due to lower provisioning in indemnity reserves on loans sold in previous periods; and

	•		lower operating expenses by $3.0 million, or 4%. This variance was principally the result of lower personnel costs, mainly salaries as a result of downsizing of U.S. operations; and lower net occupancy expenses, partially offset by $9.7 million in prepayment penalties during the quarter ended September 30, 2010 on the cancellation of $180 million of FHLB advances and $54 million in public fund certificates of deposit as part of BPNA’s deployment of excess liquidity and as part of a strategy to increase margin in future periods.

Net loss for the nine months ended September 30, 2010 totaled $176.6 million, compared with a net loss of $557.6 million for the same period in the previous year. These results reflected:

	•		lower provision for loan losses by $322.0 million, or 57%, mostly as a result of the same factors discussed for the quarter;

	•		higher non-interest income by $29.8 million principally due to reductions in the provisioning for indemnity reserves on loans previously sold, which considers factors such as reduced volume of disbursements and loss severities and expiration of indemnity terms;

	•		lower operating expenses by $41.6 million, or 17%, mainly in personnel costs due to restructuring and staff reductions and lower FDIC deposit insurance assessments, partially offset by $9.7 million in prepayment penalties previously discussed; and

	•		income tax expense of $3.4 million for the nine months ended September 30, 2010, compared with an income tax benefit of $5.7 million for the same period in the previous year.

FINANCIAL CONDITION

Assets

As of September 30, 2010, the Corporation’s total assets were $40.8 billion, compared with $34.7 billion as of December 31, 2009 and $35.6 billion as of September 30, 2009. Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of condition as of such dates. The increase in total assets from December 31, 2009 to September 30, 2010 was due to the Westernbank FDIC-assisted transaction, which as of the April 30, 2010 transaction date added $8.4 billion in total assets, net of fair value adjustments, to the

118

Corporation’s financial condition. This increase was offset in part by a reduction in the portfolio of investment securities and lower volume of loan originations. A negative economic environment has led to a reluctance to expand or invest, resulting in weak loan demand.

Investment securities

Table F provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis as of September 30, 2010, December 31, 2009 and September 30, 2009. Also, Notes 9 and 10 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

TABLE F

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


	September 30,		December 31,					September 30,
(In millions)	2010		2009		Variance			2009		Variance

U.S. Treasury securities	$	65.2	$	56.2	$	9.0		$	56.9	$	8.3
Obligations of U.S. Government sponsored entities		1,397.0		1,647.9		(250.9	)		1,694.3		(297.3	)
Obligations of Puerto Rico, States and political subdivisions		237.9		262.8		(24.9	)		271.1		(33.2	)
Collateralized mortgage obligations — federal agencies		1,347.0		1,600.2		(253.2	)		1,598.0		(251.0	)
Collateralized mortgage obligations — private label		95.6		117.8		(22.2	)		127.0		(31.4	)
Mortgage-backed securities		2,782.7		3,210.2		(427.5	)		3,445.3		(662.6	)
Equity securities		8.8		7.8		1.0			8.8		—
Others		21.4		4.8		16.6			4.8		16.6

Total investment securities AFS and HTM	$	5,955.6	$	6,907.7		($952.1	)	$	7,206.2		($1,250.6	)

The portfolio of investment securities consists primarily of liquid, high quality securities. The reduction in investment securities from December 31, 2009 and September 30, 2009 to September 30, 2010 was mostly impacted by maturities, prepayments and sales. The cash proceeds from these activities were not fully reinvested as part of a strategy to deleverage the balance sheet. Proceeds from the sale of investment securities available-for-sale for the nine months ended September 30, 2010 amounted to $396.7 million, with gains of approximately $3.7 million. The Westernbank FDIC-assisted transaction did not contribute significantly to the Corporation’s portfolio of investment securities, as the Corporation only acquired FHLB stock as part of the transaction, which was redeemed in the second quarter of 2010.

As of September 30, 2010, there were investment securities AFS and HTM with a fair value of $154 million in an unrealized loss position. The unrealized losses on these particular securities approximated $6.0 million as of September 30, 2010. These figures compare with securities of $1.8 billion with unrealized losses of $31 million as of December 31, 2009. Management performed its quarterly analysis of all debt securities in an unrealized loss position as of September 30, 2010 and concluded that no individual debt security was other-than-temporarily impaired as of such date. As of September 30, 2010, the Corporation does not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell those investment securities prior to recovery of their amortized cost basis. Notes 9 and 10 to the consolidated financial statements provide additional information by investment categories of the unrealized gains / losses with respect to the Corporation’s available-for-sale and held-to-maturity investment securities portfolio.

Loans

Refer to Table G, for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Included in Table G are $115 million of loans held-for-sale as of September 30, 2010, compared with $91 million as of December 31, 2009 and $75 million as of September 30, 2009. Loans covered under the FDIC loss sharing agreements are presented in a separate line item in Table G. Because of the loss protection provided by the FDIC, the risks of the covered loans are significantly different, thus the Corporation has determined to segregate them in the information included in Table G.

Excluding the acquired covered loans, all loan portfolios as of September 30, 2010, except for mortgage loans, declined compared with December 31, 2009 and September 30, 2009. This generally reflects weak loan demand, the high level of loan charge-offs as a result of the downturn in the real estate market and continued weakened economy,

119

and the exiting or downsizing of certain loan origination channels due to strategic decisions.

TABLE G

Loans Ending Balances (including loans held-for-sale)


					Variance					Variance
					September 30, 2010					September 30, 2010
					Vs.					Vs.
	September 30,		December 31,		December 31,			September 30,		September 30,
(In thousands)	2010		2009		2009			2009 [1]		2009

Loans not covered under FDIC loss sharing agreements:
Commercial	$	11,724,536	$	12,666,955		($942,419	)	$	13,076,772		($1,352,236	)
Construction		1,300,469		1,724,373		(423,904	)		1,882,069		(581,600	)
Lease financing		613,560		675,629		(62,069	)		699,350		(85,790	)
Mortgage		4,859,206		4,691,145		168,061			4,621,915		237,291
Consumer		3,759,799		4,045,807		(286,008	)		4,191,410		(431,611	)

Total non-covered loans	$	22,257,570	$	23,803,909		($1,546,339	)	$	24,471,516		($2,213,946	)
Loans covered under FDIC loss sharing agreements [2]		4,006,227		—		4,006,227			—		4,006,227

Total loans	$	26,263,797	$	23,803,909	$	2,459,888		$	24,471,516	$	1,792,281


[1]		Loans disclosed exclude the discontinued operations of PFH.

[2]		Refer to Note 11 to the consolidated financial statements for the composition of the loans covered under FDIC loss sharing agreements.

The explanations for loan portfolio variances discussed below exclude the impact of the acquired covered loans.

As of September 30, 2010, the commercial and construction loan portfolios decreased $1.4 billion when compared to December 31, 2009. The decrease in these portfolios was both reflected in the BPPR and BPNA reportable segments and was impacted by lower new loan origination activity, portfolio run-off associated with exited origination channels in the U.S. operations, and loan net charge-offs during the nine months ended September 30, 2010 that totaled $426.0 million.

The decrease in the consumer loan portfolio from December 31, 2009 to September 30, 2010 by approximately $286 million, or 7%, was mostly reflected in personal and auto loans in Puerto Rico and home equity lines of credit and closed-end second mortgages in E-LOAN. Net charge-offs in the consumer loan portfolio amounted to $163.7 million for the nine months ended September 30, 2010. Also, portfolio run-off exceeded the volume of new personal and auto loan originations in the BPPR reportable segment due to current weak economic conditions. Furthermore, the run-off of Popular Finance’s loan portfolio contributed to such decrease. Popular Finance’s operations were closed in late 2008. Also, there were reductions in the consumer loan portfolio of the BPNA reportable segment, primarily due to loan charge-offs and the run-off of its auto, closed-end second mortgages and home equity lines of credit portfolios, which represent business lines exited in prior years. Consumer loans as of September 30, 2010 decreased significantly from September 30, 2009 as a result of similar factors. Consumer loans as of September 30, 2010 include $41 million in credit cards pertaining to BPPR’s Westernbank operations and which are not covered by the FDIC under the loss sharing agreements.

The decline in the lease financing portfolio from December 31, 2009 to September 30, 2010 was mostly at the BPPR reportable segment by $36 million, which as well as the other loan portfolios continues to reflect the general slowdown in originations. The Corporation’s U.S. operations are no longer originating lease financing and as such, the outstanding portfolio in those operations is running off.

The mortgage loan portfolio as of September 30, 2010 increased $168 million from December 31, 2009. The BPPR reportable segment showed an increase of $324 million, while the BPNA reportable segment experienced a reduction of $156 million. The reduction at BPNA resulted principally from the discontinuance of the non-conventional mortgage loan origination business in the Corporation’s U.S. mainland operations. The Corporation’s mortgage loan origination subsidiary in Puerto Rico, Popular Mortgage, continued its efforts to originate loans despite the weak economic conditions in the Island. As indicated in the Overview section of this MD&A, during the third quarter of 2010, the Puerto Rico government signed into law an aggressive housing incentive package which should help boost future residential housing sales activity. There is a reduction from September 30, 2009 in BPNA due to high volume of net charge-offs in the non-conventional mortgage loan portfolio and run-off of the portfolio.

120

The covered loans were initially recorded at fair value. Their carrying value approximated $4.0 billion as of September 30, 2010, of which approximately 67% pertained to commercial and construction loans, 29% to mortgage loans and 4% to consumer loans. The unpaid principal balance on the covered loans approximated $8.2 billion as of September 30, 2010. Note 11 to the consolidated financial statements presents the carrying amount of the covered loans broken down by major loan type categories. A substantial amount of the covered loans, or approximately $3.7 billion of their carrying value as of September 30, 2010, is accounted for under ASC Subtopic 310-30.

Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into pools based on similar characteristics, including factors such as loan type, interest rate type, accruing status, and amortization type. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. 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 undiscounted contractually required principal and interest and the undiscounted cash flows expected to be collected. The non-accretable difference was established in purchase accounting to absorb losses expected at the acquisition date on such loans. Amounts absorbed by the non-accretable difference do not affect the statement of operations or the allowance for loan losses. Loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. The loans under ASC Subtopic 310-30 will be reviewed each reporting period to determine whether any changes occurred in expected cash flows that would result in a reclassification from non-accretable difference to accretable yield or in the establishment of an allowance for loan losses.

The following table presents acquired loans accounted for pursuant to ASC Subtopic 310-30 as of the April 30, 2010 acquisition date:


(In thousands)

Contractually-required principal and interest	$	10,995,387
Non-accretable difference		5,789,480

Cash flows expected to be collected		5,205,907
Accretable yield		1,303,908

Fair value of loans accounted for under ASC Subtopic 310-30	$	3,901,999	[1]


[1]		Reflects a difference of $11.4 million compared with the amounts disclosed in the Form 8-K/A filed on July 16, 2010, which included the financial statements and exhibits pertaining to the Westernbank FDIC-assisted transaction at the acquisition date. The Corporation reassessed the classification of certain acquired loans and, due to their revolving characteristics, reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the fair value of the loans.

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments.

121


				Carrying amount
(In thousands)	Accretable yield			of loans

Balance as of January 1, 2010		—			—
Additions [1]	$	1,303,908		$	3,901,999
Accretion		(95,506	)		95,506
Payments received					(338,308	)

Balance as of September 30, 2010	$	1,208,402		$	3,659,197


[1]		Represents the estimated fair value of the loans at the date of acquisition. There were no reclassifications from non-accretable difference to accretable yield from April 30, 2010 to September 30, 2010.


(In thousands)

Fair value of loans accounted under ASC Subtopic 310-20	$	358,989	[1]
Gross contractual amounts receivable (principal and interest)	$	1,007,880
Estimate of contractual cash flows not expected to be collected	$	614,653


[1]		Reflects a difference of $11.4 million compared with the amounts disclosed in the Form 8-K/A filed on July 16, 2010, which included the financial statements and exhibits pertaining to the Westernbank FDIC-assisted transaction at the acquisition date. The Corporation reassessed the classification of certain acquired loans and, due to their revolving characteristics, reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the fair value of the loans.

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments.

FDIC loss share indemnification asset

As part of the loan portfolio fair value estimation in the Westernbank FDIC-assisted transaction, the Corporation established the FDIC loss share indemnification asset, which represented the present value of the estimated losses on loans to be reimbursed by the FDIC. The FDIC loss share indemnification asset amounted to $3.3 billion as of September 30, 2010 and is presented in a separate line item in the consolidated statement of condition.

122

Other assets

Table H provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated statements of condition as of September 30, 2010, December 31, 2009 and September 30, 2009.

TABLE H

Breakdown of Other Assets


					Variance					Variance
					September 30, 2010					September 30, 2010
					Vs.					Vs.
	September 30,		December 31,		December 31,			September 30,		September 30,
(In thousands)	2010		2009		2009			2009		2009

Net deferred tax assets (net of valuation allowance)	$	336,661	$	363,967		($27,306	)	$	380,596		($43,935	)
Investments under the equity method		292,493		99,772		192,721			97,817		194,676
Bank-owned life insurance program		236,824		232,387		4,437			230,579		6,245
Prepaid FDIC insurance assessment		164,190		206,308		(42,118	)		—		164,190
Other prepaid expenses		91,193		130,762		(39,569	)		144,949		(53,756	)
Derivative assets		85,180		71,822		13,358			81,249		3,931
Trade receivables from brokers and counterparties		37,996		1,104		36,892			8,275		29,721
Others		215,448		218,795		(3,347	)		213,256		2,192

Total other assets	$	1,459,985	$	1,324,917	$	135,068		$	1,156,721	$	303,264

The increase in other assets from December 31, 2009 to September 30, 2010 was primarily due to the 49% ownership interest in EVERTEC, which is being accounted as an investment under the equity method. Refer to the Overview and Sale of Processing and Technology business section of this MD&A for a description of the EVERTEC transaction. When compared to September 30, 2009, there was also an increase in the prepaid FDIC insurance assessment, which represents the unamortized balance of the FDIC insurance premiums prepaid in 2009, which correspond to years 2010 through 2012.

Deposits and Borrowings

Deposits

A breakdown of the Corporation’s deposits at period-end is included in Table I.

TABLE I

Deposits Ending Balances


					Variance				Variance
	September 30,		December 31,		September 30, 2010 Vs.		September 30,		September 30, 2010 Vs.
(In thousands)	2010		2009		December 31, 2009		2009		September 30, 2009

Demand deposits *	$	6,023,732	$	5,066,282	$	957,450	$	4,894,509	$	1,129,223
Savings, NOW and money market deposits		10,328,457		9,635,347		693,110		9,509,512		818,945
Time deposits		11,387,855		11,223,265		164,590		11,978,877		(591,022	)

Total deposits	$	27,740,044	$	25,924,894	$	1,815,150	$	26,382,898	$	1,357,146


*		Includes interest and non-interest bearing demand deposits.

Brokered certificates of deposit, which are included as time deposits, amounted to $2.5 billion as of September 30, 2010, compared with $2.7 billion as of December 31, 2009 and $2.8 billion as of September 30, 2009.

The increase in demand and saving deposits from December 31, 2009 to September 30, 2010 was principally related to the deposits assumed in the Westernbank FDIC-assisted transaction and to an increase in deposits in trust held on a short-term basis, principally for payment of government bonds. The increase in time deposits from December 31, 2009 to September 30, 2010, was influenced by an increase in the BPPR reportable segment, in part due to time deposits assumed in the Westernbank FDIC-assisted transaction, partially offset by a reduction in BPNA due to reduced levels of deposits gathered through E-LOAN’s internet platform, the effect of a reduction in the pricing of

123

these deposits and strategic actions taken that reduced BPNA’s asset base considerably. Also, the decrease in time deposits was associated with a reduction in brokered certificates of deposit.

The increase in demand and savings accounts from September 30, 2009 to September 30, 2010 was principally influenced by similar factors described above. The decrease in time deposits from September 30, 2009 to the same date in 2010 was due to a reduction in brokered certificates of deposit of $264 million and a decrease of $1.1 billion in non-brokered time deposits at the BPNA reportable segment.

Borrowings

The Corporation’s borrowings amounted to $7.7 billion as of September 30, 2010, compared with $5.3 billion as of December 31, 2009 and $5.5 billion as of September 30, 2009. The increase in borrowings from the end of 2009 to September 30, 2010 was related to the note issued to the FDIC in relation to the FDIC-assisted transaction, which amounted to $3.3 billion as of September 30, 2010. The note issued to the FDIC is collateralized by the covered loans (other than certain consumer loans) and other real estate acquired in the agreement with the FDIC and all proceeds derived from such assets, including cash inflows from claims to the FDIC under the loss sharing agreements. Borrowings under the note bear interest at the per annum rate of 2.50% and is paid monthly. The Corporation may prepay the note in whole or in part without any penalty subject to certain notification requirements indicated in the agreement. During the third quarter of 2010, the Corporation prepaid $2.1 billion of the note issued to the FDIC from funds unrelated to the assets securing the note. The increase related to the note issued to the FDIC was partially offset by a reduction of $275 million in repurchase agreements, cancellation of $175 million in term notes, which had contractual maturities in September 2011, that were repurchased by the Corporation from holders of record in July 2010, and a reduction of $430 million in advances with the Federal Home Loan Banks (“FHLB”). The latter two were in part associated with the Corporation’s strategy to extinguish certain high-cost debt. The increase in borrowings from September 30, 2009 to the same date in 2010 was also influenced by similar factors.

In March 2010, the SEC’s Division of Corporation Finance sent a letter to certain public companies requesting information about repurchase agreements, securities lending transactions or other transactions involving the obligation to repurchase the transferred assets. The letter requests several disclosures with respect to such transfers that are recorded as sales. In this regard, the Corporation records all its repurchase transactions as collateralized borrowings rather than as sales transactions.

Refer to Note 16 to the consolidated financial statements for detailed information on the Corporation’s borrowings as of September 30, 2010, December 31, 2009 and September 30, 2009. Also, refer to the Liquidity Risk section in this MD&A for additional information on the Corporation’s funding sources as of September 30, 2010.

Other liabilities

The increase in other liabilities of $295 million from December 31, 2009 to September 30, 2010 included two items directly associated to the Westernbank FDIC-assisted transaction. Such items included: (1) the equity appreciation instrument described in the Westernbank FDIC-assisted transaction section in this MD&A with a fair value of $17 million as of September 30, 2010, and an outstanding balance of $120 million of a contingent liability for unfunded loan commitments recorded at the acquisition date pertaining primarily to commercial and construction loans and commercial revolving lines of credit. Losses incurred on loan disbursements made under these unfunded loan commitments may be covered by the FDIC loss sharing agreements provided that the Corporation complies with specific requirements under such agreements.

Stockholders’ Equity

Stockholders’ equity totaled $4.1 billion as of September 30, 2010, compared with $2.5 billion as of December 31, 2009 and $2.7 billion as of September 30, 2009. Refer to the consolidated statements of condition and of stockholders’ equity for information on the composition of stockholders’ equity. Also, the disclosures of accumulated other comprehensive income (loss), an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive loss. The increase in stockholders’ equity from December 31, 2009 to September 30, 2010 was due to the issuance of depositary shares and conversion to common stock during the second quarter of 2010, which contributed with $1.15 billion in additional capital, and the net income recorded during 2010, principally from the sale of 51% interest in EVERTEC.

124

Included within surplus in stockholders’ equity as of September 30, 2010 and December 31, 2009 was $402 million corresponding to a statutory reserve fund applicable exclusively to Puerto Rico banking institutions. This statutory reserve fund totaled $392 million as of September 30, 2009. The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. As of September 30, 2010 and 2009 and December 31, 2009, BPPR was in compliance with the statutory reserve requirement.

REGULATORY CAPITAL

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. As indicated earlier, the EVERTEC transaction improved the Corporation’s capital ratios considerably. The regulatory capital ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage as of September 30, 2010, December 31, 2009, and September 30, 2009 are presented on Table J. As of such dates, BPPR and BPNA were well-capitalized.

TABLE J

Capital Adequacy Data


	September 30,			December 31,			September 30,
(Dollars in thousands)	2010			2009			2009

Risk-based capital
Tier I capital	$	3,928,317		$	2,563,915		$	2,771,723
Supplementary (Tier II) capital		342,129			346,527			350,323

Total capital	$	4,270,446		$	2,910,442		$	3,122,046

Risk-weighted assets
Balance sheet items	$	23,263,719		$	23,182,230		$	23,999,569
Off-balance sheet items		3,158,181			2,964,649			3,082,839

Total risk-weighted assets	$	26,421,900		$	26,146,879		$	27,082,408

Average assets	$	39,324,765		$	34,197,244		$	34,958,245

Ratios:
Tier I capital (minimum required — 4.00%)		14.87	%		9.81	%		10.23	%
Total capital (minimum required — 8.00%)		16.16			11.13			11.53
Leverage ratio *		9.99			7.50			7.93


*		All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification. As of September 30, 2010, the capital adequacy minimum requirement for Popular, Inc. was (in thousands): Total Capital of $2,113,752, Tier I Capital of $1,056,876, and Tier I Leverage of $1,179,743 based on a 3% ratio or $1,572,991 based on a 4% ratio according to the Bank’s classification.

125

capital elements), net of goodwill less any associated deferred tax liability. The new limit would be effective on March 31, 2011. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act, recently passed in July 2010, has a provision to effectively phase out the use of trust preferred securities as Tier 1 capital throughout a five-year period. As of September 30, 2010, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. As of September 30, 2010, the remaining trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008, and were issued prior to October 4, 2010 and thus, are exempt from the Dodd-Frank banking bill provision.

During the 2010 third quarter, the Basel Committee on Banking Supervision revised the Capital Accord (Basel III), which narrows the definition of capital and increases capital requirements for specific exposures. The new capital requirements will be phased-in over six years beginning in 2013. If these revisions were adopted currently, the Corporation estimates they would not have a significant impact on our regulatory capital ratios based on our current understanding of the revisions to capital qualification. We await clarification from our banking regulators on their interpretation of Basel III and any additional requirements to the stated thresholds.

The Corporation’s tangible common equity ratio was 8.31% as of September 30, 2010 and 5.40% as of December 31, 2009. The Corporation’s Tier 1 common equity to risk-weighted assets ratio was 11.40% as of September 30, 2010, compared with 6.39% as of December 31, 2009.

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

The table that follows provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets as of September 30, 2010 and December 31, 2009.


(In thousands, except share or per share information)	September 30, 2010			December 31, 2009

Total stockholders’ equity	$	4,109,200		$	2,538,817
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(665,333	)		(604,349	)
Less: Other intangibles		(60,438	)		(43,803	)

Total tangible common equity	$	3,333,269		$	1,840,505

Total assets	$	40,820,716		$	34,736,325
Less: Goodwill		(665,333	)		(604,349	)
Less: Other intangibles		(60,438	)		(43,803	)

Total tangible assets	$	40,094,945		$	34,088,173

Tangible common equity to tangible assets		8.31	%		5.40	%
Common shares outstanding at end of period		1,022,686,418			639,540,105
Tangible book value per common share	$	3.26		$	2.88

The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Corporation’s capital position. In connection with the Supervisory Capital Assessment Program (“SCAP”), the Federal Reserve Board began supplementing its assessment of the capital adequacy of a bank holding company based on a variation of Tier 1 capital, known as Tier 1 common equity.

Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in the federal banking regulations, this measure is considered to be a non-GAAP financial measure. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Corporation has procedures in place to calculate these measures using the appropriate GAAP or regulatory components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

126

The table below reconciles the Corporation’s total common stockholders’ equity (GAAP) as of September 30, 2010 and December 31, 2009 to Tier 1 common equity as defined by the Federal Reserve Board, FDIC and other bank regulatory agencies (non-GAAP).


	September 30,			December 31,
(In thousands)	2010			2009

Common stockholders’ equity	$	4,059,040		$	2,488,657
Less: Unrealized gains on available-for-sale securities, net of tax [1]		(195,564	)		(91,068	)
Less: Disallowed deferred tax assets [2]		(227,576	)		(179,655	)
Less: Intangible assets:
Goodwill		(665,333	)		(604,349	)
Other disallowed intangibles		(30,045	)		(18,056	)
Less: Aggregate adjusted carrying value of all non-financial equity investments		(1,590	)		(2,343	)
Add: Pension liability adjustment, net of tax and accumulated net gains (losses) on cash flow hedges [3]		74,301			78,488

Total Tier 1 common equity	$	3,013,233		$	1,671,674


[1]		In accordance with regulatory risk-based capital guidelines, Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax.

[2]		Approximately $134 million of the Corporation’s $337 million of net deferred tax assets as of September 30, 2010 ($186 million and $364 million, respectively, as of December 31, 2009), were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $228 million of such assets as of September 30, 2010 ($180 million as of December 31, 2009) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets”, were deducted in arriving at Tier 1 capital. The remaining $25 million of the Corporation’s other net deferred tax assets as of September 30, 2010 ($2 million as of December 31, 2009) represented primarily the following items (a) the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines; (b) the deferred tax asset corresponding to the pension liability adjustment recorded as part of accumulated other comprehensive income; and (c) the deferred tax liability associated with goodwill and other intangibles.

[3]		The Federal Reserve Bank has granted interim capital relief for the impact of pension liability adjustment.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table K.

The Corporation’s non-accruing and charge-off policies by major categories of loan portfolios are as follows:

	•		Commercial and construction loans — recognition of interest income on commercial and construction loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest, or when other factors indicate that the collection of principal and interest is doubtful. The impaired portions on these loans are charged-off at no longer than 365 days past due.

	•		Lease financing — recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Leases are charged-off when they are 120 days in arrears.

	•		Mortgage loans — recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due.

	•		Consumer loans — recognition of interest income on closed-end consumer loans and home-equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Closed-end consumer loans are charged-off when they are 120 days in arrears. Open- end consumer loans are charged-off when they are 180 days in arrears.

127

	•		Troubled debt restructurings (“TDRs”) — Loans classified as TDRs are reported in non-accrual status if the loan was in non-accruing status at the time of the modification. The TDR loan should continue in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after classified as a TDR).

			Acquired covered loans from the Westernbank FDIC-assisted transaction that are restructured after acquisition are not considered restructured loans for purposes of the Corporation’s accounting and disclosure if the loans are accounted for in pools pursuant to ASC Subtopic 310-30.

	•		As previously indicated in this MD&A and notes to the accompanying financial statements, covered loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs will be recorded only to the extent that losses exceed the purchase accounting estimates.

	•		Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income using the effective yield method over the life of the loan. Loans accounted for under ASC Subtopic 310-20 are placed on non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across quarters or year-to-date periods. Given the significant amount of acquired loans that are past due but still accruing due to the accounting under ASC Subtopic 310-30, the Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) results in significant distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the nonaccretable balance, the net charge-off ratio including the acquired loans is lower for portfolios that have significant amounts of acquired loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across quarters or years, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures excluding covered loans and related amounts from both the numerator and denominator provides better perspective into underlying trends related to the quality of its loan portfolio.

128

TABLE K
Non-Performing Assets


				As a percentage						As a percentage						As a percentage
	September 30,			of loans HIP			December 31,			of loans HIP			September 30,			of loans HIP
(Dollars in thousands)	2010			by category [2]			2009			by category			2009			by category

Commercial	$	784,304			6.7	%	$	836,728			6.6	%	$	776,027			5.9	%
Construction		818,186			62.9			854,937			49.6			768,987			40.9
Lease financing		6,478			1.1			9,655			1.4			10,309			1.5
Mortgage		669,175			14.1			510,847			11.1			484,219			10.6
Consumer		65,906			1.8			64,185			1.6			75,992			1.8

Total non-performing loans, excluding covered loans		2,344,049			10.6	%		2,276,352			9.6	%		2,115,534			8.7	%
Other real estate owned (“OREO”), excluding covered OREO		168,823						125,483						129,485

Total non-performing assets, excluding covered assets		2,512,872						2,401,835						2,245,019
Covered loans and OREO [1]		200,517						—						—

Total non-performing assets	$	2,713,389					$	2,401,835					$	2,245,019

Accruing loans past due 90 days or more [3]	$	296,647					$	239,559					$	202,840

Ratios excluding covered loans and OREO:
Non-performing assets to total assets		6.84	%					6.91	%					6.30	%
Allowance for loan losses to loans held-in-portfolio		5.62						5.32						4.95
Allowance for loan losses to non-performing loans		53.07						55.40						57.07

Ratios including covered loans and OREO:
Non-performing assets to total assets		6.65	%					6.91	%					6.30	%
Allowance for loan losses to loans held-in-portfolio		4.76						5.32						4.95
Allowance for loan losses to non-performing loans		50.42						55.40						57.07


HIP =		“held-in-portfolio”

[1]		The amount consists of $123 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $78 million in covered OREO. It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[2]		Loans held-in-portfolio used in the computation exclude $4.0 billion in covered loans as of September 30, 2010.

[3]		The carrying value of covered loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $738 million as of September 30, 2010. This amount is excluded from the above table as the covered loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.

As of September 30, 2010, non-performing loans secured by real estate, excluding covered loans, amounted to $1.6 billion, or 17.44% of total loans secured by real estate, excluding covered loans, in the Puerto Rico operations and $607 million or 10.41%, respectively, in the U.S. mainland operations. These figures compare to $1.3 billion or 14.92% in the Puerto Rico operations and $697 million or 10.69% in the U.S. mainland operations as of December 31, 2009.

In addition to the non-performing loans included in Table K, as of September 30, 2010, there were $318 million of performing loans, excluding covered loans, which in management’s opinion are currently subject to potential future classification as non-performing and are considered impaired, compared with $248 million as of December 31, 2009 and $233 million as of September 30, 2009.

Table L summarizes the detail of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, for the quarters and nine months ended September 30, 2010 and 2009.

129

TABLE L
Allowance for Loan Losses and Selected Loan Losses Statistics


	Third Quarter									Nine months ended September 30,
(Dollars in thousands)	2010			2009			Variance			2010			2009			Variance

Balance at beginning of period	$	1,277,016		$	1,146,239		$	130,777		$	1,261,204		$	882,807		$	378,397
Provision for loan losses		215,013			331,063			(116,050	)		657,471			1,053,036			(395,565	)
Losses:
Commercial		109,239			64,238			45,001			279,440			187,874			91,566
Construction		75,918			96,495			(20,577	)		184,216			217,990			(33,774	)
Lease financing		3,205			5,501			(2,296	)		12,953			16,650			(3,697	)
Mortgage		23,722			36,143			(12,421	)		80,250			92,906			(12,656	)
Consumer		60,567			84,608			(24,041	)		193,750			260,699			(66,949	)

Total losses		272,651			286,985			(14,334	)		750,609			776,119			(25,510	)

Recoveries:
Commercial		8,944			5,124			3,820			28,890			17,546			11,344
Construction		5,472			554			4,918			8,776			707			8,069
Lease financing		1,226			1,567			(341	)		3,949			3,638			311
Mortgage		1,232			1,821			(589	)		4,236			2,803			1,433
Consumer		7,742			8,018			(276	)		30,077			22,983			7,094

Total recoveries		24,616			17,084			7,532			75,928			47,677			28,251

Net loans charged-off:
Commercial		100,295			59,114			41,181			250,550			170,328			80,222
Construction		70,446			95,941			(25,495	)		175,440			217,283			(41,843	)
Lease financing		1,979			3,934			(1,955	)		9,004			13,012			(4,008	)
Mortgage		22,490			34,322			(11,832	)		76,014			90,103			(14,089	)
Consumer		52,825			76,590			(23,765	)		163,673			237,716			(74,043	)

Total net loans charged-off		248,035			269,901			(21,866	)		674,681			728,442			(53,761	)

Balance at end of period	$	1,243,994		$	1,207,401		$	36,593		$	1,243,994		$	1,207,401		$	36,593

Ratios excluding covered loans:
Annualized net charge-offs to average loans held-in-portfolio		4.52	%		4.43	%					3.98	%		3.91	%
Provision for loan losses to net charge-offs		0.87	x		1.23	x					0.97	x		1.45	x
Ratios including covered loans:
Annualized net charge-offs to average loans held-in-portfolio		3.82	%		4.43	%					3.61	%		3.91	%
Provision for loan losses to net charge-offs		0.87	x		1.23x						0.97x			1.45x

Note: There was no need to record an allowance for loan losses on the covered loans as of September 30, 2010.

130

Table M presents annualized net charge-offs to average loans held-in-portfolio by loan category for the quarters and nine months ended September 30, 2010 and 2009.

TABLE M
Annualized Net Charge-offs to Average Loans Held-in-Portfolio, Excluding Covered Loans


							Nine months ended
	Quarters ended September 30,						September 30,
	2010			2009			2010			2009

Commercial		3.47	%		1.81	%		2.78	%		1.71	%
Construction		20.11			19.45			15.18			13.83
Lease financing		1.28			2.23			1.88			2.40
Mortgage		1.97			3.16			2.24			2.75
Consumer		5.54			7.18			5.60			7.17

Total annualized net charge-offs to average loans held-in-portfolio		4.52	%		4.43	%		3.98	%		3.91	%

Note: Average loans held-in-portfolio exclude covered loans acquired in the Westernbank FDIC-assisted transaction which were recorded at fair value on date of acquisition, and thus, considered a credit discount component. The Westernbank acquired loan portfolio did not impact net charge-offs for the quarter and nine months ended September 30, 2010.

Commercial loans

As shown in Table K, the level of non-performing commercial loans as of September 30, 2010, compared to December 31, 2009, decreased on a consolidated basis from December 31, 2009, mainly in the BPNA reportable segment. This decrease was attributed mainly to the mainland U.S. commercial real estate portfolio which has reflected signs of stabilization. As shown in the next table, the level of non-performing commercial loans in the Puerto Rico operations as of September 30, 2010 has remained high, when compared with the end of 2009, due to continued weak economic conditions. The level of non-performing commercial loans in the United States operations has shown improved performance from December 31, 2009. As compared to December 31, 2009, the percentage of non-performing commercial loans to commercial loans held-in-portfolio as of September 30, 2010 increased in the BPPR reportable segment influenced by the significant loan portfolio reduction and sustained high level of delinquencies.

The increase in non-performing commercial loans from September 30, 2009 to the same date in 2010 was principally due to Puerto Rico’s recessionary economy, particularly during 2009. The table that follows provides information on commercial non-performing loans as of September 30, 2010, September 30, 2009 and December 31, 2009, and net charge-offs information for the quarter and nine months ended September 30, 2010 and September 30, 2009 for the BPPR and BPNA reportable segments.



	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPPR Reportable Segment:
Non-performing commercial loans	$	514,628		$	516,184		$	506,772		$	514,628		$	506,772
Non-performing commercial loans to commercial loans HIP, both excluding covered loans		7.58	%		7.25	%		6.87	%		7.58	%		6.87	%
Commercial loan net charge-offs	$	57,248					$	25,500		$	121,785		$	81,651
Commercial loan net charge-offs (annualized) to average commercial loans HIP, excluding covered loans		3.47	%					1.40	%		2.37	%		1.48	%

BPNA Reportable Segment:
Non-performing commercial loans	$	269,676		$	320,477		$	269,255		$	269,676		$	269,255
Non-performing commercial loans to commercial loans HIP		5.51	%		5.79	%		4.73	%		5.51	%		4.73	%
Commercial loan net charge-offs	$	43,047					$	33,615		$	128,765		$	88,678
Commercial loan net charge-offs (annualized) to average commercial loans HIP		3.48	%					2.34	%		3.34	%		2.00	%

There were 2 commercial loan relationships greater than $10 million in non-accrual status with an outstanding debt of approximately $23 million as of September 30, 2010, compared with 5 commercial loan relationships with an outstanding debt of approximately $100 million as of December 31, 2009, and 5 commercial loan relationships with an outstanding debt of $100 million as of September 30, 2009.

131

The Corporation’s commercial loan net charge-offs for the quarter ended September 30, 2010 increased when compared with the quarter ended September 30, 2009. Due to the recessionary environment that has resulted in lower absorption rates and pressure in real estate values, the commercial loan portfolio in Puerto Rico continues to reflect high delinquencies and reductions in the value of the underlying collateral. The commercial loan net charge-offs at the BPNA reportable segment also reported an increase mostly related to commercial real estate. Notwithstanding, the commercial loans portfolio in the U.S. mainland reflected a reduction of approximately $51 million in non-performing loans from December 31, 2009 to September 30, 2010.

The allowance for loan losses corresponding to commercial loans held-in-portfolio represented 4.37% of that portfolio, excluding covered loans, as of September 30, 2010, compared with 3.46% as of December 31, 2009. The ratio of allowance to non-performing loans in the commercial loan category was 65.33% as of September 30, 2010, compared with 52.31% as of December 31, 2009.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding construction and covered loans, amounted to $7.1 billion as of September 30, 2010, of which $3.2 billion was secured with owner occupied properties, compared with $7.5 billion and $3.4 billion, respectively, as of December 31, 2009. CRE non-performing loans amounted to $575 million or 8.14% of CRE loans as of September 30, 2010, compared to $557 million or 7.41%, respectively, as of December 31, 2009. The CRE non-performing loans ratios for the Corporation’s Puerto Rico and U.S. mainland operations were 10.10% and 5.87%, respectively, as of September 30, 2010, compared with 8.29% and 6.39%, respectively, as of December 31, 2009.

As of September 30, 2010, the Corporation’s commercial loan portfolio, excluding covered loans, included a total of $200 million of loan modifications for the BPPR reportable segment and $4 million for the BPNA reportable segment, which were considered TDRs since they involved granting a concession to borrowers under financial difficulties. The outstanding commitments for these commercial loan TDRs amounted to $4 million in the BPPR reportable segment and no commitments outstanding in the BPNA reportable segment as of September 30, 2010. The commercial loan TDRs in non-performing status for the BPPR and BPNA reportable segments as of September 30, 2010 amounted to $49 million and $4 million, respectively. The commercial loan TDRs were evaluated for impairment resulting in a specific reserve of $32.9 million for the BPPR reportable segment and $1.0 million for the BPNA reportable segment as of September 30, 2010.

Construction loans

As shown in Table K, non-performing construction loans decreased by $36.8 million from December 31, 2009 to September 30, 2010, resulting from a decrease in the BPNA reportable segment offset by an increase in the BPPR reportable segment. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, increased from 49.58% as of December 31, 2009 to 62.94% as of September 30, 2010, after considering a reduction of $424 million in construction loans held-in-portfolio, excluding covered loans. The ratio of non-performing construction loans to construction loans held-in-portfolio was 40.86% as of September 30, 2009.

There were 18 construction loan relationships greater than $10 million in non-performing status with an outstanding balance of $489 million as of September 30, 2010, mostly related to the Puerto Rico operations, compared with 22 construction loan relationships with an outstanding balance of $544 million as of December 31, 2009. As of September 30, 2009, there were 21 construction loan relationships with an outstanding balance of $524 million in non-performing status. The construction loans in non-performing status for both reportable segments are primarily residential real estate construction loans which have been adversely impacted by general market conditions, decreases in property values, oversupply in certain areas and reduced absorption rates.

Construction loans net charge-offs for the quarter ended September 30, 2010, compared with the same quarter in the previous year, decreased in both reportable segments. These declines were primarily related to particular construction borrowers for which charge-offs were recorded during the third quarter of 2009. Construction loan net charge-offs recorded during the third quarter of 2010 were mainly related to loans with specific reserves established in previous quarters. The construction loan portfolio is currently considered one of the higher-risk portfolios of the Corporation as it continues to be adversely impacted by depressed economic and real estate market conditions, particularly in Puerto Rico.

132

Management has identified construction loans considered impaired and has established specific reserves based on the value of the collateral. The allowance for loan losses corresponding to construction loans, excluding covered loans, represented 23.66% of that portfolio, excluding covered loans, as of September 30, 2010, compared with 19.79% as of December 31, 2009. The ratio of allowance to non-performing loans in the construction loans category was 37.59% as of September 30, 2010, compared with 39.92% as of December 31, 2009.

The BPPR reportable segment’s construction loan portfolio, excluding covered loans, totaled $884 million as of September 30, 2010, compared with $1.1 billion as of December 31, 2009 and $1.2 billion as of September 30, 2009. The significant increase in the ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, was influenced by the reduction in the construction loan portfolio balance. The allowance for loan losses corresponding to the construction loan portfolio for the BPPR reportable segment totaled $236 million or 26.74% of construction loans held-in-portfolio, excluding covered loans, as of September 30, 2010 compared to $215 million or 19.86%, respectively, as of December 31, 2009. The table that follows provides information on construction non-performing loans as of September 30, 2010, September 30, 2009 and December 31, 2009, and net charge-offs information for the quarter and nine months ended September 30, 2010 and September 30, 2009 for the BPPR reportable segment.



	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPPR Reportable Segment:
Non-performing construction loans	$	618,879		$	604,610		$	581,338		$	618,879		$	581,338
Non-performing construction loans to construction loans HIP, excluding covered loans		70.03	%		55.86	%		48.49	%		70.03	%		48.49	%
Construction loan net charge-offs	$	54,567					$	64,216		$	112,701		$	136,103
Construction loans net charge-offs (annualized) to average construction loans HIP, excluding covered loans		23.62	%					20.26	%		15.10	%		13.34	%

The BPNA reportable segment construction loan portfolio totaled $416 million as of September 30, 2010, compared with $642 million as of December 31, 2009 and $683 million as of September 30, 2009. The allowance for loan losses corresponding to the construction loan portfolio for the BPNA reportable segment totaled $71 million or 17.13% of construction loans held-in-portfolio as of September 30, 2010 compared to $126 million or 19.67%, respectively, as of December 31, 2009. The table that follows provides the credit quality information for the BPNA reportable segment’s construction loan portfolio.



	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPNA Reportable Segment:
Non-performing construction loans	$	199,307		$	250,327		$	187,649		$	199,307		$	187,649
Non-performing construction loans to construction loans HIP		47.88	%		38.99	%		27.47	%		47.88	%		27.47	%
Construction loan net charge-offs	$	15,879					$	31,724		$	62,739		$	81,180
Construction loan net charge-offs (annualized) to average construction loans HIP		13.31	%					17.98	%		15.32	%		14.73	%

The construction loan portfolio, excluding covered loans, included a total of $248 million worth of loan modifications for the BPPR reportable segment and $95 million for the BPNA reportable segment, which were considered TDRs as of September 30, 2010. The outstanding commitments for these construction loan TDRs as of September 30, 2010 amounted to $80 million for the BPPR reportable segment and $2 million for the BPNA reportable segment. The construction loan TDRs in non-performing status for the BPPR and BPNA reportable segments as of September 30, 2010 amounted to $248 million and $95 million, respectively. These construction loan TDRs were individually evaluated for impairment resulting in a reserve of $38 million for the BPPR reportable segment and $16 million for the BPNA reportable segment as of September 30, 2010.

In the current stressed housing market, the value of the collateral securing the loan has become the most important factor in determining the amount of loss incurred and the appropriate level of the allowance for loan losses. The likelihood of losses that are equal to the entire recorded investment for a real estate loan is remote. However, in some cases during recent quarters declining real estate values have resulted in the determination that the estimated value of the collateral was insufficient to cover all of the recorded investment in the loans.

133

Mortgage loans

Non-performing mortgage loans held-in-portfolio increased $158 million from December 31, 2009 to September 30, 2010, associated with the BPPR reportable segment, partially offset by a reduction in the BPNA reportable segment. Non-performing mortgage loans increased by $185 million from September 30, 2009 to September 30, 2010.

The decrease in the ratio of mortgage loan net charge-offs to average mortgage loans held-in-portfolio for the quarter ended September 30, 2010, compared with the same quarter in the previous year, which is shown in Table M, was mainly due to lower losses in the U.S. mainland non-conventional mortgage business. The BPPR reportable segment reported an increase in delinquencies when compared to the quarter ended September 30, 2009. The underwriting criteria and high reinstatement experience associated with the mortgage loans in Puerto Rico have helped to maintain losses at manageable levels. However, the mortgage business has continued to be negatively impacted by the depressed economic conditions in Puerto Rico as evidenced by the increased levels of non-performing loans.

The BPPR reportable segment’s mortgage loan portfolio totaled $3.4 billion as of September 30, 2010, compared with $3.1 billion as of December 31, 2009 and $3.0 billion as of September 30, 2009. The allowance for loan losses corresponding to the mortgage loan portfolio for the BPPR reportable segment totaled $38 million or 1.11% of mortgage loans held-in-portfolio, excluding covered loans, as of September 30, 2010 compared to $25 million or 0.79%, respectively, as of December 31, 2009. As of September 30, 2010, the mortgage loan TDRs for the BPPR’s reportable segment amounted to $148 million, of which $95 million were in non-performing status. Although the criteria for specific impairment excludes large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment (e.g. mortgage loans), it specifically requires its application to modifications considered TDRs. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $3 million as of September 30, 2010. The table that follows provides information on mortgage non-performing loans as of September 30, 2010, September 30, 2009 and December 31, 2009, and net charge-offs information for the quarter and nine months ended September 30, 2010 and September 30, 2009 for the BPPR reportable segment.



	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPPR Reportable Segment:
Non-performing mortgage loans	$	480,614		$	311,918		$	295,640		$	480,614		$	295,640
Non-performing mortgage loans to mortgage loans HIP, excluding covered loans		13.98	%		9.95	%		9.79	%		13.98	%		9.79	%
Mortgage loan net charge-offs	$	5,102					$	5,030		$	14,543		$	8,017
Mortgage loans net charge-offs (annualized) to average mortgage loans HIP, excluding covered loans		0.63	%					0.72	%		0.62	%		0.39	%

The BPNA reportable segment mortgage loan portfolio totaled $1.3 billion as of September 30, 2010, compared with $1.5 billion as of December 31, 2009 and September 30, 2009. As compared to the quarter and nine months ended September 30, 2009, this portfolio has reflected more stable levels of non-performing loans and better performance in terms of losses. However, the volume of loan modifications and loans in the process of foreclosure continue to reflect the difficult economic conditions and languishing real estate values in the U.S. mainland.

The following table presents the credit quality indicators for the BPNA reportable segment’s mortgage loan portfolio.



	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPNA Reportable Segment:
Non-performing mortgage loans	$	187,496		$	197,748		$	187,398		$	187,496		$	187,398
Non-performing mortgage loans to mortgage loans HIP		14.32	%		13.49	%		12.28	%		14.32	%		12.28	%
Mortgage loan net charge-offs	$	17,389					$	29,291		$	61,471		$	82,086
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP		5.21	%					7.51	%		5.90	%		6.77	%

134

BPNA’s non-conventional mortgage loan portfolio outstanding as of September 30, 2010 amounted to approximately $936.2 million with a related allowance for loan losses of $127 million, which represents 13.55% of that particular loan portfolio, compared with $1.1 billion with a related allowance for loan losses of $118 million or 11.16%, respectively, as of December 31, 2009. The Corporation is no longer originating non-conventional mortgage loans at BPNA. Net charge-offs for BPNA’s non-conventional mortgage loan portfolio totaled $14.4 million for the quarter ended September 30, 2010, resulting in a ratio of 6.02% of annualized net charge-offs to average non-conventional mortgage loans held-in-portfolio for the quarter ended September 30, 2010, compared with $26.1 million and 9.30%, respectively, for the quarter ended September 30, 2009.

BPNA’s non-conventional mortgage loan portfolio reported, on a cumulative basis, a total of $205 million worth of loan modifications considered TDRs as of September 30, 2010, compared with $187 million as of December 31, 2009. As of September 30, 2010, BPNA’s non-conventional mortgage loan TDRs in non-performing status amounted to $71 million. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $59 million as of September 30, 2010, compared with a specific allowance for loan losses of $52 million as of December 31, 2009 for the BPNA reportable segment.

Consumer loans

Non-performing consumer loans remained relatively stable from December 31, 2009 to September 30, 2010, primarily as a result of a decrease of $3.2 million in the BPNA reportable segment, partially offset by an increase of $4.9 million in the BPPR reportable segment. The decrease in the BPNA reportable segment was primarily associated with home equity lines of credit and closed-end second mortgages, which are categorized by the Corporation as consumer loans. These portfolios have experienced improvements in delinquency levels, specifically as compared to 2009.

Non-performing consumer loans, excluding covered loans, decreased by $10 million from September 30, 2009 to September 30, 2010. This variance was the result of a decrease of $17 million in the BPNA reportable segment offset by an increase of $7 million in the BPPR reportable segment. The decrease in the BPNA reportable segment was mainly attributed to the improved performance in E-LOAN’s consumer loan portfolios. The increase in non-performing loans from September 30, 2009 to September 30, 2010 for the BPPR reportable segment was principally in auto loans due to current economic conditions.

Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio decreased mostly due to lower delinquencies in certain portfolios in the U.S. mainland and in Puerto Rico. The decrease in the ratio of consumer loans net charge-offs to average consumer loans held-in-portfolio in the BPPR reportable segment was mainly attributed to personal loans and credit cards.

The table that follows provides information on consumer non-performing loans as of September 30, 2010, September 30, 2009 and December 31, 2009, and net charge-offs information for the quarter and nine months ended September 30, 2010 and September 30, 2009 for the BPPR reportable segment.


	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30, 2009

BPPR Reportable Segment:
Non-performing consumer loans	$	41,604		$	36,695		$	34,571		$	41,604		$	34,571
Non-performing consumer loans to consumer loans HIP, excluding covered loans		1.43	%		1.19	%		1.09	%		1.43	%		1.09	%
Consumer loans net charge-offs	$	34,058					$	42,865		$	100,026		$	130,998
Consumer loan net charge-offs (annualized) to average consumer loans HIP, excluding covered loans		4.62	%					5.36	%		4.46	%		5.33	%

135

The following table presents the credit quality indicators for the BPNA reportable segment’s consumer loan portfolio.


	For the quarters ended									For the nine months ended
	September			December			September			September			September
(Dollars in thousands)	30, 2010			31, 2009			30, 2009			30, 2010			30 2009

BPNA Reportable Segment:
Non-performing consumer loans	$	24,302		$	27,490		$	41,421		$	24,302		$	41,421
Non-performing consumer loans to consumer loans HIP		2.88	%		2.83	%		4.01	%		2.88	%		4.01	%
Consumer loan net charge-offs	$	18,767					$	33,726		$	63,647		$	106,718
Consumer loan net charge-offs (annualized) to average consumer loans HIP		8.67	%					12.59	%		9.38	%		12.44	%

As previously explained, the decrease in non-performing consumer loans for the BPNA reportable segment was attributed in part to E-LOAN’s home equity lines of credit and closed-end second mortgages. As of September 30, 2010, approximately $16 million or 3.55% of E-LOAN’s home equity lines of credit and closed-end second mortgages were in non-performing status, compared with $16 million or 2.89% as of December 31, 2009, and $29 million or 5.02%, respectively, as of September 30, 2009. As compared to 2009, these loan portfolios showed signs of improved performance due to significant charge-offs recorded in previous quarters improving the quality of the remaining portfolio, combined with aggressive collection efforts and loan modification programs. Combined net charge-offs for E-LOAN’s home equity lines of credit and closed-end second mortgages amounted to approximately $12.9 million or 10.88% of those particular average loan portfolios for the quarter ended September 30, 2010, compared with $25.0 million or 16.53%, respectively, for the quarter ended September 30, 2009. With the downsizing of E-LOAN, this subsidiary ceased originating these types of loans. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding as of September 30, 2010 totaled $461 million with a related allowance for loan losses of $66 million, representing 14.35% of that particular portfolio. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding as of December 31, 2009 totaled $539 million with a related allowance for loan losses of $95 million, representing 17.59% of that particular portfolio.

Other real estate

Other real estate represents real estate property acquired through foreclosure.

Other real estate not covered under loss sharing agreements with the FDIC increased by $43 million from December 31, 2009 to September 30, 2010, and included commercial and residential properties. With the slowdown in the real estate market caused primarily by persistent weak economic conditions in certain geographical areas, there has been a softening effect on the market for resale of repossessed real estate properties. Defaulted loans have increased, and these loans move through the foreclosure process to the other real estate classification. The combination of increased flow of defaulted loans from the loan portfolio to other real estate owned and the slowing of the liquidation market has resulted in an increase in the number of other real estate units on hand. The increase was partially offset by write-downs recorded in the fair value of the properties based on re-appraisals.

Other real estate covered under loss sharing agreements with the FDIC amounted to $78 million as of September 30, 2010 and is disclosed in a separate line item in the statement of condition in the accompanying consolidated financial statements. As part of the Westernbank FDIC-assisted transaction, the Corporation acquired that portfolio of other real estate properties, which were recognized at fair value less estimated costs to sell at the April 30, 2010 transaction date.

136

Accruing loans past due 90 days or more

Accruing loans past due 90 days or more disclosed in Table K consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option to repurchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from other financial institutions that, although delinquent, the Corporation has received timely payment from the sellers / servicers, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from other financial institutions, which are in the process of foreclosure, are classified as non-performing mortgage loans.

Allowance for Loan Losses

Refer to the 2009 Annual Report for a detailed description of the Corporation’s accounting policy for determining the allowance for loan losses and for the Corporation’s definition of impaired loans.

As indicated previously in this MD&A, the covered loans were recognized at fair value as of the April 30, 2010 acquisition date, which included the impact of expected credit losses and therefore, no allowance for credit losses was recorded as of such date. To the extent credit deterioration occurs after the date of acquisition, the Corporation would record an allowance for loan losses. Also, the Corporation would record an increase in the FDIC loss share indemnification asset for the expected reimbursement from the FDIC under the loss sharing agreements. Management determined that there was no need to record an allowance for loan losses on the covered loans as of September 30, 2010.

Tables N to P set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) as of September 30, 2010, December 31, 2009, and September 30, 2009 by loan category and by whether the allowance and related provisions were calculated individually pursuant to the requirements for specific impairment or through a general valuation allowance.

TABLE N

Composition of the Allowance for Loan Losses as of September 30, 2010


							Lease
(Dollars in thousands)	Commercial			Construction			Financing			Mortgage			Consumer			Total

Specific ALLL	$	107,318		$	182,134			—		$	62,039			—		$	351,491
Impaired loans [1]		621,557			794,716			—			309,840			—			1,726,113
Specific ALLL to impaired loans		17.27	%		22.92	%		—			20.02	%		—			20.36	%

General ALLL	$	405,053		$	125,454		$	14,302		$	112,641		$	235,053		$	892,503

Loans held-in-portfolio, excluding impaired loans [1]		11,097,570			505,213			613,560			4,440,228			3,759,798			20,416,369
General ALLL to loans held-in-portfolio, excluding impaired loans		3.65	%		24.83	%		2.33	%		2.54	%		6.25	%		4.37	%

Total ALLL	$	512,371		$	307,588		$	14,302		$	174,680		$	235,053		$	1,243,994
Total loans held-in-portfolio [1]		11,719,127			1,299,929			613,560			4,750,068			3,759,798			22,142,482
ALLL to loans held-in-portfolio		4.37	%		23.66	%		2.33	%		3.68	%		6.25	%		5.62	%


[1]		Excludes covered loans from the Westernbank FDIC-assisted transaction. Covered loans did not require an allowance for loan losses as of September 30, 2010.

137

TABLE O

Composition of the Allowance for Loan Losses as of December 31, 2009


							Lease
(Dollars in thousands)	Commercial			Construction			Financing			Mortgage			Consumer			Total

Specific ALLL	$	108,769		$	162,907			—		$	52,211			—		$	323,887
Impaired loans	$	645,513		$	841,361			—		$	186,747			—		$	1,673,621
Specific ALLL to impaired loans		16.85	%		19.36	%		—			27.96	%		—			19.35	%

General ALLL	$	328,940		$	178,412		$	18,558		$	102,400		$	309,007		$	937,317

Loans held-in-portfolio, excluding impaired loans	$	12,018,546		$	883,012		$	675,629		$	4,416,498		$	4,045,807		$	22,039,492

General ALLL to loans held-in-portfolio, excluding impaired loans		2.74	%		20.20	%		2.75	%		2.32	%		7.64	%		4.25	%

Total ALLL	$	437,709		$	341,319		$	18,558		$	154,611		$	309,007		$	1,261,204
Total loans held-in-portfolio	$	12,664,059		$	1,724,373		$	675,629		$	4,603,245		$	4,045,807		$	23,713,113
ALLL to loans held-in-portfolio		3.46	%		19.79	%		2.75	%		3.36	%		7.64	%		5.32	%

TABLE P

Composition of the Allowance for Loan Losses as of September 30, 2009


(Dollars in thousands)	Commercial			Construction			Lease Financing			Mortgage			Consumer			Total

Specific ALLL	$	106,701		$	171,031			—		$	35,492			—		$	313,224
Impaired loans	$	619,544		$	751,976			—		$	167,863			—		$	1,539,383
Specific ALLL to impaired loans		17.22	%		22.74	%		—			21.14	%		—			20.35	%

General ALLL	$	266,563		$	168,309		$	24,609		$	108,848		$	325,848		$	894,177
Loans held-in-portfolio, excluding impaired loans	$	12,456,324		$	1,130,093		$	699,350		$	4,379,509		$	4,191,410		$	22,856,686
General ALLL to loans held-in-portfolio, excluding impaired loans		2.14	%		14.89	%		3.52	%		2.49	%		7.77	%		3.91	%

Total ALLL	$	373,264		$	339,340		$	24,609		$	144,340		$	325,848		$	1,207,401
Total loans held-in-portfolio	$	13,075,868		$	1,882,069		$	699,350		$	4,547,372		$	4,191,410		$	24,396,069
ALLL to loans held-in-portfolio		2.85	%		18.03	%		3.52	%		3.17	%		7.77	%		4.95	%

As compared to December 31, 2009, the allowance for loan losses decreased by approximately $17 million. This decrease is the net result of a decrease in the BPNA reportable segment by $75 million offset by an increase of $58 million in the BPPR reportable segment. The increase in the allowance for loan losses for the commercial loan portfolio as of September 30, 2010 was mainly attributed to BPPR’s commercial real estate portfolio considering this market has been negatively impacted by the current economic situation in Puerto Rico. The construction loan portfolio continues to maintain the highest allowance coverage mainly due to the continued deterioration of economic and housing market conditions in Puerto Rico. The increase in the allowance for loan losses for mortgage loans from December 31, 2009 to September 30, 2010 was primarily related to the BPPR reportable segment influenced by the increasing level of delinquent mortgages and increasing loan modifications. The reduction in the allowance for loan losses for the consumer loan portfolio continues to be driven by more stable performance trends

138

in certain portfolios in terms of non-performing loans and losses combined with portfolio reductions in the Puerto Rico and U.S. mainland operations.

The Corporation’s recorded investment in commercial, construction and mortgage loans that were considered impaired and the related valuation allowance were as follows:


	September 30, 2010				December 31, 2009				September 30, 2009
	Recorded		Valuation		Recorded		Valuation		Recorded		Valuation
(In millions)	Investment		Allowance		Investment		Allowance		Investment		Allowance

Impaired loans:
Valuation allowance required	$	1,246.7	$	351.5	$	1,263.3	$	323.9	$	1,134.5	$	313.2
No valuation allowance required		479.4		—		410.3		—		404.9		—

Total impaired loans	$	1,726.1	$	351.5	$	1,673.6	$	323.9	$	1,539.4	$	313.2

With respect to the $479 million portfolio of impaired commercial and construction loans for which no allowance for loan losses was required as of September 30, 2010, management followed the guidance for specific impairment of a loan. When a loan is impaired, the measurement of the impairment may be based on: (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate; (2) the observable market price of the impaired loan; or (3) the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The $479 million impaired commercial and construction loans with no valuation allowance were collateral dependent loans in which management performed a detailed analysis based on the fair value of the collateral less estimated costs to sell and determined that the collateral was deemed adequate to cover any losses as of September 30, 2010.

Average impaired loans during the quarters ended September 30, 2010 and 2009 were $1.7 billion and $1.5 billion, respectively. The Corporation recognized interest income on impaired loans of $5.2 million and $5.1 million for the quarters ended September 30, 2010 and 2009, respectively, and $14.5 million and $12.0 million, respectively, for the year-to-date periods ended September 30, 2010 and September 30, 2009.

The following tables set forth an analysis of the activity in the specific reserves for impaired loans, excluding covered loans, for the quarters ended September 30, 2010 and September 30, 2009:


	For the quarter ended September 30, 2010
(In thousands)	Commercial Loans		Construction Loans		Mortgage Loans		Total

Specific ALLL as of July 1, 2010	$	132,753	$	188,949	$	61,737	$	383,439
Provision for impaired loans		28,942		67,595		5,309		101,846
Less: Charge-offs		54,377		74,410		5,007		133,794

Specific ALLL as of September 30, 2010	$	107,318	$	182,134	$	62,039	$	351,491


	For the quarter ended September 30, 2009
(In thousands)	Commercial Loans		Construction Loans		Mortgage Loans		Total

Specific ALLL as of July 1, 2009	$	197,898	$	85,608	$	29,584	$	313,090
Provision for impaired loans		59,814		41,004		7,743		108,561
Less: Charge-offs		86,681		19,911		1,835		108,427

Specific ALLL as of September 30, 2009	$	171,031	$	106,701	$	35,492	$	313,224

For the quarter ended September 30, 2010, total charge-offs for individually evaluated impaired loans amounted to approximately $133.8 million, of which $89.0 million pertained to the BPPR reportable segment and $44.8 million to the BPNA reportable segment. Most of these charge-offs were related to the commercial and construction portfolios. As compared to the quarter ended September 30, 2009, the increase in charge-offs for construction loans considered impaired was mainly associated to particular borrowers in the BPPR reportable segment. The specific reserves for these borrowers were established in prior quarters.

139

Given the challenging economic environment in Puerto Rico, the Corporation’s credit metrics for its Puerto Rico operations will remain under pressure in 2010, particularly real estate related assets. The U.S. operations have followed the general credit trends on the mainland demonstrating progressive improvement; nonetheless, credit quality continues to be closely monitored.

Other commitments to extend credit

Commercial letters of credit and standby letters of credit amounted to $19 million and $116 million, respectively, as of September 30, 2010; $13 million and $134 million, respectively, as of December 31, 2009; and $18 million and $162 million, respectively, as of September 30, 2009. In addition, the Corporation has commitments to originate mortgage loans amounting to $64 million as of September 30, 2010, $48 million as of December 31, 2009 and $55 million as of September 30, 2009.

Commitments to extend credit, which include credit card lines, commercial lines of credit, and other unused credit commitments, amounted to $6.2 billion as of September 30, 2010, excluding the commitments to extend credit that pertain to the Westernbank acquired lending relationships, and $7.0 billion as of December 31, 2009 and September 30, 2009.

As of September 30, 2010, the Corporation maintained a reserve of approximately $8 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit unrelated to the acquired lending relationships from the Westernbank FDIC-assisted transaction, compared to $15 million as of December 31, 2009. The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the Corporation’s allowance for loan losses methodology. The decrease in the reserve for unfunded commitments from December 31, 2009 to September 30, 2010 was primarily related to decreasing trends in funding rates in BPPR’s and BPNA’s commercial portfolios, and E-LOAN’s home equity lines of credit. This reserve for unfunded exposures remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of condition.

Geographical and government risk

As explained in the 2009 Annual Report, the Corporation is exposed to geographical and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 29 to the consolidated financial statements.

A significant portion of the Corporation’s financial activities and credit exposure is concentrated in Puerto Rico. Since 2006, the Puerto Rico economy has been experiencing recessionary conditions. Based on information published by the Puerto Rico Planning Board (the “Planning Board”), the Puerto Rico real gross national product decreased an estimated 3.6% during fiscal year 2010. The unemployment rate in Puerto Rico has remained high at 16%, as of August 2010. The Puerto Rico economy continues to be challenged, primarily, by a housing sector that remains under pressure, contraction in the manufacturing sector and a fiscal deficit that constrains government spending.

The government recently enacted a housing-incentive law that puts into effect temporary measures, effective from September 1, 2010 through June 30, 2011, that seek to stimulate demand for housing and reduce the significant

140

excess supply of new homes. The incentives include reductions in taxes and government closing fees, tax exemption on rental income from new properties for 10 years, exemption on long-term capital gain tax in future sale of new properties and no property taxes for five years on new housing, among others.

Several major projects are under consideration by the Puerto Rico Government in areas such as energy and road infrastructure. These are to be structured as public and private partnerships and are expected to generate economic activity as they are awarded and construction commences. There are also various hotel projects under development. Another positive development is the remaining disbursements under the American Recovery and Reinvestment Act of 2009 (“ARRA”), of which $3.2 billion or close to 48% had been disbursed as of June 30, 2010. The Puerto Rican economy is still vulnerable, but the government has made progress in addressing the budget deficit while the banking sector has been substantially recapitalized and consolidated through FDIC-assisted transactions.

The current state of the economy and uncertainty in the private and public sectors has resulted in, among other things, a downturn in the Corporation’s loan originations; deterioration in the credit quality of the Corporation’s loan portfolios as reflected in high levels of non-performing assets, loan loss provisions and charge-offs, particularly in the Corporation’s construction and commercial loan portfolios; an increase in the rate of foreclosures on mortgage loans; and a reduction in the value of the Corporation’s loans and loan servicing portfolio, all of which have adversely affected its profitability. The persistent economic slowdown would cause those adverse effects to continue, as delinquency rates may increase in the short-term, until sustainable growth resumes. Also, a potential reduction in consumer spending may also impact growth in the Corporation’s other interest and non-interest revenues.

As of September 30, 2010, the Corporation had $1.2 billion of credit facilities granted to or guaranteed by the Puerto Rico Government and its political subdivisions, of which $215 million were uncommitted lines of credit. Of these total credit facilities granted, $1 billion were outstanding as of September 30, 2010. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities.

Furthermore, as of September 30, 2010, the Corporation had outstanding $238 million in obligations of Puerto Rico, States and political subdivisions as part of its investment securities portfolio. Refer to Notes 9 and 10 to the consolidated financial statements for additional information. Of that total, $234 million was exposed to the creditworthiness of the Puerto Rico Government and its municipalities.

As further detailed in Notes 9 and 10 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government sponsored entities, as well as mortgage-backed securities guaranteed by GNMA. In addition, $523 million of residential mortgages and $292 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies as of September 30, 2010.

141

REGULATORY RISK

The Corporation is subject to regulations imposed by the U.S. Treasury Office of Foreign Assets Control, or OFAC. OFAC regulations impose restrictions on financial transactions by persons subject to those regulations with or involving targeted countries and persons, including Cuba, Burma/Myanmar, Iran and Sudan and persons and entities identified on OFAC’s list of Specially Designated Nationals and Blocked Persons, or the SDN List. The Corporation has no business operations, subsidiaries or affiliated entities in the countries targeted by the OFAC regulations and it has procedures in place designed to identify transactions involving targeted countries and persons or entities on the SDN List. See additional information on Item 1A. Risk Factors included in this Form 10-Q.

OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS

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

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

There were no significant changes in other contractual obligations, such as purchase obligations, capital leases, and operating leases, or pension and postretirement liabilities, and uncertain tax positions as of September 30, 2010, when compared with December 31, 2009. Refer to Note 19 to the consolidated financial statements for information on commitments and guarantees.

As previously indicated, the Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on fluctuations in interest rates. These contracts are carried at fair value on the consolidated statements of condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions. The Corporation’s derivative activities have not changed significantly from December 31, 2009.

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

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

142

Refer to the Credit Risk Management and Loan Quality section of this MD&A for a discussion on contractual amounts as they relate to commitments to extend credit.

The Corporation is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters (except for the matters described in the Legal Proceedings section in Note 19 to the consolidated financial statements which are in very early stages and as to which the outcome cannot be predicted) will not have a material adverse effect on the Corporation’s business, results of operations, financial condition and liquidity.

Guarantees associated with loans sold / serviced

As of September 30, 2010, the Corporation serviced $4.1 billion in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and Freddie Mac programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation may be required to repurchase the loan or reimburse for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the nine months ended September 30, 2010, the Corporation repurchased approximately $93 million in mortgage loans subject to the credit recourse provisions. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing of the related property. Most claims associated with the residential mortgage loans subject to credit recourse provisions are settled by repurchases of delinquent loans. As of September 30, 2010, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $38 million (December 31, 2009 — $16 million; September 30, 2009 — $16 million). Refer to Note 19 to the consolidated financial statements for a description of the methodology followed to determine the recourse liability.

143

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. As of September 30, 2010, the Corporation serviced $18.0 billion in mortgage loans, including the loans serviced with credit recourse. The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds from mortgage loans foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantee programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. As of September 30, 2010, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $25 million. To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

As of September 30, 2010, the Corporation established reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN. Loans had been sold to investors on a servicing released basis subject to certain representations and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation is required to make certain representations relating to borrower creditworthiness, loan documentation and collateral, which if not complied, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. The loans had been sold prior to 2009. As of September 30, 2010, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $35 million, which was included as part of other liabilities in the consolidated statement of condition. E-LOAN is no longer originating and selling loans, since the subsidiary ceased these activities during 2008. On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to E-LOAN’s customary representation and warranty arrangements. The analysis incorporates expectations on future disbursements based on quarterly repurchases and make-whole events. The analysis also considers factors such as the average length-time between the loan’s funding date and the loan repurchase date as observed in the historical loan data. During the nine months ended September 30, 2010, E-LOAN charged-off approximately $8.8 million against this representation and warranty reserve associated with loan repurchases and indemnification or make-whole events (nine months ended September 30, 2009 — $13.2 million). Make-whole events are typically defaulted loans in which the investor attempts to recover through the collateral or guarantees, and the seller is obligated to cover any impaired or unrecovered portion of the loan. Claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation.

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

144

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights, and the equity appreciation instrument. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.

The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

	•		Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. No significant degree of judgment for these valuations is needed, as they are based on quoted prices that are readily available in an active market.

	•		Level 2 — Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.

	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the financial asset or liability. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability, including assumptions about risk. The inputs are developed based on the best available information, which might include the Corporation’s own data such as internally-developed models and discounted cash flow analyses.

The Corporation requires the use of observable inputs when available, in order to minimize the use of unobservable inputs to determine fair value. 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 on 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.

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

Refer to Note 21 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. As of September 30, 2010, approximately $6.3 billion, or 97%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value are classified as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments. U.S. Treasury securities are valued based on yields that are interpolated from the constant maturity treasury curve. Obligations of U.S. Government sponsored entities are priced based on an active exchange market and on quoted prices for similar securities. Obligations of Puerto Rico, States and political subdivisions are valued based on trades, bid price or spread, two sided markets, quotes, benchmark curves, market data feeds, discount and capital rates and trustee reports. MBS and CMOs are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Refer to the Derivatives section below for a description of the valuation techniques used to value these instruments.

145

As of September 30, 2010, the remaining 3% of assets measured at fair value on a recurring basis were classified as Level 3 since their valuation methodology considered significant unobservable inputs. The financial assets measured as Level 3 included mostly tax-exempt GNMA mortgage-backed securities and mortgage servicing rights (“MSRs”). GNMA tax exempt mortgage-backed securities are priced using a local demand price matrix prepared from local dealer quotes, and other local investments such as corporate securities and local mutual funds which are priced by local dealers. MSRs, on the other hand, are priced internally using a discounted cash flow model which considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Additionally, the Corporation reported $651 million of financial assets that were measured at fair value on a nonrecurring basis as of September 30, 2010, all of which were classified as Level 3 in the hierarchy.

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 $47 million as of September 30, 2010, of which $38 million were Level 3 assets and $9 million were Level 2 assets. These assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities is based on an internally-prepared matrix derived from an average of two indicative local broker quotes. The main input used in the matrix pricing is non-binding local broker quotes obtained from limited trade activity. Therefore, these securities are classified as Level 3.

During the quarter and nine months ended September 30, 2010, $113 million and $197 million, respectively, of tax-exempt FNMA and GNMA mortgage-backed securities were transferred out of Level 3 and into Level 2 as a result of a change in valuation methodology from an internally-developed matrix pricing to pricing them based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. Pursuant to the Corporation’s policy, these transfers were recognized as of the end of the reporting period. There were no transfers in and / or out of Level 1 during the quarter and nine months ended September 30, 2010. Refer to Note 21 to the consolidated financial statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value as of September 30, 2010. Also, refer to the Critical Accounting Policies / Estimates in the 2009 Annual Report for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

Trading Account Securities and Investment Securities Available-for-Sale

The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the quarter and nine months ended September 30, 2010, 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 quarter and nine months ended September 30, 2010, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.

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

146

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.

As of September 30, 2010, the Corporation’s portfolio of trading and investment securities available-for-sale amounted to $6.2 billion and represented 96% of the Corporation’s assets measured at fair value on a recurring basis. As of September 30, 2010, net unrealized gains on the trading and available-for-sale investment securities portfolios approximated $30 million and $225 million, respectively. Fair values for most of the Corporation’s trading and investment securities available-for-sale are classified as Level 2. Trading and investment securities available-for-sale classified as Level 3, which are the securities that involved the highest degree of judgment, represent less than 1% of the Corporation’s total portfolio of trading and investment securities available-for-sale.

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”), which amounted to $166 million as of September 30, 2010, do not trade in an active, open market with readily observable prices. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level data and market assumptions. The valuation model combines loans with common characteristics that impact servicing cash flows (e.g. investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows. Market valuation assumptions include prepayment speeds, discount rate, cost to service, escrow account earnings, and contractual servicing fee income, among other considerations. Prepayment speeds are derived from market data that is more relevant to the U.S. mainland loan portfolios and, thus, are adjusted for the Corporation’s loan characteristics and portfolio behavior since prepayment rates in Puerto Rico have been historically lower. Other assumptions are, in the most part, directly obtained from third-party providers. Disclosure of two of the key economic assumptions used to measure MSRs, which are prepayment speed and discount rate, and a sensitivity analysis to adverse changes to these assumptions, is included in Note 12 to the consolidated financial statements.

Derivatives

Derivatives, such as interest rate swaps, interest rate caps and indexed options, are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives held by the Corporation are classified as Level 2. Valuations of derivative assets and liabilities reflect the values associated with counterparty risk and nonperformance risk, respectively. The non-performance risk, which measures the Corporation’s own credit risk, is determined using internally-developed models that consider the net realizable value of the collateral posted, remaining term, and the creditworthiness or credit standing of the Corporation. The counterparty risk is also determined using internally-developed models which incorporate the creditworthiness of the entity that bears the risk, net realizable value of the collateral received, and available public data or internally-developed data to determine their probability of default. To manage the level of credit risk, the Corporation employs procedures for credit approvals and credit limits, monitors the counterparties’ credit condition, enters into master netting agreements whenever possible and, when appropriate, requests additional collateral. During the quarter and nine months ended September 30, 2010, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $0.8 million and $2.4 million, respectively, recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a loss of $1.2 million and $1.8 million, respectively, resulting from the Corporation’s own credit standing adjustment and a gain of $0.4 million and a loss of $0.6 million, respectively, from the assessment of the counterparties’ credit risk.

Equity appreciation instrument

The fair value of the equity appreciation instrument issued to the FDIC was estimated by determining a call option value using the Black-Scholes Option Pricing Model. The principal variables in determining the fair value of the equity appreciation instrument include the implied volatility determined based on the historical daily volatility of the Corporation’s common stock, the exercise price of the instrument, the price of the call option, and the risk-free rate. The equity appreciation instrument is classified as Level 2. The Corporation recognized non-interest income of $10.6 million and $35.0 million, respectively, during the quarter and nine months ended September 30, 2010 as a result of

147

a decrease in the fair value of the equity appreciation instrument. The carrying amount of the equity appreciation instrument, which is recorded as other liability in the consolidated statement of condition, amounted to $17.5 million as of September 30, 2010.

Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent

The impairment is based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, size and supply and demand. Continued deterioration of the housing markets and the economy in general have adversely impacted and continue to affect the market activity related to real estate properties. These collateral dependent impaired loans are classified as Level 3 and are reported as a nonrecurring fair value measurement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The financial results and capital levels of Popular, Inc. are constantly exposed to market risk. Market risk represents the risk of loss due to adverse movements in market rates or prices, which include interest rates, foreign exchange rates and equity prices; the failure to meet financial obligations coming due because of the inability to liquidate assets or obtain adequate funding; and the inability to easily unwind or offset specific exposures without significantly lowering prices because of inadequate market depth or market disruptions.

While the Corporation is exposed to various business risks, the risks relating to interest rate risk and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature.

The Asset Liability Management Committee (“ALCO”) and the Corporate Finance Group are responsible for planning and executing the Corporation’s market, interest rate risk, funding activities and strategy, and for implementing the policies and procedures approved by the Corporation’s Risk Management Committee. In addition, a Market Risk Manager, who is part of the Risk Management Group, has been appointed to enhance and strengthen controls surrounding interest, liquidity, and market risks, and independently monitor and report adherence with established market and liquidity policies. The ALCO meets on a monthly basis and reviews various interest rate risk sensitivities, ratios and portfolio information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

Interest rate risk (“IRR”), a component of market risk, is considered by management as a predominant market risk in terms of its potential impact on profitability or market value. The techniques for measuring the potential impact of the Corporation’s exposure to market risk from changing interest rates that were described in the 2009 Annual Report are the same as those applied by the Corporation as of September 30, 2010.

Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs. It also incorporates assumptions on balance sheet growth and expected changes in its composition, estimated prepayments in accordance with projected interest rates, pricing and maturity expectations on new volumes and other non-interest related data. It is a dynamic process, emphasizing future performance under diverse economic conditions.

Management assesses interest rate risk using various interest rate scenarios that differ in magnitude and direction, the speed of change and the projected shape of the yield curve. For example, the types of interest rate scenarios processed include most likely economic scenarios, flat or unchanged rates, yield curve twists, +/- 200 and + 400 basis points parallel ramps and +/- 200 basis points parallel shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures. The asset and liability management group also evaluates the reasonableness of assumptions used and results obtained in the monthly sensitivity analyses. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage loans and mortgage-backed securities, estimates on the

148

duration of the Corporation’s deposits and interest rate scenarios.

The Corporation runs net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline gradually by the same amount. The rising rate scenarios considered in these market risk disclosures reflect gradual parallel changes of 200 and 400 basis points during the twelve-month period ending September 30, 2011. Under a 200 basis points rising rate scenario, projected net interest income increases by $44.0 million, while under a 400 basis points rising rate scenario, projected net interest income increases by $69.5 million, when compared against the Corporation’s flat or unchanged interest rates forecast scenario. Given the fact that as of September 30, 2010 some market interest rates continued to be close to zero, management has focused on measuring the risk on net interest income in rising rate scenarios. These interest rate simulations exclude the impact on loans accounted pursuant to ASC Subtopic 310-30, whose yields are based on management’s current expectation of future cash flows.

Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future.

The Corporation estimates the sensitivity of economic value of equity (“EVE”) to changes in interest rates. EVE is equal to the estimated present value of the Corporation’s assets minus the estimated present value of the liabilities. This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact of up or down rate changes in expected cash flows, including principal and interest, from all future periods.

EVE sensitivity calculated using interest rate shock scenarios is estimated on a quarterly basis. The shock scenarios consist of +/- 200 basis points parallel shocks. Management has defined limits for the increases / decreases in EVE resulting from the shock scenarios. As of September 30, 2010, the Corporation was in compliance with these limits.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk adjustments which could have a positive or negative effect in the Corporation’s earnings.

FDIC-assisted transaction

The Corporation’s total assets increased significantly from December 31, 2009 to September 30, 2010 because of the acquired loans in the Westernbank FDIC-assisted transaction. Management believes that the transaction will improve the Corporation’s net interest income, as it will generate more interest earned on the acquired loans than it will pay in interest on deposits and borrowings related to the acquisition with limited exceptions. The loans were initially recorded at estimated fair values. The estimated fair values of acquired loans on the acquisition date reflect an estimate of expected losses related to these assets. As a result, operating losses may be affected if loan losses exceed the losses reflected in the fair value of these assets at the acquisition date. In addition, to the extent that the stated interest rate on the acquired covered loans was not considered a market rate of interest at the acquisition date, appropriate adjustments to the acquisition-date fair value were recorded. These adjustments mitigate the risk associated with the acquisition of loans earning a below-market rate of return. As expressed in previous sections of this report, most of the covered loans will have an accretable yield. The accretable yield is the amount by which the undiscounted expected cash flows exceed the estimated fair value. The accretable yield includes the future interest expected to be collected over the remaining life of the acquired loans and the purchase premium or discount. The remaining life includes the effects of estimated prepayments, expected credit losses and adjustments to market liquidity and prevailing interest rates at acquisition date. For covered loans accounted for under ASC Subtopic 310-30, the Corporation is required to periodically evaluate its estimate of cash flows expected to be collected. These evaluations, performed quarterly, will require the continued usage of key assumptions and estimates, similar to the initial estimate of fair value. Given the current economic environment, management must apply judgment to develop its estimates of cash flows for those covered loans given the impact of home price and property value changes, changing loss severities and prepayment speeds. Decreases in the expected cash flows will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. Increases in the

149

expected cash flows will generally result in an increase in interest income over the remaining life of the loan, or pool of loans.

As indicated in the Westerbank FDIC-assisted transaction section in this MD&A, the equity appreciation instrument issued to the FDIC is recognized at fair value and added $35.0 million to non-interest income for the nine months ended September 30, 2010. The fair value of the equity appreciation instrument is estimated by determining a call option value using the Black-Scholes Option Pricing Model, and the value depends largely on variations of the Corporation’s current common stock price, its projected volatility and the remaining maturity of the instrument.

Foreign Exchange

The Corporation holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive income (loss) in the consolidated statements of condition, except for highly-inflationary environments in which the effects would be included in the consolidated statements of operations.

As of September 30, 2010, the Corporation had approximately $35 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income (loss), compared to an unfavorable adjustment of $41 million as of December 31, 2009 and September 30, 2009.

Popular, Inc. operates in Venezuela through its wholly-owned subsidiary EVERTEC DE VENEZUELA, C.A. On January 7, 2010, Venezuela’s National Consumer Price Index (“NCPI”) for December 2009 was released. The cumulative three-year inflation rates for both of Venezuela’s inflation indices were over 100 percent. The Corporation began considering Venezuela’s economy as highly inflationary as of January 1, 2010, and the financial statements of EVERTEC — Venezuela were remeasured as if the functional currency was the reporting currency as of such date. ASC Paragraph 830-10-45-11 defines a highly inflationary economy as one with a cumulative inflation rate of approximately 100 percent or more over a three-year period. Under ASC Topic 830, if a country’s economy is classified as highly inflationary, the functional currency of the foreign entity operating in that country must be remeasured to the functional currency of the reporting entity. The unfavorable impact of remeasuring the financial statements of EVERTEC — Venezuela as of September 30, 2010, was approximately $1.8 million. Total assets for EVERTEC — Venezuela remeasured approximated $8.0 million as of September 30, 2010.

LIQUIDITY

The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. An institution is also exposed to liquidity risk if the markets on which it depends are subject to temporary disruptions.

The Corporation obtains liquidity from both sides of the balance sheet as well as from off-balance-sheet activities. Liquid assets can be quickly and easily converted to cash at a reasonable cost, or are timed to mature when management anticipates a need for additional liquidity. The Corporation’s investment portfolio, including money markets such as fed funds sold and loans that can be pledged at the Federal Home Loan Bank (“FHLB”) and the investment portfolio currently not pledged to other counterparties in the repo market, are used to manage Popular’s liquidity needs. The Corporation’s banking subsidiaries also had established collateralized borrowing facilities at the Discount Window with the Federal Reserve Bank of New York (“Fed”) that can be used under stress scenarios. On the liability side, diversified sources of deposits and secured credit facilities provide liquidity to Popular’s operations. Even if some of these alternatives may not be available temporarily, it is expected that in the normal course of business, the Corporation’s funding sources are adequate.

Factors that the Corporation does not control, such as the economic outlook of its principal markets and regulatory changes, could affect its ability to obtain funding. In order to prepare for the possibility of such scenario,

150

management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the Fed. The Corporation has a significant amount of assets available for raising funds through these channels.

Deposits, including customer deposits, brokered certificates of deposit, and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 68% of the Corporation’s total assets as of September 30, 2010 and 75% as of December 31, 2009. The decrease in the ratio of deposits to total assets from the end of 2009 to September 30, 2010 was directly related to the aforementioned Westernbank FDIC-assisted transaction. As shown in the Westernbank FDIC-assisted Transaction section of this MD&A, the acquired loans (book value prior to purchase accounting adjustments) exceeded substantially the assumed liabilities, and as such, the Corporation funded the acquisition by issuing a note to the FDIC. The FDIC retained substantially all of Westernbank’s brokered certificates of deposit, which for former Westernbank entity represented a major funding source for its earning assets.

In addition to traditional deposits, the Corporation maintains borrowing arrangements. As of September 30, 2010, these borrowings consisted primarily of the note issued to the FDIC as part of the Westernbank FDIC-assisted transaction, FHLB borrowings, securities sold under agreement to repurchase, junior subordinated deferrable interest debentures, and term notes. Refer to Note 16 to the consolidated financial statements for the composition of the Corporation’s borrowings as of September 30, 2010 and December 31, 2009. The most significant variance in the Corporation’s borrowings composition from December 31, 2009 to September 30, 2010 is primarily related to the note issued to the FDIC.

The composition of the Corporation’s financing to total assets as of September 30, 2010 and December 31, 2009 is included in Table Q.

TABLE Q
Financing to Total Assets


					% increase (decrease) from			% of total assets
	September 30,		December 31,		December 31, 2009 to			September 30,			December 31,
(Dollars in millions)	2010		2009		September 30, 2010			2010			2009

Non-interest bearing deposits	$	5,371	$	4,495		19.5	%		13.2	%		13.0	%
Interest-bearing core deposits		15,883		14,983		6.0			38.9			43.1
Other interest-bearing deposits		6,486		6,447		0.6			15.9			18.6
Repurchase agreements		2,358		2,633		(10.4	)		5.8			7.6
Other short-term borrowings		191		7		N.M.			0.4			—
Notes payable		5,143		2,649		94.1			12.6			7.6
Others		1,280		983		30.2			3.1			2.8
Stockholders’ equity		4,109		2,539		61.8			10.1			7.3

N.M. means not meaningful

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. Also, it is managed at the level of the banking and non-banking subsidiaries.

The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities.

Banking Subsidiaries

Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and BPNA), or “the banking subsidiaries,” include retail and commercial deposits, brokered deposits, collateralized borrowings, unpledged investment securities, and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the Discount Window of the Fed, and have a considerable amount of collateral pledged that

151

can be used to quickly raise funds under these facilities. Furthermore, during the nine months ended September 30, 2010, the BHCs made capital contributions to BPNA and BPPR amounting to $495 million and $600 million, respectively. BPNA has received capital contributions in order to ensure it maintains its well-capitalized status. The capital contribution to BPPR was done to strengthen its regulatory capital ratios upon executing the Westernbank FDIC-assisted transaction. As indicated previously, during the quarter ended June 30, 2010, BPPR issued a note to the FDIC as part of the consideration paid in the Westernbank FDIC-assisted transaction. As indicated in a previous section of this MD&A, during the third quarter of 2010, BPPR prepaid $2.1 billion of the outstanding balance of the note issued to the FDIC. Funds for the repayment were principally obtained from excess liquidity maintained in cash with the Fed, and to a lesser extent, a combination of proceeds from sales of investment securities with unrealized gains, FHLB advances and repurchase agreements. The note issued to the FDIC was selected for partial repayment because it resulted in more favorable economics for the Corporation than prepaying other of its liabilities, which entailed prepayment penalties. This FDIC obligation was also of sufficient size to permit the Corporation to deploy its excess liquidity.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, repayment of outstanding obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for some derivative transactions and recourse obligations; off-balance sheet activities mainly in connection with contractual commitments; recourse provisions; servicing advances; derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.

The bank operating subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the Fed and FHLB, in addition to liquid unpledged securities. The Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits. In addition, the total loan portfolio is funded with deposits with the exception of the Westernbank acquisition which is partially funded with the note issued to the FDIC.

The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit rating of the Corporation may impact its ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the effect of a downgrade in the credit ratings.

Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table I for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. As indicated in the glossary, for purposes of defining core deposits, the Corporation excludes brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $21.3 billion, or 77% of total deposits, as of September 30, 2010, compared with $19.5 billion, or 75% of total deposits, as of December 31, 2009. Core deposits financed 61% of the Corporation’s earning assets as of September 30, 2010, compared to 60% as of December 31, 2009.

152

Certificates of deposit with denominations of $100,000 and over as of September 30, 2010 totaled $4.8 billion, or 17% of total deposits, compared to $4.7 billion, or 18%, as of December 31, 2009. Their distribution by maturity as of September 30, 2010 was as follows:


(In thousands)

3 months or less	$	1,898,184
3 to 6 months		720,406
6 to 12 months		956,355
Over 12 months		1,203,366

	$	4,778,311

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. As of September 30, 2010 and December 31, 2009, the banking subsidiaries had credit facilities authorized with the FHLB aggregating $1.7 billion and $1.9 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $693 million as of September 30, 2010 and $1.1 billion as of December 31, 2009. Such advances are collateralized by securities and mortgage loans, do not have restrictive covenants and do not have any callable features. Refer to Note 16 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding. As indicated in the Operating Expenses section of this MD&A, the Corporation extinguished $180 million of FHLB advances borrowed by BPNA.

As of September 30, 2010, the banking subsidiaries had a borrowing capacity at the Fed’s Discount Window of approximately $2.7 billion, which remained unused as of that date. This compares to a borrowing capacity at the Fed discount window of $2.9 billion as of December 31, 2009, which was also unused. This facility is a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under this borrowing facility is dependent upon the balance of performing loans and securities pledged as collateral and the haircuts assigned to such collateral.

The Corporation incurred $9.7 million in prepayment penalties during the quarter ended September 30, 2010 on the cancellation of $180 million of FHLB advances and $54 million in public fund certificates of deposit as part of BPNA’s deployment of excess liquidity and as part of a strategy to increase margin in future periods.

As of September 30, 2010, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet its anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, during the foreseeable future and have sufficient liquidity resources to address a stress event.

Westernbank FDIC-assisted Transaction and Impact on Liquidity

Apart from the impact of the note issued to the FDIC that was described above, the Corporation’s liquidity is also impacted by the loan payment performance and reimbursements on the loss sharing agreements.

In the short-term, there may be a significant amount of the covered loans acquired in the FDIC-assisted transaction that will experience deterioration in payment performance, or will be determined to have inadequate collateral values to repay the loans. In such instances, the Corporation will likely no longer receive payments from the borrowers, which will impact cash flows. The loss sharing agreements will not fully offset the financial effects of such a situation. However, if a loan is subsequently charged off or written down after the Corporation exhausts its best efforts at collection, the loss sharing agreements will cover 80% of the loss associated with the covered loans, offsetting most of any deterioration in the performance of the covered loans.

The effects of the loss sharing agreements on cash flows and operating results in the long-term will be similar to the short-term effects described above. The long-term effects that we may experience will depend primarily on the ability of the borrowers whose loans are covered by the loss sharing agreements to make payments over time. As the loss sharing agreements are in effect for a period of ten years for one-to-four family loans and five years for commercial, construction and consumer loans, changing economic conditions will likely impact the timing of future charge-offs and the resulting reimbursements from the FDIC. Management believes that any recapture of interest income and recognition of cash flows from the borrowers or received from the FDIC (as part of the FDIC loss share receivable) may be recognized unevenly over this period, as management exhausts its collection efforts under the Corporation’s normal practices.

153

Bank Holding Companies

The principal sources of funding for the holding companies include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries (subject to regulatory limits), asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from new borrowings or stock issuances. The principal source of cash flows for the parent holding company during the second quarter of 2010 was the aforementioned capital issuance of $1.1 billion, which was completed primarily to strengthen the Corporation’s regulatory capital ratios in preparation for the Westernbank FDIC-assisted transaction, and proceeds from the sale of the ownership interest in EVERTEC during the third quarter of 2010. During the third quarter of 2010, the Corporation received $528.6 million, net of transaction costs and taxes, from the sale of EVERTEC. The principal use of these funds include capitalizing its banking subsidiaries, the repayment of debt, and interest payments to holders of senior debt and trust preferred securities. The Corporation suspended the payment of dividends to common and preferred stockholders during 2009 as a result of dividend restrictions imposed by regulators and in order to conserve capital.

The Corporation’s bank holding companies (“BHCs”, Popular, Inc., Popular North America, Inc. and Popular International Bank, Inc.) have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries. However, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness are now minimal given that the PFH business was discontinued. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are at a level below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.

A principal use of liquidity at the BHCs is to ensure its subsidiaries are adequately capitalized. Operating losses at the BPNA banking subsidiary have required the BHCs to contribute equity capital to BPNA to ensure that it meets the regulatory guidelines for “well-capitalized” institutions. In the event that additional capital contributions were necessary, management believes that the BHCs currently have enough liquidity resources to meet potential capital needs from BPNA in the ordinary course of business. As indicated previously, the BHCs made substantial capital contributions to the banking subsidiaries during the nine months ended September 30, 2010.

The maturities of the bank holding companies’ outstanding notes payable as of September 30, 2010 and December 31, 2009 are shown in the table below. These borrowings are principally unsecured senior debt (term notes) and junior subordinated debentures (trust preferred securities).


	September 30,			December 31,
(In thousands)	2010			2009

Year
2010		—		$	2,000
2011	$	3,675			353,675
2012		374,389			274,183
2013		3,000			3,000
2014		—			—
Later years		439,800			439,800
No stated maturity		936,000	[1]		936,000	[1]

Subtotal	$	1,756,864		$	2,008,658
Less: Discount		(496,678)	[1]		(512,350)	[1]

Total	$	1,260,186		$	1,496,308


[1]		Amounts are related to junior subordinated debentures associated with the trust preferred securities that were issued to the U.S. Treasury in August 2009.

The reduction in the maturity of unsecured senior debt from the 2011 maturity classification was the result of three events: (1) the exercise of a put option by the holder of $75 million in term notes during the quarter ended March 31, 2010 and (2) the extension of the maturity of $100 million in term notes from September 2011 to March 2012 based on modifications negotiated with the note holders during the quarter ended March 31, 2010, which set a fixed interest rate of 13%, and (3) the repurchase and cancellation in July 2010 of $175 million in term notes with interest that adjusted in the event of senior debt rating downgrades. These floating rate term notes had an interest rate of 9.75% over the 3-month LIBOR with a maturity date of September 2011.

154

The Corporation no longer has outstanding any term notes with rating triggers or in which the holders have the right to require the Corporation to purchase the notes prior to its contractual maturity.

The repayment of the BHCs obligations represents a potential cash need which is expected to be met with internal liquidity resources, new borrowings, and the cash inflows from the sale of the 51% ownership interest in EVERTEC completed in September 2010.

The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future.

The Corporation’s short-term and long-term debt ratings and outlook by major rating agencies as of September 30, 2010 are presented in the table below.


	As of September 30, 2010
		Popular, Inc.
	Short-term	Long-term
	debt	debt	Outlook

Fitch	B	B	Positive
Moody’s	—	Ba1	Negative
S&P	C	B	Positive

In November 2010, Moody’s Investors Service downgraded the ratings of 10 large U.S. regional banks after reducing its government support assumptions for these entities. The affected entities, whose ratings were placed on review for possible downgrade on July 27, 2010, had benefited from Moody’s support assumptions since 2009. The rating of the Corporation’s banking subsidiary was reduced by one notch, to Baa3, which is investment grade. It was driven by Moody’s opinion that the likelihood of federal government support for banks in the event of stress, is less likely as signaled in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The ratings of the BHCs was not impacted by the ratings action.

The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries did have $18 million in deposits as of September 30, 2010 that are subject to rating triggers. As of September 30, 2010, the Corporation had repurchase agreements amounting to $229 million that were subject to rating triggers or the maintenance of well-capitalized regulatory capital ratios, and were collateralized with securities with a fair value of $242 million.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and credit ratings. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $84 million as of September 30, 2010, with the Corporation providing collateral totaling $98 million to cover the net liability position with counterparties on these derivative instruments.

In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. Based on BPPR’s failure to maintain the required credit ratings, the third parties could have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in the Contractual Obligations and Commercial Commitments section of this MD&A, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations approximated $166 million as of September 30, 2010. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results.

155

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended on September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

On October 19, 2009, plaintiffs in the Hoff case filed a consolidated class action complaint which included as defendants the underwriters in the May 2008 offering of Series B Preferred Stock, among others. The consolidated action purports to be on behalf of purchasers of Popular’s securities between January 24, 2008 and February 19, 2009 and alleges that the defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading. The consolidated action also alleges that the defendants violated Section 11, Section 12(a)(2) and Section 15 of the Securities Act by making allegedly untrue statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading in connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities class action complaint seeks class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. On January 11, 2010, Popular, the underwriter defendants and the individual defendants moved to dismiss the consolidated securities class action complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court also dismissed the Section 11 claim brought against Popular’s directors on statute of limitations grounds and the Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing. The Court declined to dismiss the claims brought against Popular and certain of its officers under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder),

156

Section 20(a) of the Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately alleged that defendants made materially false and misleading statements with the requisite state of mind.

The Díaz case, filed in the Puerto Rico Court of First Instance, San Juan, was removed to the U.S. District Court for the District of Puerto Rico. On October 13, 2009, Popular and the individual defendants moved to consolidate the García and Díaz actions. On October 26, 2009, plaintiff moved to remand the Díaz case to the Puerto Rico Court of First Instance and to stay defendants’ consolidation motion pending the outcome of the remand proceedings. On September 30, 2010, the Court issued an order without opinion remanding the Diaz case to the Puerto Rico Court of First Instance. On October 13, 2010, the Court issued a Statement of Reasons In Support of Remand Order. On October 28, 2010, Popular and the individual defendants moved for reconsideration of the remand order. The reconsideration motion is pending.

157

in that action moved for reconsideration of the Court’s dismissal. On May 4, 2010, the Court denied plaintiff’s request for reconsideration. On June 7, 2010, plaintiff filed an appeal before the Puerto Rico Court of Appeals. On June 11, 2010, Popular and the individual defendants moved to dismiss the appeal. On June 22, 2010, the Court of Appeals dismissed the appeal. On July 6, 2010, plaintiff moved for reconsideration of the Court’s dismissal. On July 16, 2010, the Court of Appeals denied plaintiff’s request for reconsideration.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our 2009 Form 10-K, as supplemented and updated by the discussion below. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors in our 2009 Form 10-K.

The risks described in our 2009 Form 10-K and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Risks related to the Business Environment and our Industry

Further deterioration in collateral values of properties securing our construction, commercial and mortgage loan portfolios

Further deterioration of the value of real estate collateral securing our construction, commercial and mortgage loan portfolios may result in increased credit losses. As of September 30, 2010, approximately 6%, 53% and 21% of our loan portfolio not covered under the FDIC loss share agreements, consisted of construction, commercial and mortgage loans, respectively.

Substantially our entire loan portfolio is located within the boundaries of the U.S. economy. Whether the collateral is located in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands or the U.S. mainland, the performance of our loan portfolio and the collateral value backing the transactions are dependent upon the performance of and conditions within each specific real estate market. Recent economic reports related to the real estate market in Puerto Rico indicate that certain pockets of the real estate market are subject to reductions in value related to general economic conditions. In certain mainland markets like southern Florida, Illinois and California, we have been seeing the negative impact associated with low absorption rates and property value adjustments due to overbuilding. We measure the impairment based on the fair value of the collateral, if collateral dependent, which is derived from estimated collateral values, principally appraisal reports, that take into consideration prices in observed transactions involving similar assets in similar locations, size and supply and demand. An appraisal report is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. In addition, given the current slowdown in the real estate market in Puerto Rico, the properties securing these loans may be difficult to dispose of, if foreclosed.

Construction and commercial loans, mostly secured by commercial and residential real estate properties entail a higher credit risk than consumer and residential mortgage loans, since they are larger in size, may have less collateral coverage, concentrate more risk in a single borrower and are generally more sensitive to economic downturns. As of September 30, 2010, commercial and construction loans secured by commercial and residential real estate properties, excluding loans covered under FDIC loss share agreements, amounted to $8.4 billion or 38% of the total loan portfolio, excluding covered loans.

During the nine months ended September 30, 2010, net charge-offs specifically related to values of properties securing our construction, commercial and mortgage loan portfolios totaled $175.4 million, $113.8 million and $76.0 million respectively. Continued deterioration on the fair value of real estate properties for collateral dependent impaired loans would require increases in the Corporation’s provision for loan losses and allowance for loan losses. Any such increase would have an adverse effect on our future financial condition and results of operations. For more information on the credit quality of our construction, commercial and mortgage portfolio see the Credit Risk Management and Loan Quality section of the Management’s Discussion and Analysis included in this Form 10-Q.

Risks Related to the FDIC-assisted Transaction

We entered into an FDIC-assisted transaction involving Westernbank Puerto Rico (“the FDIC-assisted transaction”), which could present additional risks to our business.

On April 30, 2010, Popular, Inc.’s banking subsidiary, Banco Popular of Puerto Rico (“BPPR”), acquired certain assets and assumed certain liabilities of Puerto Rico-based Westernbank Puerto Rico (“Westernbank”) from the Federal Deposit Insurance Corporation (the “FDIC”) in an assisted transaction (herein, the “FDIC-assisted transaction”). Although this transaction provides for FDIC assistance to BPPR to mitigate certain risks, such as sharing exposure to loan losses (80% of the losses in substantially all the acquired portfolio will be borne by the FDIC) and providing indemnification against certain liabilities of the former Westernbank, we are still subject to some of the same risks we would face in acquiring another bank in a negotiated transaction. Such risks include risks associated with maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the timeframes we expect. In addition, because the FDIC-assisted transaction was structured in a manner that did not allow bidders the time and access to information normally associated with preparing for and evaluating a negotiated transaction, we may face additional risks in the FDIC-assisted transaction.

The success of the FDIC-assisted transaction will depend on a number of uncertain factors.

The success of the FDIC-assisted transaction will depend on a number of factors, including, without limitation:

	•		our ability to limit the outflow of deposits held by our new customers in the acquired branches and to successfully retain and manage interest-earning assets (i.e., loans) acquired in the FDIC-assisted transaction;

	•		our ability to attract new deposits and to generate new interest-earning assets in the areas previously served by the former Westernbank branches;

	•		our ability to control the incremental non-interest expense from the former Westernbank branches and other units in a manner that enables us to maintain a favorable overall efficiency ratio;

	•		our ability to collect on the loans acquired and satisfy the standard requirements imposed in the loss sharing agreements; and

158

•

our ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches.

The FDIC-assisted transaction increases BPPR’s commercial real estate and construction loan portfolio, which have a greater credit risk than residential mortgage loans.

With the acquisition of most of the former Westernbank’s loan portfolio, the commercial real estate loan and construction loan portfolios represent a larger portion of BPPR’s total loan portfolio than prior to the FDIC-assisted transaction. This type of lending is generally considered to have more complex credit risks than traditional single-family residential or consumer lending, because the principal is concentrated in a limited number of loans with repayment dependent on the successful operation or completion of the related real estate or construction project. Consequently, these loans are more sensitive to the current adverse conditions in the real estate market and the general economy. These loans are generally less predictable, more difficult to evaluate and monitor, and their collateral may be more difficult to dispose of in a market decline. Furthermore, since these loans are to Puerto Rico based borrowers, the Corporation’s credit exposure concentration in Puerto Rico increased as a result of the acquisition. Although, the negative economic aspects of these risks are substantially reduced as a result of the FDIC loss sharing agreements, changes in national and local economic conditions could lead to higher loan charge-offs in connection with the FDIC-assisted transaction all of which would not be supported by the loss sharing agreements with the FDIC.

We acquired significant portfolios of loans in the FDIC-assisted transaction. Although these loan portfolios will be initially accounted for at fair value, there is no assurance that the loans we acquired will not become impaired, which may result in additional charge-offs to this portfolio. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may increase the level of charge-offs that we make to our loan portfolio, and consequently, reduce our net income, and may also increase the level of charge-offs on the loan portfolio that we have acquired and correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition even if other favorable events occur.

Although we have entered into loss sharing agreements with the FDIC which provide that 80% of losses related to specified loan portfolios that we have acquired in connection with the FDIC-assisted transaction will be borne by the FDIC, we are not protected for all losses resulting from charge-offs with respect to those specified loan portfolios. Additionally, the loss sharing agreements have limited terms; therefore, any charge-off of related losses that we experience after the term of the loss sharing agreements will not be reimbursed by the FDIC and will negatively impact our results of operations. The loss sharing agreements also impose standard requirements on us which must be satisfied in order to retain loss share protections. The FDIC has the right to refuse or delay payment for loan losses if the loss sharing agreements are not managed in accordance with their terms.

Our decisions regarding the fair value of assets acquired could be inaccurate and our estimated loss share indemnification asset in the FDIC-assisted transaction may be inadequate, which could materially and adversely affect our business, financial condition, results of operations, and future prospects .

Management makes various assumptions and judgments about the collectability of acquired loan portfolios, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In the FDIC-assisted transaction, we may record a loss share indemnification asset that we consider adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss share indemnification asset, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information. If our assumptions are incorrect, our current indemnification asset may be insufficient to cover future loan losses, and increased loss reserves may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. However, in the event expected losses from the Westernbank portfolio were to increase more than originally expected, the related increase in loss reserves would be largely offset by higher than expected indemnity payments from the FDIC. Any increase in future loan losses could have a negative effect on our operating results.

159

Our ability to obtain reimbursement under the loss sharing agreements on covered assets depends on our compliance with the terms of the loss sharing agreements.

Management must certify to the FDIC on a monthly and quarterly basis our compliance with the terms of the FDIC loss share agreements as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their loss sharing coverage. Under the terms of the FDIC loss share agreements, the assignment or transfer of the loss sharing agreements to another entity generally requires the written consent of the FDIC. No assurances can be given that we will manage the covered assets in such a way as to always maintain loss share coverage on all such assets.

Goodwill recorded on the FDIC-assisted transaction may increase or decrease during a one year period following the FDIC-assisted transaction acquisition date.

The goodwill recorded in connection with the Westerbank FDIC-assisted transaction is preliminary and subject to revision for a period of one year following the April 30, 2010 acquisition date. Adjustments may be recorded based on additional information received after the acquisition date that may affect the fair value of assets acquired and liabilities assumed. Downward adjustments in the values of assets acquired or increases in values of liabilities assumed on the date of acquisition would increase the preliminary goodwill recorded.

Risks Related to the EVERTEC Sale Transaction

We sold 51% interest in our merchant acquiring and processing and technology business. The loss of income from the sale of the 51% interest could have an adverse effect on the Corporation’s earnings and future growth.

On September 30, 2010, we sold 51% majority interest in the Corporation’s merchant acquiring and processing and technology business and retained a 49% interest. We will have a reduction in revenues from the sold portion of the merchant acquiring and processing and technology business, which for the foreseeable future we do not expect will be offset by our participation in the earnings of EVERTEC, which will be adversely impacted by the amount of debt incurred in connection with the transaction.

We entered into a Master Services Agreement pursuant to which EVERTEC will provide services to the Corporation and its subsidiaries on an exclusive basis.

As part of the EVERTEC transaction, the Corporation entered into a Master Services Agreement pursuant to which EVERTEC will provide various processing and information technology services to the Corporation and its subsidiaries on an exclusive basis. As we now rely on a third party for the provision of these services, there can be no assurances that the quality of the services will be appropriate nor that the third party will continue to provide us with the necessary financial transaction processing and technology services.

Risk Related to Regulatory Reform

Recently adopted financial reform legislation will impose significant new limitations on our business activities and subject us to increased regulation and additional costs.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act implements significant changes in the regulation of financial institutions and will fundamentally change the system of oversight described under “Item 1. Business—Regulation and Supervision and Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2009. Although we cannot predict how regulatory implementation of the Dodd-Frank Act will occur, the related findings of various regulatory and commission studies, the interpretations issued as part of the rulemaking process and the final regulations that are issued with respect to various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices, and could expose us to additional costs (including increased compliance costs). These changes may also require us to invest significant management attention and resources to make any necessary changes.

We and our subsidiaries and affiliates, as well as EVERTEC, conduct business with financial institutions and/or card payment networks operating in countries whose nationals, including some of our customers’ customers, engage in transactions in countries that are the target of U.S. economic sanctions and embargoes, including Cuba. As U.S.-based entities, we and our subsidiaries and affiliates, as well as EVERTEC, are obligated to comply with the economic sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). These regulations prohibit U.S.-based entities from entering into or facilitating unlicensed transactions with, for the benefit of, or in some cases involving the property and property interests of, persons, governments or countries designated by the U.S. government under one or more sanctions regimes. Failure to comply with these sanctions and embargoes may result in material fines, sanctions or other penalties being imposed on us. In addition, various state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies that do business involving countries or entities, and this could adversely affect the market for our securities.

For these reasons, we have established risk-based policies and procedures designed to assist us and our personnel in complying with applicable U.S. laws and regulations. EVERTEC has also done this. These policies and procedures employ software to screen transactions for evidence of sanctioned-country and persons involvement. Consistent with a risk-based approach and the difficulties in identifying all transactions of our customers’ customers that may involve a sanctioned country, there can be no assurance that our policies and procedures will prevent us from violating applicable U.S. laws and regulations in transactions in which we engage, and such violations could adversely affect our reputation, business, financial condition and results of operations.

In June 2010, EVERTEC discovered potential violations of the Cuban Assets Control Regulations (“CACR”), which are administered by OFAC, due to an oversight in which the screening parameters for two customers located in Haiti and Belize were not activated. EVERTEC initiated an internal review and submitted an initial voluntary self-disclosure to OFAC. We have agreed to indemnify EVERTEC for claims or damages related to the economic sanctions regulations administered by OFAC, including these potential violations of the CACR.

Separately, in September 2010 EVERTEC submitted an initial voluntary self-disclosure to OFAC regarding the processing of certain Cuba-related credit card transactions involving Costa Rica and Venezuela that it believed could not be rejected under governing local law and policies, but which nevertheless may have not been consistent with the CACR. The voluntary self-disclosure also covered the transmission, through EVERTEC’s Costa Rica subsidiary, of data relating to debit card payment initiated by people traveling in Cuba. We have agreed to indemnify EVERTEC for claims or damages related to these potential violations of the CACR. We cannot predict the timing, total costs or ultimate outcome of any OFAC review, or to what extent, if at all, we could be subject to indemnification claims, fines, sanctions or other penalties.

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

Issuer Purchases of Equity Securities

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The Corporation has to date used shares purchased in the market to make grants under the Plan. The maximum number of shares of common stock that may be granted under this Plan is 10,000,000.

The following table sets forth the details of purchases of Common Stock during the quarter ended September 30, 2010 under the 2004 Omnibus Incentive Plan.


Not in thousands
					Total Number of Shares		Maximum Number of Shares
	Total Number of Shares		Average Price Paid		Purchased as Part of Publicly		that May Yet be Purchased
Period	Purchased		per Share		Announced Plans or Programs		Under the Plans or Programs [a]

July 1 — July 31		—		—		—		6,774,016
August 1 — August 31		30,434	$	2.76		30,434		6,743,582
September 1 — September 30		29,284		2.90		29,284		6,723,652

Total September 30, 2010		59,718	$	2.83		59,718		6,723,652


[a]		Includes shares forfeited.

160

Item 6. Exhibits


Exhibit No.		Exhibit Description

2.1		Second Amendment to Agreement and Plan of Merger, dated as of August 8, 2010, among Popular, Inc., EVERTEC, Inc., AP Carib Holdings, Ltd. and Carib Acquisition, Inc. (incorporated by reference to Exhibit 2.1 of the Corporation’s Current Report on Form 8-K dated August 8, 2010 and filed on August 12, 2010).

2.2		Third Amendment to Agreement and Plan of Merger, dated as of September 15, 2010, among Popular, Inc., EVERTEC, Inc., AP Carib Holdings, Ltd. and Carib Acquisition, Inc. (incorporated by reference to Exhibit 2.1 of the Corporation’s Current Report on Form 8-K dated September 15, 2010 and filed on September 21, 2010).

2.3		Fourth Amendment to Agreement and Plan of Merger, dated as of September 30, 2010, among Popular, Inc., EVERTEC, Inc., AP Carib Holdings, Ltd. and Carib Acquisition, Inc. (incorporated by reference to Exhibit 2.1 of the Corporation’s Current Report on Form 8-K dated September 30, 2010 and filed on October 6, 2010).

10.1		Employment offer to Mr. Carlos J. Vázquez, as President of Banco Popular North America.

12.1		Computation of the ratios of earnings to fixed charges and preferred stock dividends.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

161

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	POPULAR, INC. (Registrant)
Date: November 9, 2010	By:	/s/ Jorge A. Junquera
		Jorge A. Junquera
		Senior Executive Vice President & Chief Financial Officer


Date: November 9, 2010	By:	/s/ Ileana Gonzalez Quevedo
		Ileana Gonzalez Quevedo
		Senior Vice President & Corporate Comptroller

162

TABLE OF CONTENTS

Item 1. Financial Statements Popular, Inc Note 1 Nature Of Operations Note 2 Business Combination Note 3 Sale Of Processing and Technology Business Note 4 Basis Of Presentation and Summary Of Significant Accounting Policies Note 5 Adoption Of New Accounting Standards and Issued But Not Yet Effective Accounting Standards Note 6 Discontinued Operations Note 7 Restrictions on Cash and Due From Banks and Certain Securities Note 8 Pledged Assets Note 9 Investment Securities Available-for-sale Note 10 Investment Securities Held-to-maturity Note 11 Loans Held-in-portfolio and Allowance For Loan Losses Note 12 Transfers Of Financial Assets and Mortgage Servicing Rights Note 13 Other Assets Note 14 Goodwill and Other Intangible Assets Note 15 Deposits Note 16 Borrowings Note 17 Trust Preferred Securities Note 18 Stockholders Equity Note 19 Commitments, Contingencies and Guarantees Note 20 Non-consolidated Variable Interest Entities Note 21 Fair Value Measurement Note 22 Fair Value Of Financial Instruments Note 23 Net Income Per Common Share Note 24 Other Service Fees Note 25 Pension and Postretirement Benefits Note 26 Stock-based Compensation Note 27 Income Taxes Note 28 Supplemental Disclosure on The Consolidated Statements Of Cash Flows Note 29 Segment Reporting Note 30 Subsequent Events Note 31 Condensed Consolidating Financial Information Of Guarantor and Issuers Of Registered Guaranteed Securities Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

Exhibits

EX-10.1 EX-12.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2

Supplier name	Ticker
Visa Inc.	V
Cisco Systems, Inc.	CSCO
Fidelity National Information Services, Inc.	FIS
International Business Machines Corporation	IBM
Bank of America Corporation	BAC
Adobe Inc.	ADBE
American Express Company	AXP
Mastercard Incorporated	MA

BPOP 10-Q Quarter ended Sept. 30, 2010