BPOP 10-Q Quarterly Report March 31, 2012

BPOP 10-Q Quarter ended March 31, 2012

POPULAR INC

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10-Q 1 d339943d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2012

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specified in its charter)


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

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

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 1,027,812,904 shares outstanding as of April 30, 2012.

POPULAR, INC.

INDEX


Part I – Financial Information			Page

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at March 31, 2012, December 31, 2011 and March 31, 2011			4

Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2012 and 2011			5

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2012 and 2011			6

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2012 and 2011			7

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2012 and 2011			8

Notes to Unaudited Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			115

Item 3. Quantitative and Qualitative Disclosures about Market Risk			175

Item 4. Controls and Procedures			175

Part II – Other Information

Item 1. Legal Proceedings			176

Item 1A. Risk Factors			176

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			177

Item 6. Exhibits			177

Signatures			178

Forward-Looking Information

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

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

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

•

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

•

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 (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

•

regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;

•

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

•

the performance of the stock and bond markets;

•

competition in the financial services industry;

•

additional Federal Deposit Insurance Corporation (“FDIC”) assessments; and

•

possible legislative, tax or regulatory changes.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

All forward-looking statements included in this 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.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


(In thousands, except share information)	March 31, 2012			December 31, 2011			March 31, 2011
Assets:
Cash and due from banks	$	472,806		$	535,282		$	464,555

Money market investments:
Federal funds sold		—			75,000			—
Securities purchased under agreements to resell		240,411			252,668			200,185
Time deposits with other banks		1,063,852			1,048,506			761,380

Total money market investments		1,304,263			1,376,174			961,565

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		348,103			402,591			587,218
Other trading securities		56,190			33,740			47,581
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		1,736,706			1,737,868			2,105,783
Other investment securities available-for-sale		3,401,910			3,271,955			3,580,558
Investment securities held-to-maturity, at amortized cost (fair value at
March 31, 2012 - $124,829; December 31, 2011 - $125,254;
March 31, 2011 - $147,816)		124,372			125,383			142,106
Other investment securities, at lower of cost or realizable value (realizable
value at March 31, 2012 - $197,372; December 31, 2011 - $181,583;
March 31, 2011 - $176,336)		195,708			179,880			174,930
Loans held-for-sale, at lower of cost or fair value		361,596			363,093			569,678

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		20,577,995			20,703,192			20,781,549
Loans covered under loss sharing agreements with the FDIC		4,221,788			4,348,703			4,729,550
Less – Unearned income		99,321			100,596			104,760
Allowance for loan losses		803,264			815,308			736,505

Total loans held-in-portfolio, net		23,897,198			24,135,991			24,669,834

FDIC loss share asset		1,880,357			1,915,128			2,426,305
Premises and equipment, net		533,545			538,486			543,577
Other real estate not covered under loss sharing agreements with the FDIC		193,768			172,497			156,888
Other real estate covered under loss sharing agreements with the FDIC		110,559			109,135			65,562
Accrued income receivable		126,568			125,209			147,670
Mortgage servicing assets, at fair value		156,331			151,323			167,416
Other assets		1,439,532			1,462,393			1,314,739
Goodwill		647,911			648,350			647,387
Other intangible assets		61,798			63,954			56,441

Total assets	$	37,049,221		$	37,348,432		$	38,829,793

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	5,366,420		$	5,655,474		$	4,913,009
Interest bearing		21,831,316			22,286,653			22,283,665

Total deposits		27,197,736			27,942,127			27,196,674

Assets sold under agreements to repurchase		2,113,557			2,141,097			2,642,800
Other short-term borrowings		751,200			296,200			290,302
Notes payable		1,843,754			1,856,372			3,794,655
Other liabilities		1,175,903			1,193,883			1,100,456

Total liabilities		33,082,150			33,429,679			35,024,887

Commitments and contingencies (See Note 18)

Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding in all periods presented		50,160			50,160			50,160
Common stock, $0.01 par value; 1,700,000,000 shares authorized in all periods presented; 1,027,555,936 shares issued at March 31, 2012 (December 31, 2011 – 1,026,346,396; March 31, 2011 – 1,023,628,492) and 1,027,117,068 shares outstanding (December 31, 2011 – 1,025,904,567; March 31, 2011 – 1,023,416,118)		10,276			10,263			10,236
Surplus		4,116,710			4,114,661			4,096,245
Accumulated deficit		(165,249	)		(212,726	)		(338,126	)
Treasury stock – at cost, 438,868 shares at March 31, 2012 (December 31, 2011 – 441,829; March 31, 2011 – 212,374)		(1,041	)		(1,057	)		(607	)
Accumulated other comprehensive loss, net of tax		(43,785	)		(42,548	)		(13,002	)

Total stockholders’ equity		3,967,071			3,918,753			3,804,906

Total liabilities and stockholders’ equity	$	37,049,221		$	37,348,432		$	38,829,793

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended March 31,
(In thousands, except per share information)	2012			2011
Interest income:
Loans	$	387,942		$	423,375
Money market investments		948			947
Investment securities		45,070			52,375
Trading account securities		5,891			8,754

Total interest income		439,851			485,451

Interest expense:
Deposits		51,679			76,879
Short-term borrowings		13,583			14,015
Long-term debt		37,007			51,198

Total interest expense		102,269			142,092

Net interest income		337,582			343,359
Provision for loan losses - non-covered loans		82,514			59,762
Provision for loan losses - covered loans		18,209			15,557

Net interest income after provision for loan losses		236,859			268,040

Service charges on deposit accounts		46,589			45,630
Other service fees (Refer to Note 24)		66,039			58,652
Trading account loss		(2,143	)		(499	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		15,471			7,244
Adjustments (expense) to indemnity reserves on loans sold		(3,875	)		(9,848	)
FDIC loss share (expense) income (Refer to Note 25)		(15,255	)		16,035
Fair value change in equity appreciation instrument		—			7,745
Other operating income		17,082			39,409

Total non-interest income		123,908			164,368

Operating expenses:
Personnel costs		121,491			106,140
Net occupancy expenses		24,162			24,586
Equipment expenses		11,341			12,036
Other taxes		13,438			11,972
Professional fees		48,105			46,688
Communications		7,131			7,210
Business promotion		12,850			9,860
FDIC deposit insurance		24,926			17,673
Loss on early extinguishment of debt		69			8,239
Other real estate owned (OREO) expenses		14,165			2,211
Other operating expenses		15,896			26,179
Amortization of intangibles		2,593			2,255

Total operating expenses		296,167			275,049

Income before income tax		64,600			157,359
Income tax expense		16,192			147,227

Net Income	$	48,408		$	10,132

Net Income Applicable to Common Stock	$	47,477		$	9,202

Net Income per Common Share – Basic	$	0.05		$	0.01

Net Income per Common Share – Diluted	$	0.05		$	0.01

Dividends Declared per Common Share		—			—

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarter ended
	March 31,
(In thousands)	2012			2011
Net income	$	48,408		$	10,132

Other comprehensive loss before tax:
Foreign currency translation adjustment		(86	)		(591	)
Reclassification adjustment for losses included in net income		—			10,084
Adjustment of pension and postretirement benefit plans		—			—
Amortization of net losses		6,289			3,243
Amortization of prior service cost		(50	)		(240	)
Unrealized holding losses on securities available-for-sale arising during the period		(7,882	)		(19,978	)
Reclassification adjustment for losses included in net income		—			—
Unrealized net losses on cash flow hedges		(290	)		(51	)
Reclassification adjustment for net losses (gains) included in net income		1,057			(935	)

Other comprehensive loss before tax		(962	)		(8,468	)
Income tax (expense) benefit		(275	)		1,427

Total other comprehensive loss, net of tax		(1,237	)		(7,041	)

Comprehensive income, net of tax	$	47,171		$	3,091

Tax effect allocated to each component of other comprehensive loss:


	Quarter ended
	March 31,
(In thousands)	2012			2011
Underfunding of pension and postretirement benefit plans	$	—		$	—
Amortization of net losses		(1,740	)		(966	)
Amortization of prior service cost		15			72
Unrealized holding losses on securities available-for-sale arising during the period		1,681			1,941
Reclassification adjustment for losses included in net income		—			—
Unrealized net losses on cash flow hedges		87			15
Reclassification adjustment for net losses (gains) included in net income		(318	)		365

Income tax (expense) benefit	$	(275	)	$	1,427

Disclosure of accumulated other comprehensive loss:


(In thousands)	March 31, 2012			December 31, 2011			March 31, 2011
Foreign currency translation adjustment	$	(28,915	)	$	(28,829	)	$	(26,658	)

Pension and postretirement benefit plans		(327,048	)		(333,287	)		(207,933	)
Tax effect		115,504			117,229			79,962

Net of tax amount		(211,544	)		(216,058	)		(127,971	)

Unrealized holding gains on securities available-for-sale		222,864			230,746			164,596
Tax effect		(25,987	)		(27,668	)		(22,933	)

Net of tax amount		196,877			203,078			141,663

Unrealized (losses) gains on cash flow hedges		(290	)		(1,057	)		(51	)
Tax effect		87			318			15

Net of tax amount		(203	)		(739	)		(36	)

Accumulated other comprehensive loss	$	(43,785	)	$	(42,548	)	$	(13,002	)

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


(In thousands)	Common stock, including treasury stock			Preferred stock		Surplus		Accumulated deficit			Accumulated other comprehensive loss			Total
Balance at December 31, 2010	$	9,655		$	50,160	$	4,094,005	$	(347,328	)	$	(5,961	)	$	3,800,531
Net income									10,132						10,132
Issuance of stock		7					2,240								2,247
Dividends declared:
Preferred stock									(930	)					(930	)
Common stock purchases		(33	)												(33	)
Other comprehensive loss, net of tax												(7,041	)		(7,041	)

Balance at March 31, 2011	$	9,629		$	50,160	$	4,096,245	$	(338,126	)	$	(13,002	)	$	3,804,906

Balance at December 31, 2011	$	9,206		$	50,160	$	4,114,661	$	(212,726	)	$	(42,548	)	$	3,918,753
Net income									48,408						48,408
Issuance of stock		13					2,049								2,062
Dividends declared:
Preferred stock									(931	)					(931	)
Common stock purchases		(6	)												(6	)
Common stock reissuance		22													22
Other comprehensive loss, net of tax												(1,237	)		(1,237	)

Balance at March 31, 2012	$	9,235		$	50,160	$	4,116,710	$	(165,249	)	$	(43,785	)	$	3,967,071


Disclosure of changes in number of shares:	March 31, 2012			December 31, 2011			March 31, 2011
Preferred Stock:
Balance at beginning and end of period		2,006,391			2,006,391			2,006,391

Common Stock – Issued:
Balance at beginning of year		1,026,346,396			1,022,929,158			1,022,929,158
Issuance of stock		1,209,540			3,417,238			699,334

Balance at end of the period		1,027,555,936			1,026,346,396			1,023,628,492
Treasury stock		(438,868	)		(441,829	)		(212,374	)

Common Stock – Outstanding		1,027,117,068			1,025,904,567			1,023,416,118

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Quarters ended March 31,
(In thousands)	2012			2011
Cash flows from operating activities:
Net income	$	48,408		$	10,132

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		100,723			75,319
Amortization of intangibles		2,593			2,255
Depreciation and amortization of premises and equipment		11,756			12,060
Net accretion of discounts and amortization of premiums and deferred fees		(4,077	)		(88,327	)
Impairment losses on net assets to be disposed of		—			8,564
Fair value adjustments on mortgage servicing rights		(784	)		6,171
Fair value change in equity appreciation instrument		—			(7,745	)
FDIC loss share expense (income)		15,255			(13,621	)
FDIC deposit insurance expense		24,926			17,673
Adjustments (expense) to indemnity reserves on loans sold		3,875			9,848
Earnings from investments under the equity method		(2,252	)		(6,826	)
Deferred income tax expense		4,418			140,915
(Gain) loss on:
Disposition of premises and equipment		(6,284	)		(1,412	)
Early extinguishment of debt		69			—
Sale of loans, including valuation adjustments on loans held-for-sale		(15,471	)		(7,244	)
Sale of equity method investment		—			(16,666	)
Acquisitions of loans held-for-sale		(76,118	)		(90,780	)
Proceeds from sale of loans held-for-sale		63,460			45,448
Net disbursements on loans held-for-sale		(223,500	)		(184,641	)
Net (increase) decrease in:
Trading securities		270,691			206,222
Accrued income receivable		(1,357	)		2,988
Other assets		22,956			(4,602	)
Net increase (decrease) in:
Interest payable		(2,249	)		(4,410	)
Pension and other postretirement benefit obligation		4,720			(123,957	)
Other liabilities		(2,421	)		(38,203	)

Total adjustments		190,929			(60,971	)

Net cash provided by (used in) operating activities		239,337			(50,839	)

Cash flows from investing activities:
Net decrease in money market investments		71,911			17,730
Purchases of investment securities:
Available-for-sale		(529,445	)		(752,479	)
Held-to-maturity		(250	)		(51,998	)
Other		(47,629	)		(38,305	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		388,472			278,274
Held-to-maturity		1,539			27,335
Other		31,800			27,050
Net repayments on loans		191,073			427,622
Proceeds from sale of loans		21,304			200,387
Acquisition of loan portfolios		(140,005	)		(348,226	)
Payments received from FDIC under loss sharing agreements		20,896			583
Net proceeds from sale of equity method investment		—			31,068
Mortgage servicing rights purchased		(474	)		(383	)
Acquisition of premises and equipment		(12,298	)		(18,599	)
Proceeds from sale of:
Premises and equipment		11,946			7,763
Foreclosed assets		25,923			44,648

Net cash provided by (used in) investing activities		34,763			(147,530	)

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		(745,906	)		433,505
Federal funds purchased and assets sold under agreements to repurchase		(27,541	)		230,250
Other short-term borrowings		455,000			(73,920	)
Payments of notes payable		(22,284	)		(622,568	)
Proceeds from issuance of notes payable		2,719			242,000
Proceeds from issuance of common stock		2,062			2,247
Dividends paid		(620	)		(930	)
Treasury stock acquired		(6	)		(33	)

Net cash (used in) provided by financing activities		(336,576	)		210,551

Net (decrease) increase in cash and due from banks		(62,476	)		12,182
Cash and due from banks at beginning of period		535,282			452,373

Cash and due from banks at end of period	$	472,806		$	464,555

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

Notes to Consolidated Financial

Statements (Unaudited)


Note 1 -	Organization, consolidation and basis of presentation	10
Note 2 -	New accounting pronouncements	11
Note 3 -	Restrictions on cash and due from banks and certain securities	13
Note 4 -	Pledged assets	13
Note 5 -	Investment securities available-for-sale	15
Note 6 -	Investment securities held-to-maturity	20
Note 7 -	Loans	22
Note 8 -	Allowance for loan losses	31
Note 9 -	FDIC loss share asset and true-up payment obligation	49
Note 10 -	Transfers of financial assets and mortgage servicing rights	51
Note 11 -	Other assets	54
Note 12 -	Goodwill and other intangible assets	54
Note 13 -	Deposits	56
Note 14 -	Borrowings	57
Note 15 -	Trust preferred securities	59
Note 16 -	Stockholders’ equity	61
Note 17 -	Guarantees	61
Note 18 -	Commitments and contingencies	64
Note 19 -	Non-consolidated variable interest entities	69
Note 20 -	Related party transactions with affiliated company / joint venture	72
Note 21 -	Fair value measurement	74
Note 22 -	Fair value of financial instruments	83
Note 23 -	Net income per common share	88
Note 24 -	Other service fees	88
Note 25 -	FDIC loss share (expense) income	89
Note 26 -	Pension and postretirement benefits	89
Note 27 -	Stock-based compensation	90
Note 28 -	Income taxes	92
Note 29 -	Supplemental disclosure on the consolidated statements of cash flows	95
Note 30 -	Segment reporting	95
Note 31 -	Subsequent events	99
Note 32 -	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	100

Note 1 – Organization, consolidation and basis of presentation

Nature of Operations

Popular, Inc. (the “Corporation”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States, 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 mortgage banking, investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. 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. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries (the “Corporation”). All significant intercompany accounts and transactions have been eliminated in consolidation. In accordance with the consolidation guidance for variable interest entities, the Corporation would also consolidate any variable interest entities (“VIEs”) for which it has a controlling financial interest and therefore is the primary beneficiary. The Corporation does not hold an interest in any VIEs subject to consolidation at this time. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of financial condition. The results of operations of companies or assets acquired are included only from the dates of acquisition.

Unconsolidated investments, in which there is at least 20% ownership, are generally accounted for by the equity method. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in other operating income. Investments, in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are received. Limited partnerships are accounted for by the equity method unless the Corporation’s interest is so “minor” that it may have virtually no influence over partnership operating and financial policies.

Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements.

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2011 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain reclassifications have been made to the 2011 consolidated financial statements and notes to the financial statements to conform with the 2012 presentation.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2011, included in the Corporation’s 2011 Annual Report (the “2011 Annual Report”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2 – New accounting pronouncements

FASB Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”) and FASB Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”)

The FASB issued ASU 2011-05 in June 2011. The amendment of this ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU also does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.

In December 2011, the FASB issued ASU 2011-12, which defers indefinitely the new requirement in ASU 2011-05 to present components of reclassification adjustments out of accumulated other comprehensive income on the face of the income statement by income statement line item.

The Corporation adopted the provisions of these two guidance in the first quarter of 2012. The guidance impacts presentation disclosure only and did not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

The FASB issued ASU 2011-11 in December 2011. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. To meet this objective, entities with financial instruments and derivatives that are either offset on the balance sheet or subject to a master netting arrangement or similar arrangement shall disclose the following quantitative information separately for assets and liabilities in tabular format: a) gross amounts of recognized assets and liabilities; b) amounts offset to determine the net amount presented in the balance sheet; c) net amounts presented in the balance sheet; d) amounts subject to an enforceable master netting agreement or similar arrangement not otherwise included in (b), including: amounts related to recognized financial instruments and other derivatives instruments if either management makes an accounting election not to offset or the amounts do not meet the guidance in ASC Section 210-20-45 or ASC Section 815-10-45, and also amounts related to financial collateral (including cash collateral); and e) the net amount after deducting the amounts in (d) from the amounts in (c).

In addition to these tabular disclosures, entities are required to provide a description of the setoff rights associated with assets and liabilities subject to an enforceable master netting arrangement.

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.

The provisions of this guidance impact presentation disclosure only and will not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (“ASU 2011-10”)

the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under ASC Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.

ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted; however, the Corporation is not early adopting this ASU.

The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”)

The FASB issued Accounting Standards Update (“ASU”) No. 2011-08 in September 2011. ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity the option to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350, Intangibles-Goodwill and Other . The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The previous guidance under ASC Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

This ASU also removes the guidance that permitted the entities to carry forward the calculation of the fair value of the reporting unit from one year to the next if certain conditions are met. In addition, the new qualitative indicators replace those currently used to determine whether an interim goodwill impairment test is required. These indicators are also applicable for assessing whether to perform step two for reporting units with zero or negative carrying amounts.

ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued. The Corporation did not elect to adopt early the provisions of this ASU.

The Corporation adopted this guidance on January 1, 2012. The provisions of this guidance simplify how entities test for goodwill impairment and it did not impact the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”)

The FASB issued ASU 2011-04 in May 2011. The amendment of this ASU provides a consistent definition of fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU modifies some fair value measurement principles and disclosure requirements including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, measuring the fair value of financial instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement, disclosing quantitative information about unobservable inputs used in Level 3 fair value measurements, and other additional disclosures about fair value measurements.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively and early application was not permitted.

The Corporation adopted this guidance on the first quarter of 2012. It did not have a material impact on the Corporation’s consolidated financial statements. Refer to Notes 21 and 22 for additional fair value disclosures included for the quarter ended March 31, 2012.

FASB Accounting Standards Update 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”)

The FASB issued ASU 2011-03 in April 2011. The amendment of this ASU affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The ASU modifies the criteria for determining when these transactions would be accounted for as financings (secured borrowings / lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). This ASU does not affect other transfers of financial assets. ASC Topic 860 prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over transferred financial assets.

Specifically, the amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early application was not permitted.

The adoption of this guidance on January 1, 2012 did not have an impact on the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

Note 3—Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $877 million at March 31, 2012 (December 31, 2011—$838 million; March 31, 2011—$843 million). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2012 and December 31, 2011, the Corporation held $36 million in restricted assets in the form of cash and funds deposited in money market accounts (March 31, 2011—$51 million).

Note 4 – Pledged assets

Certain securities, loans and other real estate owned were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, and loan servicing agreements. 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:


	March 31,		December 31,		March 31,
(In thousands)	2012		2011		2011
Investment securities available-for-sale, at fair value	$	1,840,351	$	1,894,651	$	1,529,464
Investment securities held-to-maturity, at amortized cost		25,000		25,000		49,734
Loans held-for-sale measured at lower of cost or fair value		4,421		5,286		2,638
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		536,666		—		4,634,499
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		8,967,998		8,571,268		8,906,093
Other real estate covered under loss sharing agreements with the FDIC		—		—		65,562

Total pledged assets	$	11,374,436	$	10,496,205	$	15,187,990

Pledged securities and loans that the creditor has the right by custom or contract to repledge are presented separately on the consolidated statements of financial condition.

At March 31, 2012, the Corporation had $1.3 billion in investment securities available-for-sale and $0.3 billion in loans that served as collateral to secure public funds (December 31, 2011—$1.4 billion and $0.4 billion, respectively; March 31, 2011—$1.0 billion and $0.7 billion, respectively).

At March 31, 2012, the Corporation’s banking subsidiaries had short-term and long-term credit facilities authorized with the Federal Home Loan Bank system (the “FHLB”) aggregating $2.5 billion (December 31, 2011—$2.0 billion; March 31, 2011—$1.7 billion). Refer to Note 14 to the consolidated financial statements for borrowings outstanding under these credit facilities. At March 31, 2012, the credit facilities authorized with the FHLB were collateralized by $3.7 billion in loans held-in-portfolio (December 31, 2011—$3.2 billion; March 31, 2011—$2.7 billion). Also, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $3.2 billion (December 31, 2011—$2.6 billion; March 31, 2011—$2.8 billion), which remained unused as of such date. The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At March 31, 2012, the credit facilities with the Fed discount window were collateralized by $4.9 billion in loans held-in-portfolio (December 31, 2011—$4.0 billion; March 31, 2011—$5.5 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition.

In addition, at March 31, 2012 and December 31, 2011, securities sold but not yet delivered amounting to $68 million were pledged to secure repurchase agreements.

Loans held-in-portfolio and other real estate owned that are covered by loss sharing agreements with the FDIC amounting to $4.7 billion served as collateral to secure the note issued to the FDIC at March 31, 2011.

Note 5 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale.


	At March 31, 2012
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	7,012	$	84	$	—	$	7,096		1.50	%
After 1 to 5 years		27,790		3,198		—		30,988		3.82

Total U.S. Treasury securities		34,802		3,282		—		38,084		3.35

Obligations of U.S. Government sponsored entities
Within 1 year		99,515		1,735		—		101,250		3.36
After 1 to 5 years		625,230		21,897		—		647,127		3.31
After 5 to 10 years		310,004		2,290		940		311,354		2.14
After 10 years		32,085		369		387		32,067		4.00

Total obligations of U.S. Government sponsored entities		1,066,834		26,291		1,327		1,091,798		3.00

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		765		4		—		769		4.94
After 1 to 5 years		13,039		296		23		13,312		4.04
After 5 to 10 years		4,595		41		—		4,636		5.33
After 10 years		37,320		799		—		38,119		5.38

Total obligations of Puerto Rico, States and political subdivisions		55,719		1,140		23		56,836		5.06

Collateralized mortgage obligations—federal agencies
After 1 to 5 years		6,822		81		—		6,903		1.48
After 5 to 10 years		41,988		1,347		—		43,335		2.86
After 10 years		1,756,972		51,991		394		1,808,569		2.66

Total collateralized mortgage obligations—federal agencies		1,805,782		53,419		394		1,858,807		2.66

Collateralized mortgage obligations—private label
After 5 to 10 years		5,041		1		149		4,893		0.77
After 10 years		52,445		70		2,740		49,775		2.52

Total collateralized mortgage obligations—private label		57,486		71		2,889		54,668		2.37

Mortgage-backed securities
Within 1 year		32		—		—		32		3.71
After 1 to 5 years		6,619		311		—		6,930		3.90
After 5 to 10 years		102,677		7,837		1		110,513		4.67
After 10 years		1,755,946		131,139		36		1,887,049		4.24

Total mortgage-backed securities		1,865,274		139,287		37		2,004,524		4.26

Equity securities (without contractual maturity)		6,595		875		11		7,459		2.81

Other
After 5 to 10 years		17,850		3,063		—		20,913		10.99
After 10 years		5,410		117		—		5,527		3.62

Total other		23,260		3,180		—		26,440		9.28

Total investment securities available-for-sale	$	4,915,752	$	227,545	$	4,681	$	5,138,616		3.40	%


	At December 31, 2011
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
After 1 to 5 years	$	34,980	$	3,688	$	—	$	38,668		3.35	%

Total U.S. Treasury securities		34,980		3,688		—		38,668		3.35

Obligations of U.S. Government sponsored entities
Within 1 year		94,492		2,382		—		96,874		3.45
After 1 to 5 years		655,625		25,860		—		681,485		3.38
After 5 to 10 years		171,633		2,969		—		174,602		2.94
After 10 years		32,086		499		—		32,585		3.20

Total obligations of U.S. Government sponsored entities		953,836		31,710		—		985,546		3.30

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		765		9		—		774		4.97
After 1 to 5 years		14,824		283		31		15,076		4.07
After 5 to 10 years		4,595		54		—		4,649		5.33
After 10 years		37,320		909		—		38,229		5.38

Total obligations of Puerto Rico, States and political subdivisions		57,504		1,255		31		58,728		5.03

Collateralized mortgage obligations—federal agencies
After 1 to 5 years		2,424		49		—		2,473		3.28
After 5 to 10 years		55,096		1,446		—		56,542		2.64
After 10 years		1,589,373		49,462		208		1,638,627		2.84

Total collateralized mortgage obligations—federal agencies		1,646,893		50,957		208		1,697,642		2.83

Collateralized mortgage obligations—private label
After 5 to 10 years		5,653		1		181		5,473		0.81
After 10 years		59,460		—		7,141		52,319		2.44

Total collateralized mortgage obligations—private label		65,113		1		7,322		57,792		2.30

Mortgage-backed securities
Within 1 year		57		1		—		58		3.91
After 1 to 5 years		7,564		328		—		7,892		3.86
After 5 to 10 years		111,639		8,020		1		119,658		4.66
After 10 years		1,870,736		141,274		49		2,011,961		4.25

Total mortgage-backed securities		1,989,996		149,623		50		2,139,569		4.27

Equity securities (without contractual maturity)		6,594		426		104		6,916		2.96

Other
After 5 to 10 years		17,850		700		—		18,550		10.99
After 10 years		6,311		101		—		6,412		3.61

Total other		24,161		801		—		24,962		9.06

Total investment securities available-for-sale	$	4,779,077	$	238,461	$	7,715	$	5,009,823		3.58	%


	At March 31, 2011
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
After 1 to 5 years	$	7,003	$	98	$	—	$	7,101		1.50	%
After 5 to 10 years		28,505		2,076		—		30,581		3.81

Total U.S. Treasury securities		35,508		2,174		—		37,682		3.35

Obligations of U.S. Government sponsored entities
Within 1 year		230,290		906		921		230,275		2.95
After 1 to 5 years		1,005,737		45,685		92		1,051,330		3.73
After 5 to 10 years		180,000		—		518		179,482		2.66

Total obligations of U.S. Government sponsored entities		1,416,027		46,591		1,531		1,461,087		3.47

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,357		10		—		10,367		3.92
After 1 to 5 years		15,753		255		6		16,002		4.52
After 5 to 10 years		20,765		35		167		20,633		5.07
After 10 years		5,505		62		—		5,567		5.28

Total obligations of Puerto Rico, States and political subdivisions		52,380		362		173		52,569		4.70

Collateralized mortgage obligations—federal agencies
Within 1 year		35		—		—		35		3.36
After 1 to 5 years		1,737		88		—		1,825		4.76
After 5 to 10 years		91,067		1,019		865		91,221		2.47
After 10 years		1,487,274		28,001		1,011		1,514,264		2.94

Total collateralized mortgage obligations—federal agencies		1,580,113		29,108		1,876		1,607,345		2.91

Collateralized mortgage obligations—private label
After 5 to 10 years		8,109		13		90		8,032		0.86
After 10 years		73,612		51		4,547		69,116		2.30

Total collateralized mortgage obligations—private label		81,721		64		4,637		77,148		2.16

Mortgage-backed securities
Within 1 year		633		51		—		684		5.35
After 1 to 5 years		13,444		519		4		13,959		3.98
After 5 to 10 years		164,579		10,230		8		174,801		4.71
After 10 years		2,143,295		81,696		967		2,224,024		4.25

Total mortgage-backed securities		2,321,951		92,496		979		2,413,468		4.28

Equity securities (without contractual maturity)		8,722		968		256		9,434		3.43

Other
After 5 to 10 years		17,850		2,363		—		20,213		11.00
After 10 years		7,473		—		78		7,395		3.62

Total other		25,323		2,363		78		27,608		8.82

Total investment securities available-for-sale	$	5,521,745	$	174,126	$	9,530	$	5,686,341		3.67	%

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

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

There were no securities sold during the quarters ended March 31, 2012 and 2011.

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


	At March 31, 2012
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of U.S. Government sponsored entities	$	235,106	$	1,327	$	—	$	—	$	235,106	$	1,327
Obligations of Puerto Rico, States and political subdivisions		2,816		23		—		—		2,816		23
Collateralized mortgage obligations—federal agencies		101,959		379		3,002		15		104,961		394
Collateralized mortgage obligations—private label		914		29		48,494		2,860		49,408		2,889
Mortgage-backed securities		209		3		1,475		34		1,684		37
Equity securities		47		3		3		8		50		11

Total investment securities available-for-sale in an unrealized loss position	$	341,051	$	1,764	$	52,974	$	2,917	$	394,025	$	4,681


	At December 31, 2011
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	7,817	$	28	$	191	$	3	$	8,008	$	31
Collateralized mortgage obligations—federal agencies		90,543		208		—		—		90,543		208
Collateralized mortgage obligations—private label		13,595		539		44,148		6,783		57,743		7,322
Mortgage-backed securities		5,577		14		1,466		36		7,043		50
Equity securities		5,199		95		2		9		5,201		104

Total investment securities available-for-sale in an unrealized loss position	$	122,731	$	884	$	45,807	$	6,831	$	168,538	$	7,715


	At March 31, 2011
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of U.S. Government sponsored entities	$	304,080	$	1,531	$	—	$	—	$	304,080	$	1,531
Obligations of Puerto Rico, States and political subdivisions		18,138		167		301		6		18,439		173
Collateralized mortgage obligations—federal agencies		345,887		1,876		—		—		345,887		1,876
Collateralized mortgage obligations—private label		21,678		252		46,424		4,385		68,102		4,637
Mortgage-backed securities		35,010		714		9,185		265		44,195		979
Equity securities		3,798		169		51		87		3,849		256
Other		7,395		78		—		—		7,395		78

Total investment securities available-for-sale in an unrealized loss position	$	735,986	$	4,787	$	55,961	$	4,743	$	791,947	$	9,530

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.

At March 31, 2012, 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. At March 31, 2012, the Corporation did 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 at March 31, 2012. No other-than-temporary impairment losses on equity securities were recorded during the quarters ended March 31, 2012 and 2011. Management has the intent and ability to hold the investments in equity securities that are at a loss position at March 31, 2012, 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” (“private-label CMO”) 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. At March 31, 2012, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses at March 31, 2012, 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 at March 31, 2012, thus management expects to recover the amortized cost basis of the securities.

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


	March 31, 2012				December 31, 2011				March 31, 2011
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	1,117,928	$	1,157,729	$	1,049,315	$	1,089,069	$	1,029,936	$	1,057,977
FHLB		583,897		604,020		553,940		578,617		1,003,317		1,047,747
Freddie Mac		1,149,415		1,176,487		984,270		1,010,669		977,365		993,342

Note 6 – Investment securities held-to-maturity


	At March 31, 2012
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	7,375	$	29	$	—	$	7,404		2.31	%
After 1 to 5 years		11,649		556		—		12,205		5.83
After 5 to 10 years		19,302		395		51		19,646		6.00
After 10 years		59,391		116		623		58,884		4.05

Total obligations of Puerto Rico, States and political subdivisions		97,717		1,096		674		98,139		4.52

Collateralized mortgage obligations—federal agencies
After 10 years		155		6		—		161		5.16

Total collateralized mortgage obligations—federal agencies		155		6		—		161		5.16

Other
After 1 to 5 years		26,500		29		—		26,529		3.39

Total other		26,500		29		—		26,529		3.39

Total investment securities held-to-maturity	$	124,372	$	1,131	$	674	$	124,829		4.28	%


	At December 31, 2011
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	7,275	$	6	$	—	$	7,281		2.24	%
After 1 to 5 years		11,174		430		—		11,604		5.80
After 5 to 10 years		18,512		266		90		18,688		5.99
After 10 years		62,012		40		855		61,197		4.11

Total obligations of Puerto Rico, States and political subdivisions		98,973		742		945		98,770		4.51

Collateralized mortgage obligations—private label
After 10 years		160		—		9		151		5.45

Total collateralized mortgage obligations—private label		160		—		9		151		5.45

Other
After 1 to 5 years		26,250		83		—		26,333		3.41

Total other		26,250		83		—		26,333		3.41

Total investment securities held-to-maturity	$	125,383	$	825	$	954	$	125,254		4.28	%


	At March 31, 2011
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		Value		yield
U.S. Treasury securities
Within 1 year	$	24,734	$	—	$	—	$	24,734		0.02	%

Total U.S. Treasury securities		24,734		—		—		24,734		0.02

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		2,235		30		—		2,265		5.56
After 1 to 5 years		15,973		356		—		16,329		4.19
After 5 to 10 years		18,340		94		264		18,170		5.97
After 10 years		54,154		6,695		1,325		59,524		4.13

Total obligations of Puerto Rico, States and political subdivisions		90,702		7,175		1,589		96,288		4.55

Collateralized mortgage obligations - private label
After 10 years		170		—		9		161		5.45

Total collateralized mortgage obligations - private label		170		—		9		161		5.45

Other
Within 1 year		1,250		—		—		1,250		0.96
After 1 to 5 years		25,250		133		—		25,383		3.47

Total other		26,500		133		—		26,633		3.35

Total investment securities held-to-maturity	$	142,106	$	7,308	$	1,598	$	147,816		3.54	%

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

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012, December 31, 2011 and March 31, 2011:


	At March 31, 2012
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	30,866	$	674	$	30,866	$	674

Total investment securities held-to-maturity in an unrealized loss position	$	—	$	—	$	30,866	$	674	$	30,866	$	674


	At December 31, 2011
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	10,323	$	92	$	31,062	$	853	$	41,385	$	945
Collateralized mortgage obligations - private label		—		—		151		9		151		9

Total investment securities held-to-maturity in an unrealized loss position	$	10,323	$	92	$	31,213	$	862	$	41,536	$	954


	At March 31, 2011
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)	value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions	$	26,407	$	567	$	30,808	$	1,022	$	57,215	$	1,589
Collateralized mortgage obligations - private label		—		—		161		9		161		9

Total investment securities held-to-maturity in an unrealized loss position	$	26,407	$	567	$	30,969	$	1,031	$	57,376	$	1,598

As indicated in Note 5 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at March 31, 2012 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 at March 31, 2012 was attributable to changes in interest rates and not credit quality, thus no other-than-temporary decline in value was necessary to be recorded in these held-to-maturity securities at March 31, 2012. At March 31, 2012, 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 7 – Loans

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. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

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

For a summary of the accounting policy related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to the consolidated financial statements included in the 2011 Annual Report. Also, refer to Note 8 for a description of enhancements done to the Corporation’s methodology for determining the allowance for loan losses which were effective on March 31, 2012.

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at March 31, 2012 and December 31, 2011.


	Non-covered loans		Non-covered loans
(In thousands)	HIP at March 31, 2012		HIP at December 31, 2011
Commercial multi-family	$	802,286	$	808,933
Commercial real estate non-owner occupied		2,641,361		2,665,499
Commercial real estate owner occupied		2,665,551		2,817,266
Commercial and industrial		3,759,044		3,681,629
Construction		236,579		239,939
Mortgage		5,591,745		5,518,460
Leasing		543,314		548,706
Legacy ^[2]		603,874		648,409
Consumer:
Credit cards		1,204,551		1,230,029
Home equity lines of credit		542,249		557,894
Personal		1,119,335		1,130,593
Auto		533,575		518,476
Other		235,210		236,763

Total loans held-in-portfolio ^[1]	$	20,478,674	$	20,602,596

[1]	Non-covered loans held-in-portfolio at March 31, 2012 are net of $99 million in unearned income and exclude $362 million in loans held-for-sale. (December 31, 2011 - $101 million in unearned income and $363 million in loans held-for-sale.)

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

The following table presents the composition of covered loans at March 31, 2012 and December 31, 2011.


	Covered loans at		Covered loans at
(In thousands)	March 31, 2012		December 31, 2011
Commercial real estate	$	2,202,860	$	2,271,295
Commercial and industrial		228,841		241,447
Construction		532,433		546,826
Mortgage		1,150,996		1,172,954
Consumer		106,658		116,181

Total loans held-in-portfolio	$	4,221,788	$	4,348,703

The following table provides a breakdown of loans held-for-sale (“LHFS”) at March 31, 2012 and December 31, 2011 by main categories.


	Non-covered loans
(In thousands)	March 31, 2012		December 31, 2011
Commercial	$	25,994	$	26,198
Construction		206,246		236,045
Mortgage		129,356		100,850

Total	$	361,596	$	363,093

During the quarter ended March 31, 2012, the Corporation recorded purchases of mortgage loans amounting to $215 million (March 31, 2011—$439 million). In addition, during the quarter ended March 31, 2012, the Corporation recorded purchases of construction loans amounting to $1 million (no construction loans were purchased during the quarter ended March 31, 2011). There were no significant purchases of commercial loans during the quarters ended March 31, 2012 and 2011.

The Corporation performed whole-loan sales involving approximately $50 million of residential mortgage loans during the quarter ended March 31, 2012 (March 31, 2011—$235 million). Also, the Corporation securitized approximately $190 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter ended March 31, 2012 (March 31, 2011—$256 million). Furthermore, the Corporation securitized approximately $60 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter ended March 31, 2012 (March 31, 2011—$73 million). The Corporation sold commercial and construction loans with a book value of approximately $20 million during the quarter ended March 31, 2012 (March 31, 2011—$2 million).

Non-covered loans

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at March 31, 2012 and December 31, 2011. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from another financial institution that, although delinquent, the Corporation has received timely payment from the seller / servicer, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from another financial institution, which are in the process of foreclosure, are classified as non-performing mortgage loans.


At March 31, 2012
	Puerto Rico				U.S. mainland				Popular, Inc.
	Non-covered loans
			Accruing				Accruing				Accruing
	Non-accrual		loans past-due		Non-accrual		loans past-due		Non-accrual		loans past-due
(In thousands)	loans		90 days or more		loans		90 days or more		loans		90 days or more
Commercial multi-family	$	14,666	$	—	$	16,860	$	—	$	31,526	$	—
Commercial real estate non-owner occupied		62,155		—		86,448		—		148,603		—
Commercial real estate owner occupied		377,623		—		52,979		—		430,602		—
Commercial and industrial		166,472		671		41,475		—		207,947		671
Construction		56,247		—		13,223		—		69,470		—
Mortgage		633,517		293,805		33,700		—		667,217		293,805
Leasing		5,673		—		—		—		5,673		—
Legacy		—		—		79,077		—		79,077		—
Consumer:
Credit cards		—		24,478		623		—		623		24,478
Home equity lines of credit		—		439		12,212		—		12,212		439
Personal		17,630		—		1,639		—		19,269		—
Auto		6,527		—		38		—		6,565		—
Other		2,971		695		48		—		3,019		695

Total ^[1]	$	1,343,481	$	320,088	$	338,322	$	—	$	1,681,803	$	320,088

[1]	For purposes of this table non-performing loans exclude $232 million in non-performing loans held-for-sale.


At December 31, 2011
	Puerto Rico				U.S. mainland				Popular, Inc.
	Non-covered loans
			Accruing				Accruing				Accruing
	Non-accrual		loans past-due		Non-accrual		loans past-due		Non-accrual		loans past-due
(In thousands)	loans		90 days or more		loans		90 days or more		loans		90 days or more
Commercial multi-family	$	15,396	$	—	$	13,935	$	—	$	29,331	$	—
Commercial real estate non-owner occupied		51,013		—		80,820		—		131,833		—
Commercial real estate owner occupied		385,303		—		59,726		—		445,029		—
Commercial and industrial		179,459		675		44,440		—		223,899		675
Construction		53,859		—		42,427		—		96,286		—
Mortgage		649,279		280,912		37,223		—		686,502		280,912
Leasing		5,642		—		—		—		5,642		—
Legacy		—		—		75,660		—		75,660		—
Consumer:
Credit cards		—		25,748		735		—		735		25,748
Home equity lines of credit		—		157		10,065		—		10,065		157
Personal		19,317		—		1,516		—		20,833		—
Auto		6,830		—		34		—		6,864		—
Other		5,144		468		27		—		5,171		468

Total ^[1]	$	1,371,242	$	307,960	$	366,608	$	—	$	1,737,850	$	307,960

[1]	For purposes of this table non-performing loans exclude $262 million in non-performing loans held-for-sale.

The following tables present loans by past due status at March 31, 2012 and December 31, 2011 for non-covered loans held-in-portfolio (net of unearned income).


March 31, 2012
Puerto Rico
Non- covered loans
	Past due										Non - covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	409	$	—	$	14,666	$	15,075	$	94,503	$	109,578
Commercial real estate non-owner occupied		6,708		230		62,155		69,093		1,209,572		1,278,665
Commercial real estate owner occupied		51,307		10,426		377,623		439,356		1,648,609		2,087,965
Commercial and industrial		58,769		8,000		167,143		233,912		2,719,549		2,953,461
Construction		12,360		—		56,247		68,607		107,161		175,768
Mortgage		261,859		45,756		927,322		1,234,937		3,525,408		4,760,345
Leasing		9,203		1,448		5,673		16,324		526,990		543,314
Consumer:
Credit cards		15,323		11,016		24,478		50,817		1,140,363		1,191,180
Home equity lines of credit		205		340		439		984		18,693		19,677
Personal		15,471		9,360		17,630		42,461		932,538		974,999
Auto		21,213		5,817		6,527		33,557		498,360		531,917
Other		678		651		3,666		4,995		228,735		233,730

Total	$	453,505	$	93,044	$	1,663,569	$	2,210,118	$	12,650,481	$	14,860,599


March 31, 2012
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	4,107	$	—	$	16,860	$	20,967	$	671,741	$	692,708
Commercial real estate non-owner occupied		31,834		169		86,448		118,451		1,244,245		1,362,696
Commercial real estate owner occupied		14,371		237		52,979		67,587		509,999		577,586
Commercial and industrial		8,159		605		41,475		50,239		755,344		805,583
Construction		681		—		13,223		13,904		46,907		60,811
Mortgage		32,232		4,798		33,700		70,730		760,670		831,400
Legacy		18,752		1,806		79,077		99,635		504,239		603,874
Consumer:
Credit cards		178		169		623		970		12,401		13,371
Home equity lines of credit		4,804		1,938		12,212		18,954		503,618		522,572
Personal		5,082		98		1,639		6,819		137,517		144,336
Auto		31		5		38		74		1,584		1,658
Other		11		18		48		77		1,403		1,480

Total	$	120,242	$	9,843	$	338,322	$	468,407	$	5,149,668	$	5,618,075


March 31, 2012
Popular, Inc.
Non-covered loans
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.
Commercial multi-family	$	4,516	$	—	$	31,526	$	36,042	$	766,244	$	802,286
Commercial real estate non-owner occupied		38,542		399		148,603		187,544		2,453,817		2,641,361
Commercial real estate owner occupied		65,678		10,663		430,602		506,943		2,158,608		2,665,551
Commercial and industrial		66,928		8,605		208,618		284,151		3,474,893		3,759,044
Construction		13,041		—		69,470		82,511		154,068		236,579
Mortgage		294,091		50,554		961,022		1,305,667		4,286,078		5,591,745
Leasing		9,203		1,448		5,673		16,324		526,990		543,314
Legacy		18,752		1,806		79,077		99,635		504,239		603,874
Consumer:
Credit cards		15,501		11,185		25,101		51,787		1,152,764		1,204,551
Home equity lines of credit		5,009		2,278		12,651		19,938		522,311		542,249
Personal		20,553		9,458		19,269		49,280		1,070,055		1,119,335
Auto		21,244		5,822		6,565		33,631		499,944		533,575
Other		689		669		3,714		5,072		230,138		235,210

Total	$	573,747	$	102,887	$	2,001,891	$	2,678,525	$	17,800,149	$	20,478,674


December 31, 2011
Puerto Rico
Non-covered loans
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Puerto Rico
Commercial multi-family	$	435	$	121	$	15,396	$	15,952	$	107,164	$	123,116
Commercial real estate non-owner occupied		16,584		462		51,013		68,059		1,193,447		1,261,506
Commercial real estate owner occupied		39,578		21,003		385,303		445,884		1,785,542		2,231,426
Commercial and industrial		46,013		17,233		180,134		243,380		2,611,154		2,854,534
Construction		608		21,055		53,859		75,522		85,419		160,941
Mortgage		202,072		98,565		930,191		1,230,828		3,458,655		4,689,483
Leasing		7,927		2,301		5,642		15,870		532,836		548,706
Consumer:
Credit cards		14,507		11,479		25,748		51,734		1,164,086		1,215,820
Home equity lines of credit		155		395		157		707		19,344		20,051
Personal		17,583		10,434		19,317		47,334		935,854		983,188
Auto		22,677		5,883		6,830		35,390		480,874		516,264
Other		1,740		1,442		5,612		8,794		226,310		235,104

Total	$	369,879	$	190,373	$	1,679,202	$	2,239,454	$	12,600,685	$	14,840,139


December 31, 2011
U.S. mainland
	Past due
	30-59		60-89		90 days		Total				Loans HIP
(In thousands)	days		days		or more		past due		Current		U.S. mainland
Commercial multi-family	$	14,582	$	—	$	13,935	$	28,517	$	657,300	$	685,817
Commercial real estate non-owner occupied		15,794		3,168		80,820		99,782		1,304,211		1,403,993
Commercial real estate owner occupied		14,004		449		59,726		74,179		511,661		585,840
Commercial and industrial		22,545		3,791		44,440		70,776		756,319		827,095
Construction		—		—		42,427		42,427		36,571		78,998
Mortgage		30,594		13,190		37,223		81,007		747,970		828,977
Legacy		30,712		7,536		75,660		113,908		534,501		648,409
Consumer:
Credit cards		314		229		735		1,278		12,931		14,209
Home equity lines of credit		7,090		3,587		10,065		20,742		517,101		537,843
Personal		3,574		2,107		1,516		7,197		140,208		147,405
Auto		106		37		34		177		2,035		2,212
Other		29		10		27		66		1,593		1,659

Total	$	139,344	$	34,104	$	366,608	$	540,056	$	5,222,401	$	5,762,457


December 31, 2011
Popular, Inc.
Non-covered loans
	Past due										Non-covered
	30-59		60-89		90 days		Total				loans HIP
(In thousands)	days		days		or more		past due		Current		Popular, Inc.
Commercial multi-family	$	15,017	$	121	$	29,331	$	44,469	$	764,464	$	808,933
Commercial real estate non-owner occupied		32,378		3,630		131,833		167,841		2,497,658		2,665,499
Commercial real estate owner occupied		53,582		21,452		445,029		520,063		2,297,203		2,817,266
Commercial and industrial		68,558		21,024		224,574		314,156		3,367,473		3,681,629
Construction		608		21,055		96,286		117,949		121,990		239,939
Mortgage		232,666		111,755		967,414		1,311,835		4,206,625		5,518,460
Leasing		7,927		2,301		5,642		15,870		532,836		548,706
Legacy		30,712		7,536		75,660		113,908		534,501		648,409
Consumer:
Credit cards		14,821		11,708		26,483		53,012		1,177,017		1,230,029
Home equity lines of credit		7,245		3,982		10,222		21,449		536,445		557,894
Personal		21,157		12,541		20,833		54,531		1,076,062		1,130,593
Auto		22,783		5,920		6,864		35,567		482,909		518,476
Other		1,769		1,452		5,639		8,860		227,903		236,763

Total	$	509,223	$	224,477	$	2,045,810	$	2,779,510	$	17,823,086	$	20,602,596

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at March 31, 2012 and December 31, 2011 by main categories.


	Non-covered loans HFS
(In thousands)	March 31, 2012		December 31, 2011
Commercial	$	25,994	$	26,198
Construction		206,246		236,045
Mortgage		53		59

Total	$	232,293	$	262,302

Covered loans

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
Covered loans
	Non-accrual		Accruing loans past		Non-accrual		Accruing loans past
(In thousands)	loans		due 90 days or more		loans		due 90 days or more
Commercial real estate	$	24,924	$	—	$	14,241	$	125
Commercial and industrial		62,324		463		63,858		1,392
Construction		4,541		6,172		4,598		5,677
Mortgage		423		113		423		113
Consumer		483		625		516		377

Total ^[1]	$	92,695	$	7,373	$	83,636	$	7,684

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

The following tables present loans by past due status at March 31, 2012 and December 31, 2011 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.


March 31, 2012
Covered loans
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP
Commercial real estate	$	53,879	$	20,695	$	537,549	$	612,123	$	1,590,737	$	2,202,860
Commercial and industrial		5,483		4,708		93,658		103,849		124,992		228,841
Construction		2,411		480		415,960		418,851		113,582		532,433
Mortgage		58,408		6,532		187,719		252,659		898,337		1,150,996
Consumer		5,018		1,939		14,701		21,658		85,000		106,658

Total covered loans	$	125,199	$	34,354	$	1,249,587	$	1,409,140	$	2,812,648	$	4,221,788


December 31, 2011
Covered loans
	Past due
	30-59		60-89		90 days		Total				Covered
(In thousands)	days		days		or more		past due		Current		loans HIP
Commercial real estate	$	35,286	$	25,273	$	519,222	$	579,781	$	1,691,514	$	2,271,295
Commercial and industrial		4,438		1,390		99,555		105,383		136,064		241,447
Construction		997		625		434,661		436,283		110,543		546,826
Mortgage		32,371		28,238		196,541		257,150		915,804		1,172,954
Consumer		2,913		3,289		15,551		21,753		94,428		116,181

Total covered loans	$	76,005	$	58,815	$	1,265,530	$	1,400,350	$	2,948,353	$	4,348,703

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


	March 31, 2012									December 31, 2011
	Covered loans ASC 310-30
	Carrying amount									Carrying amount
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Commercial real estate	$	1,853,679		$	215,758		$	2,069,437		$	1,920,141		$	215,560		$	2,135,701
Commercial and industrial		79,335			3,482			82,817			85,859			4,621			90,480
Construction		199,724			309,418			509,142			279,561			260,208			539,769
Mortgage		1,125,643			13,288			1,138,931			1,065,842			102,027			1,167,869
Consumer		86,930			7,648			94,578			95,048			7,604			102,652

Carrying amount		3,345,311			549,594			3,894,905			3,446,451			590,020			4,036,471
Allowance for loan losses		(63,240	)		(31,319	)		(94,559	)		(62,951	)		(20,526	)		(83,477	)

Carrying amount, net of allowance	$	3,282,071		$	518,275		$	3,800,346		$	3,383,500		$	569,494		$	3,952,994

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, including amounts charged off by the Corporation, amounted to $5.8 billion at March 31, 2012 (December 31, 2011—$6.0 billion). At March 31, 2012, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2012 and 2011, were as follows:


	Activity in the accretable discount
	Covered loans ASC 310-30
	For the quarters ended
	March 31, 2012									March 31, 2011
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	1,428,764		$	41,495		$	1,470,259		$	1,307,927		$	23,181		$	1,331,108
Accretion		(62,467	)		(6,870	)		(69,337	)		(63,418	)		(9,514	)		(72,932	)
Change in expected cash flows		148,422			(6,825	)		141,597			—			—			—

Ending balance	$	1,514,719		$	27,800		$	1,542,519		$	1,244,509		$	13,667		$	1,258,176


	Carrying amount of covered loans accounted for pursuant to ASC 310-30
	For the quarters ended
	March 31, 2012									March 31, 2011
	Non-credit			Credit						Non-credit			Credit
	impaired			impaired						impaired			impaired
(In thousands)	loans			loans			Total			loans			loans			Total
Beginning balance	$	3,383,500		$	569,494		$	3,952,994		$	3,894,379		$	645,549		$	4,539,928
Accretion		62,467			6,870			69,337			63,418			9,514			72,932
Collections		(100,656	)		(26,770	)		(127,426	)		(169,147	)		(20,217	)		(189,364	)

Ending balance	$	3,345,311		$	549,594		$	3,894,905		$	3,788,650		$	634,846		$	4,423,496
Allowance for loan losses
ASC 310-30 covered loans		(63,240	)		(31,319	)		(94,559	)		—			(5,297	)		(5,297	)

	$	3,282,071		$	518,275		$	3,800,346		$	3,788,650		$	629,549		$	4,418,199

The following table provides the activity in the allowance for loan losses related to covered loans accounted for pursuant to ASC Subtopic 310-30.


	ASC 310-30 Covered loans
(In thousands)	March 31, 2012			March 31, 2011
Balance at beginning of period	$	83,477		$	—
Provision for loan losses		11,370			9,127
Net charge-offs		(288	)		(3,830	)

Balance at end of period	$	94,559		$	5,297

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20. Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.3 billion at March 31, 2012 and 2011.

Note 8 – Allowance for loan losses

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

•

Historical net loss rates (including losses from impaired loans) by loan type and by legal entity adjusted for recent net charge-off trends and environmental factors. The base net loss rates are based on the moving average of annualized net charge-offs computed over a 3-year historical loss window for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios.

•

Net charge-off trend factors are applied to adjust the base loss rates based on recent loss trends. The Corporation applies a trend factor when base losses are below recent loss trends. Currently, the trend factor is based on the last 12 months of losses for the commercial, construction and legacy loan portfolios and 6 months of losses for the consumer and mortgage loan portfolios. The trend factor accounts for inherent imprecision and the “lagging perspective” in base loss rates. The trend factor replaces the base-loss period when it is higher than base loss up to a determined cap.

•

Environmental factors, which include credit and macroeconomic indicators such as employment, price index and construction permits, were adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Correlation and regression analyses are used to select and weight these indicators.

During the first quarter of 2012, in order to better reflect current market conditions, management revised the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses for the Corporation’s commercial and construction loan portfolios. The change in the methodology, which is described in the paragraphs below, was implemented as of March 31, 2012 and resulted in a reduction to the allowance for loan losses of $40.5 million. As part of the analyses performed with the revisions in the allowance for loan losses methodology, the Corporation recorded an increase of $15.7 million related to environmental factor reserves for BPPR’s commercial loan portfolio which although improving continues to warrant additional scrutiny. The net impact of the revisions in the allowance methodology and the aforementioned increase due to environmental factors was $24.8 million for the quarter.

Management made the following principal changes to the methodology during the first quarter of 2012:

•

Established a more granular stratification of the commercial loan portfolios to enhance the homogeneity of the loan classes. Previously, the Corporation used loan groupings for commercial loan portfolios based on business lines and collateral types (secured / unsecured loans). As part of the loan segregation, management evaluated the risk profiles of the loan portfolio, recent and historical credit and loss trends, current and expected portfolio behavior and the economic factors affecting the economy. The revised groupings consider product types (construction, commercial multifamily, commercial & industrial, non-owner occupied commercial real estate (“CRE”) and owner occupied CRE) and business lines for each of the Corporation’s reportable segments, BPPR and BPNA. In addition, the Corporation established a legacy portfolio at the BPNA reportable segment, comprised of commercial loans, construction loans and commercial lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years.

The refinement in the loan groupings resulted in a decrease to the allowance for loan losses of $7.9 million at March 31, 2012, which consisted of a $9.7 million reduction related to the BPNA reportable segment, partially offset by an increase of $1.8 million related to the BPPR reportable segment.

•

Increased the historical look-back period for determining the loss trend factor . The Corporation increased the look-back period for assessing recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months.

Previously, the Corporation used a trend factor based on 6 months of net charge-offs as it aligned the estimation of inherent losses for the Corporation’s commercial and construction loan portfolios with deteriorating trends.

Given the current overall commercial and construction credit quality improvements noted on recent periods in terms of loss trends, non-performing loan balances and non-performing loan inflows, management concluded that a 12-month look-back period for the trend factor aligns the Corporation’s allowance for loan losses methodology to current credit quality trends.

The increase in the historical look-back period for determining the loss trend factor resulted in a decrease to the allowance for loan losses of $28.1 million at March 31, 2012, of which $24.0 million related to the BPPR reportable segment and $4.1 million to the BPNA reportable segment.

There were additional enhancements to the allowance for loan losses methodology which accounted for a reduction to the allowance for loan losses of $4.5 million at March 31, 2012, of which $3.9 million related to the BPNA reportable segment and $0.6 million to the BPPR reportable segment. This reduction related to loan portfolios with minimal or zero loss history.

There were no changes in the methodology for environmental factor reserves. There were no changes to the allowance for loan losses methodology for the Corporation’s consumer and mortgage loan portfolios during the first quarter of 2012.

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarters ended March 31, 2012 and 2011.


For the quarter ended March 31, 2012
Puerto Rico—Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	255,453		$	5,850		$	72,322		$	4,651		$	115,126		$	453,402
Provision		3,394			450			36,411			470			27,067			67,792
Charge-offs		(47,644	)		(280	)		(13,491	)		(1,217	)		(32,238	)		(94,870	)
Recoveries		10,126			651			1,265			1,063			8,107			21,212

Ending balance	$	221,329		$	6,671		$	96,507		$	4,967		$	118,062		$	447,536


For the quarter ended March 31, 2012
Puerto Rico—Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	94,472		$	20,435		$	5,310		$	—		$	4,728		$	124,945
Provision (reversal of provision)		(300	)		9,556			5,410			—			3,543			18,209
Charge-offs		(4,102	)		(264	)		(203	)		—			(89	)		(4,658	)
Recoveries		—			—			—			—			—			—

Ending balance	$	90,070		$	29,727		$	10,517		$	—		$	8,182		$	138,496


For the quarter ended March 31, 2012
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	113,979		$	2,631		$	29,939		$	46,228		$	44,184		$	236,961
Provision (reversal of provision)		(4,864	)		(3	)		4,261			12,055			3,273			14,722
Charge-offs		(19,602	)		(1,396	)		(5,332	)		(8,473	)		(10,358	)		(45,161	)
Recoveries		2,737			1,230			104			4,915			1,724			10,710

Ending balance	$	92,250		$	2,462		$	28,972		$	54,725		$	38,823		$	217,232


For the quarter ended March 31, 2012
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	463,904		$	28,916		$	107,571		$	46,228		$	4,651		$	164,038		$	815,308
Provision (reversal of provision)		(1,770	)		10,003			46,082			12,055			470			33,883			100,723
Charge-offs		(71,348	)		(1,940	)		(19,026	)		(8,473	)		(1,217	)		(42,685	)		(144,689	)
Recoveries		12,863			1,881			1,369			4,915			1,063			9,831			31,922

Ending balance	$	403,649		$	38,860		$	135,996		$	54,725		$	4,967		$	165,067		$	803,264


For the quarter ended March 31, 2011
Puerto Rico—Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	256,643		$	16,074		$	42,029		$	7,154		$	133,531		$	455,431
Provision		1,099			3,385			21,515			633			25,067			51,699
Charge-offs		(46,032	)		(9,754	)		(8,204	)		(1,946	)		(35,477	)		(101,413	)
Recoveries		7,504			1,733			527			767			7,063			17,594

Ending balance	$	219,214		$	11,438		$	55,867		$	6,608		$	130,184		$	423,311


For the quarter ended March 31, 2011
Puerto Rico—Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	—		$	—		$	—		$	—		$	—		$	—
Provision		3,642			11,279			59			—			577			15,557
Charge-offs		(1,707	)		(4,345	)		—			—			(346	)		(6,398	)
Recoveries		—			—			—			—			—			—

Ending balance	$	1,935		$	6,934		$	59		$	—		$	231		$	9,159


For the quarter ended March 31, 2011
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	143,281		$	23,711		$	28,839		$	76,405		$	65,558		$	337,794
Provision (reversal of provision)		2,280			(808	)		(17,833	)		13,755			10,669			8,063
Charge-offs		(19,532	)		(982	)		(1,358	)		(23,504	)		(17,914	)		(63,290	)
Recoveries		2,048			218			788			3,255			1,352			7,661
Net recovery related to loans transferred to LHFS		—			—			13,807			—			—			13,807

Ending balance	$	128,077		$	22,139		$	24,243		$	69,911		$	59,665		$	304,035


For the quarter ended March 31, 2011
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	399,924		$	39,785		$	70,868		$	76,405		$	7,154		$	199,089		$	793,225
Provision		7,021			13,856			3,741			13,755			633			36,313			75,319
Charge-offs		(67,271	)		(15,081	)		(9,562	)		(23,504	)		(1,946	)		(53,737	)		(171,101	)
Recoveries		9,552			1,951			1,315			3,255			767			8,415			25,255
Net recovery related to loans transferred to LHFS		—			—			13,807			—			—			—			13,807

Ending balance	$	349,226		$	40,511		$	80,169		$	69,911		$	6,608		$	190,080		$	736,505

The following tables present information at March 31, 2012, December 31, 2011 and March 31, 2011 regarding loan ending balances and the allowance for loan losses by portfolio segment and whether such loans and the allowance pertains to loans individually or collectively evaluated for impairment.


At March 31, 2012
Puerto Rico
(In thousands)	Commercial		Construction		Mortgage		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	11,115	$	1,013	$	27,096	$	1,344	$	18,887	$	59,455
General ALLL non-covered loans		210,214		5,658		69,411		3,623		99,175		388,081

ALLL - non-covered loans		221,329		6,671		96,507		4,967		118,062		447,536

Specific ALLL covered loans		32,489		—		—		—		—		32,489
General ALLL covered loans		57,581		29,727		10,517		—		8,182		106,007

ALLL - covered loans		90,070		29,727		10,517		—		8,182		138,496

Total ALLL	$	311,399	$	36,398	$	107,024	$	4,967	$	126,244	$	586,032

Loans held-in-portfolio:
Impaired non-covered loans	$	402,097	$	51,023	$	396,854	$	5,412	$	135,745	$	991,131
Non-covered loans held-in-portfolio excluding impaired loans		6,027,572		124,745		4,363,491		537,902		2,815,758		13,869,468

Non-covered loans held-in-portfolio		6,429,669		175,768		4,760,345		543,314		2,951,503		14,860,599

Impaired covered loans		85,855		—		—		—		—		85,855
Covered loans held-in-portfolio excluding impaired loans		2,345,846		532,433		1,150,996		—		106,658		4,135,933

Covered loans held-in-portfolio		2,431,701		532,433		1,150,996		—		106,658		4,221,788

Total loans held-in-portfolio	$	8,861,370	$	708,201	$	5,911,341	$	543,314	$	3,058,161	$	19,082,387


At March 31, 2012
U.S. Mainland
(In thousands)	Commercial		Construction		Mortgage		Legacy		Consumer		Total
Allowance for credit losses:
Specific ALLL	$	1,883	$	—	$	13,850	$	765	$	103	$	16,601
General ALLL		90,367		2,462		15,122		53,960		38,720		200,631

Total ALLL	$	92,250	$	2,462	$	28,972	$	54,725	$	38,823	$	217,232

Loans held-in-portfolio:
Impaired loans	$	150,055	$	13,126	$	53,900	$	47,731	$	2,455	$	267,267
Loans held-in-portfolio, excluding impaired loans		3,288,518		47,685		777,500		556,143		680,962		5,350,808

Total loans held-in-portfolio	$	3,438,573	$	60,811	$	831,400	$	603,874	$	683,417	$	5,618,075


At March 31, 2012
Popular, Inc.
(In thousands)	Commercial		Construction		Mortgage		Legacy		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	12,998	$	1,013	$	40,946	$	765	$	1,344	$	18,990	$	76,056
General ALLL non-covered loans		300,581		8,120		84,533		53,960		3,623		137,895		588,712

ALLL - non-covered loans		313,579		9,133		125,479		54,725		4,967		156,885		664,768

Specific ALLL covered loans		32,489		—		—		—		—		—		32,489
General ALLL covered loans		57,581		29,727		10,517		—		—		8,182		106,007

ALLL - covered loans		90,070		29,727		10,517		—		—		8,182		138,496

Total ALLL	$	403,649	$	38,860	$	135,996	$	54,725	$	4,967	$	165,067	$	803,264

Loans held-in-portfolio:
Impaired non-covered loans	$	552,152	$	64,149	$	450,754	$	47,731	$	5,412	$	138,200	$	1,258,398
Non-covered loans held-in-portfolio excluding impaired loans		9,316,090		172,430		5,140,991		556,143		537,902		3,496,720		19,220,276

Non-covered loans held-in-portfolio		9,868,242		236,579		5,591,745		603,874		543,314		3,634,920		20,478,674

Impaired covered loans		85,855		—		—		—		—		—		85,855
Covered loans held-in-portfolio excluding impaired loans		2,345,846		532,433		1,150,996		—		—		106,658		4,135,933

Covered loans held-in-portfolio		2,431,701		532,433		1,150,996		—		—		106,658		4,221,788

Total loans held-in-portfolio	$	12,299,943	$	769,012	$	6,742,741	$	603,874	$	543,314	$	3,741,578	$	24,700,462


At December 31, 2011
Puerto Rico
(In thousands)	Commercial		Construction		Mortgage		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	10,407	$	289	$	14,944	$	793	$	16,915	$	43,348
General ALLL non-covered loans		245,046		5,561		57,378		3,858		98,211		410,054

ALLL - non-covered loans		255,453		5,850		72,322		4,651		115,126		453,402

Specific ALLL covered loans		27,086		—		—		—		—		27,086
General ALLL covered loans		67,386		20,435		5,310		—		4,728		97,859

ALLL - covered loans		94,472		20,435		5,310		—		4,728		124,945

Total ALLL	$	349,925	$	26,285	$	77,632	$	4,651	$	119,854	$	578,347

Loans held-in-portfolio:
Impaired non-covered loans	$	403,089	$	49,747	$	333,346	$	6,104	$	137,582	$	929,868
Non-covered loans held-in-portfolio excluding impaired loans		6,067,493		111,194		4,356,137		542,602		2,832,845		13,910,271

Non-covered loans held-in-portfolio		6,470,582		160,941		4,689,483		548,706		2,970,427		14,840,139

Impaired covered loans		76,798		—		—		—		—		76,798
Covered loans held-in-portfolio excluding impaired loans		2,435,944		546,826		1,172,954		—		116,181		4,271,905

Covered loans held-in-portfolio		2,512,742		546,826		1,172,954		—		116,181		4,348,703

Total loans held-in-portfolio	$	8,983,324	$	707,767	$	5,862,437	$	548,706	$	3,086,608	$	19,188,842


At December 31, 2011
U.S. Mainland
(In thousands)	Commercial		Construction		Mortgage		Legacy		Consumer		Total
Allowance for credit losses:
Specific ALLL	$	1,331	$	—	$	14,119	$	57	$	131	$	15,638
General ALLL		112,648		2,631		15,820		46,171		44,053		221,323

Total ALLL	$	113,979	$	2,631	$	29,939	$	46,228	$	44,184	$	236,961

Loans held-in-portfolio:
Impaired loans	$	153,240	$	41,963	$	49,534	$	48,890	$	2,526	$	296,153
Loans held-in-portfolio, excluding impaired loans		3,349,505		37,035		779,443		599,519		700,802		5,466,304

Total loans held-in-portfolio	$	3,502,745	$	78,998	$	828,977	$	648,409	$	703,328	$	5,762,457


At December 31, 2011
Popular, Inc.
(In thousands)	Commercial		Construction		Mortgage		Legacy		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	11,738	$	289	$	29,063	$	57	$	793	$	17,046	$	58,986
General ALLL non-covered loans		357,694		8,192		73,198		46,171		3,858		142,264		631,377

ALLL - non-covered loans		369,432		8,481		102,261		46,228		4,651		159,310		690,363

Specific ALLL covered loans		27,086		—		—		—		—		—		27,086
General ALLL covered loans		67,386		20,435		5,310		—		—		4,728		97,859

ALLL - covered loans		94,472		20,435		5,310		—		—		4,728		124,945

Total ALLL	$	463,904	$	28,916	$	107,571	$	46,228	$	4,651	$	164,038	$	815,308

Loans held-in-portfolio:
Impaired non-covered loans	$	556,329	$	91,710	$	382,880	$	48,890	$	6,104	$	140,108	$	1,226,021
Non-covered loans held-in-portfolio excluding impaired loans		9,416,998		148,229		5,135,580		599,519		542,602		3,533,647		19,376,575

Non-covered loans held-in-portfolio		9,973,327		239,939		5,518,460		648,409		548,706		3,673,755		20,602,596

Impaired covered loans		76,798		—		—		—		—		—		76,798
Covered loans held-in-portfolio excluding impaired loans		2,435,944		546,826		1,172,954		—		—		116,181		4,271,905

Covered loans held-in-portfolio		2,512,742		546,826		1,172,954		—		—		116,181		4,348,703

Total loans held-in-portfolio	$	12,486,069	$	786,765	$	6,691,414	$	648,409	$	548,706	$	3,789,936	$	24,951,299


At March 31, 2011
Puerto Rico
(In thousands)	Commercial		Construction		Mortgage		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	8,212	$	—	$	6,883	$	—	$	—	$	15,095
General ALLL non-covered loans		211,002		11,438		48,984		6,608		130,184		408,216

ALLL - non-covered loans		219,214		11,438		55,867		6,608		130,184		423,311

Specific ALLL covered loans		—		—		—		—		—		—
General ALLL covered loans		1,935		6,934		59		—		231		9,159

ALLL - covered loans		1,935		6,934		59		—		231		9,159

Total ALLL	$	221,149	$	18,372	$	55,926	$	6,608	$	130,415	$	432,470

Loans held-in-portfolio:
Impaired non-covered loans	$	325,075	$	56,607	$	141,819	$	—	$	—	$	523,501
Non-covered loans held-in-portfolio excluding impaired loans		6,337,511		92,682		3,889,361		565,881		2,852,855		13,738,290

Non-covered loans held-in-portfolio		6,662,586		149,289		4,031,180		565,881		2,852,855		14,261,791

Impaired covered loans		—		—		—		—		—		—
Covered loans held-in-portfolio excluding impaired loans		2,709,130		621,187		1,247,476		—		151,757		4,729,550

Covered loans held-in-portfolio		2,709,130		621,187		1,247,476		—		151,757		4,729,550

Total loans held-in-portfolio	$	9,371,716	$	770,476	$	5,278,656	$	565,881	$	3,004,612	$	18,991,341


At March 31, 2011
U.S. Mainland
(In thousands)	Commercial		Construction		Mortgage		Legacy		Consumer		Total
Allowance for credit losses:
Specific ALLL	$	1,514	$	—	$	1,283	$	—	$	—	$	2,797
General ALLL		126,563		22,139		22,960		69,911		59,665		301,238

Total ALLL	$	128,077	$	22,139	$	24,243	$	69,911	$	59,665	$	304,035

Loans held-in-portfolio:
Impaired loans	$	124,004	$	68,217	$	5,207	$	104,017	$	—	$	301,445
Loans held-in-portfolio, excluding impaired loans		3,614,695		72,377		859,295		794,755		772,431		6,113,553

Total loans held-in-portfolio	$	3,738,699	$	140,594	$	864,502	$	898,772	$	772,431	$	6,414,998


At March 31, 2011
Popular, Inc.
(In thousands)	Commercial		Construction		Mortgage		Legacy		Leasing		Consumer		Total
Allowance for credit losses:
Specific ALLL non-covered loans	$	9,726	$	—	$	8,166	$	—	$	—	$	—	$	17,892
General ALLL non-covered loans		337,565		33,577		71,944		69,911		6,608		189,849		709,454

ALLL - non-covered loans		347,291		33,577		80,110		69,911		6,608		189,849		727,346

Specific ALLL covered loans		—		—		—		—		—		—		—
General ALLL covered loans		1,935		6,934		59		—		—		231		9,159

ALLL - covered loans		1,935		6,934		59		—		—		231		9,159

Total ALLL	$	349,226	$	40,511	$	80,169	$	69,911	$	6,608	$	190,080	$	736,505

Loans held-in-portfolio:
Impaired non-covered loans	$	449,079	$	124,824	$	147,026	$	104,017	$	—	$	—	$	824,946
Non-covered loans held-in-portfolio excluding impaired loans		9,952,206		165,059		4,748,656		794,755		565,881		3,625,286		19,851,843

Non-covered loans held-in-portfolio		10,401,285		289,883		4,895,682		898,772		565,881		3,625,286		20,676,789

Impaired covered loans		—		—		—		—		—		—		—
Covered loans held-in-portfolio excluding impaired loans		2,709,130		621,187		1,247,476		—		—		151,757		4,729,550

Covered loans held-in-portfolio		2,709,130		621,187		1,247,476		—		—		151,757		4,729,550

Total loans held-in-portfolio	$	13,110,415	$	911,070	$	6,143,158	$	898,772	$	565,881	$	3,777,043	$	25,406,339

Impaired loans

The following tables present loans individually evaluated for impairment at March 31, 2012 and December 31, 2011.


March 31, 2012
Puerto Rico
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	143	$	143	$	—	$	8,629	$	13,035	$	8,772	$	13,178	$	—
Commercial real estate non-owner occupied		23,072		24,403		1,988		39,455		43,338		62,527		67,741		1,988
Commercial real estate owner occupied		37,989		50,338		4,053		162,233		212,474		200,222		262,812		4,053
Commercial and industrial		38,950		43,746		5,074		91,626		128,809		130,576		172,555		5,074
Construction		4,716		9,187		1,013		46,307		96,665		51,023		105,852		1,013
Mortgage		375,863		380,449		27,096		20,991		20,991		396,854		401,440		27,096
Leasing		5,412		5,412		1,344		—		—		5,412		5,412		1,344
Consumer:
Credit cards		39,045		39,045		1,973		—		—		39,045		39,045		1,973
Personal		92,042		92,042		16,208		—		—		92,042		92,042		16,208
Other		4,658		4,658		706		—		—		4,658		4,658		706
Covered loans		81,675		81,675		32,489		4,180		4,180		85,855		85,855		32,489

Total Puerto Rico	$	703,565	$	731,098	$	91,944	$	373,421	$	519,492	$	1,076,986	$	1,250,590	$	91,944


March 31, 2012
U.S. mainland
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	—	$	—	$	—	$	11,719	$	17,749	$	11,719	$	17,749	$	—
Commercial real estate non-owner occupied		4,364		4,817		1,591		60,981		88,638		65,345		93,455		1,591
Commercial real estate owner occupied		—		—		—		41,565		51,091		41,565		51,091		—
Commercial and industrial		4,151		4,151		292		27,275		33,453		31,426		37,604		292
Construction		—		—		—		13,126		15,066		13,126		15,066		—
Mortgage		49,136		49,823		13,850		4,764		—		53,900		49,823		13,850
Legacy		10,306		10,306		765		37,425		63,016		47,731		73,322		765
Consumer		2,455		2,455		103		—		—		2,455		2,455		103

Total U.S. mainland	$	70,412	$	71,552	$	16,601	$	196,855	$	269,013	$	267,267	$	340,565	$	16,601


March 31, 2012
Popular, Inc.
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	143	$	143	$	—	$	20,348	$	30,784	$	20,491	$	30,927	$	—
Commercial real estate non-owner occupied		27,436		29,220		3,579		100,436		131,976		127,872		161,196		3,579
Commercial real estate owner occupied		37,989		50,338		4,053		203,798		263,565		241,787		313,903		4,053
Commercial and industrial		43,101		47,897		5,366		118,901		162,262		162,002		210,159		5,366
Construction		4,716		9,187		1,013		59,433		111,731		64,149		120,918		1,013
Mortgage		424,999		430,272		40,946		25,755		20,991		450,754		451,263		40,946
Legacy		10,306		10,306		765		37,425		63,016		47,731		73,322		765
Leasing		5,412		5,412		1,344		—		—		5,412		5,412		1,344
Consumer:
Credit cards		39,045		39,045		1,973		—		—		39,045		39,045		1,973
Personal		92,042		92,042		16,208		—		—		92,042		92,042		16,208
Other		7,113		7,113		809		—		—		7,113		7,113		809
Covered loans		81,675		81,675		32,489		4,180		4,180		85,855		85,855		32,489

Total Popular, Inc.	$	773,977	$	802,650	$	108,545	$	570,276	$	788,505	$	1,344,253	$	1,591,155	$	108,545


December 31, 2011
Puerto Rico
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	10,463	$	10,463	$	575	$	12,206	$	21,312	$	22,669	$	31,775	$	575
Commercial real estate non-owner occupied		5,909		7,006		836		45,517		47,439		51,426		54,445		836
Commercial real estate owner occupied		37,534		46,806		2,757		165,745		215,288		203,279		262,094		2,757
Commercial and industrial		42,294		55,180		6,239		83,421		108,224		125,715		163,404		6,239
Construction		1,672		2,369		289		48,075		101,042		49,747		103,411		289
Mortgage		333,346		336,682		14,944		—		—		333,346		336,682		14,944
Leasing		6,104		6,104		793		—		—		6,104		6,104		793
Consumer:
Credit cards		38,874		38,874		2,151		—		—		38,874		38,874		2,151
Personal		93,760		93,760		14,115		—		—		93,760		93,760		14,115
Other		4,948		4,948		649		—		—		4,948		4,948		649
Covered loans		75,798		75,798		27,086		1,000		1,000		76,798		76,798		27,086

Total Puerto Rico	$	650,702	$	677,990	$	70,434	$	355,964	$	494,305	$	1,006,666	$	1,172,295	$	70,434


December 31, 2011
U.S. mainland
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	—	$	—	$	—	$	8,655	$	12,403	$	8,655	$	12,403	$	—
Commercial real estate non-owner occupied		1,306		1,306		214		61,111		83,938		62,417		85,244		214
Commercial real estate owner occupied		1,239		1,239		455		46,403		56,229		47,642		57,468		455
Commercial and industrial		7,390		7,390		662		27,136		29,870		34,526		37,260		662
Construction		—		—		—		41,963		44,751		41,963		44,751		—
Mortgage		39,570		39,899		14,119		9,964		9,964		49,534		49,863		14,119
Legacy		6,013		6,013		57		42,877		69,221		48,890		75,234		57
Consumer:
Auto		93		93		6		—		—		93		93		6
Other Consumer		2,433		2,433		125		—		—		2,433		2,433		125

Total U.S. mainland	$	58,044	$	58,373	$	15,638	$	238,109	$	306,376	$	296,153	$	364,749	$	15,638


December 31, 2011
Popular, Inc.
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Recorded investment		Unpaid principal balance		Related allowance
Commercial multi-family	$	10,463	$	10,463	$	575	$	20,861	$	33,715	$	31,324	$	44,178	$	575
Commercial real estate non-owner occupied		7,215		8,312		1,050		106,628		131,377		113,843		139,689		1,050
Commercial real estate owner occupied		38,773		48,045		3,212		212,148		271,517		250,921		319,562		3,212
Commercial and industrial		49,684		62,570		6,901		110,557		138,094		160,241		200,664		6,901
Construction		1,672		2,369		289		90,038		145,793		91,710		148,162		289
Mortgage		372,916		376,581		29,063		9,964		9,964		382,880		386,545		29,063
Legacy		6,013		6,013		57		42,877		69,221		48,890		75,234		57
Leasing		6,104		6,104		793		—		—		6,104		6,104		793
Consumer:
Credit cards		38,874		38,874		2,151		—		—		38,874		38,874		2,151
Personal		93,760		93,760		14,115		—		—		93,760		93,760		14,115
Auto		93		93		6		—		—		93		93		6
Other		7,381		7,381		774		—		—		7,381		7,381		774
Covered loans		75,798		75,798		27,086		1,000		1,000		76,798		76,798		27,086

Total Popular, Inc.	$	708,746	$	736,363	$	86,072	$	594,073	$	800,681	$	1,302,819	$	1,537,044	$	86,072

The following table presents the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2012 and 2011.


March 31, 2012
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial multi-family	$	15,721	$	—	$	10,187	$	90	$	25,908	$	90
Commercial real estate non-owner occupied		56,977		181		63,881		487		120,858		668
Commercial real estate owner occupied		201,750		576		44,604		—		246,354		576
Commercial and industrial		128,146		483		32,976		37		161,122		520
Construction		50,385		16		27,545		—		77,930		16
Mortgage		365,100		5,573		51,717		482		416,817		6,055
Legacy		—		—		48,311		46		48,311		46
Leasing		5,758		—		—		—		5,758		—
Consumer:
Credit cards		38,959		—		—		—		38,959		—
Personal		92,901		—		—		—		92,901		—
Auto		—		—		46		—		46		—
Other		4,803		—		2,444		—		7,247		—
Covered loans		81,327		—		—		—		81,327		—

Total Popular, Inc.	$	1,041,827	$	6,829	$	281,711	$	1,142	$	1,323,538	$	7,971


March 31, 2011
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial multi-family	$	14,744	$	106	$	5,982	$	—	$	20,726	$	106
Commercial real estate non-owner occupied		27,542		117		92,583		114		120,125		231
Commercial real estate owner occupied		183,972		446		14,527		69		198,499		515
Commercial and industrial		91,570		252		10,409		31		101,979		283
Construction		61,153		49		116,921		124		178,074		173
Mortgage		131,514		1,914		2,603		98		134,117		2,012
Legacy		—		—		58,202		28		58,202		28

Total Popular, Inc.	$	510,495	$	2,884	$	301,227	$	464	$	811,722	$	3,348

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $911 million at March 31, 2012 (December 31, 2011—$881 million). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted to $445 thousand related to the construction loan portfolio and $3 million related to the commercial loan portfolio at March 31, 2012 (December 31, 2011—$152 thousand and $3 million, respectively).

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession.

Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving credit lines to long-term loans. Commercial real estate (“CRE”), which includes multifamily, owner-occupied and non-owner occupied CRE, and construction loans modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. Construction loans modified in a TDR may also involve extending the interest-only payment period.

Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally five to ten years. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.

Home equity modifications are made infrequently and are not offered if the Corporation also holds the first mortgage. Home equity modifications are uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Corporation has lowered monthly payments by extending the term. Credit cards modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally up to 24 months.

Loans modified in a TDR that are not accounted pursuant to ASC 310-30 are typically already in non-accrual status at the time of the modification and partial charge-offs have in some cases already been taken against the outstanding loan balance. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.

Loans modified in a TDR may have the financial effect to the Corporation of increasing the specific allowance for loan losses associated with the loan. Consumer and residential mortgage loans modified under the Corporation’s loss mitigation programs that are determined to be TDRs are individually evaluated for impairment based on an analysis of discounted cash flows.

For consumer and mortgage loans that are modified with regard to payment terms and which constitute TDRs, the discounted cash flow value method is used as the impairment valuation is more appropriately calculated based on the ongoing cash flow from the individuals rather than the liquidation of the asset. The computations give consideration to probability of defaults and loss-given-foreclosure on the related estimated cash flows.

Commercial and construction loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The vast majority of the Corporation’s modified commercial loans are measured for impairment using the estimated fair value of the collateral, as these are normally considered as collateral dependent loans. In very few instances, the Corporation

measures modified commercial loans at their estimated realizable values determined by discounting the expected future cash flows. Construction loans that have been modified are also accounted for as collateral dependent loans. The Corporation determines the fair value measurement dependent upon its exit strategy for the particular asset(s) acquired in foreclosure. The discounted cash flows analyses for the commercial and construction TDRs, currently, do not consider a default component. As indicated above, the vast majority of the Corporation’s modified commercial and construction loans are measured for impairment using the estimated fair value of the collateral, thus the consideration of the default rates in the evaluation of TDRs in these portfolios is not deemed material.

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarter ended March 31, 2012.


Puerto Rico
For the quarter ended March 31, 2012
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other
Commercial multi-family		—		—		—		—
Commercial real estate non-owner occupied		1		3		—		—
Commercial real estate owner occupied		2		8		—		—
Commercial and industrial		17		31		—		—
Construction		1		1		—		—
Mortgage		36		41		335		45
Leasing		—		28		—		—
Consumer:
Credit cards		547		—		—		340
HELOCs		—		—		—		—
Personal		388		9		—		—
Auto		—		—		2		—
Other		11		—		—		—

Total		1,003		121		337		385


U.S. mainland
For the quarter ended March 31, 2012
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other

Commercial multi-family		—		—		—		—
Commercial real estate non-owner occupied		—		—		—		1
Commercial real estate owner occupied		—		—		—		—
Commercial and industrial		—		—		—		—
Construction		—		—		—		1
Mortgage		2		—		25		—
Legacy		—		—		—		2
Consumer:
Credit cards		—		—		—		—
HELOCs		—		—		—		—
Personal		—		—		—		—
Auto		—		—		—		—
Other		—		—		—		—

Total		2		—		25		4


Popular, Inc.
For the quarter ended March 31, 2012
	Reduction in interest rate		Extension of maturity date		Combination of reduction in interest rate and extension of maturity date		Other

Commercial multi-family		—		—		—		—
Commercial real estate non-owner occupied		1		3		—		1
Commercial real estate owner occupied		2		8		—		—
Commercial and industrial		17		31		—		—
Construction		1		1		—		1
Mortgage		38		41		360		45
Legacy		—		—		—		2
Leasing		—		28		—		—
Consumer:
Credit cards		547		—		—		340
HELOCs		—		—		—		—
Personal		388		9		—		—
Auto		—		—		2		—
Other		11		—		—		—

Total		1,005		121		362		389

The following tables present by class, quantitative information related to loans modified as TDRs during the quarter ended March 31, 2012.


Puerto Rico
For the quarter ended March 31, 2012
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification

Commercial multi-family		—	$	—	$	—	$	—
Commercial real estate non-owner occupied		4		878		878		(38	)
Commercial real estate owner occupied		10		3,212		3,212		(37	)
Commercial and industrial		48		6,373		6,373		21
Construction		2		1,097		1,097		52
Mortgage		457		61,916		62,510		4,644
Leasing		28		510		486		50
Consumer:
Credit cards		887		7,225		8,366		40
HELOCs		—		—		—		—
Personal		397		4,782		4,788		720
Auto		2		45		24		(1	)
Other		11		41		41		—

Total		1,846	$	86,079	$	87,775	$	5,451


U.S. Mainland
For the quarter ended March 31, 2012
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family		—	$	—	$	—	$	—
Commercial real estate non-owner occupied		1		3,545		3,545		—
Commercial real estate owner occupied		—		—		—		—
Commercial and industrial		—		—		—		—
Construction		1		1,573		1,573		—
Mortgage		27		3,021		3,111		478
Legacy		2		951		951		—
Consumer:
Credit cards		—		—		—		—
HELOCs		—		—		—		—
Personal		—		—		—		—
Auto		—		—		—		—
Other		—		—		—		—

Total		31		$9,090		$9,180		$478


Popular, Inc.
For the quarter ended March 31, 2012
(Dollars in thousands)	Loan count		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Increase (decrease) in the allowance for loan losses as a result of modification
Commercial multi-family		—	$	—	$	—	$	—
Commercial real estate non-owner occupied		5		4,423		4,423		(38	)
Commercial real estate owner occupied		10		3,212		3,212		(37	)
Commercial and industrial		48		6,373		6,373		21
Construction		3		2,670		2,670		52
Mortgage		484		64,937		65,621		5,122
Legacy		2		951		951		—
Leasing		28		510		486		50
Consumer:
Credit cards		887		7,225		8,366		40
HELOCs		—		—		—		—
Personal		397		4,782		4,788		720
Auto		2		45		24		(1	)
Other		11		41		41		—

Total		1,877	$	95,169	$	96,955	$	5,929

The following tables present by class, TDRs that were subject to payment default from January 1, 2012 through March 31, 2012 and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, whichever occurs first. The recorded investment at March 31, 2012 is inclusive of all partial paydowns and charge-offs since modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.


Puerto Rico
Defaulted during the quarter ended March 31, 2012
(Dollars In thousands)	Loan count		Recorded investment as of first default date during the quarter ended March 31, 2012
Commercial multi-family		—	$	—
Commercial real estate non-owner occupied		1		1,770
Commercial real estate owner occupied		7		1,746
Commercial and industrial		7		1,070
Construction		—		—
Mortgage		159		23,088
Leasing		9		369
Consumer:
Credit cards		240		2,046
HELOCs		—		—
Personal		96		739
Auto		—		—
Other		1		1

Total		520	$	30,829


U.S. mainland
Defaulted during the quarter ended March 31, 2012
(Dollars In thousands)	Loan count		Recorded investment as of first default date during the quarter ended March 31, 2012
Commercial multi-family		—	$	—
Commercial real estate non-owner occupied		1		1,935
Commercial real estate owner occupied		—		—
Commercial and industrial		—		—
Construction		—		—
Mortgage		3		413
Legacy		—		—
Consumer:
Credit cards		—		—
HELOCs		—		—
Personal		—		—
Auto		—		—
Other		—		—

Total		4	$	2,348


Popular, Inc.
Defaulted during the quarter ended March 31, 2012
(Dollars In thousands)	Loan count		Recorded investment as of first default date during the quarter ended March 31, 2012

Commercial multi-family		—	$	—
Commercial real estate non-owner occupied		2		3,705
Commercial real estate owner occupied		7		1,746
Commercial and industrial		7		1,070
Construction		—		—
Mortgage		162		23,501
Legacy		—		—
Leasing		9		369
Consumer:
Credit cards		240		2,046
HELOCs		—		—
Personal		96		739
Auto		—		—
Other		1		1

Total		524	$	33,177

Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.

Credit Quality

The Corporation has defined a dual risk rating system to assign a rating to all credit exposures, particularly for the commercial and construction loan portfolios. Risk ratings in the aggregate provide the Corporation’s management the asset quality profile for the loan portfolio. The dual risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower, and at the credit facility level based on the collateral supporting the transaction. The Corporation’s consumer and mortgage loans are not subject to the dual risk rating system. Consumer and mortgage loans are classified substandard or loss based on their delinquency status. All other consumer and mortgage loans that are not classified as substandard or loss would be considered “unrated”.

The Corporation’s obligor risk rating scales range from rating 1 (Excellent) to rating 14 (Loss). The obligor risk rating reflects the risk of payment default of a borrower in the ordinary course of business.

Pass Credit Classifications:

Pass (Scales 1 through 8) – Loans classified as pass have a well defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.

Watch (Scale 9) – Loans classified as watch have acceptable business credit, but borrowers’ operations, cash flow or financial condition evidence more than average risk, requires above average levels of supervision and attention from Loan Officers.

Special Mention (Scale 10) – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

Adversely Classified Classifications:

Substandard (Scales 11 and 12) – Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as such have well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful (Scale 13) - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss (Scale 14) – Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future.

Risk ratings scales 10 through 14 conform to regulatory ratings. The assignment of the obligor risk rating is based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Corporation periodically reviews loans classified as watch list or worse, to evaluate if they are properly classified, and to determine impairment, if any. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal process of applicable credit facilities, the Corporation evaluates the corresponding loan grades.

Loans classified as pass credits are excluded from the scope of the review process described above until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Corporation for a modification. In these circumstances, the credit facilities are specifically evaluated to assign the appropriate risk rating classification.

The Corporation has a Credit Process Review Group within the Corporate Credit Risk Management Division (“CCRMD”), which performs annual comprehensive credit process reviews of several middle markets, construction, asset-based and corporate banking lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, the Credit Process Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. CCRMD has contracted an outside loan review firm to perform the credit process reviews for the portfolios of commercial and construction loans in the U.S. mainland operations. The CCRMD participates in defining the review plan with the outside loan review firm and actively participates in the discussions of the results of the loan reviews with the business units. The CCRMD may periodically review the work performed by the outside loan review firm. CCRMD reports the results of the credit process reviews to the Risk Management Committee of the Corporation’s Board of Directors.

The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at March 31, 2012 and December 31, 2011.


March 31, 2012
			Special										Pass/
(In thousands)	Watch		Mention		Substandard		Doubtful		Loss		Sub-total		Unrated		Total
Puerto Rico ^[1]
Commercial multi-family	$	411	$	690	$	15,748	$	—	$	—	$	16,849	$	92,729	$	109,578
Commercial real estate non-owner occupied		161,701		128,583		211,376		2,802		—		504,462		774,203		1,278,665
Commercial real estate owner occupied		185,413		188,528		677,087		3,560		—		1,054,588		1,033,377		2,087,965
Commercial and industrial		330,584		268,899		476,301		3,223		1,084		1,080,091		1,873,370		2,953,461

Total Commercial		678,109		586,700		1,380,512		9,585		1,084		2,655,990		3,773,679		6,429,669
Construction		2,557		31,886		65,463		1,312		—		101,218		74,550		175,768
Mortgage		—		—		610,678		—		—		610,678		4,149,667		4,760,345
Leasing		—		—		3,385		—		2,289		5,674		537,640		543,314
Consumer		—		—		47,022		—		4,020		51,042		2,900,461		2,951,503

Total Puerto Rico	$	680,666	$	618,586	$	2,107,060	$	10,897	$	7,393	$	3,424,602	$	11,435,997	$	14,860,599

U.S. mainland
Commercial multi-family	$	71,457	$	10,546	$	75,719	$	—	$	—	$	157,722	$	534,986	$	692,708
Commercial real estate non-owner occupied		167,425		49,888		242,138		—		—		459,451		903,245		1,362,696
Commercial real estate owner occupied		27,156		13,717		143,120		—		—		183,993		393,593		577,586
Commercial and industrial		24,199		32,386		90,819		—		—		147,404		658,179		805,583

Total Commercial		290,237		106,537		551,796		—		—		948,570		2,490,003		3,438,573
Construction		1,515		—		35,262		—		—		36,777		24,034		60,811
Mortgage		—		—		33,767		—		—		33,767		797,633		831,400
Legacy		37,138		37,898		141,124		—		—		216,160		387,714		603,874
Consumer		—		—		6,741		—		7,818		14,559		668,858		683,417

Total U.S. mainland	$	328,890	$	144,435	$	768,690	$	—	$	7,818	$	1,249,833	$	4,368,242	$	5,618,075

Popular, Inc.
Commercial multi-family	$	71,868	$	11,236	$	91,467	$	—	$	—	$	174,571	$	627,715	$	802,286
Commercial real estate non-owner occupied		329,126		178,471		453,514		2,802		—		963,913		1,677,448		2,641,361
Commercial real estate owner occupied		212,569		202,245		820,207		3,560		—		1,238,581		1,426,970		2,665,551
Commercial and industrial		354,783		301,285		567,120		3,223		1,084		1,227,495		2,531,549		3,759,044

Total Commercial		968,346		693,237		1,932,308		9,585		1,084		3,604,560		6,263,682		9,868,242
Construction		4,072		31,886		100,725		1,312		—		137,995		98,584		236,579
Mortgage		—		—		644,445		—		—		644,445		4,947,300		5,591,745
Legacy		37,138		37,898		141,124		—		—		216,160		387,714		603,874
Leasing		—		—		3,385		—		2,289		5,674		537,640		543,314
Consumer		—		—		53,763		—		11,838		65,601		3,569,319		3,634,920

Total Popular, Inc.	$	1,009,556	$	763,021	$	2,875,750	$	10,897	$	15,211	$	4,674,435	$	15,804,239	$	20,478,674

The following table presents the weighted average obligor risk rating at March 31, 2012 for those classifications that consider a range of rating scales.


Weighted average obligor risk rating	(Scales 11 and 12)		(Scales 1 through 8)
Weighted average obligor risk rating	Substandard		Pass
Puerto Rico: ^[1]
Commercial multi-family		11.93		5.99
Commercial real estate non-owner occupied		11.28		7.08
Commercial real estate owner occupied		11.56		6.83
Commercial and industrial		11.38		6.81

Total Commercial		11.46		6.87

Construction		11.77		7.93


U.S. mainland:	Substandard		Pass
Commercial multi-family		11.22		7.11
Commercial real estate non-owner occupied		11.36		6.98
Commercial real estate owner occupied		11.37		7.00
Commercial and industrial		11.44		6.88

Total Commercial		11.36		6.87

Construction		11.37		7.68

Legacy		11.50		7.46

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


December 31, 2011
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Sub-total		Pass/ Unrated		Total
Puerto Rico ^[1]
Commercial multi-family	$	420	$	698	$	11,848	$	—	$	—	$	12,966	$	110,150	$	123,116
Commercial real estate non-owner occupied		177,523		134,266		210,596		2,886		—		525,271		736,235		1,261,506
Commercial real estate owner occupied		201,375		192,591		680,912		4,631		—		1,079,509		1,151,917		2,231,426
Commercial and industrial		248,188		282,935		439,853		3,326		1,458		975,760		1,878,774		2,854,534

Total Commercial		627,506		610,490		1,343,209		10,843		1,458		2,593,506		3,877,076		6,470,582
Construction		2,245		27,820		69,562		1,586		—		101,213		59,728		160,941
Mortgage		—		—		626,771		—		—		626,771		4,062,712		4,689,483
Leasing		—		—		1,365		—		4,277		5,642		543,064		548,706
Consumer		—		—		53,648		—		4,015		57,663		2,912,764		2,970,427

Total Puerto Rico	$	629,751	$	638,310	$	2,094,555	$	12,429	$	9,750	$	3,384,795	$	11,455,344	$	14,840,139

U.S. mainland
Commercial multi-family	$	71,335	$	8,230	$	69,400	$	—	$	—	$	148,965	$	536,852	$	685,817
Commercial real estate non-owner occupied		192,080		48,085		231,266		—		—		471,431		932,562		1,403,993
Commercial real estate owner occupied		21,109		20,859		146,367		—		—		188,335		397,505		585,840
Commercial and industrial		30,020		26,131		102,607		—		—		158,758		668,337		827,095

Total Commercial		314,544		103,305		549,640		—		—		967,489		2,535,256		3,502,745
Construction		3,202		10,609		54,096		—		—		67,907		11,091		78,998
Mortgage		—		—		37,236		—		—		37,236		791,741		828,977
Legacy		34,233		38,724		148,629		—		—		221,586		426,823		648,409
Consumer		—		—		5,667		—		6,711		12,378		690,950		703,328

Total U.S. mainland	$	351,979	$	152,638	$	795,268	$	—	$	6,711	$	1,306,596	$	4,455,861	$	5,762,457

Popular, Inc.
Commercial multi-family	$	71,755	$	8,928	$	81,248	$	—	$	—	$	161,931	$	647,002	$	808,933
Commercial real estate non-owner occupied		369,603		182,351		441,862		2,886		—		996,702		1,668,797		2,665,499
Commercial real estate owner occupied		222,484		213,450		827,279		4,631		—		1,267,844		1,549,422		2,817,266
Commercial and industrial		278,208		309,066		542,460		3,326		1,458		1,134,518		2,547,111		3,681,629

Total Commercial		942,050		713,795		1,892,849		10,843		1,458		3,560,995		6,412,332		9,973,327
Construction		5,447		38,429		123,658		1,586		—		169,120		70,819		239,939
Mortgage		—		—		664,007		—		—		664,007		4,854,453		5,518,460
Legacy		34,233		38,724		148,629		—		—		221,586		426,823		648,409
Leasing		—		—		1,365		—		4,277		5,642		543,064		548,706
Consumer		—		—		59,315		—		10,726		70,041		3,603,714		3,673,755

Total Popular, Inc.	$	981,730	$	790,948	$	2,889,823	$	12,429	$	16,461	$	4,691,391	$	15,911,205	$	20,602,596

The following table presents the weighted average obligor risk rating at December 31, 2011 for those classifications that consider a range of rating scales.


Weighted average obligor risk rating	(Scales 11 and 12) Substandard		(Scales 1 through 8) Pass
Puerto Rico: ^[1]
Commercial multi-family		11.91		5.92
Commercial real estate non-owner occupied		11.23		7.16
Commercial real estate owner occupied		11.56		6.85
Commercial and industrial		11.40		6.62

Total Commercial		11.46		6.79

Construction		11.76		7.84


	Substandard		Pass
U.S. mainland:
Commercial multi-family		11.20		7.09
Commercial real estate non-owner occupied		11.35		7.00
Commercial real estate owner occupied		11.41		7.04
Commercial and industrial		11.39		6.85

Total Commercial		11.35		6.99

Construction		11.78		7.52

Legacy		11.45		7.47

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

Note 9 – FDIC loss share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss share agreements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid BPPR 80% reimbursement under the loss share agreements. The loss share agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years. The loss share agreement applicable to commercial (including construction) 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.

The following table sets forth the activity in the FDIC loss share asset for the periods presented.


	For the quarter ended March 31,
(In thousands)	2012			2011
Balance at beginning of year	$	1,915,128		$	2,410,219
(Amortization) accretion of loss share indemnification asset, net		(29,375	)		25,796
Credit impairment losses to be covered under loss sharing agreements		13,422			12,445
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments accounted for under ASC Subtopic 310-20		(248	)		(21,465	)
Payments received from FDIC under loss sharing agreements		(20,896	)		(583	)
Other adjustments attributable to FDIC loss sharing agreements		2,326			(107	)

Balance at March 31	$	1,880,357		$	2,426,305

As part of the loss share agreements, BPPR has to make a true-up payment to the FDIC on a pre-determined date following the true-up measurement date of the final shared-loss month, or upon the final disposition of all covered assets under the loss share agreements in the event losses on the loss share agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%).

At March 31, 2012, the carrying amount of the true-up payment obligation amounted to $100 million (December 31, 2011—$98 million; March 31, 2011—$94 million).

The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss share agreements, BPPR must:

•

manage and administer the covered assets and collect and effect charge-offs and recoveries with respect to such covered assets in a manner consistent with its usual and prudent business and banking practices and, with respect to single family shared-loss loans, the procedures (including collection procedures) customarily employed by BPPR in servicing and administering mortgage loans for its own account and the servicing procedures established by FNMA or the Federal Home Loan Mortgage Corporation (“FHLMC”), as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions;

•

exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;

•

use commercially reasonable efforts to maximize recoveries with respect to losses on single family shared-loss assets and best efforts to maximize collections with respect to commercial shared-loss assets;

•

retain sufficient staff to perform the duties under the loss share agreements;

•

adopt and implement accounting, reporting, record-keeping and similar systems with respect to the commercial shared-loss assets;

•

comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan;

•

provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets;

•

file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries; and

•

maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.

Note 10 – 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/service agreements the Corporation is required to service the loans in accordance with the agencies’ servicing guidelines and standards. Substantially, all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Notes 17 and 19 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of the transfers occurring during the quarters ended March 31, 2012 and 2011 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2012, the Corporation recorded a net gain of $13.7 million (March 31, 2011—$6.3 million) related to the residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized. Refer to Note 21 for a description of the level hierarchy.


	Proceeds Obtained During the Quarter Ended March 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities-GNMA		—	$	190,178		—	$	190,178
Mortgage-backed securities-FNMA		—		59,535		—		59,535

Total trading account securities		—	$	249,713		—	$	249,713

Mortgage servicing rights		—		—	$	3,233	$	3,233

Total		—	$	249,713	$	3,233	$	252,946


	Proceeds Obtained During the Quarter Ended March 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities-GNMA		—	$	255,574		—	$	255,574
Mortgage-backed securities-FNMA		—		73,018		—		73,018

Total trading account securities		—	$	328,592		—	$	328,592

Mortgage servicing rights		—		—	$	5,949	$	5,949

Total		—	$	328,592	$	5,949	$	334,541

During the quarter ended March 31, 2012, the Corporation retained servicing rights on whole loan sales involving approximately $53 million in principal balance outstanding (March 31, 2011—$37 million), with realized gains of approximately $1.9 million (March 31, 2011—gains of $0.9 million). All loan sales performed during the quarters ended March 31, 2012 and 2011 were without credit recourse agreements.

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

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 using a discounted cash flow model 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 MSRs measured using the fair value method.


Residential MSRs
(In thousands)	March 31, 2012			March 31, 2011
Fair value at beginning of period	$	151,323		$	166,907
Purchases		474			383
Servicing from securitizations or asset transfers		3,757			6,297
Changes due to payments on loans ^[1]		(4,161	)		(3,246	)
Reduction due to loan repurchases		(810	)		(1,008	)
Changes in fair value due to changes in valuation model inputs or assumptions		5,755			(1,917	)
Other disposals		(7	)		—

Fair value at end of period	$	156,331		$	167,416

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

Residential mortgage loans serviced for others were $17.2 billion at March 31, 2012 (December 31, 2011—$17.3 billion; March 31, 2011—$18.0 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 and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter ended March 31, 2012 amounted to $12.1 million (March 31, 2011—$12.4 million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At March 31, 2012, those weighted average mortgage servicing fees were 0.28% (March 31, 2011 – 0.26%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the quarters ended March 31, 2012 and 2011 were as follows:


	Quarter ended
	March 31, 2012			March 31, 2011
Prepayment speed		5.6	%		4.9	%
Weighted average life		17.8 years			20.6 years
Discount rate (annual rate)		11.5	%		11.4	%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:

Originated MSRs


(In thousands)	March 31, 2012			December 31, 2011			March 31, 2011
Fair value of retained interests	$	101,890		$	99,280		$	104,513
Weighted average life		12.1 years			13.0 years			12.5 years
Weighted average prepayment speed (annual rate)		8.3	%		7.7	%		8.0	%
Impact on fair value of 10% adverse change	$	(3,129	)	$	(2,744	)	$	(3,441	)
Impact on fair value of 20% adverse change	$	(6,385	)	$	(5,800	)	$	(6,811	)
Weighted average discount rate (annual rate)		12.5	%		12.6	%		12.7	%
Impact on fair value of 10% adverse change	$	(4,142	)	$	(3,913	)	$	(4,582	)
Impact on fair value of 20% adverse change	$	(8,234	)	$	(7,948	)	$	(8,895	)

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

Purchased MSRs


(In thousands)	March 31, 2012			December 31, 2011			March 31, 2011
Fair value of retained interests	$	54,441		$	52,043		$	62,903
Weighted average life		13.7 years			14.6 years			12.0 years
Weighted average prepayment speed (annual rate)		7.3	%		6.9	%		8.3	%
Impact on fair value of 10% adverse change	$	(1,958	)	$	(1,887	)	$	(2,577	)
Impact on fair value of 20% adverse change	$	(3,474	)	$	(3,303	)	$	(4,642	)
Weighted average discount rate (annual rate)		11.4	%		11.4	%		11.4	%
Impact on fair value of 10% adverse change	$	(2,405	)	$	(2,376	)	$	(2,821	)
Impact on fair value of 20% adverse change	$	(4,305	)	$	(4,214	)	$	(5,077	)

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

At March 31, 2012, the Corporation serviced $3.3 billion (December 31, 2011—$3.5 billion; March 31, 2011—$3.8 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At March 31, 2012, the Corporation had recorded $173 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2011—$180 million; March 31, 2011—$157 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation.

Note 11– Other assets

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


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Net deferred tax assets (net of valuation allowance)	$	424,193	$	429,691	$	250,568
Investments under the equity method		335,762		313,152		294,559
Bank-owned life insurance program		238,870		238,077		239,103
Prepaid FDIC insurance assessment		34,634		58,082		129,093
Other prepaid expenses		69,524		77,335		66,719
Derivative assets		58,604		61,886		65,169
Securities sold not yet delivered		71,007		69,535		37,752
Others		206,938		214,635		231,776

Total other assets	$	1,439,532	$	1,462,393	$	1,314,739

Note 12 – Goodwill and other intangible assets

The changes in the carrying amount of goodwill for the quarter ended March 31, 2012 and 2011, allocated by reportable segments, were as follows (refer to Note 30 for the definition of the Corporation’s reportable segments):


2012
(In thousands)	Balance at January 1, 2012		Goodwill on acquisition		Purchase accounting adjustments			Other		Balance at March 31, 2012
Banco Popular de Puerto Rico	$	246,272	$	—	$	(439	)	$	—	$	245,833
Banco Popular North America		402,078		—		—			—		402,078

Total Popular, Inc.	$	648,350	$	—	$	(439	)	$	—	$	647,911


2011
(In thousands)	Balance at January 1, 2011		Goodwill on acquisition		Purchase accounting adjustments			Other		Balance at March 31, 2011
Banco Popular de Puerto Rico	$	245,309	$	—	$	—		$	—	$	245,309
Banco Popular North America		402,078		—		—			—		402,078

Total Popular, Inc.	$	647,387	$	—	$	—		$	—	$	647,387

Purchase accounting adjustments consists of adjustments to the value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs, if any, and contingent consideration paid during a contractual contingency period.

The following table presents the gross amount of goodwill and accumulated impairment losses by reportable segments.


March 31, 2012
(In thousands)	Balance at January 1, 2012 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2012 (net amounts)		Balance at March 31, 2012 (gross amounts)		Accumulated impairment losses		Balance at March 31, 2012 (net amounts)
Banco Popular de Puerto Rico	$	246,272	$	—	$	246,272	$	245,833	$	—	$	245,833
Banco Popular North America		566,489		164,411		402,078		566,489		164,411		402,078

Total Popular, Inc.	$	812,761	$	164,411	$	648,350	$	812,322	$	164,411	$	647,911


December 31, 2011
(In thousands)	Balance at January 1, 2011 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2011 (net amounts)		Balance at December 31, 2011 (gross amounts)		Accumulated impairment losses		Balance at December 31, 2011 (net amounts)
Banco Popular de Puerto Rico	$	245,309	$	—	$	245,309	$	246,272	$	—	$	246,272
Banco Popular North America		566,489		164,411		402,078		566,489		164,411		402,078

Total Popular, Inc.	$	811,798	$	164,411	$	647,387	$	812,761	$	164,411	$	648,350


March 31, 2011
(In thousands)	Balance at January 1, 2011 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2011 (net amounts)		Balance at March 31, 2011 (gross amounts)		Accumulated impairment losses		Balance at March 31, 2011 (net amounts)
Banco Popular de Puerto Rico	$	245,309	$	—	$	245,309	$	245,309	$	—	$	245,309
Banco Popular North America		566,489		164,411		402,078		566,489		164,411		402,078

Total Popular, Inc.	$	811,798	$	164,411	$	647,387	$	811,798	$	164,411	$	647,387

At March 31, 2012, December 31, 2011 and March 31, 2011, the Corporation had $6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark.

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


	March 31, 2012				December 31, 2011				March 31, 2011
(In thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Core deposits	$	77,885	$	37,543	$	80,591	$	38,199	$	80,591	$	31,912
Other customer relationships		19,791		4,563		19,953		4,643		5,092		3,578
Other intangibles		188		74		242		103		189		55

Total	$	97,864	$	42,180	$	100,786	$	42,945	$	85,872	$	35,545

Certain core deposits and other customer relationships intangibles with a gross amount of $3 million and $0.6 million, respectively, became fully amortized during the quarter ended March 31, 2012, and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.

During the quarter ended March 31, 2012, the Corporation recognized $2.6 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2011—$2.3 million).

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


(In thousands)
Remaining 2012	$	7,503
Year 2013		9,871
Year 2014		9,227
Year 2015		7,084
Year 2016		6,799
Year 2017		4,050

Note 13 – Deposits

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


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Savings accounts	$	6,631,518	$	6,473,215	$	6,274,716
NOW, money market and other interest bearing demand deposits		5,276,207		5,103,398		4,991,617

Total savings, NOW, money market and other interest bearing demand deposits		11,907,725		11,576,613		11,266,333

Certificates of deposit:
Under $100,000		6,066,658		6,473,095		6,402,998
$100,000 and over		3,856,933		4,236,945		4,614,334

Total certificates of deposit		9,923,591		10,710,040		11,017,332

Total interest bearing deposits	$	21,831,316	$	22,286,653	$	22,283,665

A summary of certificates of deposit by maturity at March 31, 2012, follows:


(In thousands)
2012	$	5,543,598
2013		1,896,635
2014		914,494
2015		835,831
2016		523,224
2017 and thereafter		209,809

Total certificates of deposit	$	9,923,591

At March 31, 2012, the Corporation had brokered deposits amounting to $2.9 billion (December 31, 2011—$3.4 billion; March 31, 2011—$2.5 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $15 million at March 31, 2012 (December 31, 2011—$13 million; March 31, 2011—$61 million).

Note 14 – Borrowings

Assets sold under agreements to repurchase as of the end of the periods presented were as follows:


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Assets sold under agreements to repurchase	$	2,113,557	$	2,141,097	$	2,642,800

The repurchase agreements outstanding at March 31, 2012 were collateralized by $1.8 billion (December 31, 2011—$1.8 billion; March 31, 2011—$2.1 billion) in investment securities available-for-sale, $348 million (December 31, 2011—$403 million; March 31, 2011—$587 million) in trading securities and $68 million (December 31, 2011—$68 million; March 31, 2011—$32 million) in securities sold not yet delivered that are classified 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 financial condition.

In addition, there were repurchase agreements outstanding collateralized by $244 million in securities purchased under agreements to resell to which the Corporation has the right to repledge the securities (December 31, 2011—$274 million; March 31, 2011—$209 million). 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; accordingly, are not reflected in the Corporation’s consolidated statements of financial condition.

Other short-term borrowings as of the end of the periods presented consisted of:


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Advances with the FHLB paying interest at maturity, at fixed rates ranging from 0.37% to 0.40% (March 31, 2011—0.36% to 0.40%)	$	750,000	$	295,000	$	250,000
Term funds purchased paying interest at maturity, at fixed rates ranging from 0.70% to 1.05%		—		—		39,102
Others		1,200		1,200		1,200

Total other short-term borrowings	$	751,200	$	296,200	$	290,302

Note: Refer to the Corporation’s 2011 Annual Report for rates information corresponding to the short-term borrowings outstanding at December 31, 2011.

Notes payable as of the end of the periods reported consisted of:


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Advances with the FHLB with maturities ranging from 2012 through 2021 paying interest at monthly fixed rates ranging from 1.07% to 4.95% (March 31, 2011 - 0.66% to 4.95%)	$	623,286	$	642,568	$	577,000
Note issued to the FDIC paying interest monthly at an annual fixed rate of 2.50%		—		—		2,022,669
Term notes with maturities ranging from 2012 to 2016 paying interest semiannually at fixed rates ranging from 5.25% to 7.86% (March 31, 2011 - 5.25% to 7.03%)		278,337		278,309		278,201
Term notes with maturities ranging from 2012 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate		478		588		907
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 15)		439,800		439,800		439,800
Junior subordinated deferrable interest debentures (related to trust preferred securities) ($936,000 less discount of $459,043 at March 31, 2012 and $485,128 at March 31, 2011) 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 15) ^[1]		476,957		470,037		450,872
Others		24,896		25,070		25,206

Total notes payable	$	1,843,754	$	1,856,372	$	3,794,655

Note: Refer to the Corporation’s 2011 Annual Report, for rates and maturity information corresponding to the borrowings outstanding at December 31, 2011. The10-year U.S. Treasury note key index rate at March 31, 2012 and March 31, 2011 were 2.21% and 3.47%, respectively.

[1]

The debentures are perpetual and may be redeemed by the Corporation at any time, subject to the consent of the Board of Governors of the Federal Reserve System. The discount on the debentures is being amortized over an estimated 30-year term that started in August 2009. The effective interest rate, including the discount accretion, was approximately 16% at March 31, 2012 and 2011.

A breakdown of borrowings by contractual maturities at March 31, 2012 is included in the table below.


(In thousands)	Assets sold under agreements to repurchase		Short-term borrowings		Notes payable		Total
Year
2012	$	1,021,360	$	751,200	$	192,697	$	1,965,257
2013		—		—		98,901		98,901
2014		350,000		—		189,452		539,452
2015		174,135		—		36,099		210,234
2016		453,062		—		311,479		764,541
Later years		115,000		—		538,169		653,169
No stated maturity		—		—		936,000		936,000

Subtotal		2,113,557		751,200		2,302,797		5,167,554
Less: Discount		—		—		459,043		459,043

Total borrowings	$	2,113,557	$	751,200	$	1,843,754	$	4,708,511

Note 15 – Trust preferred securities

At March 31, 2012, December 31, 2011 and March 31, 2011, four statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued 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 pursuant to accounting principles generally accepted in the United States of America.

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of financial 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.

The following table presents financial data pertaining to the different trusts at March 31, 2012, December 31, 2011 and March 31, 2011.


(Dollars in thousands)
Issuer	BanPonce Trust I			Popular Capital Trust I			Popular North America Capital Trust I			Popular Capital Trust Il			Popular Capital 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		[1],[3],[6]			[2],[4],[5]			[1],[3],[5]			[2],[4],[5]			[2],[4],[7],[8]

[1]	Statutory business trust that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation.

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

[3]	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.

[4]	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.

[5]

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.

[6]	Same as [5] above, except that the investment company event does not apply for early redemption.

[7]	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.

[8]

Carrying value of junior subordinates debentures of $477 million at March 31, 2012 ($936 million aggregate liquidation amount, net of $459 million discount) and $470 million at December 31, 2011 ($936 million aggregate liquidation amount, net of $466 million discount) and $451 million at March 31, 2011 ($936 million aggregate liquidation amount, net of $485 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 certain 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). At March 31, 2012, December 31, 2011, and March 31, 2011 the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed 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. Effective March 31, 2011, 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. Furthermore, the Dodd-Frank Act, enacted in July 2010, has a provision to effectively phase out the use of trust preferred securities issued before May 19, 2010 as Tier 1 capital over a 3-year period commencing on January 1, 2013. Trust preferred securities issued on or after May 19, 2010 no longer qualify as Tier 1 capital. At March 31, 2012, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. The Corporation has not issued any trust preferred securities since May 19, 2010. At March 31, 2012, the remaining $935 million of trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008, which are exempt from the phase-out provision.

Note 16 – Stockholders’ equity

BPPR statutory reserve

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund amounted to $415 million at March 31, 2012 (December 31, 2011 - $415 million; March 31, 2011 - $402 million). There were no transfers between the statutory reserve account and the retained earnings account during the three months ended March 31, 2012 and March 31, 2011.

Refer to Note 31 for information on the reverse stock split approved by the holders of the Corporation’s common stock on April 27, 2012.

Note 17 – Guarantees

At March 31, 2012, the Corporation recorded a liability of $1.0 million (December 31, 2011 - $0.5 million and March 31, 2011 - $0.6 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.

From time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. The Corporation has not sold any mortgage loans subject to credit recourse since 2009. Also, from time to time, the Corporation may sell, in bulk sale transactions, residential mortgage loans and Small Business Administration (“SBA”) commercial loans subject 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 representation and warranties.

At March 31, 2012, the Corporation serviced $3.3 billion (December 31, 2011 - $3.5 billion; March 31, 2011 - $3.8 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ended March 31, 2012, the Corporation repurchased approximately $50 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2011 - $63 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At March 31, 2012, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $56 million (December 31, 2011 - $59 million; March 31, 2011 - $55 million).

The following table presents the changes in the Corporation’s liability for estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2012 and 2011.


(In thousands)	2012			2011
Balance as of beginning of period	$	58,659		$	53,729
Additions for new sales		—			—
Provision for recourse liability		4,232			9,765
Net charge-offs / terminations		(6,776	)		(8,176	)

Balance as of end of period	$	56,115		$	55,318

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” 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, 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 ratios, and 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 are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans approximated $0.4 million in unpaid principal balance with losses amounting to $0.1 million for the quarter ended March 31, 2012 (March 31, 2011 - $4.8 million and $0.4 million, respectively). A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended June 30, 2011, the Corporation’s banking subsidiary, BPPR, reached an agreement (the “June 2011 agreement”) with the FDIC, as receiver for a local Puerto Rico institution, and the financial institution with respect to a loan servicing portfolio that BPPR services since 2008, related to FHLMC and GNMA pools. The loans were originated and sold by the financial institution and the servicing rights were transferred to BPPR in 2008. As part of the 2008 servicing agreement, the financial institution was required to repurchase from BPPR any loans that BPPR, as servicer, was required to repurchase from the investors under representation and warranty obligations. As part of the June 2011 agreement, the Corporation received cash to discharge the financial institution from any repurchase obligation and other claims over the serviced portfolio. At March 31, 2012, the related representation and warranty reserve amounted to $8.6 million, and the related serviced portfolio approximated $3.4 billion (December 31, 2011 - $8.5 million and $3.5 billion, respectively).

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2012, the Corporation serviced $17.2 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2011 - $17.3 billion; March 31, 2011 - $18.0 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with

respect to that loan. At March 31, 2012, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $34 million (December 31, 2011 - $32 million; March 31, 2011 - $28 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.

At March 31, 2012, the Corporation has reserves for customary representation and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. These loans had been sold to investors on a servicing released basis subject to certain representation and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain representations relating to borrower creditworthiness, loan documentation and collateral, which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At March 31, 2012, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $11 million, which was included as part of other liabilities in the consolidated statement of financial condition (December 31, 2011 - $11 million; March 31, 2011 - $31 million). E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of the outstanding agreements with major counterparties were settled during 2010 and 2011. 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. Make-whole events are typically defaulted cases in which the investor attempts to recover by 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. The following table presents the changes in the Corporation’s liability for estimated losses associated with customary representations and warranties related to loans sold by E-LOAN for the quarters ended March 31, 2012 and 2011.


(In thousands)	2012		2011
Balance as of beginning of period	$	10,625	$	30,659
Additions for new sales		—		—
Provision for representation and warranties		—		83
Net charge-offs / terminations		—		(54	)
Other—settlements paid		—		—

Balance as of end of period	$	10,625	$	30,688

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $0.6 billion at March 31, 2012 (December 31, 2011 and March 31, 2011 - $0.7 billion). In addition, at March 31, 2012, December 31, 2011 and March 31, 2011, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4 billion of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 15 to the consolidated financial statements for further information on the trust preferred securities.

Note 18 – Commitments and contingencies

Off-balance sheet risk

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

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

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


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Commitments to extend credit:
Credit card lines	$	4,361,641	$	4,297,755	$	3,864,026
Commercial lines of credit		2,092,520		2,039,629		2,471,756
Other unused credit commitments		367,672		358,572		373,832
Commercial letters of credit		11,700		11,632		13,297
Standby letters of credit		131,785		124,709		133,178
Commitments to originate mortgage loans		66,908		53,323		40,002

At March 31, 2012, the Corporation maintained a reserve of approximately $9 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit (December 31, 2011 - $15 million; March 31, 2011 - $17 million), including $3 million of the unamortized balance of the contingent liability on unfunded loan commitments recorded with the Westernbank FDIC-assisted transaction (December 31, 2011 - $5 million; March 31, 2011 - $4 million).

Other commitments

At March 31, 2012, the Corporation also maintained other non-credit commitments for $10 million, primarily for the acquisition of other investments (December 31, 2011 and March 31, 2011 - $10 million).

Business concentration

Since the Corporation’s business activities are currently concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 30 to the consolidated financial statements.

The Corporation’s loan portfolio is diversified by loan category. However, approximately $12.4 billion, or 61% of the Corporation’s loan portfolio not covered under the FDIC loss sharing agreements, excluding loans held-for-sale, at March 31, 2012, consisted of real estate related loans, including residential mortgage loans, construction loans and commercial loans secured by commercial real estate (December 31, 2011 - $12.5 billion, or 61%; March 31, 2011 - $12.2 billion, or 59%).

Except for the Corporation’s exposure to the Puerto Rico Government sector, no individual or single group of related accounts is considered material in relation to the Corporation’s total assets or deposits, or in relation to the Corporation’s overall business. At March 31, 2012, the Corporation had approximately $1.1 billion of credit facilities granted to or guaranteed by the Puerto Rico Government, its municipalities and public corporations, of which $264 million were uncommitted lines of credit (December 31, 2011 - $1.3 billion and $140 million, respectively; March 31, 2011 - $1.4 billion and $215 million, respectively). Of the total credit facilities granted, $863 million was outstanding at March 31, 2012 (December 31, 2011 - $1.2 billion; March 31, 2011 - $1.1 billion). Furthermore, at March 31, 2012, the Corporation had $151 million in obligations issued or guaranteed by the Puerto Rico Government, its municipalities and public corporations as part of its investment securities portfolio (December 31, 2011 - $154 million; March 31, 2011 - $143 million).

Other contingencies

As indicated in Note 9 to the consolidated financial statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The true-up payment obligation was estimated at $100 million at March 31, 2012 (December 31, 2011 - $98 million; March 31, 2011 - $94 million).

Legal Proceedings

The nature of Popular’s business ordinarily results in a certain number of claims, litigation, investigations, and legal and administrative cases and proceedings. When the Corporation determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious defenses) when, in management’s judgment, it is in the best interests of both the Corporation and its shareholders to do so.

On at least a quarterly basis, Popular assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable that the Corporation will incur a material loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted on at least a quarterly basis as appropriate to reflect any relevant developments. For matters where a material loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates the aggregate range of reasonably possible losses for those matters where a range may be determined, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $16.5 million at March 31, 2012. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

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

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., and certain of its directors and officers, among others. The five class actions were 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 .).

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 purported to be on behalf of purchasers of Popular’s securities between January 24, 2008 and February 19, 2009 and alleged 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 alleged 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 sought class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. On January 11, 2010, the 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 purported 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 was alleged to be a plan fiduciary. The consolidated complaint alleged that defendants breached their alleged fiduciary obligations by, among other things, failing to eliminate Popular stock as an investment alternative in the plans. The complaint sought 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 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. No opinion was, however, issued prior to the settlement in principle discussed below.

The derivative actions ( García v. Carrión, et al . and Díaz v. Carrión, et al .) were brought purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers and directors and alleged breaches of fiduciary duty, waste of assets and abuse of control in connection with Popular’s issuance of allegedly false and misleading financial statements and financial reports and the offering of the Series B Preferred Stock. The derivative complaints sought a judgment that the action was a proper derivative action, an award of damages, restitution, 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. 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 Diaz 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 court denied Popular’s request for reconsideration shortly thereafter.

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 plaintiff had not propounded a “proper purpose” under Puerto Rico law for such inspection. On April 28, 2010, 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.

At the Court’s request, the parties to the Hoff and García cases discussed the prospect of mediation and agreed to nonbinding mediation in an attempt to determine whether the cases could be settled. On January 18 and 19, 2011, the parties to the Hoff and García cases engaged in nonbinding mediation before the Honorable Nicholas Politan. As a result of the mediation, the Corporation and the other named defendants to the Hoff matter entered into a memorandum of understanding to settle this matter. Under the

terms of the memorandum of understanding, subject to certain customary conditions including court approval of a final settlement agreement in consideration for the full settlement and release of all defendants, the parties agreed that the amount of $37.5 million would be paid by or on behalf of defendants. On June 17, 2011, the parties filed a stipulation of settlement and a joint motion for preliminary approval of such settlement, which the Court granted on June 20, 2011. On or about July 5, 2011, the amount of $37.5 million was paid to the settlement fund by or on behalf of defendants. Specifically, the amount of $26 million was paid by insurers and the amount of $11.5 million was paid by Popular (after which approximately $4.7 million was reimbursed by insurers per the terms of the relevant insurance agreement). On January 18, 2011, certain individual shareholders filed a suit captioned Montilla-Rojo et al. v. Popular, Inc., et al ., against the Corporation and certain officers asserting claims under the federal securities laws similar or identical to those in the Hoff action. On February 25, 2011, those shareholders filed an amended complaint asserting additional legal theories. On June 19, 2011, certain of those shareholders sought leave to intervene in the securities class action. On June 28, 2011, the Court denied their motion to intervene as untimely. On or about October 11, 2011, certain individual shareholders, including shareholders represented by counsel in the Montilla-Rojo action, filed requests to opt-out of the proposed settlement in the Hoff securities class action. Other purported shareholders represented by the same counsel, filed an objection to the settlement. On November 22, 2011, the plaintiffs in the Montilla-Rojo action filed a second amended complaint asserting additional legal theories. On December 2, 2011, the parties to the Montilla-Rojo action filed a joint motion to stay the proceedings in light of the pending appeal in the related Hoff securities class action. The Court granted the motion to stay on December 13, 2011. With the January 27, 2012 voluntary dismissal of the appeal (below), the stay was lifted. On March 13, 2012, defendants filed a motion to dismiss the Montilla-Rojo second amended complaint. On April 23, 2012, plaintiffs filed their opposition thereto. Defendants were granted leave to reply by May 7, 2012.

On November 2, 2011, the Court in the Hoff securities class action announced at a hearing on the proposed settlement that it would deny certain individual shareholders’ requests to opt out, overrule the objection to the settlement and grant final approval in a written order to follow, which order and final judgment were issued on the same date. On November 29, 2011, the individual shareholders whose requests to opt-out were rejected and the objectors to the settlement appealed from the final judgment to the United States Court of Appeals for the First Circuit. On December 21, 2011, the lead plaintiffs in the Hoff action filed a motion for an order requiring the objectors to post a bond to cover the costs associated with the objectors’ appeal, which the Court granted on January 9, 2012. On January 17, 2012, the objectors moved for reconsideration of the order requiring them to post a bond. On January 24, 2012, the Court denied the objectors’ motion for reconsideration. On January 27, 2012, the objectors filed a motion informing the Court that they would voluntarily dismiss the appeal with prejudice, which the Court noted on January 30, 2012.

In April 2011, the parties to the García and Díaz actions entered into a separate memorandum of understanding. Under the terms of this memorandum of understanding, subject to certain customary conditions, including court approval of a final settlement agreement, and in consideration for the full and final settlement and release of all defendants, Popular agreed, for a period of three years, to maintain or implement certain corporate governance practices, measures and policies, as set forth in the memorandum of understanding. Aside from the payment by or on behalf of Popular of approximately $2.1 million of attorneys’ fees and expenses of counsel for the plaintiffs, all of which were covered by insurance), the settlement did not require any cash payments by or on behalf of Popular or the defendants. On June 14, 2011, a motion for preliminary approval of settlement was filed. On July 8, 2011, the Court granted preliminary approval of such settlement and set the final approval hearing date for September 12, 2011. On that same date, the Court granted final approval of the settlement. On September 23, 2011, the court in Díaz entered a separate judgment approving the final settlement as well.

Prior to the Hoff and derivative action mediation, the parties to the ERISA class action entered into a separate memorandum of understanding to settle that action. Under the terms of the ERISA memorandum of understanding, subject to certain customary conditions including court approval of a final settlement agreement and in consideration for the full settlement and release of all defendants, the parties agreed that the amount of $8.2 million would be paid by or on behalf of the defendants. The parties filed a joint request to approve the settlement on April 13, 2011. On June 8, 2011, the Court held a preliminary approval hearing, and on June 23, 2011, the Court preliminarily approved such settlement. On June 30, 2011, the amount of $8.2 million was transferred to the settlement fund by insurers on behalf of the defendants. A final fairness hearing was set for August 26, 2011. On that date, the Court stated that it would approve the settlement but requested that plaintiffs’ counsel submit certain supporting documentation prior to issuing its final approval. On March 12, 2012, the Court granted final approval of the settlement.

Popular does not expect to record any material gain or loss as a result of the settlements. Popular has made no admission of liability in connection with these settlements.

In addition to the foregoing, Banco Popular is a defendant in two class lawsuits arising from its consumer banking and trust-related activities. On October 7, 2010, a putative class action 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 and others similarly situated who he purports to represent have suffered damages because of Banco Popular’s allegedly 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. On January 13, 2011, Banco Popular submitted a motion to dismiss the complaint.

In January 2012, the parties to the Almeyda action entered into a memorandum of understanding. Under the terms of this memorandum of understanding, subject to certain customary conditions, including court approval of a final settlement agreement, and in consideration for the full and final settlement and release of all defendants, the parties agreed that the amount of $0.4 million will be paid by defendants, which amount, net of attorneys’ fees, shall be donated to one or more non-profit consumer financial counseling services organizations based in Puerto Rico. A settlement stipulation and a joint motion for preliminary approval of such settlement, which were expected to be filed with the Court by March 14, 2012, have not yet been filed as the parties continue in discussions with respect to the beneficiaries of the donations to be made by the defendants as part of such settlement.

On December 13, 2010, Popular was served with a class action complaint captioned García Lamadrid , et al. v. Banco Popular de Puerto Rico, et al., filed in the Puerto Rico Court of First Instance. The complaint generally seeks damages against Banco Popular de Puerto Rico, other defendants and their respective insurance companies for their alleged breach of certain fiduciary duties, breach of contract, and alleged violations of local tort law. Plaintiffs seek in excess of $600 million in damages, plus costs and attorneys fees.

More specifically, plaintiffs—Guillermo García Lamadrid and Benito del Cueto Figueras—are suing Defendant BPPR for the losses they (and others) experienced through their investment in the RG Financial Corporation-backed Conservation Trust Fund securities. Plaintiffs essentially claim that Banco Popular allegedly breached its purported fiduciary duty to keep all relevant parties informed of any developments that could affect the Conservation Trust notes or that could become an event of default under the relevant trust agreements; and that in so doing, it acted imprudently, unreasonably and with gross negligence. Popular and the other defendants submitted separate motions to dismiss on or about February 28, 2011. Plaintiffs submitted a consolidated opposition thereto on April 15, 2011. The parties were allowed to submit replies and surreplies to such motions and the motions have now been deemed submitted by the Court and are pending resolution. An argumentative hearing on this motion was set for April 20, 2012, but was subsequently cancelled. It has now been tentatively scheduled for July 3, 2012.

Note 19 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. Also, it established Popular Capital Trust III for the purpose of exchanging Series C preferred stock shares held by the U.S. Treasury for trust preferred securities issued by this trust. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision-making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary.

Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities.

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these trusts and guaranteed mortgage securitization transactions has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, these VIEs are not required to be consolidated in the Corporation’s financial statements at March 31, 2012.

The Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt. In the case of the guaranteed mortgage securitization transactions, the Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE.

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 at March 31, 2012, December 31, 2011 and March 31, 2011, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation may retain the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. Pursuant to ASC Subtopic 810-10, the servicing fees that the Corporation receives for its servicing role are considered variable interests in the VIEs since the servicing fees are subordinated to the principal and interest that first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies.

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer with non-consolidated VIEs at March 31, 2012, December 31, 2011 and March 31, 2011.


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Assets
Servicing assets:
Mortgage servicing rights	$	103,130	$	101,511	$	108,447

Total servicing assets	$	103,130	$	101,511	$	108,447

Other assets:
Servicing advances	$	2,583	$	3,027	$	3,506

Total other assets	$	2,583	$	3,027	$	3,506

Total	$	105,713	$	104,538	$	111,953

Maximum exposure to loss	$	105,713	$	104,538	$	111,953

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 at March 31, 2012 (December 31, 2011—$9.4 billion; March 31, 2011 - $9.4 billion).

Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at March 31, 2012, December 31, 2011 and March 31, 2011, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

In September of 2011, BPPR sold construction and commercial real estate loans with a fair value of $148 million, and most of which were non-performing, to a newly created joint venture, PRLP 2011 Holdings, LLC. The joint venture is majority owned by Caribbean Property Group (“CPG”), Goldman Sachs & Co. and East Rock Capital LLC. The joint venture was created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to the joint venture for the acquisition of the loans in an amount equal to the sum of 57% of the purchase price of the loans, or $84 million, and $2 million of closing costs, for a total acquisition loan of $86 million (the “acquisition loan”). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $68.5 million to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $20 million to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in September 2011, BPPR received $48 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture.

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

The Corporation has determined that PRLP 2011 Holdings, LLC is a VIE but the Corporation is not the primary beneficiary. All decisions are made by CPG (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture. Also, the Manager delegates the day-to-day management and servicing of the loans to CPG Island Servicing, LLC, an affiliate of CPG, which contracted Archon, an affiliate of Goldman Sachs, to act as subservicer, but it has the responsibility to oversee such servicing responsibilities.

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

The following table presents the carrying amount and classification of the assets and liabilities, net of eliminations, related to the Corporation’s variable interests in the non-consolidated VIE, PRLP 2011 Holdings, LLC and its maximum exposure to loss at March 31, 2012 and December 31, 2011.


(In thousands)	March 31, 2012			December 31, 2011
Assets
Loans held-in-portfolio:
Acquisition loan	$	64,456		$	64,711
Advances under the working capital line		1,658			—
Advances under the advance facility		2,445			—

Total loans held-in-portfolio	$	68,559		$	64,711

Accrued interest receivable	$	199		$	—
Other assets:
Investment in PRLP 2011 Holdings LLC	$	43,294		$	37,561

Total other assets	$	43,294		$	37,561

Total assets	$	112,052		$	102,272

Deposits	$	(6,438	)	$	(48	)

Total liabilities	$	(6,438	)	$	(48	)

Total net assets	$	105,614		$	102,224

Maximum exposure to loss	$	105,614		$	102,224

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2012 would be not recovering the carrying amount of the acquisition loan, the advances on the advance facility and working capital line, and the equity interest held by the Corporation, net of the deposits.

Note 20 – Related party transactions with affiliated company / joint venture

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in EVERTEC, Inc. (“EVERTEC”) to an unrelated third-party, including the Corporation’s merchant acquiring and processing and technology businesses (the “EVERTEC transaction”), and retained a 49% ownership interest in Carib Holdings, the holding company of EVERTEC. EVERTEC continues to provide various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. The investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. Refer to Note 25 “Related party transactions” to the consolidated financial statements included in the Corporation’s 2011 Annual Report for details on this sale to an unrelated third-party.

The Corporation’s investment in EVERTEC, including the impact of intra-entity eliminations, amounted to $192 million at March 31, 2012 (December 31, 2011—$203 million; March 31, 2011—$203 million), and is included as part of “other assets” in the consolidated statements of financial condition. The Corporation did not receive any capital distributions from EVERTEC during the period from January 1, 2012 through March 31, 2012 or during the year ended December 31, 2011.

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations since October 1, 2010. The following table presents the Corporation’s proportionate share of income (loss) from EVERTEC for the quarters ended March 31, 2012 and 2011. The unfavorable impact of the elimination in non-interest income presented in the table is principally offset by the elimination of 49% of the professional fees (operating expenses) paid by the Corporation to EVERTEC during the same period.


	Quarters ended March 31,
(In thousands)	2012			2011
Share of income from the equity investment in EVERTEC	$	1,730		$	11,792
Intra-company eliminations considered in other operating income (detailed in next table)		(13,345	)		(13,713	)

Share of loss from the equity investment in EVERTEC, net of eliminations	$	(11,615	)	$	(1,921	)

The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarters ended March 31, 2012 and 2011. Items that represent expenses to the Corporation are presented with parenthesis. For consolidation purposes, the Corporation eliminates 49% of the income (expense) between EVERTEC and the Corporation from the corresponding categories in the consolidated statements of operations and the net effect of all items at 49% is eliminated against other operating income, which is the category used to record the Corporation’s share of income (loss) as part of its equity method investment in EVERTEC. The 51% majority interest in the table that follows represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s results of operations.


	Quarters ended
	March 31, 2012									March 31, 2011
(In thousands)	100%			Popular’s 49% interest (eliminations)			51% majority interest			100%			Popular’s 49% interest (eliminations)			51% majority interest			Category
Interest income on loan to EVERTEC	$	823		$	403		$	420		$	1,056		$	518		$	538			Interest income
Interest income on investment securities issued by EVERTEC		963			472			491			963			472			491			Interest income
Interest expense on deposits		(110	)		(54	)		(56	)		(295	)		(145	)		(150	)		Interest expense
ATH and credit cards interchange income from services to EVERTEC		5,853			2,868			2,985			6,793			3,328			3,465			Other service fees
Processing fees on services provided by EVERTEC		(36,659	)		(17,963	)		(18,696	)		(38,678	)		(18,952	)		(19,726	)		Professional fees
Rental income charged to EVERTEC		1,682			824			858			1,807			886			921			Net occupancy
Transition services provided to EVERTEC		213			105			108			369			181			188			Other operating expenses

Total	$	(27,235	)	$	(13,345	)	$	(13,890	)	$	(27,985	)	$	(13,712	)	$	(14,273	)

The Corporation had the following financial condition accounts outstanding with EVERTEC at March 31, 2012, December 31, 2011 and March 31, 2011. The 51% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statements of financial condition.


	At March 31, 2012				At December 31, 2011				At March 31, 2011
(In thousands)	100%		51% majority interest		100%		51% majority interest		100%		51% majority interest
Loans	$	53,306	$	27,186	$	53,215	$	27,140	$	57,459	$	29,304
Investment securities		35,000		17,850		35,000		17,850		35,000		17,850
Deposits		79,241		40,413		54,288		27,687		50,846		25,932
Accounts receivables (Other assets)		3,251		1,658		5,132		2,617		3,709		1,891
Accounts payable (Other liabilities)		14,685		7,489		14,684		7,489		17,078		8,710

EVERTEC has certain performance bonds outstanding, which are guaranteed by the Corporation under a general indemnity agreement between the Corporation and the insurance companies issuing the bonds. EVERTEC’s performance bonds guaranteed by the Corporation amounted to approximately $14.0 million at March 31, 2012 (December 31, 2011—$15.0 million; March 31, 2011—$10.4 million). Also, EVERTEC has a letter of credit issued by BPPR, for an amount of $2.9 million at March 31, 2012, December 31, 2011 and March 31, 2011. As part of the merger agreement, the Corporation also agreed to maintain outstanding this letter of credit for a 5-year period. EVERTEC and the Corporation entered into a Reimbursement Agreement, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant.

As indicated in Note 19 to the consolidated financial statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation’s results of operations for the quarter ended March 31, 2012.


	March 31, 2012
(In thousands)	100%		Popular’s 24.9% interest (eliminations)		75.1% majority interest		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	785	$	195	$	590		Interest income

The Corporation had the following financial condition accounts outstanding with PRLP 2011 Holdings, LLC at March 31, 2012 and December 31, 2011. The 75.1% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statement of financial condition.


	At March 31, 2012				At December 31, 2011
(In thousands)	100%		75.1% majority interest		100%		75.1% majority interest
Loans	$	91,290	$	68,559	$	86,167	$	64,711
Deposits (non-interest bearing)		8,573		6,438		64		48
Accrued interest receivable		265		199		—		—

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 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 at March 31, 2012, December 31, 2011 and March 31, 2011:


At March 31, 2012
(In thousands)	Level 1		Level 2			Level 3			Total
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	38,084		$	—		$	38,084
Obligations of U.S. Government sponsored entities		—		1,091,798			—			1,091,798
Obligations of Puerto Rico, States and political subdivisions		—		56,836			—			56,836
Collateralized mortgage obligations-federal agencies		—		1,858,807			—			1,858,807
Collateralized mortgage obligations-private label		—		54,668			—			54,668
Mortgage-backed securities		—		1,997,298			7,226			2,004,524
Equity securities		3,846		3,613			—			7,459
Other		—		26,440			—			26,440

Total investment securities available-for-sale	$	3,846	$	5,127,544		$	7,226		$	5,138,616

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	28,038		$	—		$	28,038
Collateralized mortgage obligations		—		734			2,750			3,484
Mortgage-backed securities-federal agencies		—		335,961			16,363			352,324
Other		—		16,372			3,988			20,360

Total trading account securities	$	—	$	381,105		$	23,101		$	404,206

Mortgage servicing rights	$	—	$	—		$	156,331		$	156,331
Derivatives		—		58,691			—			58,691

Total assets	$	3,846	$	5,567,340		$	186,658		$	5,757,844

Liabilities
Derivatives	$	—	$	(62,717	)	$	—		$	(62,717	)
Contingent consideration		—		—			(100,834	)		(100,834	)

Total liabilities	$	—	$	(62,717	)	$	(100,834	)	$	(163,551	)


At December 31, 2011
(In thousands)	Level 1		Level 2			Level 3			Total
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	38,668		$	—		$	38,668
Obligations of U.S. Government sponsored entities		—		985,546			—			985,546
Obligations of Puerto Rico, States and political subdivisions		—		58,728			—			58,728
Collateralized mortgage obligations-federal agencies		—		1,697,642			—			1,697,642
Collateralized mortgage obligations-private label		—		57,792			—			57,792
Mortgage-backed securities		—		2,132,134			7,435			2,139,569
Equity securities		3,465		3,451			—			6,916
Other		—		24,962			—			24,962

Total investment securities available-for-sale	$	3,465	$	4,998,923		$	7,435		$	5,009,823

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	90,332		$	—		$	90,332
Collateralized mortgage obligations		—		737			2,808			3,545
Mortgage-backed securities-federal agencies		—		303,428			21,777			325,205
Other		—		13,212			4,036			17,248

Total trading account securities	$	—	$	407,709		$	28,621		$	436,330

Mortgage servicing rights	$	—	$	—		$	151,323		$	151,323
Derivatives		—		61,887			—			61,887

Total assets	$	3,465	$	5,468,519		$	187,379		$	5,659,363

Liabilities
Derivatives	$	—	$	(66,700	)	$	—		$	(66,700	)
Contingent consideration		—		—			(99,762	)		(99,762	)

Total liabilities	$	—	$	(66,700	)	$	(99,762	)	$	(166,462	)


At March 31, 2011
(In thousands)	Level 1		Level 2			Level 3			Total
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	37,682		$	—		$	37,682
Obligations of U.S. Government sponsored entities		—		1,461,087			—			1,461,087
Obligations of Puerto Rico, States and political subdivisions		—		52,569			—			52,569
Collateralized mortgage obligations-federal agencies		—		1,607,345			—			1,607,345
Collateralized mortgage obligations-private label		—		77,148			—			77,148
Mortgage-backed securities		—		2,405,753			7,715			2,413,468
Equity securities		4,007		5,427			—			9,434
Other		—		27,608			—			27,608

Total investment securities available-for-sale	$	4,007	$	5,674,619		$	7,715		$	5,686,341

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	21,578		$	—		$	21,578
Collateralized mortgage obligations		—		713			2,678			3,391
Mortgage-backed securities-federal agencies		—		566,795			20,862			587,657
Other		—		18,132			2,883			21,015

Total trading account securities	$	—	$	607,218		$	26,423		$	633,641

Mortgage servicing rights	$	—	$	—		$	167,416		$	167,416
Derivatives		—		66,327			—			66,327

Total	$	4,007	$	6,348,164		$	201,554		$	6,553,725

Liabilities
Derivatives	$	—	$	(66,902	)	$	—		$	(66,902	)
Equity appreciation instrument		—		(578	)		—			(578	)
Contingent consideration		—		—			(94,483	)		(94,483	)

Total	$	—	$	(67,480	)	$	(94,483	)	$	(161,963	)

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2012 and 2011.


Quarter ended March 31, 2012
(In millions)	Balance at January 1, 2012			Gains (losses) included in earnings/ OCI			Purchases		Sales			Settlements		Transfers into Level 3		Transfers out of Level 3			Balance at March 31, 2012			Changes in unrealized gains (losses) included in earnings related to assets still held at March 31, 2012
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	7		$	—		$	—	$	—		$	—	$	—	$	—		$	7		$	—

Total investment securities available-for-sale	$	7		$	—		$	—	$	—		$	—	$	—	$	—		$	7		$	—	[a]

Trading account securities:
Collateralized mortgage obligations	$	3		$	—		$	—	$	—		$	—	$	—	$	—		$	3		$	—
Residential mortgage- backed securities—federal agencies		22			1			3		(4	)		—		2		(8	)		16			1
Other		4			—			—		—			—		—		—			4			—

Total trading account securities	$	29		$	1		$	3	$	(4	)	$	—	$	2	$	(8	)	$	23		$	1	[b]

Mortgage servicing rights	$	151		$	1		$	4	$	—		$	—	$	—	$	—		$	156		$	6	[c]

Total assets	$	187		$	2		$	7	$	(4	)	$	—	$	2	$	(8	)	$	186		$	7

Liabilities
Contingent consideration	$	(100	)	$	(1	)	$	—	$	—		$	—	$	—	$	—		$	(101	)	$	(1	)

Total liabilities	$	(100	)	$	(1	)	$	—	$	—		$	—	$	—	$	—		$	(101	)	$	(1	)[d]

[a]	Gains (losses) are included in OCI.

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

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

[d]	Gains (losses) are included in “FDIC loss share (expense) income” in the consolidated statement of operations.


Quarter ended March 31, 2011
(In millions)	Balance at January 1, 2011			Gains (losses) included in earnings/ OCI			Purchases		Sales			Settlements		Transfers in (out) of Level 3		Balance at March 31, 2011			Changes in unrealized gains (losses) included in earnings related to assets still held at March 31, 2011
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	8		$	—		$	—	$	—		$	—	$	—	$	8		$	—

Total investment securities available-for-sale	$	8		$	—		$	—	$	—		$	—	$	—	$	8		$	—	[a]

Trading account securities:
Collateralized mortgage obligations	$	3		$	—		$	—	$	—		$	—	$	—	$	3		$	—
Residential mortgage- backed securities—federal agencies		20			—			2		(1	)		—		—		21			—
Other		3			—			—		—			—		—		3			—

Total trading account securities	$	26		$	—		$	2	$	(1	)	$	—	$	—	$	27		$	—	[b]

Mortgage servicing rights	$	167		$	(6	)	$	7	$	—		$	—	$	—	$	168		$	(2	)[c]

Total assets	$	201		$	(6	)	$	9	$	(1	)	$	—	$	—	$	203		$	(2	)

Liabilities
Contingent consideration	$	(93	)	$	(1	)	$	—	$	—		$	—	$	—	$	(94	)	$	(1	)

Total liabilities	$	(93	)	$	(1	)	$	—	$	—		$	—	$	—	$	(94	)	$	(1	)[d]

[a]	Gains (losses) are included in OCI.

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

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

[d]	Gains (losses) are included in “FDIC loss share (expense) income” in the consolidated statement of operations.

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 ended March 31, 2011. There were no transfers in and/or out of Level 1 and Level 2 during the quarter ended March 31, 2011.

Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2012 and 2011 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statements of operations as follows:


	Quarter ended March 31, 2012						Quarter ended March 31, 2011
(In millions)	Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date			Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date
FDIC loss share (expense) income	$	(1	)	$	(1	)	$	(1	)	$	(1	)
Other service fees		1			6			(6	)		(2	)
Trading account loss		1			1			—			—

Total	$	1		$	6		$	(7	)	$	(3	)

The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.

(In thousands)

Fair Value
at March 31,
2012

Valuation
Technique

Unobservable Inputs

Weighted Average (Range)

Collateralized mortgage obligations - trading

2,750

Discounted

cash flow
model

Weighted average life

Yield

Constant prepayment rate

2.4 years (0.4 - 3.4 years)

4.15 %

24.2% (19.5% - 28.0%)

Other - trading

1,325

Discounted

cash flow
model

Weighted average life

Yield

Constant prepayment rate

5.8 years

12.9 %

9.0 %

Mortgage servicing rights

156,331

Discounted

cash flow
model

Prepayment speed

Weighted average life

Discount rate

7.9% (4.2% - 24.7%)

12.7 years (4.0 - 24.0 years)

12.1% (10.0 - 15.5%)

Contingent consideration

Discounted

Credit loss rate on covered loans

27.4% (0.0% - 100.0%)

cash flow

Risk premium component

(100,834

)

model

of discount rate

4.8 %

Loans

49,876

External
Appraisal

Haircut applied on

external appraisals

25.3% (5.0% - 48.0%)

Other real estate owned

76,648

External
Appraisal

Haircut applied on

external appraisals

19.1% (5.0% - 40.0%)

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial instruments are valued internally by the Corporation’s investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation’s Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. The Corporation’s Corporate Comptroller’s unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external pricing service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation’s Corporate Treasury unit validates the economic assumptions developed by the external pricing service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s unit. Significant variances in prepayment speeds are investigated by the Corporate Treasury unit. The Corporation’s MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting period. Changes in valuation assumptions must also be approved by the MSR Committee. The fair value of MSRs are compared with those of the external service pricing provider on a quarterly basis in order to validate if the fair values are within the materiality thresholds established by management to monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results.

Additionally, 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 quarters ended March 31, 2012 and 2011, and which were still included in the consolidated statements of financial 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 at March 31, 2012											Carrying value at March 31, 2011
(In millions)	Level 1		Level 2		Level 3		Total		Write- downs			Level 1		Level 2		Level 3		Total		Write- downs
Loans ^[1]	$	—	$	—	$	50	$	50	$	(11	)	$	—	$	—	$	19	$	19	$	(3	)
Loans held-for-sale ^[2]		—		—		8		8		(1	)		—		—		10		10		(1	)
Other real estate owned ^[3]		—		—		77		77		(13	)		—		—		13		13		(4	)

Total	$	—	$	—	$	135	$	135	$	(25	)	$	—	$	—	$	42	$	42	$	(8	)

[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 on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale.

[3]	Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell excluded from the reported fair value amount were $5 million at March 31, 2012 and $1 million at March 31, 2011.

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 all non-financial instruments. Accordingly, the aggregate fair value amounts 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 those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2.

•

Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value derived 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-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3.

•

Collateralized mortgage obligations: Agency and private-label collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived 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 securities, commercial paper 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, these securities 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 discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. 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.

Contingent consideration liability

The fair value of the true-up payment obligation (contingent consideration) to the FDIC as it relates to the Westernbank FDIC-assisted transaction was estimated using projected cash outflows related to the loss sharing agreements at the true-up measurement date. It took into consideration the intrinsic loss estimate, asset premium/discount, cumulative shared loss payments, and the cumulative servicing amount related to the loan portfolio. Refer to Note 9 to the consolidated financial statements for a description of the formula established in the loss share agreements for determining the true-up payment.

On a quarterly basis, management evaluates and revises the estimated credit loss rates that are used to determine expected cash flows on the covered loan pools. The expected credit losses on the loan pools are used to determine the loss share cash outflows expected to be paid to the FDIC when the true-up payment is due.

The loss share cash outflows expected to be paid to the FDIC were discounted using a term rate consistent with the time remaining until the payment is due. The discount rate was an estimate of the sum of the risk-free benchmark rate for the term remaining before the true-up payment is due and a premium to account for the credit risk profile of BPPR owing the payment and a liquidity premium. Two methodologies were used to realize this estimate. One consisted of adding a risk premium determined by an independent third party to the US Treasury benchmark. This resulted in a discount rate of 6.6%. The second methodology involved using an index of the yields on corporate bonds with credit ratings similar to BPPR. This index amounted to 6.7%. Both observations were averaged, resulting in a discount rate of 6.6%, which was used for estimating the value of the true-up payment obligation.

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, and which could be subject to internal adjustments based on the age of the appraisal. 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 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.

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 at March 31, 2012 and December 31, 2011, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

Following is a description of the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation. For a description of the valuation methodologies and inputs used to estimate the fair value for each class of financial assets and liabilities measured at fair value, refer to Note 21.

Cash and due from banks

Cash and due from banks include cash on hand, cash items in process of collection, and non-interest bearing deposits due from other financial institutions. The carrying amount of cash and due from banks is a reasonable estimate of its fair value. Cash and due from banks are classified as Level 1.

Money market investments

Investments in money market instruments are highly liquid instruments with an average maturity of three months or less. For this reason, they carry a low risk of changes in value as a result of changes in interest rates, and the carrying amount approximates their fair value. Money market investments include federal funds sold, securities purchased under agreements to resell, time deposits with other banks, and restricted cash. These money market investments are classified as Level 2.

Investment securities held-to-maturity

•

Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds priced based on a bond’s theoretical value derived 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 and are classified as Level 2. Other municipal bonds include Puerto Rico public municipalities debt and bonds collateralized by second mortgages under the Home Purchase Stimulus Program. Puerto Rico public municipalities debt was valued internally based on benchmark treasury notes and a credit spread derived from comparable Puerto Rico government trades and recent issuances. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was based on internal yield and prepayment speed assumptions, these municipal bonds are classified as Level 3.

•

Agency collateralized mortgage obligation: The fair value of the agency collateralized mortgage obligation (“CMO”), which is guaranteed by GNMA, was based on internal yield and prepayment speed assumptions. This agency CMO is classified as Level 3.

•

Other: Other securities include foreign and corporate debt. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. The fair value of corporate debt, which is collateralized by municipal bonds of Puerto Rico, was internally derived from benchmark treasury notes and a credit spread based on comparable Puerto Rico government trades, similar securities, and/or recent issuances. Corporate debt is classified as Level 3.

Other investment securities

•

Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

•

Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

•

Trust preferred securities: Given that the fair value of junior subordinated debentures is the same amount as the fair value of the trust preferred securities, the fair value of the equity-method investment in the common stock, which represents the capital contribution to create these trusts, is the same as its book value. The equity-method investment in the common stock of these trusts is classified as Level 2, except for that of Popular Capital Trust III (Troubled Asset Relief Program) which is classified as Level 3. Refer to Note 15 for additional information on these trust preferred securities.

•

Other investments: Other investments include private equity method investments and Visa Class B common stock held by the Corporation. Since there are no observable market values, private equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3.

Loans held-for-sale

The fair value of certain impaired loans held-for-sale was based on a discounted cash flow model that assumes that no principal payments are received prior to the effective average maturity date, that the outstanding unpaid principal balance is reduced by a monthly net loss rate, and that the remaining unpaid principal balance is received as a lump sum principal payment at the effective average maturity date. The remaining unpaid principal balance expected to be received, which is based on the prior 12-month cash payment experience of these loans and their expected collateral recovery, was discounted using the interest rate currently offered to clients for the origination of comparable loans. These loans are classified as Level 3. For loans held-for-sale originated with the intent to sell in the secondary market, its fair value was determined using similar characteristics of loans and secondary market prices assuming the conversion to mortgage-backed securities. Given that the valuation methodology uses internal assumptions based on loan level data, these loans are classified as Level 3. The fair value of certain other loans held-for-sale is based on bids received from potential buyers; binding offers; or external appraisals, net of internal adjustments and estimated costs to sell. Loans held-for-sale based on binding offers are classified as Level 2. Loans held-for-sale based on indicative offers and/or external appraisals are classified as Level 3.

Loans held-in-portfolio

The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting expected cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair valuation of the lease financing portfolio, therefore it is included in the loans total at its carrying amount. Loans held-in-portfolio are classified as Level 3.

FDIC loss share asset

Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net losses were discounted using the U.S. Government agency curve. The loss share asset is classified as Level 3.

Deposits

•

Demand deposits: The fair value of demand deposits, which have no stated maturity, was calculated based on the amount payable on demand as of the respective dates. These demand deposits include non-interest bearing demand deposits, savings, NOW, and money market accounts. Thus, these deposits are classified as Level 2.

•

Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these certificates of deposit incorporate an early cancellation estimate based on historical experience. Time deposits are classified as Level 2.

Assets sold under agreements to repurchase

•

Securities sold under agreements to repurchase (structured and non-structured): Securities sold under agreements to repurchase with short-term maturities approximate fair value because of the short-term nature of those instruments. Resell and repurchase agreements with long-term maturities were valued using discounted cash flows based on the three-month LIBOR curve. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. In the case of callable structured repurchase agreements, the callable feature is not considered when determining the fair value of those repurchase agreements, since there is a remote possibility, based on forward rates, that the investor will call back these agreements before maturity since it is not expected that the interest rates would rise more than the specified interest rate of these agreements. Securities sold under agreements to repurchase (structured and non-structured) are classified as Level 2.

Other short-term borrowings

The carrying amount of other short-term borrowings approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Thus, these other short-term borrowings are classified as Level 2.

Notes payable

•

FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows over their contractual term. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2.

•

Medium-term notes: The fair value of publicly-traded medium-term notes was determined using recent trades of similar transactions. Publicly-traded medium-term notes are classified as Level 2. The fair value of non-publicly traded debt was based on remaining contractual cash outflows, discounted at a rate commensurate with the non-performance credit risk of the Corporation, which is subjective in nature. Non-publicly traded debt is classified as Level 3.

•

Junior subordinated deferrable interest debentures (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2.

•

Junior subordinated deferrable interest debentures (Troubled Asset Relief Program): The fair value of junior subordinated deferrable interest debentures was based on the discounted value of contractual cash flows over their contractual term. The discount rate was based on the rate at which a similar security was priced in the open market. Thus, these junior subordinated deferrable interest debentures are classified as Level 3.

•

Others: The other category includes capital lease obligations. Generally accepted accounting principles do not require a fair valuation of capital lease obligations, therefore; it is included at its carrying amount. Capital lease obligations are classified as Level 3.

Commitments to extend credit and letters of credit

Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. Since the fair value of commitments to extend credit varies depending on the undrawn amount of the credit facility, fees are subject to constant change, and cash flows are dependent on the creditworthiness of borrowers, commitments to extend credit are classified as Level 3. The fair value of letters of credit was based on fees currently charged on similar agreements. Given that the fair value of letters of credit constantly vary due to fees being subject to constant change and whether the fees are received depends on the creditworthiness of the account parties, letters of credit are classified as Level 3.

The following table presents the carrying or notional amounts, as applicable, and estimated fair values for financial instruments with their corresponding level in the fair value hierarchy.


	March 31, 2012										December 31, 2011
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value		Carrying amount		Fair value
Financial Assets:
Cash and due from banks	$	472,806	$	472,806	$	—	$	—	$	472,806	$	535,282	$	535,282
Money market investments		1,304,263		—		1,304,263		—		1,304,263		1,376,174		1,376,174
Trading account securities, excluding derivatives [1]		404,206		—		381,105		23,101		404,206		436,330		436,330
Investment securities available-for-sale [1]		5,138,616		3,846		5,127,544		7,226		5,138,616		5,009,823		5,009,823
Investment securities held-to-maturity:
Obligations of Puerto Rico, States and political subdivisions	$	97,717	$	—	$	1,400	$	96,739	$	98,139	$	98,973	$	98,770
Collateralized mortgage obligation-federal agency		155		—		—		161		161		160		151
Other		26,500		—		1,500		25,029		26,529		26,250		26,333

Total investment securities held-to-maturity	$	124,372	$	—	$	2,900	$	121,929	$	124,829	$	125,383	$	125,254

Other investment securities:
FHLB stock	$	100,240	$	—	$	100,240	$	—	$	100,240	$	84,133	$	84,133
FRB stock		79,369		—		79,369		—		79,369		79,648		79,648
Trust preferred securities		14,197		—		13,197		1,000		14,197		14,197		14,197
Other investments		1,902		—		—		3,566		3,566		1,902		3,605

Total other investment securities	$	195,708	$	—	$	192,806	$	4,566	$	197,372	$	179,880	$	181,583

Loans held-for-sale	$	361,596	$	—	$	3,229	$	375,794	$	379,023	$	363,093	$	390,783
Loans not covered under loss sharing agreement with the FDIC		19,813,906		—		—		16,749,026		16,749,026		19,912,233		16,753,889
Loans covered under loss sharing agreements with the FDIC		4,083,292		—		—		4,665,129		4,665,129		4,223,758		4,663,327
FDIC loss share asset		1,880,357		—		—		1,734,507		1,734,507		1,915,128		1,755,295
Mortgage servicing rights		156,331		—		—		156,331		156,331		151,323		151,323
Derivatives		58,691		—		58,691		—		58,691		61,887		61,887

		$XXX,XX		$XXX,XX		$XXX,XX		$XXX,XX		$XXX,XX		$XXX,XX		$XXX,XX
	March 31, 2012										December 31, 2011
(In thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair value		Carrying amount		Fair value
Financial Liabilities:
Deposits:
Demand deposits	$	17,274,145	$	—	$	17,274,145	$	—	$	17,274,145	$	17,232,087	$	17,232,087
Time deposits		9,923,591		—		10,015,038		—		10,015,038		10,710,040		10,825,256

Total deposits	$	27,197,736	$	—	$	27,289,183	$	—	$	27,289,183	$	27,942,127	$	28,057,343

Assets sold under agreements to repurchase:
Securities sold under agreements to repurchase	$	1,125,367	$	—	$	1,131,082	$	—	$	1,131,082	$	1,102,907	$	1,107,314
Structured repurchase agreements		988,190		—		1,102,336		—		1,102,336		1,038,190		1,166,488

Total assets sold under agreements to repurchase	$	2,113,557	$	—	$	2,233,418	$	—	$	2,233,418	$	2,141,097	$	2,273,802

Other short-term borrowings [2]	$	751,200	$	—	$	751,200	$	—	$	751,200	$	296,200	$	296,200
Notes payable:
FHLB advances	$	623,286	$	—	$	654,941	$	—	$	654,941	$	642,568	$	673,505
Medium-term notes		278,815		—		283,965		4,053		288,018		278,897		282,898
Junior subordinated deferrable interest debentures (related to trust preferred securities)		439,800		—		343,276		—		343,276		439,800		284,238
Junior subordinated deferrable interest debentures (Troubled Asset Relief Program)		476,957		—		—		729,351		729,351		470,037		457,120
Others		24,896		—		—		24,896		24,896		25,070		25,070

Total notes payable	$	1,843,754	$	—	$	1,282,182	$	758,300	$	2,040,482	$	1,856,372	$	1,722,831

Derivatives	$	62,717	$	—	$	62,717	$	—	$	62,717	$	66,700	$	66,700

Contingent consideration	$	100,834	$	—	$	—	$	100,834	$	100,834	$	99,762	$	99,762


(In thousands)	Notional amount		Level 1		Level 2		Level 3		Fair value		Notional amount		Fair value
Commitments to extend credit	$	6,821,833	$	—	$	—	$	1,796	$	1,796	$	6,231,213	$	2,062
Letters of credit		143,485		—		—		3,450		3,450		136,341		2,339

[1]	Refer to Note 21 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.

[2]	Refer to Note 14 to the consolidated financial statements for the composition of short-term borrowings.

Note 23 – Net income per common share

The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the quarters ended March 31, 2012 and 2011:

		$XXX,XX			$XXX,XX
	Quarters ended March 31,
(In thousands, except per share information)	2012			2011
Net income (loss)	$	48,408		$	10,132
Preferred stock dividends		(931	)		(930	)

Net income (loss) applicable to common stock	$	47,477		$	9,202

Average common shares outstanding		1,023,418,052			1,021,536,201
Average potential dilutive common shares		1,526,948			802,894

Average common shares outstanding - assuming dilution		1,024,945,000			1,022,339,095

Basic and dilutive EPS	$	0.05		$	0.01

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 ended March 31, 2012, there were 1,682,158 weighted average antidilutive stock options outstanding (March 31, 2011 – 2,121,618). Additionally, the Corporation has outstanding a warrant issued to the U.S. Treasury to purchase 20,932,836 shares of common stock, which have an antidilutive effect at March 31, 2012 and 2011.

Note 24 – Other service fees

The caption of other services fees in the consolidated statements of operations consist of the following major categories:

		$XXX,XX,XX		$XXX,XX,XX
	Quarters ended March 31,
(In thousands)	2012		2011
Mortgage servicing fees, net of fair value adjustments	$	12,931	$	6,260
Insurance fees		12,390		11,926
Credit card fees and discounts		11,892		10,576
Debit card fees		9,832		12,925
Sale and administration of investment products		8,889		7,130
Trust fees		4,081		3,495
Processing fees		1,774		1,697
Other fees		4,250		4,643

Total other services fees	$	66,039	$	58,652

Note 25 – FDIC loss share (expense) income

The caption of FDIC loss share (expense) income in the consolidated statements of operations consists of the following major categories:


	Quarters ended March 31,
(In thousands)	2012			2011
(Amortization) accretion of loss share indemnification asset, net	$	(29,375	)	$	25,796
80% mirror accounting on discount accretion on loans and unfunded commitments accounted for under ASC 310-20		(248	)		(21,465	)
80% mirror accounting on provision for loan losses for reductions in expected cash flows that are reimbursable by the FDIC ^[1]		13,422			12,445
Other		946			(741	)

Total FDIC loss share (expense) income	$	(15,255	)	$	16,035

[1]

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

Note 26 – Pension and postretirement benefits

The Corporation has a non-contributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries. The accrual of benefits under the plans is frozen to all participants.

The components of net periodic pension cost for the periods presented were as follows:


	Pension Plan						Benefit Restoration Plans
	Quarters ended March 31,						Quarters ended March 31,
(In thousands)	2012			2011			2012			2011
Interest cost	$	7,495		$	7,785		$	393		$	395
Expected return on plan assets		(9,810	)		(10,840	)		(526	)		(451	)
Amortization of net loss		5,426			2,828			323			148

Total net periodic pension cost (benefit)	$	3,111		$	(227	)	$	190		$	92

The Corporation did not make any contributions to the pension and benefit restoration plans during the quarter ended March 31, 2012. The total contributions expected to be paid during the year 2012 for the pension and benefit restoration plans amount to approximately $50 thousand.

The Corporation also provides certain postretirement health care benefits for retired employees of certain subsidiaries. The table that follows presents the components of net periodic postretirement benefit cost.


	Quarters ended March 31,
(In thousands)	2012			2011
Service cost	$	548		$	504
Interest cost		1,950			2,136
Amortization of prior service cost		(50	)		(240	)
Amortization of net loss		540			267

Total postretirement cost	$	2,988		$	2,667

Contributions made to the postretirement benefit plan for the quarter ended March 31, 2012 amounted to approximately $1.6 million. The total contributions expected to be paid during the year 2012 for the postretirement benefit plan amount to approximately $7.4 million.

Note 27 – 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.


(Not in thousands)
Exercise price range per share	Options outstanding		Weighted-average exercise price of options outstanding		Weighted-average remaining life of options outstanding in years		Options exercisable (fully vested)		Weighted-average exercise price of options exercisable
$ 15.82 - $18.50		598,409	$	16.77		0.92		598,409	$	16.77
$ 19.25 - $27.20		1,083,749	$	25.27		2.26		1,083,749	$	25.27

$ 15.82 - $27.20		1,682,158	$	22.25		1.79		1,682,158	$	22.25

There was no intrinsic value of options outstanding at March 31, 2012 and 2011. There was no intrinsic value of options exercisable at March 31, 2012 and 2011.

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


(Not in thousands)	Options Outstanding			Weighted-Average Exercise Price
Outstanding at December 31, 2010		2,275,166		$	20.67
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(205,715	)		19.55

Outstanding at December 31, 2011		2,069,451		$	20.78
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(387,293	)		14.42

Outstanding at March 31, 2012		1,682,158		$	22.25

The stock options exercisable at March 31, 2012 totalled 1,682,158 (March 31, 2011 – 2,121,618). There were no stock options exercised during the quarters ended March 31, 2012 and 2011. Thus, there was no intrinsic value of options exercised during the quarters ended March 31, 2012 and 2011.

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2011 and 2012.

There was no stock option expense recognized for the quarters ended March 31, 2012 and 2011.

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.

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

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


(Not in thousands)	Restricted Stock			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2010		1,131,736		$	3.61
Granted		1,559,463			3.24
Vested		(51,563	)		9.00
Forfeited		(220,293	)		4.20

Non-vested at December 31, 2011		2,419,343		$	3.20
Granted		1,521,904			1.68
Vested		—			—
Forfeited		—			—

Non-vested at March 31, 2012		3,941,247		$	2.61

During the quarter ended March 31, 2012, 1,521,904 shares of restricted stock were awarded to management under the Incentive Plan (March 31, 2011 - 1,559,463). The awards granted met the standards for compensation established under the Interim Final Rule promulgated pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”).

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 quarters ended March 31, 2012 and 2011, no performance shares were granted under this plan.

During the quarter ended March 31, 2012, the Corporation recognized $0.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (March 31, 2011 - $0.5 million, with a tax benefit of $0.1 million). No additional income tax expense was recorded for the U.S. employees due to the valuation allowance of the deferred tax asset. There was no performance share expense recognized for the quarters ended March 31, 2012 and 2011. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2012 was $7.0 million and is expected to be recognized over a weighted-average period of 1.5 years.

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


(Not in thousands)	Restricted Stock			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2010		—			—
Granted		305,898		$	2.95
Vested		(305,898	)		2.95
Forfeited		—			—

Non-vested at December 31, 2011		—			—
Granted		53,750		$	1.60
Vested		(53,750	)		1.60
Forfeited		—			—

Non-vested at March 31, 2012		—			—

During the quarter ended March 31, 2012, 53,750 shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (March 31, 2011 – 23,284). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $35 thousand (March 31, 2011 - $0.1 million, with a tax benefit of $35 thousand). The fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2012 for directors was $86 thousand.

Note 28 – Income taxes

The reasons for the difference between the income tax expense applicable to income before taxes and the amount computed by applying the statutory tax rate in Puerto Rico are included in the following tables.


	Quarters ended
	March 31, 2012						March 31, 2011
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax at statutory rates	$	19,380			30	%	$	47,207			30	%
Net benefit of net tax exempt interest income		(7,014	)		(11	)		(2,407	)		(2	)
Effect of income subject to preferential tax rate		(971	)		(2	)		(232	)		—
Deferred tax asset valuation allowance		1,167			2			(5,305	)		(3	)
Non-deductible expenses		5,639			9			5,326			3
Difference in tax rates due to multiple jurisdictions		(3,207	)		(5	)		(2,464	)		(2	)
Initial adjustment in deferred tax due to change in tax rate		—			—			103,287			66
State taxes and others		1,198			2			1,815			1

Income tax expense	$	16,192			25	%	$	147,227			93	%

On January 31, 2011, the Governor of Puerto Rico signed into law a new Internal Revenue Code for Puerto Rico (the “2011 Tax Code”) which resulted in a reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense of $103.3 million due to a reduction in the marginal corporate income tax rate. Under the provisions of the 2011 Tax Code, the maximum marginal corporate income tax rate is 30% for years commenced after December 31, 2010. Prior to the 2011 Tax Code, the maximum marginal corporate income tax rate in Puerto Rico was 39%, which had increased to 40.95% due to a temporary 5% surtax approved in March 2009 for years beginning on January 1, 2009 through December 31, 2011. The 2011 Tax Code, however, eliminated the special 5% surtax on corporations for tax year 2011. The effective tax rate for the Corporation’s Puerto Rico banking operations for 2012 is estimated at 20%.

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


(In thousands)	March 31, 2012		December 31, 2011
Deferred tax assets:
Tax credits available for carryforward	$	3,139	$	3,459
Net operating loss and other carryforward available		1,186,297		1,174,488
Postretirement and pension benefits		103,118		104,663
Deferred loan origination fees		7,035		6,788
Allowance for loan losses		595,494		605,105
Deferred gains		11,454		11,763
Accelerated depreciation		5,627		5,527
Intercompany deferred gains		4,054		4,344
Other temporary differences		28,470		27,341

Total gross deferred tax assets		1,944,688		1,943,478

Deferred tax liabilities:
Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations		33,524		32,293
Difference in outside basis between financial and tax reporting on sale of a business		20,721		20,721
FDIC-assisted transaction		145,628		142,000
Unrealized net gain on trading and available-for-sale securities		72,223		73,991
Deferred loan origination costs		4,224		4,277
Other temporary differences		8,262		6,187

Total gross deferred tax liabilities		284,582		279,469

Valuation allowance		1,260,099		1,259,358

Net deferred tax asset	$	400,007	$	404,651

The net deferred tax asset shown in the table above at March 31, 2012 is reflected in the consolidated statements of financial condition as $424 million in net deferred tax assets (in the “Other assets” caption) (December 31, 2011 - $430 million) and $24 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2011 - $25 million), 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 March 31, 2012. 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 it is more likely than not that the Corporation will not be able to realize the associated deferred tax assets in the future. At March 31, 2012, the Corporation recorded a valuation allowance of approximately $1.3 billion on the deferred tax assets of its U.S. operations (December 31, 2011 - $1.3 billion).

At March 31, 2012, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $425 million. The Corporation’s Puerto Rico banking operation is in a cumulative loss position for the three-year period ended March 31, 2012 taking

into account taxable income exclusive of temporary differences. This cumulative loss position was mainly due to the performance of the construction and commercial real estate loan portfolios in prior years, including the losses related to the reclassification and sale of certain loans pertaining to those portfolios. The Corporation weights all available positive and negative evidence to assess the realization of the deferred tax asset. Positive evidence assessed included (i) the Corporation’s Puerto Rico banking operations very strong earnings history; (ii) consideration that the event causing the cumulative loss position is not a continuing condition of the operations; (iii) new legislation extending the period of carryover of net operating losses to ten years; (iii) unrealized gain on appreciated assets that could be realized to increase taxable income; and (iv) the financial results of the operations showed an improvement in the profitability of the business during 2011 and first quarter of 2012. Accordingly, there is enough positive evidence to outweigh the negative evidence of the cumulative loss. Based on this evidence, the Corporation has concluded that it is more-likely-than-not that such net deferred tax asset will be realized.

The reconciliation of unrecognized tax benefits for the quarters ended March 31, 2012 and 2011 was as follows:


(In millions)	2012		2011
Balance at January 1	$	19.5	$	26.3
Additions for tax positions – January through March		0.7		2.2
Reduction as a result of settlements – January through March		—		(4.4	)

Balance at March 31	$	20.2	$	24.1

The accrued interest related to uncertain tax positions approximated $6.0 million at March 31, 2012 (March 31, 2011 - $6.6 million). Management determined that at March 31, 2012 and 2011, 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 $25.3 million at March 31, 2012 (March 31, 2011 - $30.0 million).

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

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. At March 31, 2012, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008 and thereafter; and in the Puerto Rico jurisdiction, 2007 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $11 million.

Note 29 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the quarters ended March 31, 2012 and March 31, 2011 are listed in the following table:


(In thousands)	March 31, 2012		March 31, 2011
Non-cash activities:
Loans transferred to other real estate	$	49,812	$	39,443
Loans transferred to other property		5,552		7,117

Total loans transferred to foreclosed assets		55,364		46,560
Transfers from loans held-in-portfolio to loans held-for-sale		28,294		8,465
Transfers from loans held-for-sale to loans held-in-portfolio		421		24,558
Loans securitized into investment securities ^[1]		236,327		328,592
Recoveries related to loans transferred to loans held-for-sale		—		13,807
Securities sold not yet delivered		71,007		37,752
Recognition of mortgage servicing rights on securitizations or asset transfers		3,757		6,297

[1]	Includes loans securitized into trading securities and subsequently sold before quarter end.

Note 30 – Segment reporting

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

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

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at March 31, 2012, additional disclosures are provided for the business areas included in this reportable segment, as described below:

•

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

•

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

•

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

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland, 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, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, S.A. 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 tables that follow present the results of operations and total assets by reportable segments:

2012


For the quarter ended March 31, 2012
	Banco Popular		Banco Popular		Intersegment
(In thousands)	de Puerto Rico		North America		Eliminations
Net interest income	$	290,107	$	74,075	$	—
Provision for loan losses		85,857		14,726		—
Non-interest income		113,734		15,456		—
Amortization of intangibles		1,913		680		—
Depreciation expense		9,387		2,029		—
Loss on early extinguishment of debt		69		—		—
Other operating expenses		222,357		61,882		—
Income tax expense		17,353		936		—

Net income	$	66,905	$	9,278	$	—

Segment assets	$	28,026,771	$	8,664,824	$	(12,300	)


For the quarter ended March 31, 2012
	Reportable
(In thousands)	Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (loss)	$	364,182	$	(26,816	)	$	216		$	337,582
Provision for loan losses		100,583		140			—			100,723
Non-interest income		129,190		11,506			(16,788	)		123,908
Amortization of intangibles		2,593		—			—			2,593
Depreciation expense		11,416		340			—			11,756
Loss on early extinguishment of debt		69		—			—			69
Other operating expenses		284,239		14,826			(17,316	)		281,749
Income tax expense (benefit)		18,289		(2,296	)		199			16,192

Net income (loss)	$	76,183	$	(28,320	)	$	545		$	48,408

Segment assets	$	36,679,295	$	5,342,418		$	(4,972,492	)	$	37,049,221

2011


For the quarter ended March 31, 2011
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	295,445	$	74,814	$	—
Provision for loan losses		67,256		8,063		—
Non-interest income		121,727		17,417		—
Amortization of intangibles		1,575		680		—
Depreciation expense		9,632		1,991		—
Loss on early extinguishment of debt		239		—		—
Other operating expenses		188,730		58,227		—
Income tax expense		146,144		938		—

Net income	$	3,596	$	22,332	$	—

Segment assets	$	29,452,947	$	8,975,972	$	(26,335	)


For the quarter ended March 31, 2011
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (expense)	$	370,259	$	(27,207	)	$	307		$	343,359
Provision for loan losses		75,319		—			—			75,319
Non-interest income		139,144		42,242			(17,018	)		164,368
Amortization of intangibles		2,255		—			—			2,255
Depreciation expense		11,623		437			—			12,060
Loss on early extinguishment of debt		239		8,000			—			8,239
Other operating expenses		246,957		23,093			(17,555	)		252,495
Income tax expense (benefit)		147,082		(158	)		303			147,227

Net income (loss)	$	25,928	$	(16,337	)	$	541		$	10,132

Segment assets	$	38,402,584	$	5,459,100		$	(5,031,891	)	$	38,829,793

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

2012


For the quarter ended March 31, 2012
Banco Popular de Puerto Rico
			Consumer		Other					Total Banco
	Commercial		and Retail		Financial					Popular de
(In thousands)	Banking		Banking		Services		Eliminations			Puerto Rico
Net interest income	$	100,196	$	186,258	$	3,649	$	4		$	290,107
Provision for loan losses		13,698		72,159		—		—			85,857
Non-interest income		21,092		66,004		26,664		(26	)		113,734
Amortization of intangibles		9		1,708		196		—			1,913
Depreciation expense		4,168		4,979		240		—			9,387
Loss on early extinguishment of debt		69		—		—		—			69
Other operating expenses		61,181		143,847		17,355		(26	)		222,357
Income tax expense		9,762		4,301		3,288		2			17,353

Net income	$	32,401	$	25,268	$	9,234	$	2		$	66,905

Segment assets	$	13,853,077	$	19,985,139	$	568,375	$	(6,379,820	)	$	28,026,771

2011


For the quarter ended March 31, 2011
Banco Popular de Puerto Rico
			Consumer			Other					Total Banco
	Commercial		and Retail			Financial					Popular de
(In thousands)	Banking		Banking			Services		Eliminations			Puerto Rico
Net interest income	$	119,560	$	173,470		$	2,374	$	41		$	295,445
Provision for loan losses		27,895		39,361			—		—			67,256
Non-interest income		45,358		54,901			21,523		(55	)		121,727
Amortization of intangibles		26		1,394			155		—			1,575
Depreciation expense		4,379		5,016			237		—			9,632
Loss on early extinguishment of debt		239		—			—		—			239
Other operating expenses		54,908		118,227			15,650		(55	)		188,730
Income tax expense		76,840		66,844			2,444		16			146,144

Net income (loss)	$	631	$	(2,471	)	$	5,411	$	25		$	3,596

Segment assets	$	15,607,809	$	21,285,084		$	459,462	$	(7,899,408	)	$	29,452,947

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

2012


For the quarter ended March 31, 2012
Banco Popular North America
(In thousands)	Banco Popular North America		E-LOAN			Eliminations			Total Banco Popular North America
Net interest income	$	73,607	$	468		$	—		$	74,075
Provision for loan losses		9,396		5,330			—			14,726
Non-interest income		15,292		164			—			15,456
Amortization of intangibles		680		—			—			680
Depreciation expense		2,029		—			—			2,029
Other operating expenses		61,023		859			—			61,882
Income tax expense		936		—			—			936

Net income ( loss)	$	14,835	$	(5,557	)	$	—		$	9,278

Segment assets	$	9,387,896	$	412,726		$	(1,135,798	)	$	8,664,824

2011


For the quarter ended March 31, 2011
Banco Popular North America
									Total Banco
	Banco Popular								Popular North
(In thousands)	North America		E-LOAN			Eliminations			America
Net interest income	$	74,300	$	514		$	—		$	74,814
Provision for loan losses		605		7,458			—			8,063
Non-interest income		17,374		43			—			17,417
Amortization of intangibles		680		—			—			680
Depreciation expense		1,991		—			—			1,991
Other operating expenses		55,955		2,272			—			58,227
Income tax expense		938		—			—			938

Net income (loss)	$	31,505	$	(9,173	)	$	—		$	22,332

Segment assets	$	9,645,089	$	474,834		$	(1,143,951	)	$	8,975,972

Geographic Information


	Quarter ended
(In thousands)	March 31, 2012		March 31, 2011
Revenues: ^[1]
Puerto Rico	$	353,510	$	396,249
United States		83,724		88,404
Other		24,256		23,074

Total consolidated revenues	$	461,490	$	507,727

[1]

Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain on sale and valuation adjustments of investment securities, trading account profit, net gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income, fair value change in equity appreciation instrument and other operating income.

Selected Balance Sheet Information:


(In thousands)	March 31, 2012		December 31, 2011		March 31, 2011
Puerto Rico
Total assets	$	26,980,854	$	27,410,644	$	28,582,499
Loans		18,482,906		18,594,751		18,723,166
Deposits		19,915,877		20,696,606		19,524,566
United States
Total assets	$	8,829,183	$	8,708,709	$	9,098,562
Loans		5,707,884		5,845,359		6,483,596
Deposits		6,240,063		6,151,959		6,570,511
Other
Total assets	$	1,239,184	$	1,229,079	$	1,148,732
Loans		871,268		874,282		769,255
Deposits ^[1]		1,041,796		1,093,562		1,101,597

[1]	Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

Note 31 – Subsequent events

Subsequent events are events and transactions that occur after the balance sheet date but before the 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 March 31, 2012. Such evaluation resulted in no adjustments or additional disclosures in the consolidated financial statements for the quarter ended March 31, 2012, other than information updated in the legal proceedings in Note 18 and the disclosures included below.

Approval of reverse stock split

On April 27, 2012, the stockholders of Popular, Inc. approved an amendment to the Corporation’s Restated Certificate of Incorporation to effect a reverse stock split of the Corporation’s common stock of 1-for-10, together with a corresponding reduction in the number of authorized shares of its common stock. The amendment will become effective upon the filing of a certificate of amendment to the Restated Certificate of Incorporation with the Puerto Rico Department of State or at such later date and time specified in that certificate of amendment (the “effective date”). The reverse split is expected to become effective at 11:59 p.m. Atlantic Standard Time on May 29, 2012. If effective on that date, Popular, Inc.’s common stock will begin trading on a split-adjusted basis when the market opens on May 30, 2012.

In connection with the reverse stock split, the Corporation will amend its Restated Certificate of Incorporation to reduce the number of shares of its authorized common stock. At the effective date, the number of authorized shares of common stock will be reduced from 1,700,000,000 to 170,000,000.

The reverse stock split will not affect the par value of a share of the Corporation’s common stock. At the effective date of the reverse stock split, the stated capital attributable to common stock on its statement of financial condition will be reduced by dividing the amount of the stated capital prior to the reverse stock split by 10 (including a retroactive adjustment of prior periods), and the

additional paid-in capital will be credited with the amount by which the stated capital is reduced. Reported per share net income or loss (both basic and diluted) and dividends per common share, if declared in the future, will be higher because there will be fewer shares of common stock outstanding. Basic earnings per share data will be retroactively adjusted for changes for all prior periods presented.

Dividend received from Carib Holdings

In early May 2012, EVERTEC completed a $40 million add-on notes offering and a $170 million add-on term loan as part of an amendment to its existing credit facility and used the proceeds, together with cash on hand, to pay approximately $270 million cash distribution to its parent company Carib Holdings, which in turn paid a cash dividend of $131 million to the Corporation, in its capacity as a shareholder of Carib Holdings’ ultimate parent. As a result of the dividend, the Corporation’s investment in the entity, which as of March 31, 2012 amounted to $192 million (net of intra-entity eliminations), was reduced by the amount of the dividend. The Corporation’s participation interest on the entity continues to be 49%.

Note 32 – 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 at March 31, 2012, December 31, 2011 and March 31, 2011, and the results of their operations and cash flows for periods ended March 31, 2012 and 2011.

PIBI is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Popular Insurance V.I., Inc. and Tarjetas y Transacciones en Red Tranred, C.A. Effective January 1, 2012, PNA, which was a wholly-owned subsidiary of PIBI prior to that date, became a direct wholly-owned subsidiary of PIHC after an internal reorganization.

Following the reorganization, PNA is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Equity One, Inc.; and Banco Popular North America (“BPNA”), including 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. As of March 31, 2012 and 2011, and December 31, 2011, PIBI has no outstanding registered debt securities that would also be guaranteed by PIHC.

A source of income for PIHC consists of dividends from BPPR. Currently, the prior approval of the Federal Reserve Bank of New York and the Office of the Commissioner of Financial Institutions in Puerto Rico is necessary for the payment of any dividends by BPPR to PIHC. Furthermore, under existing federal banking regulations, the prior approval of the Federal Reserve System is required for any dividend from BPPR or BPNA to the PIHC 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. Under this test, at March 31, 2012, BPPR could have declared a dividend of approximately $239 million (March 31, 2011—$70 million; December 31, 2011—$243 million); however, the prior approval continues to be necessary. BPNA could not have declared any dividends without the prior approval of the Federal Reserve Bank of New York.

100

Condensed Consolidating Statement of Financial Condition


	At March 31, 2012
							All other
	Popular Inc.		PIBI		PNA		subsidiaries and		Elimination			Popular, Inc.
(In thousands)	Holding Co.		Holding Co.		Holding Co.		eliminations		entries			Consolidated
Assets
Cash and due from banks	$	4,460	$	936	$	930	$	473,020	$	(6,540	)	$	472,806
Money market investments		18,298		16,100		14,526		1,285,964		(30,625	)		1,304,263
Trading account securities, at fair value		—		—		—		404,293		—			404,293
Investment securities available-for-sale, at fair value		41,798		—		—		5,114,293		(17,475	)		5,138,616
Investment securities held-to-maturity, at amortized cost		185,000		1,000		—		123,372		(185,000	)		124,372
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		180,365		—			195,708
Investment in subsidiaries		4,081,525		944		1,633,640		—		(5,716,109	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		361,596		—			361,596

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		212,602		—		—		20,548,313		(182,920	)		20,577,995
Loans covered under loss sharing agreements with the FDIC		—		—		—		4,221,788		—			4,221,788
Less - Unearned income		—		—		—		99,321		—			99,321
Allowance for loan losses		148		—		—		803,116		—			803,264

Total loans held-in-portfolio, net		212,454		—		—		23,867,664		(182,920	)		23,897,198

FDIC loss share asset		—		—		—		1,880,357		—			1,880,357
Premises and equipment, net		2,563		—		118		530,864		—			533,545
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		193,768		—			193,768
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		110,559		—			110,559
Accrued income receivable		2,156		6		37		124,471		(102	)		126,568
Mortgage servicing assets, at fair value		—		—		—		156,331		—			156,331
Other assets		232,648		71,068		12,954		1,163,764		(40,902	)		1,439,532
Goodwill		—		—		—		647,912		(1	)		647,911
Other intangible assets		554		—		—		61,244		—			61,798

Total assets	$	4,792,306	$	90,055	$	1,666,697	$	36,679,837	$	(6,179,674	)	$	37,049,221

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	5,374,587	$	(8,167	)	$	5,366,420
Interest bearing		—		—		—		21,899,143		(67,827	)		21,831,316

Total deposits		—		—		—		27,273,730		(75,994	)		27,197,736

Assets sold under agreements to repurchase		—		—		—		2,113,557		—			2,113,557
Other short-term borrowings		—		—		—		908,000		(156,800	)		751,200
Notes payable		767,769		—		427,325		648,660		—			1,843,754
Subordinated notes		—		—		—		185,000		(185,000	)		—
Other liabilities		57,466		4,707		44,784		1,114,857		(45,911	)		1,175,903

101


Total liabilities		825,235			4,707			472,109			32,243,804			(463,705	)		33,082,150

Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,276			4,066			2			51,564			(55,632	)		10,276
Surplus		4,108,183			2,929,370			4,153,208			5,870,137			(12,944,188	)		4,116,710
Accumulated deficit		(156,721	)		(2,819,171	)		(3,015,889	)		(1,467,930	)		7,294,462			(165,249	)
Treasury stock, at cost		(1,041	)		—			—			—			—			(1,041	)
Accumulated other comprehensive (loss)income, net of tax		(43,786	)		(28,917	)		57,267			(17,738	)		(10,611	)		(43,785	)

Total stockholders’ equity		3,967,071			85,348			1,194,588			4,436,033			(5,715,969	)		3,967,071

Total liabilities and stockholders’ equity	$	4,792,306		$	90,055		$	1,666,697		$	36,679,837		$	(6,179,674	)	$	37,049,221

102

Condensed Consolidated Statement of Financial Condition (Unaudited)


	At March 31, 2011
(In thousands)	Popular, Inc. Holding Co.		PIBI Holding Co.		PNA Holding Co.		All other subsidiaries and eliminations		Elimination entries			Popular, Inc. Consolidated
Assets
Cash and due from banks	$	1,836	$	40,583	$	675	$	464,790	$	(43,329	)	$	464,555
Money market investments		2		7,266		1,323		961,497		(8,523	)		961,565
Trading account securities, at fair value		—		—		—		634,799		—			634,799
Investment securities available-for-sale, at fair value		37,363		3,898		—		5,663,205		(18,125	)		5,686,341
Investment securities held-to-maturity, at amortized cost		209,734		1,000		—		116,372		(185,000	)		142,106
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		159,587		—			174,930
Investment in subsidiaries		3,846,966		1,104,183		1,595,118		—		(6,546,267	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		569,678		—			569,678

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		330,208		—		—		20,746,496		(295,155	)		20,781,549
Loans covered under loss sharing agreements with the FDIC		—		—		—		4,729,550		—			4,729,550
Less - Unearned income		—		—		—		104,760		—			104,760
Allowance for loan losses		60		—		—		736,445		—			736,505

Total loans held-in-portfolio, net		330,148		—		—		24,634,841		(295,155	)		24,669,834

FDIC loss share asset		—		—		—		2,426,305		—			2,426,305
Premises and equipment, net		2,818		—		121		540,638		—			543,577
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		156,888		—			156,888
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		65,562		—			65,562
Accrued income receivable		2,347		14		31		145,365		(87	)		147,670
Mortgage servicing assets, at fair value		—		—		—		167,416		—			167,416
Other assets		257,598		73,935		15,669		993,319		(25,782	)		1,314,739
Goodwill		—		—		—		647,387		—			647,387
Other intangible assets		554		—		—		55,887		—			56,441

Total assets	$	4,700,216	$	1,230,880	$	1,617,429	$	38,403,536	$	(7,122,268	)	$	38,829,793

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	4,981,103	$	(68,094	)	$	4,913,009
Interest bearing		—		—		—		22,292,338		(8,673	)		22,283,665

Total deposits		—		—		—		27,273,441		(76,767	)		27,196,674

Assets sold under agreements to repurchase		—		—		—		2,642,800		—			2,642,800
Other short-term borrowings		—		—		42,400		514,902		(267,000	)		290,302
Notes payable		741,684		—		427,189		2,625,782		—			3,794,655
Subordinated notes		—		—		—		185,000		(185,000	)		—
Other liabilities		153,626		7,636		44,345		941,449		(46,600	)		1,100,456

103


Total liabilities		895,310			7,636			513,934			34,183,374			(575,367	)		35,024,887

Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,236			4,066			2			51,564			(55,632	)		10,236
Surplus		4,087,718			4,092,743			4,066,208			5,857,287			(14,007,711	)		4,096,245
Accumulated deficit		(329,599	)		(2,869,853	)		(2,985,273	)		(1,699,949	)		7,546,548			(338,126	)
Treasury stock, at cost		(607	)		—			—			—			—			(607	)
Accumulated other comprehensive (loss) income, net of tax		(13,002	)		(3,712	)		22,558			11,260			(30,106	)		(13,002	)

Total stockholders’ equity		3,804,906			1,223,244			1,103,495			4,220,162			(6,546,901	)		3,804,906

Total liabilities and stockholders’ equity	$	4,700,216		$	1,230,880		$	1,617,429		$	38,403,536		$	(7,122,268	)	$	38,829,793

104

Condensed Consolidating Statement of Financial Condition


	At December 31, 2011
(In thousands)	Popular, Inc. Holding Co.		PIBI Holding Co.		PNA Holding Co.		All other subsidiaries and eliminations		Elimination entries			Popular, Inc. Consolidated
Assets
Cash and due from banks	$	6,365	$	391	$	932	$	534,796	$	(7,202	)	$	535,282
Money market investments		42,239		15,456		552		1,357,890		(39,963	)		1,376,174
Trading account securities, at fair value		—		—		—		436,331		—			436,331
Investment securities available-for-sale, at fair value		35,700		3,370		—		4,988,390		(17,637	)		5,009,823
Investment securities held-to-maturity, at amortized cost		185,000		1,000		—		124,383		(185,000	)		125,383
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		164,537		—			179,880
Investment in subsidiaries		3,987,287		1,147,617		1,627,313		—		(6,762,217	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		363,093		—			363,093

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		249,615		—		—		20,673,552		(219,975	)		20,703,192
Loans covered under loss sharing agreements with the FDIC		—		—		—		4,348,703		—			4,348,703
Less - Unearned income		—		—		—		100,596		—			100,596
Allowance for loan losses		8		—		—		815,300		—			815,308

Total loans held-in-portfolio, net		249,607		—		—		24,106,359		(219,975	)		24,135,991

FDIC loss share asset		—		—		—		1,915,128		—			1,915,128
Premises and equipment, net		2,533		—		118		535,835		—			538,486
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		172,497		—			172,497
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		109,135		—			109,135
Accrued income receivable		1,512		15		113		123,858		(289	)		125,209
Mortgage servicing assets, at fair value		—		—		—		151,323		—			151,323
Other assets		217,877		78,221		13,222		1,183,103		(30,030	)		1,462,393
Goodwill		—		—		—		648,350		—			648,350
Other intangible assets		554		—		—		63,400		—			63,954

Total assets	$	4,739,524	$	1,246,071	$	1,646,742	$	36,978,408	$	(7,262,313	)	$	37,348,432

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	5,689,034	$	(33,560	)	$	5,655,474
Interest bearing		—		—		—		22,302,798		(16,145	)		22,286,653

Total deposits		—		—		—		27,991,832		(49,705	)		27,942,127

Assets sold under agreements to repurchase		—		—		—		2,165,157		(24,060	)		2,141,097
Other short-term borrowings		—		—		30,500		459,600		(193,900	)		296,200
Notes payable		760,849		—		427,297		668,226		—			1,856,372
Subordinated notes		—		—		—		185,000		(185,000	)		—
Other liabilities		59,922		4,901		42,269		1,133,815		(47,024	)		1,193,883

105


Total liabilities		820,771			4,901			500,066			32,603,630			(499,689	)		33,429,679

Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,263			4,066			2			51,564			(55,632	)		10,263
Surplus		4,106,134			4,092,743			4,103,208			5,870,287			(14,057,711	)		4,114,661
Accumulated deficit		(204,199	)		(2,883,705	)		(3,013,481	)		(1,532,810	)		7,421,469			(212,726	)
Treasury stock, at cost		(1,057	)		—			—			—			—			(1,057	)
Accumulated other comprehensive (loss) income, net of tax		(42,548	)		28,066			56,947			(14,263	)		(70,750	)		(42,548	)

Total stockholders’ equity		3,918,753			1,241,170			1,146,676			4,374,778			(6,762,624	)		3,918,753

Total liabilities and stockholders’ equity	$	4,739,524		$	1,246,071		$	1,646,742		$	36,978,408		$	(7,262,313	)	$	37,348,432

106

Condensed Statement of Operations (Unaudited)


	Quarter ended March 31, 2012
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Interest income:
Loans	$	1,691		$	—		$	—		$	387,548		$	(1,297	)	$	387,942
Money market investments		12			20			8			946			(38	)		948
Investment securities		4,042			4			81			44,164			(3,221	)		45,070
Trading account securities		—			—			—			5,891			—			5,891

Total interest income		5,745			24			89			438,549			(4,556	)		439,851

Interest expense:
Deposits		—			—			—			51,760			(81	)		51,679
Short-term borrowings		—			—			143			14,292			(852	)		13,583
Long-term debt		23,527			—			8,077			8,367			(2,964	)		37,007

Total interest expense		23,527			—			8,220			74,419			(3,897	)		102,269

Net interest (expense) income		(17,782	)		24			(8,131	)		364,130			(659	)		337,582
Provision for loan losses		140			—			—			100,583			—			100,723

Net interest (expense) income after provision for loan losses		(17,922	)		24			(8,131	)		263,547			(659	)		236,859

Service charges on deposit accounts		—			—			—			46,589			—			46,589
Other service fees		—			—			—			68,962			(2,923	)		66,039
Trading account loss		—			—			—			(2,143	)		—			(2,143	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			—			15,471			—			15,471
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			(3,875	)		—			(3,875	)
FDIC loss share expense		—			—			—			(15,255	)		—			(15,255	)
Other operating income (loss)		2,952			6,109			(169	)		21,535			(13,345	)		17,082

Total non-interest income (loss)		2,952			6,109			(169	)		131,284			(16,268	)		123,908

Operating expenses:
Personnel costs		7,904			150			—			113,437			—			121,491
Net occupancy expenses		861			8			1			22,468			824			24,162
Equipment expenses		880			—			—			10,461			—			11,341
Other taxes		713			—			—			12,725			—			13,438
Professional fees		1,991			40			3			64,089			(18,018	)		48,105
Communications		133			—			—			6,998			—			7,131
Business promotion		411			—			—			12,439			—			12,850
FDIC deposit insurance		—			—			—			24,926			—			24,926
Loss on early extinguishment of debt		—			—			—			69			—			69
Other real estate owned (OREO) expenses		—			—			—			14,165			—			14,165
Other operating expenses		(12,280	)		(4,399	)		110			32,942			(477	)		15,896
Amortization of intangibles		—			—			—			2,593			—			2,593

Total operating expenses		613			(4,201	)		114			317,312			(17,671	)		296,167

(Loss) income before income tax and equity in earnings (losses) of subsidiaries		(15,583	)		10,334			(8,414	)		77,519			744			64,600
Income tax expense (benefit)		672			(393	)		—			15,714			199			16,192

107


(Loss) income before equity in earnings (losses) of subsidiaries		(16,255	)		10,727			(8,414	)		61,805		545			48,408
Equity in undistributed earnings (losses) of subsidiaries		64,663			(3,141	)		6,006			—		(67,528	)		—

Net income (loss)	$	48,408		$	7,586		$	(2,408	)	$	61,805	$	(66,983	)	$	48,408

Comprehensive income (loss), net of tax	$	47,171		$	(49,397	)	$	(2,088	)	$	58,330	$	(6,845	)	$	47,171

108

Condensed Statement of Operations (Unaudited)


	Quarter ended March 31, 2011
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.		PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Interest income:
Loans		3,020			16		—			422,726			(2,387	)		423,375
Money market investments		—			16		1			969			(39	)		947
Investment securities		4,130			7		81			51,379			(3,222	)		52,375
Trading account securities		—			—		—			8,754			—			8,754

Total interest income		7,150			39		82			483,828			(5,648	)		485,451

Interest expense:
Deposits		—			—		—			77,040			(161	)		76,879
Short-term borrowings		22			—		314			15,556			(1,877	)		14,015
Long-term debt		25,548			—		7,600			20,978			(2,928	)		51,198

Total interest expense		25,570			—		7,914			113,574			(4,966	)		142,092

Net interest (expense) income		(18,420	)		39		(7,832	)		370,254			(682	)		343,359
Provision for loan losses		—			—		—			75,319			—			75,319

Net interest (expense) income after provision for loan losses		(18,420	)		39		(7,832	)		294,935			(682	)		268,040

Service charges on deposit accounts		—			—		—			45,630			—			45,630
Other service fees		—			—		—			62,040			(3,388	)		58,652
Trading account loss		—			—		—			(499	)		—			(499	)
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—		—			7,244			—			7,244
Adjustments (expense) to indemnity reserves on loans sold		—			—		—			(9,848	)		—			(9,848	)
FDIC loss share income		—			—		—			16,035			—			16,035
Fair value change in equity appreciation instrument		—			—		—			7,745			—			7,745
Other operating income		18,185			19,944		1,696			12,875			(13,291	)		39,409

Total non-interest income		18,185			19,944		1,696			141,222			(16,679	)		164,368

Operating expenses:
Personnel costs		6,856			84		—			99,200			—			106,140
Net occupancy expenses		806			8		1			22,886			885			24,586
Equipment expenses		772			2		—			11,262			—			12,036
Other taxes		330			—		—			11,642			—			11,972
Professional fees		2,826			25		2			62,424			(18,589	)		46,688
Communications		122			5		5			7,078			—			7,210
Business promotion		423			—		—			9,437			—			9,860
FDIC deposit insurance		—			—		—			17,673			—			17,673
Loss on early extinguishment of debt		8,000			—		—			239			—			8,239
Other real estate owned (OREO) expenses		—			—		—			2,211			—			2,211
Other operating expenses		(11,481	)		8,468		110			29,583			(501	)		26,179
Amortization of intangibles		—			—		—			2,255			—			2,255

Total operating expenses		8,654			8,592		118			275,890			(18,205	)		275,049

(Loss) income before income tax and equity in earnings of subsidiaries		(8,889	)		11,391		(6,254	)		160,267			844			157,359
Income tax expense (benefit)		2,026			3,462		(264	)		141,699			304			147,227

109


(Loss) income before equity in earnings of subsidiaries		(10,915	)		7,929		(5,990	)		18,568			540			10,132
Equity in undistributed earnings of subsidiaries		21,047			16,665		21,399			—			(59,111	)		—

Net income	$	10,132		$	24,594	$	15,409		$	18,568		$	(58,571	)	$	10,132

Comprehensive income, net of tax	$	3,091		$	31,344	$	12,632		$	(159	)	$	(43,817	)	$	3,091

110

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Quarter ended March 31, 2012
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net income (loss)	$	48,408		$	7,586		$	(2,408	)	$	61,805		$	(66,983	)	$	48,408

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries		(64,663	)		3,141			(6,006	)		—			67,528			—
Provision for loan losses		140			—			—			100,583			—			100,723
Amortization of intangibles		—			—			—			2,593			—			2,593
Depreciation and amortization of premises and equipment		161			—			1			11,594			—			11,756
Net accretion of discounts and amortization of premiums and deferred fees		6,920			—			28			(10,863	)		(162	)		(4,077	)
Fair value adjustments on mortgage servicing rights		—			—			—			(784	)		—			(784	)
FDIC loss share income		—			—			—			15,255			—			15,255
FDIC deposit insurance expense		—			—			—			24,926			—			24,926
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			3,875			—			3,875
(Earnings) losses from investments under the equity method		(2,952	)		(6,109	)		170			(6,706	)		13,345			(2,252	)
Deferred income tax expense (benefit)		468			(871	)		—			4,622			199			4,418
Loss (gain) on:
Disposition of premises and equipment		—			—			—			(6,284	)		—			(6,284	)
Early extinguishment of debt		—			—			—			69			—			69
Sale of loans, including valuation adjustments on loans held for sale		—			—			—			(15,471	)		—			(15,471	)
Acquisitions of loans held-for-sale		—			—			—			(76,118	)		—			(76,118	)
Proceeds from sale of loans held-for-sale		—			—			—			63,460			—			63,460
Net disbursements on loans held-for-sale		—			—			—			(223,500	)		—			(223,500	)
Net (increase) decrease in:
Trading securities		—			—			—			270,691			—			270,691
Accrued income receivable		(643	)		9			73			(609	)		(187	)		(1,357	)
Other assets		719			(2,664	)		99			27,474			(2,672	)		22,956
Net increase (decrease) in:
Interest payable		—			—			2,525			(4,828	)		54			(2,249	)
Pension and other postretirement benefits obligations		—			—			—			4,720			—			4,720
Other liabilities		(2,766	)		203			(11	)		(908	)		1,061			(2,421	)

Total adjustments		(62,616	)		(6,291	)		(3,121	)		183,791			79,166			190,929

Net cash (used in) provided by operating activities		(14,208	)		1,295			(5,529	)		245,596			12,183			239,337


Cash flows from investing activities:
Net decrease (increase) in money market investments		24,046			(750	)		(13,973	)		71,925			(9,337	)		71,911
Purchases of investment securities:
Available-for-sale		—			—			—			(529,445	)		—			(529,445	)
Held-to-maturity		—			—			—			(250	)		—			(250	)
Other		—			—			—			(47,629	)		—			(47,629	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			—			388,472			—			388,472
Held-to-maturity		—			—			—			1,539			—			1,539
Other		—			—			—			31,800			—			31,800
Net repayments on loans		37,014			—			—			191,114			(37,055	)		191,073
Proceeds from sale of loans		—			—			—			21,304			—			21,304
Acquisition of loan portfolios		—			—			—			(140,005	)		—			(140,005	)
Payments received from FDIC under loss sharing agreements		—			—			—			20,896			—			20,896
Capital contribution to subsidiary		(50,000	)		—			—			—			50,000			—
Mortgage servicing rights purchased		—			—			—			(474	)		—			(474	)
Acquisition of premises and equipment		(199	)		—			—			(12,099	)		—			(12,298	)

111


Proceeds from sale of:
Premises and equipment		6			—			—			11,940			—			11,946
Foreclosed assets		—			—			—			25,923			—			25,923

Net cash provided by (used in) investing activities		10,867			(750	)		(13,973	)		35,011			3,608			34,763


Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			—			(719,617	)		(26,289	)		(745,906	)
Federal funds purchased and assets sold under agreements to repurchase		—			—			—			(51,601	)		24,060			(27,541	)
Other short-term borrowings		—			—			(30,500	)		448,400			37,100			455,000
Payments of notes payable		—			—			—			(22,284	)		—			(22,284	)
Proceeds from issuance of notes payable		—			—			—			2,719			—			2,719
Proceeds from issuance of common stock		2,062			—			—			—			—			2,062
Dividends paid		(620	)		—			—			—			—			(620	)
Treasury stock acquired		(6	)		—			—			—			—			(6	)
Capital contribution from parent		—			—			50,000			—			(50,000	)		—

Net cash provided by (used in) financing activities		1,436			—			19,500			(342,383	)		(15,129	)		(336,576	)

Net (decrease) increase in cash and due from banks		(1,905	)		545			(2	)		(61,776	)		662			(62,476	)
Cash and due from banks at beginning of period		6,365			391			932			534,796			(7,202	)		535,282

Cash and due from banks at end of period	$	4,460		$	936		$	930		$	473,020		$	(6,540	)	$	472,806

112

Condensed Consolidating Statement of Cash Flows (Unaudited)


	Quarter ended March 31, 2011
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net income	$	10,132		$	24,594		$	15,409		$	18,568		$	(58,571	)	$	10,132

Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiaries		(21,047	)		(16,665	)		(21,399	)		—			59,111			—
Provision for loan losses		—			—			—			75,319			—			75,319
Amortization of intangibles		—			—			—			2,255			—			2,255
Depreciation and amortization of premises and equipment		196			—			1			11,863			—			12,060
Net accretion of discounts and amortization of premiums and deferred fees		5,885			—			69			(94,119	)		(162	)		(88,327	)
Impairment losses on net assets to be disposed of		—			8,564			—			—			—			8,564
Fair value adjustments on mortgage servicing rights		—			—			—			6,171			—			6,171
Fair value change in equity appreciation instrument		—			—			—			(7,745	)		—			(7,745	)
FDIC loss share income		—			—			—			(13,621	)		—			(13,621	)
FDIC deposit insurance expense		—			—			—			17,673			—			17,673
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			9,848			—			9,848
Earnings from investments under the equity method		(11,881	)		(6,540	)		(1,695	)		—			13,290			(6,826	)
Deferred income tax expense		3,100			37			—			137,474			304			140,915
Loss (gain) on:
Disposition of premises and equipment		—			—			—			(1,412	)		—			(1,412	)
Sale of loans, including valuation adjustments on loans held for sale		—			—			—			(7,244	)		—			(7,244	)
Sale of equity method investments		(5,308	)		(11,358	)		—			—			—			(16,666	)
Acquisitions of loans held-for-sale		—			—			—			(90,780	)		—			(90,780	)
Proceeds from sale of loans held-for-sale		—			—			—			45,448			—			45,448
Net disbursements on loans held-for-sale		—			—			—			(184,641	)		—			(184,641	)
Net (increase) decrease in:
Trading securities		—			—			—			206,222			—			206,222
Accrued income receivable		(838	)		(15	)		80			3,770			(9	)		2,988
Other assets		(251	)		397			1,131			4,922			(10,801	)		(4,602	)
Net increase (decrease) in:
Interest payable		(3,467	)		—			2,003			(2,955	)		9			(4,410	)
Pension and other postretirement benefits obligations		—			—			—			(123,957	)		—			(123,957	)
Other liabilities		(15,200	)		203			(2,338	)		(23,946	)		3,078			(38,203	)

Total adjustments		(48,811	)		(25,377	)		(22,148	)		(29,455	)		64,820			(60,971	)

Net cash used in operating activities		(38,679	)		(783	)		(6,739	)		(10,887	)		6,249			(50,839	)


Cash flows from investing activities:
Net decrease (increase) in money market investments		—			246			(1,062	)		17,734			812			17,730
Purchases of investment securities:
Available-for-sale		—			—			—			(752,479	)		—			(752,479	)
Held-to-maturity		(24,734	)		—			—			(27,264	)		—			(51,998	)
Other		—			—			—			(38,305	)		—			(38,305	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			—			278,274			—			278,274
Held-to-maturity		25,879			—			—			1,456			—			27,335
Other		—			—			—			27,050			—			27,050
Net repayments on loans		145,874			193			—			427,082			(145,527	)		427,622
Proceeds from sale of loans		—			—			—			200,387			—			200,387
Acquisition of loan portfolios		—			—			—			(348,226	)		—			(348,226	)
Payments received from FDIC under loss

113


sharing agreements		—			—			—			583			—			583
Net proceeds from sale of equity method investments		(10,755	)		41,823			—			—			—			31,068
Mortgage servicing rights purchased		—			—			—			(383	)		—			(383	)
Acquisition of premises and equipment		(185	)		—			—			(18,414	)		—			(18,599	)
Proceeds from sale of:
Premises and equipment		—			—			—			7,763			—			7,763
Foreclosed assets		—			—			—			44,648			—			44,648

Net cash provided by (used in) investing activities		136,079			42,262			(1,062	)		(180,094	)		(144,715	)		(147,530	)


Cash flows from financing activities:
Net increase (decrease) in:
Deposits		—			—			—			480,386			(46,881	)		433,505
Federal funds purchased and assets sold under agreements to repurchase		—			—			—			230,250			—			230,250
Other short-term borrowings		—			—			9,900			(229,020	)		145,200			(73,920	)
Payments of notes payable		(100,000	)		—			(3,000	)		(519,568	)		—			(622,568	)
Proceeds from issuance of notes payable		—			—			—			242,000			—			242,000
Proceeds from issuance of common stock		2,247			—			—			—			—			2,247
Dividends paid		(930	)		—			—			—			—			(930	)
Treasury stock acquired		(33	)		—			—			—			—			(33	)
Return of capital		1,514			(1,514	)		—			—			—			—

Net cash (used in) provided by financing activities		(97,202	)		(1,514	)		6,900			204,048			98,319			210,551

Net increase (decrease) in cash and due from banks		198			39,965			(901	)		13,067			(40,147	)		12,182
Cash and due from banks at beginning of period		1,638			618			1,576			451,723			(3,182	)		452,373

Cash and due from banks at end of period	$	1,836		$	40,583		$	675		$	464,790		$	(43,329	)	$	464,555

114

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as mortgage banking, investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. 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. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments. The Corporation has a 49% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s system infrastructures and transaction processing businesses.

OVERVIEW

The first quarter of 2012 represents the fifth consecutive profitable quarter for the Corporation. Net income amounted to $48.4 million for the quarter ended March 31, 2012, compared with $10.1 million for the same quarter in the previous year. Most credit metrics, such as the level of net charge-offs and non-performing loans in most portfolios, reflected encouraging trends during the first quarter of the current year. Revenue generation continued solid with continued strong production from the Corporation’s Puerto Rico mortgage business, stable fee income and continuing efforts to reduce deposit costs. The Corporation continues to generate capital internally through net earnings.

The discussion that follows provides highlights of the Corporation’s results of operations for the quarter ended March 31, 2012 compared to the results of operations for the same quarter in 2011. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity.

Highlights for the first quarter of 2012, compared with first quarter of 2011

•

Net income per common share of $0.05 for the first quarter of 2012, compared with $0.01 for the same period in 2011;

•

Net interest margin on a taxable equivalent basis of 4.39% for the first quarter of 2012, compared with 4.17% for the first quarter of 2011. The Corporation continued reducing the cost of deposits, which has contributed to boost the net interest margin further, which coupled with a reduction in the cost of borrowings, has more than compensated the reduction in interest income on loans, primarily on covered loans. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs. The cost of interest bearing deposits in Puerto Rico, where the Corporation holds a considerable share of the market, fell to 87 basis points. That is a 48-basis-point drop from the year-ago quarter.

•

Provision for loan losses in the first quarter of 2012 increased by $25.4 million compared with the first quarter of 2011, principally due to an increase in the general reserve requirement for the BPPR residential mortgage loan portfolio, coupled with an increase in the specific reserve requirements for mortgage and consumer loan troubled debt restructurings. Also, influencing the unfavorable variance in the provision for loan losses was the fact that the provision for loan losses for the first quarter of 2011 included a positive impact (reduction to provision expense) of $13.8 million related to the non-conventional residential mortgage loans that were sold by BPNA in the first quarter of 2011. These increases were partially offset by a net benefit of $24.8 million related to revisions in the allowance for loan losses methodology of $40.5 million as described in the Critical Accounting Policies / Estimates section, net of $15.7 million related to environmental factor reserves for the BPPR commercial loan portfolio which although improving continues to warrant additional scrutiny.

During the first quarter of 2012, in order to better reflect current market conditions, the Corporation revised the estimation process for evaluating the adequacy of its allowance for loan losses for the Corporation’s commercial and construction loan portfolios primarily by (i) establishing a more granular stratification of the commercial and construction loan portfolios to enhance the homogeneity of the loan classes and (ii) increasing the look-back period for assessing the recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months. These changes resulted in a reduction in the Corporation’s allowance for loan losses. Refer to the Critical Accounting Policies / Estimates for detailed information on the changes to the allowance for loan losses methodology, including financial impacts.

115

The allowance for loan losses to loans held-in-portfolio ratio corresponding to non-covered loans stood at 3.25% at March 31, 2012 compared with 3.35% at December 31, 2011. The general and specific reserves related to non-covered loans amounted to $589 million and $76 million, respectively, at March 31, 2012, compared with $631 million and $59 million, respectively, at December 31, 2011. Total non-covered loans net charge-offs for the first quarter of 2012 declined $31.3 million when compared with the same quarter in the previous year. Total non-covered, non-performing loans held-in-portfolio decreased $56 million from December 31, 2011 to March 31, 2012, while non-performing loans held-for-sale declined $30 million.

•

Non-interest income amounted to $123.9 million for the quarter ended March 31, 2012, compared with $164.4 million for the same quarter in the previous year. The decline was principally due to an unfavorable variance in FDIC loss share income of $31.3 million, in part due to negative amortization of the loss share asset due to improved cash flow expectations and lower discount accretion on ASC 310-20 loans and unfunded commitments, which had a short-term accretion period that mostly expired during 2011. The negative amortization of the loss share asset is the result of lower expected losses in the FDIC covered loan portfolio, relative to the Corporation’s original estimates at the time of acquisition. The negative amortization is offset by an increase in the accretable yield (interest income), which is amortized over the expected life of the loans, which is longer than the terms of the loss sharing agreements. Refer to Table 3B for a description and amounts of the items that compose the FDIC loss share income (expense) caption.

The unfavorable variance in non-interest income was also due to the fact that during the first quarter of 2011 the Corporation completed the sale of its equity investment in the processing business of Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) with a positive impact in earnings of $16.7 million, net of tax. Refer to the Non-Interest Income section of this MD&A for additional information on the main variances in non-interest income categories.

•

Total operating expenses increased $21.1 million, principally due to higher personnel costs by $15.4 million, other real estate owned expenses, including valuation adjustments, by $12.0 million and FDIC deposit insurance assessments by $7.3 million. Also, there was a higher provision for operational losses by $6.3 million, including a legal settlement on the U.S. operations that approximated $3.1 million. These unfavorable variances were partially offset by lower losses on the early extinguishment of debt by $8.2 million, lower losses on the impairment of net assets to be disposed of by $12.9 million and lower provision for unfunded credit commitments by $4.6 million. Full-time equivalent employees were 8,074 at March 31, 2012, compared with 8,329 at December 31, 2011 and 8,260 at March 31, 2011. The reduction in headcount was mostly associated with the voluntary retirement program effective on February 1, 2012.

Refer to the Operating Expenses section in this MD&A for additional explanations on the driving factors that influenced the variances in the different operating expense categories detailed above.

•

Lower income tax expense by $131.0 million since the results for the quarter ended March 31, 2011 included a $103.3 million reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense due to a reduction in the marginal corporate income tax rate. Refer to the Income Tax section in this MD&A for information on the changes to the Puerto Rico internal revenue code that triggered the change in the tax rate.

•

Total assets amounted to $37.0 billion at March 31, 2012, compared with $37.3 billion at December 31, 2011. Total loans held-in-portfolio declined $251 million, of which $124 million pertained to non-covered loans and $127 million to covered loans. Refer to Table 7 for a breakdown by loan portfolio category.

•

Refer to Table 11 in the Financial Condition section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. The Corporation continues to have ample sources of liquidity. Refer to the Liquidity section of this MD&A for additional information on liquidity sources.

•

Deposits amounted to $27.2 billion at March 31, 2012, compared with $27.9 billion at December 31, 2011. The decrease in demand deposits from December 31, 2011 to March 31, 2012 of $244 million was principally related to lower balance of

116

deposits in trust by $561 million, partially offset by an increase in commercial accounts. The deposits in trust outstanding as of December 31, 2011 were of a short-term nature and were mostly associated with certain Puerto Rico government bond issuances for which BPPR’s trust division serves as trustee. Time deposits, including brokered certificates of deposit, decreased $786 million. These decreases were partially offset by an increase in savings, NOW and money market deposits, both from the retail and commercial sectors.

•

The Corporation’s borrowings amounted to $4.7 billion at March 31, 2012, compared with $4.3 billion at December 31, 2011. The increase in borrowings was principally in short-term debt by approximately $455 million mostly associated with FHLB advances.

•

Stockholders’ equity amounted to $4.0 billion at March 31, 2012. Capital ratios, which are shown in Table 13, continued strengthening from December 31, 2011 to March 31, 2012, principally due to the reduction in assets, and changes in balance sheet composition including the increase in lower risk-assets such as mortgage loans and internal capital generation.

Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2012 and 2011.

117

Table 1 - Financial highlights


Financial Condition Highlights	At March 31,							Average for the first quarter
(In thousands)	2012		2011		Variance			2012		2011		Variance
Money market investments	$	1,304,263	$	961,565	$	342,698		$	1,095,294	$	1,123,805	$	(28,511	)
Investment and trading securities		5,862,989		6,638,176		(775,187	)		5,666,127		6,345,664		(679,537	)
Loans		25,062,058		25,976,017		(913,959	)		24,938,842		25,945,614		(1,006,772	)
Earning assets		32,229,310		33,575,758		(1,346,448	)		31,700,262		33,415,083		(1,714,821	)
Total assets		37,049,221		38,829,793		(1,780,572	)		36,555,815		38,770,256		(2,214,441	)
Deposits*		27,197,736		27,196,674		1,062			27,257,768		27,279,489		(21,721	)
Borrowings		4,708,511		6,727,757		(2,019,246	)		4,364,646		6,746,215		(2,381,569	)
Stockholders’ equity		3,967,071		3,804,906		162,165			3,752,817		3,597,212		155,605

*	Average deposits exclude average derivatives.


Operating Highlights	First Quarter
(In thousands, except per share information)	2012		2011		Variance
Net interest income	$	337,582	$	343,359	$	(5,777	)
Provision for loan losses-non-covered loans		82,514		59,762		22,752
Provision for loan losses-covered loans		18,209		15,557		2,652
Net interest income		123,908		164,368		(40,460	)
Operating expenses		296,167		275,049		21,118

Income (loss) before income tax		64,600		157,359		(92,759	)
Income tax expense (benefit)		16,192		147,227		(131,035	)

Net income (loss)	$	48,408	$	10,132	$	38,276

Net income (loss) applicable to common stock	$	47,477	$	9,202	$	38,275

Net income (loss) per common share-basic and diluted	$	0.05	$	0.01	$	0.04


	First Quarter
Selected Statistical Information	2012			2011
Common Stock Data
Market price
High	$	2.30		$	3.53
Low		1.43			2.87
End		2.05			2.92
Book value per common share at period end		3.81			3.67
Profitability Ratios
Return on assets		0.53	%		0.11	%
Return on common equity		5.16			1.05
Net interest spread (taxable equivalent)		4.14			3.92
Net interest margin (taxable equivalent)		4.39			4.17
Capitalization Ratios
Average equity to average assets		10.27	%		9.28	%
Tier I capital to risk-weighted assets		16.51			15.23
Total capital to risk-weighted assets		17.79			16.50
Leverage ratio		11.10			10.15

118

General Business, Trends and Economy

In recent years, credit costs have been the most noticeable drivers of the Corporation’s financial results. Despite the unfavorable variance in the provision for loan losses described for the first quarter of 2012 compared with the same period in 2011, most credit trends during the first quarter of the current year were encouraging. During the first quarter of 2012, when compared with the fourth quarter of 2011, the Corporation experienced lower net charge-offs by $24.7 million, lower levels of non-performing loans held-in-portfolio by $47 million and lower commercial non-performing loan inflows by $40 million. The provision for loan losses for the quarter ended March 31, 2012 amounted to $100.7 million, a decrease of $79.1 million compared with the fourth quarter of 2011. The provision for loan losses for the non-covered portfolio for the first quarter of 2012 decreased by $41.4 million compared with the fourth quarter of 2011, of which $20.3 million was related to the BPPR reportable segment and $21.1 million to the BPNA reportable segment. In the BPPR reportable segment, the reduction in provision for loan losses was primarily driven by lower losses in the commercial and construction loan portfolios. In the BPNA reportable segment, the decrease in the provision for loan losses was driven by the combination of lower losses and the effect of the enhancement to the allowance for loan losses methodology. The drop in charge-offs in the commercial and construction loan portfolios was partially offset by increased mortgage loan charge-offs in the Puerto Rico operations. The remaining $38 million of the decrease in the provision for loan losses was due to the lower estimated losses in the covered loan portfolio.

Credit costs for the Corporation are declining, benefiting from an improvement in certain credit trends in both Puerto Rico and the U.S. mainland operations. Key highlights related to the Corporation’s loan portfolios include:

•

All of the Corporation’s loan portfolios in Puerto Rico showed improved credit quality during the first quarter of 2012. The first quarter marked the second consecutive quarter with decreasing net charge offs in the non-covered loan portfolio, which fell to $74 million, the lowest level since 2008. Non-performing loans in Puerto Rico also dropped for the second consecutive quarter, driven mostly by lower non-performing loans in the commercial and mortgage loan portfolios.

In the BPPR reportable segment, mortgage net charge-offs (excluding covered loans) increased by $7.0 million for the first quarter of 2012, compared with the last quarter in 2011. This increase was the main driver of a higher ratio of annualized net charge-offs to average non-covered mortgage loans held-in-portfolio at the BPPR reportable segment, which increased by 61 basis points, from 0.46% for the quarter ended December 31, 2011 to 1.07% for the quarter ended March 31, 2012. This increase was not caused by deterioration in the inherent credit quality of this portfolio, but was principally due to the implementation of a revised charge-off policy in Puerto Rico. During the first quarter of 2012, the Corporation revised its charge-off policy for the residential mortgage loan portfolio by including historical losses on recent other real estate owned (OREO) sales to determine the net realizable value and assess charge-offs once a loan becomes 180 days past due. Previously, this was only done once the loan was foreclosed.

•

The Corporation continues to enjoy the benefits of its de-risking strategies in the U.S. mainland operations. For the first quarter of 2012, non-performing loans at the BPNA reportable segment amounted to $338 million, an improvement of $28 million over the amounts at December 31, 2011. The first quarter of 2012 marked the 9th consecutive quarterly decrease in non-performing loans for the U.S. mainland business. Net charge-offs for the first quarter in the BPNA reportable segment amounted to $34 million, an improvement of $13 million compared with the fourth quarter of 2011. The first quarter of 2012 marked the fifth consecutive quarterly decrease in charge offs, reaching the lowest level since the first quarter in 2008 at the BPNA reportable segment.

The Corporation is reaping the benefits from the numerous actions that it has taken since 2009 to de-risk the balance sheet. In addition, to ensure the Corporation maximizes the value of the FDIC covered loan portfolio, as well as the Corporation’s special (delinquent) loan portfolios, management created a new division specifically dedicated to commercial loan administration. The new Commercial Credit Administration Group includes the Special Loans Division, the Commercial Credit Operations Division and the Loss-Sharing Agreement Administration Group. With this reorganization, the Corporation strives to streamline decision-making in those three critical areas, reinforce credit administration and allow the lending side of the Corporation’s Commercial Group to concentrate on generating business.

Critical to the Corporation’s business is the state of the economy in Puerto Rico, and it is management’s perception that it is gradually improving. There have been year-over-year increases in the number of non-farm jobs in Puerto Rico for the first time in several years, and cement sales, which are a proxy for real investment and infrastructure spending, are rising. Auto sales and hotel occupancy are also trending positively.

119

Management’s view is that the contraction in Puerto Rico’s economy seems to be over and that it is transitioning from recession to stability. While this is a positive development, Popular’s management does not expect significant economic growth in the near future. Puerto Rico still has some headwinds to deal with including a relatively high level of public-sector debt and energy needs which are highly dependent on oil. Nonetheless, the macro-economic environment appears better so far in 2012 than a year ago.

In general, the Corporation continued making progress on various fronts during the first quarter of 2012, including that (i) the credit metrics of its loan portfolio continued improving, (ii) revenue generation was once again strong, and (iii) its capital base continues to rise. The Corporation’s plan for 2012 includes (i) continue working on improving the risk profile of its loan portfolio, (ii) acquire moderate-risk assets with good returns, (iii) continue its efficiency initiatives, and (iv) further improve the U.S. community banking business.

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 2011 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2011 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, 2011 (the “2011 Annual Report”). Also, refer to Note 2 to the consolidated financial statements included in the 2011 Annual Report for a summary of the Corporation’s significant accounting policies.

Allowance for Loan Losses

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

120

•

Management made the following principal changes to the methodology during the first quarter of 2012:

•

121

Refer to Note 2 “Summary of Significant Accounting Policies” and the Critical Accounting Policies / Estimates section of the MD&A included in the Corporation’s 2011 Annual Report for additional information on the Corporation’s credit accounting policies, including interest recognition, troubled debt restructuring, accounting for impaired loans and other information with respect to the determination of specific reserves for loans individually evaluated for impairment.

STATEMENT OF OPERATIONS ANALYSIS

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, is presented with its different components on Table 2 for the quarter ended March 31, 2012 as compared with the same period in 2011, 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. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each quarter. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law. During the third quarter of 2010, BPPR’s tax position changed and, as a result, the benefit that would have been obtained from exempt investments was not applicable. However, BPPR’s tax position inverted during the second quarter of 2011, and is currently deriving a tax benefit from exempt investments. This explains the increase in the taxable equivalent adjustment shown in Table 2.

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 lease categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the quarter ended March 31, 2012 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC 310-20 and ASC 310-30, of $5.1 million, related to those items, compared with a favorable impact of $5.0 million for the same period in 2011. The interest income for covered loans for the quarter ended March 31, 2011 was favorably impacted by the discount accretion on covered loans accounted for under ASC 310-20 (revolving lines of credit), which amounted to $24.4 million for that period. This discount had been fully accreted as of the end of the third quarter of 2011.

The increase in the net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2012, compared with the same period in 2011, was mostly related to a decrease in deposit costs as the Corporation continues its effort to reduce the average cost of this funding base. Increases in the average balances of NOW, money market, savings and demand deposits have assisted in controlling the reduction within the time deposits category, and in lowering the average cost of the deposit portfolio. Also contributing to the increase in net interest margin was a higher yield for the construction loan portfolio as a result of loan collections in the U.S. mainland operations that had been previously placed in non-accrual status.

The above positive variances were in part offset by a decrease in the yield on earning assets. The yield for the covered loan portfolio had a reduction of approximately 161 basis points, related mostly to the accretion of the discount on covered loans accounted for under ASC 310-20 that was non-existent in 2012 and which, as previously indicated, amounted to $24.4 million for the first quarter of 2011. This negative variance in the yield on covered loans was partially mitigated by the positive effects of the loss reassessment process for loans accounted for under ASC310-30. The accretable amount for the loans accounted for under ASC 310-30 has increased by $633 million because of the improvement in expected cash flows on the loan pools. This benefit is being recorded through interest income on an effective yield basis throughout the life of the different loan pools. In addition, the mortgage loan yield was negatively impacted by originations in a lower rate environment and interest reversals for delinquent loans. Furthermore, the yield for the consumer loan portfolio was mainly impacted by a reduction in the yield for credit cards as a result of lower balances subject to the penalty rate and reductions in client rates due to improved credit conditions and restrictions on fees as required by regulations.

122

The average loan balance for the quarter ended March 31, 2012 experienced a substantial reduction when compared with the quarter ended March 31, 2011. Throughout 2011, the commercial and construction loan portfolios were impacted by reduced origination activity, charge-offs and sales of non-performing loans. Additionally, the normal amortization of the covered loan portfolio contributed to the reduction in the Corporation’s average loan balances. In contrast, the increase experienced by the mortgage loan category reflects primarily the effect of loan purchases made throughout 2011 within the Puerto Rico portfolio, principally from bulk purchases of performing mortgage loans and loans purchased under credit recourse agreements. Investment securities decreased in average balance as a result of maturities and prepayments of mortgage related investment securities, which funds were not reinvested due to deleveraging strategies. The borrowings category reflects the reduction of $2.3 billion in the average balance of the note issued to the FDIC. This note was repaid during 2011. The other sources of funds category in Table 2 reflects the reduction in the indemnification asset, in part as a result of collections made during the year for claims filed with the FDIC.

123

Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis

Quarters ended March 31,


Average Volume							Average Yields / Costs										Interest							Variance Attributable to
2012		2011		Variance			2012			2011			Variance				2012		2011		Variance			Rate			Volume

($ in millions)																	(In thousands)

	$1,095		$1,124		$(29)			0.35	%		0.34	%		0.01	%	Money market investments		$948		$947		$1			$(40)			$41
	5,215		5,663		(448	)		3.75			3.71			0.04		Investment securities		48,940		52,457		(3,517	)		1,342			(4,859	)
	451		682		(231	)		6.01			5.67			0.34		Trading securities		6,730		9,540		(2,810	)		610			(3,420	)
	6,761		7,469		(708	)		3.35			3.38			(0.03	)	Total money market, investment and trading securities		56,618		62,944		(6,326	)		1,912			(8,238	)
																Loans:
	10,444		11,255		(811	)		4.96			5.02			(0.06	)	Commercial		128,866		139,179		(10,313	)		(315	)		(9,998	)
	523		863		(340	)		5.03			1.56			3.47		Construction		6,535		3,311		3,224			4,968			(1,744	)
	555		592		(37	)		8.67			9.01			(0.34	)	Leasing		12,021		13,318		(1,297	)		(491	)		(806	)
	5,464		4,753		711			5.72			6.09			(0.37	)	Mortgage		78,146		72,316		5,830			(4,526	)		10,356
	3,661		3,668		(7	)		10.17			10.36			(0.19	)	Consumer		92,591		93,706		(1,115	)		(2,336	)		1,221
	20,647		21,131		(484	)		6.19			6.15			0.04		Sub-total loans		318,159		321,830		(3,671	)		(2,700	)		(971	)
	4,292		4,815		(523	)		7.00			8.61			(1.61	)	Covered loans		74,764		102,548		(27,784	)		(17,134	)		(10,650	)
	24,939		25,946		(1,007	)		6.33			6.61			(0.28	)	Total loans		392,923		424,378		(31,455	)		(19,834	)		(11,621	)
	$31,700	$	33,415	$	(1,715	)		5.69	%		5.89	%		(0.20	)%	Total earning assets	$	449,541	$	487,322	$	(37,781	)	$	(17,922	)	$	(19,859	)
	$5,246	$	4,977	$	269			0.47	%		0.73	%		(0.26	)%	Interest bearing deposits: NOW and money market*	$	6,071	$	8,915	$	(2,844	)	$	(3,239	)	$	395
	6,507		6,242		265			0.39			0.82			(0.43	)	Savings		6,265		12,557		(6,292	)		(6,879	)		587
	10,291		11,135		(844	)		1.54			2.02			(0.48	)	Time deposits		39,343		55,407		(16,064	)		(11,639	)		(4,425	)

	22,044		22,354		(310	)		0.94			1.39			(0.45	)	Total deposits		51,679		76,879		(25,200	)		(21,757	)		(3,443	)

	2,511		2,743		(232	)		2.18			2.07			0.11		Short-term borrowings		13,583		14,015		(432	)		2,430			(2,862	)
	—		2,293		(2,293	)		—			2.34			(2.34	)	FDIC note		—		13,395		(13,395	)		—			(13,395	)
	473		447		26			15.91			15.88			0.03		TARP funds**		18,796		17,752		1,044			30			1,014
																Other medium and
	1,381		1,263		118			5.28			6.37			(1.09	)	long-term debt		18,211		20,051		(1,840	)		(648	)		(1,192	)
																Total interest bearing
	26,409		29,100		(2,691	)		1.55			1.97			(0.42	)	liabilities		102,269		142,092		(39,823	)		(19,945	)		(19,878	)
	5,213		4,926		287											Non-interest bearing demand deposits
	78		(611)		689											Other sources of funds
	$31,700	$	33,415	$	(1,715	)		1.30	%		1.72	%		(0.42	)%	Total source of funds		102,269		142,092		(39,823	)		(19,945	)		(19,878	)
								4.39	%		4.17	%		0.22	%	Net interest margin
																Net interest income on a taxable equivalent basis		347,272		345,230		2,042		$	2,023		$	19
								4.14	%		3.92	%		0.22	%	Net interest spread
																Taxable equivalent adjustment		9,690		1,871		7,819
																Net interest income		$337,582		$343,359		$(5,777	)

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.

**	Junior subordinated deferrable interest debentures held by the U.S. Treasury

124

PROVISION FOR LOAN LOSSES

The Corporation’s provision for loan losses totaled $100.7 million for the quarter ended March 31, 2012 compared with $75.3 million for the same period in 2011. Refer to the Overview section of this MD&A for an explanation of the principal factors causing the increase in the provision for loan losses for the quarter as well as the Credit Risk Management and Loan Quality Section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.

NON-INTEREST INCOME

Refer to Table 3.A for a breakdown on non-interest income by major categories for the quarters ended March 31, 2012 and 2011.

Table 3.A - Non-interest income


	Quarter ended March 31,
(In thousands)	2012			2011			Variance
Service charges on deposit accounts	$	46,589		$	45,630		$	959

Other service fees:
Mortgage servicing fees, net of fair value adjustments		12,931			6,260			6,671
Insurance fees		12,390			11,926			464
Credit card fees and discounts		11,892			10,576			1,316
Debit card fees		9,832			12,925			(3,093	)
Sale and administration of investment products		8,889			7,130			1,759
Trust fees		4,081			3,495			586
Processing fees		1,774			1,697			77
Other fees		4,250			4,643			(393	)

Total other service fees		66,039			58,652			7,387

Trading account loss		(2,143	)		(499	)		(1,644	)
Net gain on sale of loans, including valuation adjustment on loans held-for-sale		15,471			7,244			8,227
Adjustment (expense) to indemnity reserves on loans sold		(3,875	)		(9,848	)		5,973
FDIC loss share (expense) income		(15,255	)		16,035			(31,290	)
Fair value change in equity appreciation instrument		—			7,745			(7,745	)
Other operating income		17,082			39,409			(22,327	)

Total non-interest income	$	123,908		$	164,368		$	(40,460	)

Non-interest income for the quarter ended March 31, 2012, compared with the same quarter in the previous year was mainly impacted by the following positive variances:

•

$8.2 million favorable variance in gain on sale of loans, including valuation adjustments on loans held-for-sale, mostly due to higher gains from the Corporation’s mortgage banking business in Puerto Rico, principally related to residential mortgage loans securitized;

•

$7.4 million favorable variance in other service fees, mostly due to an increase in the fair value of the Corporation’s mortgage servicing rights, higher fees from the sale and administration of investment products principally related to commissions from the retail business at Popular Securities and higher credit card fees and discounts due to higher interchange fees from increased volume of retail purchases. These favorable variances were partially offset by lower debit card fees mainly due to lower point-on-sale interchange income resulting from the effect of the Durbin Consumer Protection Act of 2010 implemented in October 2011, offset in part by higher transaction volume.

125

•

$6.0 million favorable variance resulting from lower adjustments recorded to indemnity reserves on loans sold by $5.2 million in the BPPR reportable segment and $0.8 million in the BPNA reportable segment and the discontinued operations of Popular Financial Holdings (“PFH”), the latter which is part of the Corporate group. The reduction in the BPPR reportable segment was principally due to improvements in credit quality trends of mortgage loans serviced subject to credit recourse and in the probability of default, foreclosure rate and constant prepayment rate assumptions, as well as a declining portfolio given that the Corporation is no longer selling loans subject to credit recourse.

These favorable variances in non-interest income for the quarter ended March 31, 2012, compared with the same quarter of the previous year, were partially offset by the following unfavorable variances:

•

$31.3 million unfavorable variance in FDIC loss share (expense) income. Table 3.B provides a breakdown of the nature of the items that triggered the variance;

Table 3.B - Financial information - Westernbank FDIC-assisted transaction


	Quarters ended March 31,
(In thousands)	2012			2011			Variance
Interest income:
Interest income on covered loans, except for discount accretion on ASC 310-20 covered loans	$	74,764		$	78,100		$	(3,336	)
Discount accretion on ASC 310-20 covered loans		—			24,448			(24,448	)

Total interest income on covered loans		74,764			102,548			(27,784	)

FDIC loss share income (expense):
(Amortization) accretion of loss share indemnification asset, net		(29,375	)		25,796			(55,171	)
80% mirror accounting on discount accretion on loans and unfunded commitments accounted for under ASC 310-20		(248	)		(21,465	)		21,217
80% mirror accounting on provision for loan losses for reductions in expected cash flows that are reimbursable by the FDIC [1]		13,422			12,445			977
Other		946			(741	)		1,687

Total FDIC loss share income (expense)		(15,255	)		16,035			(31,290	)

Fair value change in equity appreciation instrument		—			7,745			(7,745	)
Amortization of contingent liability on unfunded commitments (included in other operating income)		310			2,384			(2,074	)

Total revenues		59,819			128,712			(68,893	)

Provision for loan losses		18,209			15,557			2,652

Total revenues less provision for loan losses	$	41,610		$	113,155		$	(71,545	)

[1]

Average balances


	Quarters ended March 31,
(In millions)	2012		2011		Variance
Covered loans	$	4,292	$	4,815	$	(523	)
FDIC loss share asset		1,903		2,410		(507	)
Note issued to the FDIC		—		2,293		(2,293	)

126

•

$22.3 million unfavorable variance in other operating income due to a $20.6 million gain on the sale of the equity interest in CONTADO in March 2011 and lower income from investments accounted for under the equity method by approximately $4.6 million. The latter was the net effect of higher losses by $9.7 million (including the impact of intra-entity eliminations) from the 49% retained ownership interest in EVERTEC, partially offset by $6.7 million income in the first quarter of 2012 from the equity investment in PRLP 2011 Holdings, LLC, which holds the commercial and construction loans sold by BPPR during 2011, of which BPPR holds a 24.9% equity participation. Table 3.C provides the composition of the income (loss) from the Corporation’s 49% equity interest in EVERTEC.

Table 3.C - Income (loss) from retained ownership interest in EVERTEC


	Quarter ended March 31,
(In thousands)	2012			2011
Share of income from the equity investment in EVERTEC	$	1,730		$	11,792
Intra-company eliminations considered in other operating income		(13,345	)		(13,713	)

Share of income (loss) from the equity investment in EVERTEC, net of eliminations	$	(11,615	)	$	(1,921	)

EVERTEC’s results for the first quarter of 2011 included a $13.8 million positive impact related to the reversal of EVERTEC’s deferred tax liability upon application of the Puerto Rico income tax reform. The eliminations in Table 3.C mostly represents the costs that the Corporation records in the professional fees category within operating expenses and that EVERTEC has recognized as part of its net income and must be eliminated as it represents a transaction with an affiliate. Refer to Note 20 to the consolidated financial statements for additional information on the transactions with EVERTEC.

The variance in other operating income includes a $4.6 million gain on the sale of a real estate property owned and previously used by BPPR during the first quarter of 2012.

•

$7.7 million unfavorable variance on the fair value of the equity appreciation instrument issued to the FDIC as part of the Westernbank FDIC-assisted transaction as the results for the first quarter of 2011 included a positive impact of valuing the instrument and which expired on May 7, 2011.

127

Operating Expenses

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

Table 4 - Operating expenses


	Quarters ended March 31,
(In thousands)	2012		2011		Variance
Personnel costs:
Salaries	$	76,899	$	73,791	$	3,108
Commissions, incentives and other bonuses		12,726		9,924		2,802
Pension, postretirement and medical insurance		18,425		11,985		6,440
Other personnel costs, including payroll taxes		13,441		10,440		3,001

Total personnel costs		121,491		106,140		15,351

Net occupancy expenses		24,162		24,586		(424	)
Equipment expenses		11,341		12,036		(695	)
Other taxes		13,438		11,972		1,466
Professional fees:
Collections, appraisals and other credit related fees		8,238		6,765		1,473
Programming, processing and other technology services		24,561		24,198		363
Other professional fees		15,306		15,725		(419	)

Total professional fees		48,105		46,688		1,417

Communications		7,131		7,210		(79	)
Business promotion		12,850		9,860		2,990
FDIC deposit insurance		24,926		17,673		7,253
Loss on early extinguishment of debt		69		8,239		(8,170	)
Other real estate owned (OREO) expenses		14,165		2,211		11,954
Other operating expenses:
Credit and debit card processing, volume and interchange expenses		4,681		3,944		737
Transportation and travel		1,471		1,520		(49	)
Printing and supplies		1,034		1,223		(189	)
All other		8,710		19,492		(10,782	)

Total other operating expenses		15,896		26,179		(10,283	)

Amortization of intangibles		2,593		2,255		338

Total operating expenses	$	296,167	$	275,049	$	21,118

Operating expenses for the quarter ended March 31, 2012 increased by $21.1 million, or 8%, compared with the quarter ended March 31, 2011. This increase in operating expenses was impacted by the following main factors:

•

As shown in Table 4, personnel costs increased by $15.4 million, and consisted of the following principal variances:

higher pension, postretirement and medical insurance expenses by $6.4 million, which included an increase in the net periodic pension cost of $3.4 million, when compared with the quarter ended March 31, 2011, mainly due to the impact of a higher amortization of net losses for the period driven by a decrease in the assumed discount rate of the pension benefit obligation and lower expected return on plan assets. Refer to Note 26 to the consolidated financial statements for a breakdown of the net periodic pension cost. Medical insurance costs increased by $3.0 million resulting from higher claims activity and revised premiums.

salaries expense increased by $3.1 million. As indicated in the Overview section of this MD&A, there was a reduction in FTEs from March 31, 2011 to the same date in 2012 of 186 FTEs mainly driven by retired employees, but which retirement was not effective until February 1, 2012. The increase in the salaries caption in Table 4 was influenced by new hires during 2011, vacation and other compensation accruals and the additional day in the quarter of 2012 due to the leap year.

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higher other personnel costs, including payroll taxes, by $3.0 million, primarily due to $1.4 million in severance accruals related to an employee exit program that was executed as part of the Corporation’s efficiency efforts and payroll taxes such as unemployment, social security and workers compensation.

Higher incentives, commission and other bonuses by $2.8 million, mainly due to higher sales incentives and retail commissions and other performance incentives.

•

OREO expenses increased by $12.0 million during the first quarter of 2012 as compared to the same period of 2011 mainly as a result of higher write-downs in residential mortgage properties due to downward adjustments to the collateral values of residential properties in the BPPR reportable segment;

•

higher FDIC deposit insurance assessments by $7.3 million for the quarter ended March 31, 2012 mainly due to the change in the assessment computation for BPPR which was effective in the second quarter of 2011;

•

an increase of $3.0 million in business promotion expense, mainly costs from the AAdvantange credit card reward points program and advertising expenses;

•

professional fees increased by $1.4 million mainly related to legal services provided in connection with loan collection efforts and other legal expenses related to litigations; and

•

higher other taxes by $1.5 million, principally in municipal and other operating taxes.

These unfavorable variances for the quarter ended March 31, 2012, when compared with the same period of the previous year, were partially offset by the following positive factors:

•

the category of all other operating expenses in Table 4 decreased by $10.8 million. Main variances in this category included a positive variance of $12.9 million on impairment losses on assets to be disposed of mainly due to impairment losses recognized during 2011 related to the write-down of the Corporation’s Venezuela operations. Also, there was a positive variance of $4.6 million in the provision for unfunded credit commitments resulting from a combination of a lower loss rate and lower expected disbursements. These positive variances in the other operating expense category were partially offset by higher provision for operational losses by $6.3 million, which included a legal settlement in the Corporation’s U.S. mainland operations of $3.1 million.

•

lower loss on early extinguishment of debt by $8.2 million since the results for the quarter ended March 31, 2011 included $8.0 million in prepayment penalties on the repayment of $100 million in medium-term notes.

Income Taxes

Income tax expense amounted to $16.2 million for the quarter ended March 31, 2012, compared with $147.2 million for the same quarter of 2011. In January 2011, the Governor of Puerto Rico signed Act Number 1 (Internal Revenue Code for a New Puerto Rico) which among the most significant changes applicable to corporations was the reduction in the marginal tax rate. Consequently, as a result of this reduction in rate in Puerto Rico, the Corporation recognized during the first quarter of 2011 an income tax expense of $103.3 million and a corresponding reduction in the net deferred tax asset. Also, the decrease in income tax expense was due to lower income before tax on the Puerto Rico operations and an increase in exempt interest income net of disallowance of expenses attributed to such exempt income.

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The components of income tax for the quarters ended March 31, 2012 and 2011 are included in Table 5.

Table 5—Components of Income Tax Expense (Benefit)


	Quarters ended
	March 31, 2012						March 31, 2011
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax at statutory rates	$	19,380			30	%	$	47,207			30	%
Net benefit of net tax exempt interest income		(7,014	)		(11	)		(2,407	)		(2	)
Effect of income subject to preferential tax rate		(971	)		(2	)		(232	)		—
Deferred tax asset valuation allowance		1,167			2			(5,305	)		(3	)
Non-deductible expenses		5,639			9			5,326			3
Difference in tax rates due to multiple jurisdictions		(3,207	)		(5	)		(2,464	)		(2	)
Initial adjustment in deferred tax due to change in tax rate		—			—			103,287			66
State taxes and others		1,198			2			1,815			1

Income tax expense	$	16,192			25	%	$	147,227			93	%

Refer to Note 28 to the consolidated financial statements for additional information on income taxes, including a breakdown of deferred tax assets.

REPORTABLE SEGMENT RESULTS

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

For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 30 to the consolidated financial statements. The Corporate group reported a net loss of $28.3 million for the quarter ended March 31, 2012, compared with net loss of $16.3 million for the same quarter of the previous year. The unfavorable variance in the Corporate group was the net effect of (i) gain recognized in the first quarter of 2011 from the sale of CONTADO; and (ii) higher loss, net of intra-entity eliminations, from the equity interest in EVERTEC, partially offset by (iii) loss on the early extinguishment of debt incurred in 2011 and (iv) lower impairment losses on assets to be disposed of, particularly related to the investment in TRANRED (Venezuela).

Highlights on the earnings results for the reportable segments are discussed below.

Banco Popular de Puerto Rico

The Banco Popular de Puerto Rico reportable segment’s net income amounted to $66.9 million for the quarter ended March 31, 2012, compared with $3.6 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

•

lower net interest income by $5.3 million, or 2%, mostly due to a reduction in income from the covered loan portfolio by $27.8 million. Loan income from covered loans for the first quarter of 2011 included $24.4 million of discount accretion on revolving lines of credit accounted for pursuant to ASC 310-20. As indicated in the Net Interest Income section, the discount associated to those lines of credit was fully accreted during 2011. Also, a reduction of approximately $1.2 billion in the average volume of investment and trading securities resulted in a reduction in income due to volume of $12.2 million. The unfavorable impact resulting from these reductions was partially offset by a $19.0 million reduction in deposit costs and $14.0 million in the cost of borrowings. The latter was mainly associated with the note issued to the FDIC, which was outstanding during 2011. The net interest margin was 4.90% for the quarter ended March 31, 2012, compared with 4.78% for the same period in 2011;

•

higher provision for loan losses by $18.6 million, or 28%, mainly due to higher provisioning requirements for the consumer and mortgage loans modified under loss mitigation programs that are considered troubled debt restructurings, and are

130

required to be analyzed for specific reserves under ASC Section 310-10-35, and higher general reserve requirements for mortgage loans given the increase in the loss rate and greater volume of delinquent loans. In addition, during first quarter of 2011, there was a reduction of $24 million in the general component of the allowance for loan losses, including covered loans, compared with December 31, 2010 due to lower loss trend from the commercial, construction and consumer loan portfolios. These variances were partially offset by lower net charge-offs by $11.9 million, mainly from the construction and consumer loan portfolios, as well as the net reduction of $7.1 million related to the enhancements to the allowance for loan losses methodology for the commercial and construction loan portfolios net of an increase in the environmental factor reserves described in the Critical Accounting Policies / Estimates section, during the quarter ended March 31, 2012. Refer to Credit Risk Management and Loan Quality section of this MD&A for certain quality indicators and further explanations.

•

lower non-interest income by $8.0 million, or 7%, mainly due to FDIC loss share expense of $15.3 million recognized in the first quarter of 2012, compared with FDIC loss share income of $16.0 million for the same quarter previous year. Refer to Table 3.B for components of that latter variance. Also, there was the unfavorable variance of $7.7 million related to the FDIC equity appreciation instrument. These unfavorable variances were partially offset by higher gain on sale of loans by $8.2 million, lower adjustments by $5.2 million to increase the indemnity reserves on loans serviced, and higher other service fees by $8.4 million, mainly from favorable adjustments to the value of mortgage servicing rights, higher fees from the sale of investment banking products and higher credit card fees, partially offset by lower debit card fees. The results for the quarter ended March 31, 2012 also included the $6.7 million income from the equity investment in PRLP 2011 Holdings, LLC and a $4.6 million gain on the sale of a real estate property by BPPR.

•

higher operating expenses by $33.6 million, or 17%, mainly due to an increase in FDIC deposit insurance by $10.3 million, increase in other real estate owned costs by $10.2 million, principally due to downward adjustments to collateral values of residential mortgage properties, and higher personnel cost by $10.9 million; and

•

lower income tax expense by $128.8 million, mainly due to the $103.3 million reduction in the net deferred tax asset with a corresponding charge to income tax expense during the first quarter of 2011, which was associated with the reduction in the marginal corporate income tax rate due to the Puerto Rico tax reform previously described. Also, the variance was due to a decrease in income before tax and an increase in exempt interest income, net of disallowance of expenses attributed to such exempt income.

Banco Popular North America

For the quarter ended March 31, 2012, the reportable segment of Banco Popular North America reported net income of $9.3 million, compared with $22.3 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

•

lower net interest income by $738 thousand, which was primarily the effect of lower average volume of earning assets by $527 million, partially offset by lower deposit balances. This unfavorable net variance was partially offset by lower deposit costs and collections of interest on construction loans that were previously non-accruing status and which were paid-off during the first quarter of 2012;

•

higher provision for loan losses by $6.7 million principally related to reductions of $37 million in the general reserve component from December 31, 2010 to March 31, 2011, prompted by lower net charge-offs and improvements in certain portfolio trends, coupled with signs of economic stabilization. In addition, there was a $13.8 million reduction in the provision for loan losses for the quarter ended March 31, 2011 related to the benefit of the improved pricing from the sale of the non-conventional mortgage loan portfolio. These variances were partially offset by reductions in the provision for loan losses for the quarter ended March 31, 2012 as a result of lower net charge-offs by $21.2 million, combined with a $17.7 million benefit due to the enhancement to the allowance for loan losses methodology for the commercial and construction loan portfolios. Refer to Credit Risk Management and Loan Quality section of this MD&A for certain quality indicators and further explanations, including a summary of the changes and the impact on the Corporation’s allowance for loan losses.

•

lower non-interest income by $2.0 million, or 11%, mostly due to lower other service fees by $1.5 million, mostly related to debit card fees and lower other operating income by $1.2 million principally associated with changes in credit risk valuation adjustments on interest rate swaps; and

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•

higher operating expenses by $3.7 million, or 6%, mainly due to higher other operating expenses by $3.5 million, which included a $3.1 million legal settlement, higher personnel costs by $2.5 million in part due to higher headcount and benefit accruals, and higher other real estate owned costs by $1.8 million. These negative variances were partially offset by lower FDIC deposit insurance assessments by $3.0 million and net occupancy expenses by $1.0 million.

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $37.0 billion at March 31, 2012, $37.3 billion at December 31, 2011, and $38.8 billion at March 31, 2011. Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of financial condition as of such dates.

Trading and Investment securities

Trading account securities amounted to $404 million at March 31, 2012, compared with $436 million at December 31, 2011 and $635 million at March 31, 2011. The decrease in trading account securities from March 31, 2011 to March 31, 2012 was principally due to the sale of mortgage-backed securities in September 2011. The sale was made to take advantage of favorable market conditions for the securities and the proceeds were used to repay short-term debt.

Table 6 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis. Also, Notes 5 and 6 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

Table 6 - Breakdown of investment securities available-for-sale and held-to-maturity


(In millions)	March 31, 2012		December 31, 2011		Variance			March 31, 2011		Variance
U.S. Treasury securities	$	38.1	$	38.7	$	(0.6	)	$	62.4	$	(24.3	)
Obligations of U.S. Government sponsored entities		1,091.8		985.5		106.3			1,461.1		(369.3	)
Obligations of Puerto Rico, States and political subdivisions		154.6		157.7		(3.1	)		143.3		11.3
Collateralized mortgage obligations		1,913.6		1,755.6		158.0			1,684.7		228.9
Mortgage-backed securities		2,004.5		2,139.6		(135.1	)		2,413.4		(408.9	)
Equity securities		7.5		6.9		0.6			9.4		(1.9	)
Others		52.9		51.2		1.7			54.1		(1.2	)

Total investment securities AFS and HTM	$	5,263.0	$	5,135.2	$	127.8		$	5,828.4	$	(565.4	)

The increase in investment securities from December 31, 2011 to March 31, 2012 was related to purchases of investment securities by the BPNA reportable segment in order to deploy excess liquidity, mainly in the form of U.S. Government agency-issued collateralized mortgage obligations and U.S. agency securities.

The decrease in investment securities from March 31, 2011 to the same date in 2012 was mainly due to maturities and to prepayments of mortgage related investment securities, which funds were not reinvested due to deleveraging strategies. Also contributing to the decrease was the sale of $234 million in FHLB notes by BPPR during the third quarter of 2011. These decreases were partially offset by purchases of investment securities by the BPNA reportable segment to deploy excess liquidity.

Loans

Refer to Table 7, for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented in a separate line item in Table 7. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC.

In general, the changes in most loan categories generally reflect soft loan demand, the impact of loan charge-offs, portfolio run-off of the exited loan origination channels at the BPNA reportable segment and loan sales. The decreases were partially offset by mortgage loan growth in the Puerto Rico operations due to loans repurchased under credit recourse agreements, loan acquisitions and loan originations.

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Table 7 - Loans ending balances


(in thousands)	March 31, 2012		December 31, 2011		Variance March 31, 2012 Vs. December 31, 2011			March 31, 2011		Variance March 31, 2012 Vs. March 31, 2011
Loans not covered under FDIC loss sharing agreements:
Commercial	$	9,868,242	$	9,973,327	$	(105,085	)	$	10,401,285	$	(533,043	)
Construction		236,579		239,939		(3,360	)		289,883		(53,304	)
Legacy ^[2]		603,874		648,409		(44,535	)		898,772		(294,898	)
Lease financing		543,314		548,706		(5,392	)		565,881		(22,567	)
Mortgage		5,591,745		5,518,460		73,285			4,895,682		696,063
Consumer		3,634,920		3,673,755		(38,835	)		3,625,286		9,634

Total non-covered loans held-in-portfolio		20,478,674		20,602,596		(123,922	)		20,676,789		(198,115	)
Loans covered under FDIC loss sharing agreements ^[1]		4,221,788		4,348,703		(126,915	)		4,729,550		(507,762	)

Total loans held-in-portfolio		24,700,462		24,951,299		(250,837	)		25,406,339		(705,877	)

Loans held-for-sale:
Commercial		25,994		26,198		(204	)		61,276		(35,282	)
Construction		206,246		236,045		(29,799	)		392,113		(185,867	)
Mortgage		129,356		100,850		28,506			116,289		13,067

Total loans held-for-sale		361,596		363,093		(1,497	)		569,678		(208,082	)

Total loans	$	25,062,058	$	25,314,392	$	(252,334	)	$	25,976,017	$	(913,959	)

[1] Refer to Note 7 to the consolidated financial statements for the composition of the loans covered under FDIC loss sharing agreements.

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

The explanations for loan portfolio variances discussed below exclude the impact of the covered loans.

The decrease in commercial loans held-in-portfolio from December 31, 2011 to March 31, 2012 was reflected in the BPPR and BPNA reportable segments by $41 million and $64 million, respectively. The decrease was principally the result of portfolio runoff and charge-offs exceeding current year originations. Commercial loans held-in-portfolio at the BPPR and BPNA reportable segments declined by $233 million and $300 million, respectively, from March 31, 2011 to the same date in 2012, which was influenced by the same factors described above.

The BPNA legacy portfolio (refer to footnote 2 in Table 7) reflected declines in commercial loans of $24 million, construction loans of $18 million and lease financings of $3 million from December 31, 2011 to March 31, 2012. These declines were principally related to portfolio run-off. From March 31, 2011 to the same date in 2012, this legacy portfolio experienced declines in commercial loans of $185 million, construction loans of $96 million and lease financings of $14 million.

The decline in the lease financing portfolio corresponded to the BPPR reportable segment since BPNA’s lease financing portfolio is classified as legacy assets. The decline in the Puerto Rico operation is due to a general slowdown in originations.

The increase in mortgage loans held-in-portfolio from December 31, 2011 to March 31, 2012 was principally in the BPPR reportable segment by $71 million mainly associated with loan repurchases under credit recourse agreements, many of which are put under the Corporation’s loss mitigation programs, and loans purchased and originated, partially offset by collections and charge-offs. The Corporation has been successful in maintaining strong origination volumes prompted by government programs to incentivize housing demand and the continuous low interest rate environment. Most new production is securitized into mortgage-backed securities in the secondary markets. The BPNA reportable segment executed purchases of mortgage loans of approximately $21 million during the first quarter of 2012 as part of the Corporation’s strategy to replace loan portfolio run-off with high-quality assets with an adequate return; however, the increase from the loan purchase was offset mostly by loan repayments in the existing portfolio.

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The increase in the mortgage loans held-in-portfolio from March 31, 2011 to the same date in 2012 was mainly related to the BPPR reportable segment which increased by $729 million mostly from performing loans acquired from another financial institution in Puerto Rico during 2011, loans repurchased under credit recourse arrangements and volume of non-conforming residential mortgage loans originated from residential projects financed by BPPR which were retained in portfolio. This increase in mortgage loans was partially offset by a decline of $33 million in the BPNA reportable segment resulting from collections and charge-offs.

The decrease in consumer loans from December 31, 2011 to March 31, 2012 was derived from the BPPR reportable segment by $19 million and the BPNA reportable segment by $20 million. The decrease in the BPPR reportable segment is mostly attributable to charge-offs in the credit cards and personal loan portfolios. The decrease in the BPNA reportable segment was mainly due to loan run-off of the exited lines of business, including E-LOAN, and charge-offs.

The increase in consumer loans from March 31, 2011 to March 2012 was mainly due to an increase in the BPPR reportable segment of $99 million, mostly due to the acquisition of the AAdvantage co-branded credit card portfolio in August 2011, partially offset by a reduction of $89 million in the BPNA reportable segment mainly due to portfolio run-off at the exited lines of business, including E-LOAN.

The decrease in commercial and construction loans held-for-sale loans from March 31, 2011 to March 31, 2012 was principally driven by the BPPR reportable segment resulting from the loan sale executed in September 2011 to the joint venture PRLC Holdings LLC and to loan collections.

Covered loans were initially recorded at fair value. Their carrying value was approximately $4.2 billion at March 31, 2012, of which approximately 58% pertained to commercial loans, 13% to construction loans, 27% to mortgage loans and 2% to consumer loans. Note 7 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 $3.9 billion of their carrying value at March 31, 2012, was accounted for under ASC Subtopic 310-30. The decline in covered loans from December 31, 2011 and March 31, 2011 to March 31, 2012 was principally due to collections, partially offset by discount accretion. The increase in the accretable yield as shown in Table 8 from December 31, 2011 to March 31, 2012 was mainly due to increased cash flow expectations on the loan pools based on quarterly revisions of the portfolio. The increase in the accretable discount is recognized as interest income using the effective yield method over the estimated life of each applicable loan pool.

Table 8 - Activity in the carrying amount and accretable yield of covered loans accounted for under ASC 310-30


	Quarter ended						Quarter ended						Quarter ended
	March 31, 2012						December 31, 2011						March 31, 2011
				Carrying						Carrying						Carrying
	Accretable			amount			Accretable			amount			Accretable			amount
(In thousands)	Yield			of loans			Yield			of loans			Yield			of loans
Beginning balance	$	1,470,259		$	3,952,994		$	1,496,565		$	4,076,913		$	1,331,108		$	4,539,928
Accretion		(69,337	)		69,337			(82,866	)		82,866			(72,932	)		72,932
Changes in expected cash flows		141,597						56,560
Collections					(127,426	)					(123,308	)					(189,364	)

Ending balance	$	1,542,519		$	3,894,905		$	1,470,259		$	4,036,471		$	1,258,176		$	4,423,496
Allowance for loan losses (ALLL)					(94,559	)					(83,477	)					(5,297	)

Ending balance, net of ALLL	$	1,542,519		$	3,800,346		$	1,470,259		$	3,952,994		$	1,258,176		$	4,418,199

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Table 9 sets forth the activity in the FDIC loss share asset for the quarters ended March 31, 2012 and 2011. The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to the loss share protection from the FDIC, except that the amortization / accretion terms differ. Decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, as compared with the initial estimates, are recognized as a reduction to non-interest income prospectively over the life of the loss share agreements. This is because the indemnification asset balance is being reduced to the expected reimbursement amount from the FDIC.

Table 9 - Activity of loss share asset


	For the quarter ended March 31,
(In thousands)	2012			2011
Balance at beginning of year	$	1,915,128		$	2,410,219
(Amortization) accretion of loss share indemnification asset, net		(29,375	)		25,796
Credit impairment losses to be covered under loss sharing agreements		13,422			12,445
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded
commitments accounted for under ASC Subtopic 310-20		(248	)		(21,465	)
Payments received from FDIC under loss sharing agreements		(20,896	)		(583	)
Other adjustments attributable to FDIC loss sharing agreements		2,326			(107	)

Balance at March 31	$	1,880,357		$	2,426,305

Other assets

Table 10 provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated statements of condition at March 31, 2012, December 31, 2011 and March 31, 2011.

Table 10 - Breakdown of other assets


(In thousands)	March 31, 2012		December 31, 2011		Variance March 31, 2012 vs. December 31, 2011			March 31, 2011		Variance March 31, 2012 vs. March 31, 2011
Net deferred tax assets (net of valuation allowance)	$	424,193	$	429,691	$	(5,498	)	$	250,568	$	173,625
Investments under the equity method		335,762		313,152		22,610			294,559		41,203
Bank-owned life insurance program		238,870		238,077		793			239,103		(233	)
Prepaid FDIC insurance assessment		34,634		58,082		(23,448	)		129,093		(94,459	)
Other prepaid expenses		69,524		77,335		(7,811	)		66,719		2,805
Derivative assets		58,604		61,886		(3,282	)		65,169		(6,565	)
Securities sold not yet delivered		71,007		69,535		1,472			37,752		33,255
Others		206,938		214,635		(7,697	)		231,776		(24,838	)

Total other assets	$	1,439,532	$	1,462,393	$	(22,861	)	$	1,314,739	$	124,793

The decrease in other assets from December 31, 2011 to March 31, 2012 included a reduction in the prepaid FDIC insurance assessment due to amortization. This decrease was in part offset by higher investments accounted for under the equity method, mainly related to the 24.9% equity participation in PRLP 2011 Holdings LLC, the joint venture that holds the construction and commercial loans sold during 2011.

Other assets increased from March 31, 2011 to the same date in 2012, mainly as a result of higher net deferred tax assets, principally related to the allowance for loan losses and the treatment of charge-offs for tax purposes after the agreement reached between the Puerto Rico Treasury Department and the Corporation during mid-2011, offset in part by an increase in the deferred tax liability related to the Westernbank FDIC-assisted transaction. The increase in the investments accounted for under the equity method was impacted by the 24.9% ownership interest in PRLP 2011 Holdings LLS which amounted to $43 million at March 31, 2012, and an increase in the equity investment in Centro Financiero BHD, S.A of $12 million, partially offset by a decrease in the equity investment in EVERTEC, net of intra-entity eliminations, of $11 million. The increase in securities sold not yet delivered corresponded to transactions that settle shortly after quarter end. These increases were partially offset by a reduction in the prepaid FDIC insurance assessment due to amortization.

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Deposits and Borrowings

The composition of the Corporation’s financing to total assets at March 31, 2012 and December 31, 2011 is included in Table 11.

Table 11 - Financing to Total Assets


(In millions)	March 31, 2012		December 31, 2011		% increase (decrease) from 2011 to 2012			% of total assets 2012			2011
Non-interest bearing deposits	$	5,367	$	5,655		(5.1	)%		14.5	%		15.1	%
Interest-bearing core deposits		15,958		15,690		1.7			43.1			42.0
Other interest-bearing deposits		5,873		6,597		(11.0	)		15.9			17.7
Repurchase agreements		2,114		2,141		(1.3	)		5.7			5.7
Other short-term borrowings		751		296		153.7			2.0			0.8
Notes payable		1,844		1,856		(0.6	)		5.0			5.0
Others		1,175		1,194		(1.6	)		3.2			3.2
Stockholders’ equity		3,967		3,919		1.2			10.7			10.5

Deposits

A breakdown of the Corporation’s deposits at period-end is included in Table 12.

Table 12 - Deposits ending balances


(In thousands)	March 31, 2012		December 31, 2011		Variance March 31, 2012 vs. December 31, 2011			March 31, 2011		Variance March 31, 2012 vs. March 31, 2011
Demand deposits [1]	$	6,013,009	$	6,256,530	$	(243,521	)	$	5,496,313	$	516,696
Savings, NOW and money market deposits (non-brokered)		11,048,140		10,762,869		285,271			10,633,029		415,111
Savings, NOW and money market deposits (brokered)		212,996		212,688		308			50,000		162,996
Time deposits (non-brokered)		7,186,826		7,552,434		(365,608	)		8,565,437		(1,378,611	)
Time deposits (brokered CDs)		2,736,765		3,157,606		(420,841	)		2,451,895		284,870

Total deposits	$	27,197,736	$	27,942,127	$	(744,391	)	$	27,196,674	$	1,062

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

The decrease in demand deposits from December 31, 2011 to March 31, 2012 of $244 million was principally related to lower balance of deposits in trust by $561 million, partially offset by an increase in commercial accounts. The deposits in trust outstanding as of December 31, 2011 were short-term and were mostly associated with certain Puerto Rico government bond issuances. Brokered time deposits decreased by $421 million, primarily at Banco Popular de Puerto Rico. The Corporation raised brokered deposits in the latter months of 2011 to fund the repayment of the outstanding balance of the note that was issued to the FDIC as part of the Westernbank FDIC-assisted transaction. Following the repayment of the FDIC note, the use of brokered deposits was anticipated to fall and the funds were replaced with FHLB advances. The decrease in non-brokered time deposits of $366 million was principally at BPPR, in part due to lower deposit rate offerings more in line with market rates. Despite the decrease, the Corporation has successfully maintained the Corporation’s main relationships and has been able to substitute funds with other deposit types at lower rates. Also, lower deposit costs have contributed favorably to maintain the Corporation’s net interest margin above 4%. These decreases were partially offset by an increase of $286 million in total savings, NOW and money market deposits, both from the retail and commercial sectors.

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Borrowings

The Corporation’s borrowings amounted to $4.7 billion at March 31, 2012, compared with $4.3 billion at December 31, 2011 and $6.7 billion at March 31, 2011. The increase from December 31, 2011 to March 31, 2012 was related to higher short-term borrowings of $455 million, primarily in FHLB advances that substituted previous funding through brokered deposits. The decrease in borrowings from March 31, 2011 to the same date in 2012 was mostly related to a reduction of $2.0 billion in the note issued to the FDIC as part of the Westernbank transaction, which was fully repaid as of the end of 2011. Refer to Note 14 to the consolidated financial statements for detailed information on the Corporation’s borrowings at March 31, 2012, December 31, 2011 and March 31, 2011. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

Other liabilities

The increase in other liabilities from March 31, 2011 to March 31, 2012 resulted from an increase in the pension plan liability by $120 million primarily due to a lower discount rate and rate of return on plan assets assumed for 2012.

Stockholders’ Equity

Stockholders’ equity totaled $4.0 billion at March 31, 2012, $3.9 billion at December 31, 2011, and $3.8 billion at March 31, 2011. The increase from December 31, 2011 and March 31, 2011 was principally due to internal capital generation. The accumulated deficit was reduced by $47 million and $173 million, respectively. Refer to the consolidated statements of financial 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.

REGULATORY CAPITAL

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. The regulatory capital ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage at March 31, 2012, December 31, 2011, and March 31, 2011 are presented on Table 13. As of such dates, BPPR and BPNA were well-capitalized.

Table 13 - Capital adequacy data


(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
Risk-based capital:
Tier I capital	$	3,951,825		$	3,899,593		$	3,849,940
Supplementary (Tier II) capital		306,576			312,477			322,417

Total capital	$	4,258,401		$	4,212,070		$	4,172,357

Risk-weighted assets:
Balance sheet items	$	21,400,311		$	21,775,369		$	22,367,818
Off-balance sheet items		2,534,568			2,638,954			2,917,145

Total risk-weighted assets	$	23,934,879		$	24,414,323		$	25,284,963

Average assets	$	35,598,843		$	35,783,749		$	37,921,729

Ratios:
Tier I capital (minimum required – 4.00%)		16.51	%		15.97	%		15.23	%
Total capital (minimum required – 8.00%)		17.79			17.25			16.50
Leverage ratio *		11.10			10.90			10.15

All banks are required to have minimum tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification. At March 31, 2012 the capital adequacy minimum requirement for Popular, Inc., was (in thousands): Total Capital of $1,914,790, Tier I Capital of $957,395, and Tier I Leverage of $1,067,965, based on a 3% ratio, or $1,423,954, based on a 4% ratio, according to the Bank’s classification.

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The improvement in the Corporation’s regulatory capital ratios from December 31, 2011 to March 31, 2012 was principally due to a reduction in assets, changes in balance sheet composition including the increase in lower risk-assets such as mortgage loans, and internal capital generation.

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 certain 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). At March 31, 2012, December 31, 2011 and March 31, 2011, the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed 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. Effective March 31, 2011, 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. Furthermore, the Dodd-Frank Act, enacted in July 2010, has a provision to effectively phase-out the use of trust preferred securities issued before May 19, 2010 as Tier 1 capital over a 3-year period commencing on January 1, 2013. Trust preferred securities issued on or after May 19, 2010 no longer qualify as Tier 1 capital. At March 31, 2012, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. The Corporation has not issued any trust preferred securities since May 19, 2010. At March 31, 2012, the remaining $935 million in trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008. The Dodd-Frank Act includes an exemption from the phase-out provision that applies to these capital securities.

The Corporation’s tangible common equity to tangible assets ratio was 8.83% at March 31, 2012 and 8.62% at December 31, 2011. The Corporation’s Tier 1 common equity to risk-weighted assets ratio was 12.53% at March 31, 2012, compared with 12.10% at December 31, 2011.

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

Table 14 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2012 and December 31, 2011.


Table 14 - Reconciliation of tangible common equity and tangible assets
(In thousands, except share or per share information)	March 31, 2012			December 31, 2011
Total stockholders’ equity	$	3,967,071		$	3,918,753
Less: Preferred stock		(50,160	)		(50,160	)
Less: Goodwill		(647,911	)		(648,350	)
Less: Other intangibles		(61,798	)		(63,954	)

Total tangible common equity	$	3,207,202		$	3,156,289

Total assets	$	37,049,221		$	37,348,432
Less: Goodwill		(647,911	)		(648,350	)
Less: Other intangibles		(61,798	)		(63,954	)

Total tangible assets	$	36,339,512		$	36,636,128

Tangible common equity to tangible assets		8.83	%		8.62	%
Common shares outstanding at end of period		1,027,117,068			1,025,904,567
Tangible book value per common share	$	3.12		$	3.08

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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.

Table 15 provides a reconciliation of the Corporation’s total common stockholders’ equity (GAAP) to Tier 1 common equity at March 31, 2012 and December 31, 2011, as defined by the Federal Reserve Board, FDIC and other bank regulatory agencies (non-GAAP).


Table 15 - Reconciliation Tier 1 common equity
(In thousands)	March 31, 2012			December 31, 2011
Common stockholders’ equity	$	3,916,911		$	3,868,593
Less: Unrealized gains on available-for-sale securities, net of tax ^[1]		(196,878	)		(203,078	)
Less: Disallowed deferred tax assets ^[2]		(257,440	)		(249,325	)
Less: Intangible assets:
Goodwill		(647,911	)		(648,350	)
Other disallowed intangibles		(26,149	)		(29,655	)
Less: Aggregate adjusted carrying value of all non-financial equity investments		(1,175	)		(1,189	)
Add: Pension liability adjustment, net of tax and accumulated net gains (losses) on cash flow hedges ^[3]		211,747			216,798

Total Tier 1 common equity	$	2,999,105		$	2,953,794

[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 $138 million of the Corporation’s $424 million of net deferred tax assets at March 31, 2012 ($150 million and $430 million, respectively, at December 31, 2011), were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $257 million of such assets at March 31, 2012 ($249 million at December 31, 2011) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets”, were deducted in arriving at Tier 1 capital. The remaining $29 million of the Corporation’s other net deferred tax assets at March 31, 2012 ($31 million at December 31, 2011) 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 Board has granted interim capital relief for the impact of pension liability adjustment.

Contractual Obligations and Commercial Commitments

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

Purchase obligations include major legal and binding contractual obligations outstanding at March 31, 2012, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions.

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

At March 31, 2012, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, have not changed significantly from December 31, 2011. Refer to Note 14 for a breakdown of long-term borrowings by maturity.

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

The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2012.


Table 16 - Off-Balance sheet lending and other activities

	Amount of commitment - Expiration Period
(In millions)	Remaining 2012		Years 2013 - 2015		Years 2016 - 2018		Years 2019 - thereafter		Total
Commitments to extend credit	$	5,994	$	352	$	386	$	89	$	6,821
Commercial letters of credit		12		—		—		—		12
Standby letters of credit		100		21		11		—		132
Commitments to originate mortgage loans		56		11		—		—		67
Unfunded investment obligations		1		9		—		—		10

Total	$	6,163	$	393	$	397	$	89	$	7,042

At March 31, 2012, the Corporation maintained a reserve of approximately $9 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit, including $3 million of the unamortized balance of the contingent liability on unfunded loan commitments recorded with the Westernbank FDIC-assisted transaction. The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the Corporation’s allowance for loan losses methodology. This reserve for unfunded loan commitments remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of financial condition.

Refer to Note 18 to the consolidated financial statements for additional information on credit commitments and contingencies.

Guarantees associated with loans sold / serviced

At March 31, 2012, the Corporation serviced $3.3 billion in residential mortgage loans subject to lifetime credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs, compared with $3.5 billion at December 31, 2011. The Corporation’s last sale of mortgage loans subject to credit recourse was in 2009.

In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the

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total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. 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 the related property.

In the case of Puerto Rico, most claims are settled by repurchases of delinquent loans, the majority of which are greater than 90 days past due. The average time period to prepare an initial response to a repurchase request is from 30 to 120 days from the initial written notice depending on the type of the repurchase request. Failure by the Corporation to respond to a request for repurchase on a timely basis could result in a deterioration of the seller/servicer relationship and the seller/servicer’s overall standing. In certain instances, investors could require additional collateral to ensure compliance with the servicer’s repurchase obligation or cancel the seller/servicer license and exercise their rights to transfer the servicing to an eligible seller/servicer.

The table below presents the delinquency status of the residential mortgage loans serviced by the Corporation that are subject to lifetime credit recourse provisions.


Table 17 - Delinquency of residential mortgage loans subject to lifetime credit recourse
(In thousands)	March 31, 2012			December 31, 2011
Total portfolio	$	3,294,451		$	3,456,933
Days past due:
30 days and over	$	467,519		$	500,524
90 days and over	$	196,335		$	215,597
As a percentage of total portfolio:
30 days past due or more		14.19	%		14.48	%
90 days past due or more		5.96	%		6.24	%

During the quarter ended March 31, 2012, the Corporation repurchased approximately $50 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions, compared with $63 million for the same quarter in the previous year. There are no particular loan characteristics, such as loan vintages, loan type, loan-to-value ratio, or other criteria, that denote any specific trend or a concentration of repurchases in any particular segment. Based on historical repurchase experience, the loan delinquency status is the main factor which causes the repurchase request. The current economic situation has provoked a closer monitoring by investors of loan performance and recourse triggers, thus causing an increase in loan repurchases.

At March 31, 2012, there were 23 outstanding unresolved claims related to the credit recourse portfolio with a principal balance outstanding of $3.5 million, compared with 19 and $2.1 million, respectively, at December 31, 2011. The outstanding unresolved claims at March 31, 2012 pertained to FNMA (December 31, 2011 – pertained to FNMA and FHLMC).

At March 31, 2012, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $56 million, compared with $59 million at December 31, 2011 and $55 million at March 31, 2011.

Table 18 presents the changes in the Corporation’s liability for estimated losses related to loans serviced with credit recourse provisions for the quarters ended March 31, 2012 and 2011.


Table 18 – Activity in credit recourse liability
(In thousands)	2012			2011
Balance as of beginning of period	$	58,659		$	53,729
Additions for new sales		—			—
Provision for recourse liability		4,232			9,765
Net charge-offs / terminations		(6,776	)		(8,176	)

Balance as of end of period	$	56,115		$	55,318

The decrease of $5.5 million in the provision for credit recourse liability experienced for the quarter ended March 31, 2012, when compared with the same quarter in 2011, was mainly driven by the following positive factors: (1) the improvement in the probability

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of default (PD) component which decreased by 77 basis points, prompted by an improvement in the credit quality of mortgage loans subject to credit recourse provisions, and (2) an improvement of 72 basis points in the foreclosure rate and (3) the improvement in the constant prepayments rates resulting from the current behavior of the market interest rate scenario.

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” 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, 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 ratios and 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 are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans amounted to $0.4 million in unpaid principal balance with losses amounting to $0.1 million for the quarter ended March 31, 2012. A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended June 30, 2011, the Corporation’s banking subsidiary, BPPR, reached an agreement (the “June 2011 agreement”) with the FDIC, as receiver for a local Puerto Rico institution, and the financial institution with respect to a loan servicing portfolio that BPPR services since 2008, related to FHLMC and GNMA pools. The loans were originated and sold by the financial institution and the servicing rights were transferred to BPPR in 2008. As part of the 2008 servicing agreement, the financial institution was required to repurchase from BPPR any loans that BPPR, as servicer, was required to repurchase from the investors under representation and warranty obligations. As part of the June 2011 agreement, the Corporation received cash to discharge the financial institution from any repurchase obligation and other claims over the serviced portfolio. At March 31, 2012, the related representation and warranty reserve amounted to $8.6 million and the related serviced portfolio approximated $3.4 billion, compared with $8.5 million and $3.5 billion, respectively, at December 31, 2011.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2012, the Corporation serviced $17.2 billion in mortgage loans for third-parties, including the loans serviced with credit recourse, compared with $17.3 billion at December 31, 2011. The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At March 31, 2012, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $34 million, compared with $32 million at December 31, 2011. 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.

At March 31, 2012, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. 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 made certain

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representations relating to borrower creditworthiness, loan documentation and collateral, which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At March 31, 2012 and December 31, 2011, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $11 million. E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of the outstanding agreements with major counterparties were settled during during 2010 and 2011.

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 of time between the loan’s funding date and the loan repurchase date, as observed in the historical loan data. The liability is estimated as follows: (1) three year average of disbursement amounts (two year historical and one year projected) are used to calculate an average quarterly amount; (2) the quarterly average is annualized and multiplied by the repurchase distance, which currently averages approximately three years, to determine a liability amount; and (3) the calculated reserve is compared to current claims and disbursements to evaluate adequacy. The Corporation’s success rate in clearing the claims in full or negotiating lesser payouts has been fairly consistent. On average, the Corporation avoided paying on 49% of claimed amounts during the 24-month period ended March 31, 2012 (51% during the 24-month period ended December 31, 2011). On the remaining 51% of claimed amounts, the Corporation either repurchased the balance in full or negotiated settlements. For the accounts where the Corporation settled, it averaged paying 57% of claimed amounts during the 24-month period ended March 31, 2012 (59% during the 24-month period ended December 31, 2011). In total, during the 24-month period ended March 31, 2012, the Corporation paid an average of 34% of claimed amounts (24-month period ended December 31, 2011 – 33%).

E-LOAN’s outstanding unresolved claims related to representation and warranty obligations from mortgage loan sales prior to 2009 are presented in the table below.


Table 19 - ELOAN’s outstanding unresolved claims from loans sold
(In thousands)	March 31, 2012		December 31, 2011
By Counterparty:
GSEs	$	432	$	432
Whole loan and private-label securitization investors		1,055		360

Total outstanding claims by counterparty	$	1,487	$	792

By Product Type:
1st lien (Prime loans)	$	1,487	$	792

Total outstanding claims by product type	$	1,487	$	792

The outstanding claims balance from private-label investors are comprised by one counterparty at March 31, 2012 and at December 31, 2011.

In the case of E-LOAN, the Corporation indemnifies the lender, repurchases the loan, or settles the claim, generally for less than the full amount. Each repurchase case is different and each lender / servicer has different requirements. The large majority of the loans repurchased have been greater than 90 days past due at the time of repurchase and are included in the Corporation’s non-performing loans. Historically, claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation. The table that follows presents the changes in the Corporation’s liability for estimated losses associated with customary representations and warranties related to loans sold by E-LOAN for the quarters ended March 31, 2012 and 2011.

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Table 20 – Changes in liability for estimated losses related to loans sold by E-LOAN
(In thousands)	2012		2011
Balance as of beginning of period	$	10,625	$	30,659
Additions for new sales		—		—
Provision for representation and warranties		—		83
Net charge-offs / terminations		—		(54	)
Other - settlements paid		—		—

Balance as of end of period	$	10,625	$	30,688

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, the Risk Management Group independently monitors and reports adherence with established market and liquidity policies and recommends actions to enhance and strengthen controls surrounding interest, liquidity, and market risks. The ALCO meets on a weekly basis and reviews the Corporation’s current and forecasted asset and liability position as well as desired pricing strategies and other relevant topics. Also, on a monthly basis the ALCO 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. For a detailed description of the techniques used to measure the potential impact of the Corporation’s exposure to market risk from changing interest rates refer to the 2011 Annual Report.

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 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 March 31, 2013. Under a 200 basis points rising rate

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scenario, projected net interest income increases by $30.1 million, while under a 400 basis points rising rate scenario, projected net interest income increases by $44.1 million, when compared against the Corporation’s flat or unchanged interest rates forecast scenario. Given the fact that at March 31, 2012 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 current EVE sensitivity is focused on a rising 200 basis point parallel shock. Management has a defined limit for the increase in EVE sensitivity resulting from the shock scenario.

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.

Trading

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

At March 31, 2012, the Corporation held for trading, securities with a fair value of $404 million, representing approximately 1% of the Corporation’s total assets, compared with $436 million and 1% at December 31, 2011. Mortgage-backed securities represented 87% of the trading portfolio at March 31, 2012, compared with 75% at the end of 2011. The mortgage-backed securities are investment grade securities. Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account loss of $2.1 million for the quarter ended March 31, 2012. Table 21 provides the composition of the trading portfolio at March 31, 2012 and December 31, 2011.

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Table 21 - Trading Portfolio
	March 31, 2012					December 31, 2011
(Dollars in thousands)	Amount		Weighted Average Yield [1]			Amount		Weighted Average Yield [1]
Mortgage-backed securities (includes related trading derivatives)	$	352,410		4.42	%	$	325,205		4.56	%
Collateralized mortgage obligations		3,484		4.40			3,545		4.69
Puerto Rico and U.S. Government obligations		28,038		4.89			90,648		4.87
Interest-only strips		1,325		12.94			1,378		12.80
Other		19,036		5.94			15,555		4.32

Total	$	404,293		4.55	%	$	436,331		4.64	%

[1]	Not on a taxable equivalent basis.

The Corporation’s trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk (“VAR”), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5-day holding period, given a 99% probability. Under the Corporation’s current policies, trading exposures cannot exceed 2% of the trading portfolio market value of each subsidiary, subject to a cap.

The Corporation’s trading portfolio had a 5-day VAR of approximately $2.2 million, assuming a confidence level of 99%, for the last week in March 2012. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

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

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.

The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.

Refer to Note 21 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At March 31, 2012, approximately $5.6 billion, or 97%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments.

At March 31, 2012, 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”). Additionally, the Corporation reported $58 million of financial assets that were measured at fair value on a nonrecurring basis at March 31, 2012, all of which were classified as Level 3 in the hierarchy.

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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 $42 million at March 31, 2012, of which $26 million were Level 3 assets and $16 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from an average of two indicative local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3.

There were $2 million in transfers from Level 2 to Level 3 and $8 million in transfers from Level 3 to Level 2 for financial instruments measured at fair value on a recurring basis during the quarter ended March 31, 2012. The transfers from Level 2 to Level 3 of trading mortgage-backed securities were the result of a change in valuation technique to a matrix pricing model, based on indicative prices provided by brokers. The transfers from Level 3 to Level 2 of trading mortgage-backed securities resulted from observable market data becoming available for these securities. There were no transfers in and/or out of Level 1 during the quarter ended March 31, 2012. 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 at March 31, 2012. Also, refer to the Critical Accounting Policies / Estimates in the 2011 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 ended March 31, 2012, 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 ended March 31, 2012, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.

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

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

At March 31, 2012, the Corporation’s portfolio of trading and investment securities available-for-sale amounted to $5.5 billion and represented 96% of the Corporation’s assets measured at fair value on a recurring basis. At March 31, 2012, net unrealized gains on the trading and available-for-sale investment securities portfolios approximated $24 million and $223 million, respectively. Fair values for most of the Corporation’s trading and investment securities available-for-sale were classified as Level 2. Trading and investment securities available-for-sale classified as Level 3, which were the securities that involved the highest degree of judgment, represented less than 1% of the Corporation’s total portfolio of trading and investment securities available-for-sale.

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Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”), which amounted to $156 million at March 31, 2012, 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 10 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 were 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 ended March 31, 2012, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $0.2 million recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $0.1 million resulting from the Corporation’s own credit standing adjustment and a loss of $0.3 million from the assessment of the counterparties’ credit risk.

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.

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 occasional disruptions.

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, 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 Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank of New York (the “Fed”), in addition to maintaining securities available for pledging in the repo markets.

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 Corporation has adopted policies and limits to monitor more effectively the Corporation’s liquidity position and that of the banking subsidiaries. Additionally, contingency funding

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plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

Deposits, including customer deposits, brokered deposits, and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 73% of the Corporation’s total assets at March 31, 2012, compared with 75% at December 31, 2011. Refer to the Financial Condition Analysis section of this MD&A for explanations on the variances in the main deposit categories. During 2012, the reduction in deposits, which included brokered deposits, was compensated with funds raised through short-term FHLB advances.

In addition to traditional deposits, the Corporation maintains borrowing arrangements. At March 31, 2012, these borrowings consisted primarily of advances with the FHLB of $1.4 billion, assets sold under agreement to repurchase of $2.1 billion, junior subordinated deferrable interest debentures of $917 million (net of discount) and term notes of $279 million. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 14 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

During 2011 and 2012, the Corporation did not issue new registered debt in the capital markets.

The Corporation’s liquidity position has remained strong. There were no transactions during the first quarter of 2012, outside transactions in the ordinary course of business, that impacted significantly the Corporation’s liquidity position.

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 has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of outstanding obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.

Note 32 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the 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.

The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the 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 12 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. 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 78% of total deposits, at March 31, 2012, compared with $21.3 billion, or 76% of total deposits, at December 31, 2011. Core deposits financed 66% of the Corporation’s earning assets at March 31, 2012 and December 31, 2011.

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Certificates of deposit with denominations of $100,000 and over at March 31, 2012 totaled $3.9 billion, or 14% of total deposits, compared with $4.2 billion, or 15%, at December 31, 2011. Their distribution by maturity at March 31, 2012 was as follows:

Table 22 - Distribution by maturity of certificate of deposits of $100,000 and over


(In thousands)
3 months or less	$	1,767,374
3 to 6 months		717,443
6 to 12 months		433,798
Over 12 months		938,318

	$	3,856,933

At March 31, 2012, approximately 8% of the Corporation’s assets were financed by brokered deposits, compared with 9% at December 31, 2011. The Corporation had $2.9 billion in brokered deposits at March 31, 2012, compared with $3.4 billion at December 31, 2011. Brokered deposits, which are typically sold through an intermediary to retail investors, provide access to longer-term funds and provide the ability to raise additional funds without pressuring retail deposit pricing in the Corporation’s local markets. An unforeseen disruption in the brokered deposits market, stemming from factors such as legal, regulatory or financial risks, could adversely affect the Corporation’s ability to fund a portion of the Corporation’s operations and/or meet its obligations.

In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts.

To the extent that the banking subsidiaries are unable to obtain sufficient liquidity through core deposits, the Corporation may meet its liquidity needs through short-term borrowings by pledging securities for borrowings under repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral.

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At March 31, 2012 and December 31, 2011, the banking subsidiaries had credit facilities authorized with the FHLB aggregating $2.5 billion and $2.0 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $1.4 billion at March 31, 2012 and $0.9 billion at December 31, 2011. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. Refer to Note 14 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.

The banking subsidiaries have borrowing facilities at the Fed’s discount window. The borrowing capacity approximated $3.2 billion at March 31, 2012, compared with $2.6 billion at December 31, 2011, and remained unused as of both dates. These borrowing facilities are a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under these borrowing facilities is dependent upon the balance of performing loans and securities pledged as collateral and the haircuts assigned to such collateral.

During the quarter ended March 31, 2012, the Corporation’s bank holding companies did not make any capital contributions to BPNA and BPPR.

At March 31, 2012, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances if desired, no assurance can be given that they would be able to replace those funds in the future if the Corporation’s financial condition or general market conditions were to change. The Corporation’s financial flexibility will be severely constrained if its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of changes in interest rates, a liquidity crisis or any other factors, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

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Bank Holding Companies

The Corporation’s bank holding companies (“BHCs”) include Popular, Inc. (“PIHC”), Popular North America, Inc. (“PNA”) and Popular International Bank, Inc. (“PIBI”) The principal sources of funding for the holding companies include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries (subject to regulatory limits and authorizations) and from equity method investees, asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from new borrowings or stock issuances. The Corporation’s banking subsidiaries are required to obtain approval from the Federal Reserve System and their respective applicable state banking regulator prior to declaring or paying dividends to the Corporation.

The principal use of these funds include capitalizing its banking subsidiaries, the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest debentures (related to trust preferred securities).

Cash outflows and outflows from financing activities at the BHCs during the first quarter of 2012 have not been significant. There was a $50 million capital contribution from PIHC to PNA as part of an internal reorganization. Refer to Note 32 to the consolidated financial statements for a description of the internal reorganization.

Note 32 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s holding companies. There were no individual significant cash inflows or outflows outside the normal course of business at the holding companies during the first quarter of 2012. During the first quarter of 2011, the main source of cash flows for the parent holding company was the repayment of loans made to subsidiaries and affiliates, while the principal cash outflow was for the repayment of term notes.

Another use of liquidity at the parent holding company is the payment of dividends on preferred stock. The preferred stock dividends declared amounted to $931 thousand for the quarter ended March 31, 2012, of which $620 thousand were paid during the quarter. The preferred stock dividends paid were financed by issuing new shares of common stock to the participants of the Corporation’s qualified employee savings plans. The Corporation is required to obtain approval from the Federal Reserve System prior to declaring or paying dividends, incurring, increasing or guaranteeing debt or making any distributions on its trust preferred securities or subordinated debt. The Corporation anticipates that any future preferred stock dividend payments would continue to be financed with the issuance of new common stock in connection with its qualified employee savings plans. The Corporation is not paying dividends to holders of its common stock.

The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings together with higher credit spreads in general. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. However, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. The Corporation has an open-ended, automatic shelf registration statement filed and effective with the Securities and Exchange Comission, which permits the Corporation to issue an unspecified amount of debt or equity securities.

A principal use of liquidity at the BHCs is to ensure its banking subsidiaries are adequately capitalized. During 2011 and the first quarter of 2012, the BHCs were not required to make any capital contributions to its banking subsidiaries. Management does not expect either of the banking subsidiaries to require capitalizations for the foreseeable future.

Note 32 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the three BHCs. The loans held-in-portfolio in such financial statements are principally associated with intercompany transactions. The investment securities held-to-maturity at the parent holding company, amounting to $185 million at March 31, 2012, consisted of subordinated notes from BPPR.

The outstanding balance of notes payable at the BHCs amounted to $1.2 billion at March 31, 2012 and December 31, 2011. These borrowings are principally junior subordinated debentures (related to trust preferred securities), including those issued to the U.S. Treasury as part of the Troubled Asset Relief Program (“TARP”), and unsecured senior debt (term notes). The repayment of the BHCs obligations represents a potential cash need which is expected to be met with internal liquidity resources and new borrowings. Increasing or guaranteeing new debt would be subject to the prior approval from the Fed.

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.

As indicated in Note 31 to the consolidated financial statements, in early May 2012, the Corporation received a cash dividend of $131 million from its investment in EVERTEC. As a result of the dividend, the Corporation’s investment in the entity, which as of March 31, 2012 amounted to $192 million (net of intra-entity eliminations), was reduced by the amount of the dividend. The Corporation’s participation interest on the entity continues to be 49%.

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Obligations Subject to Rating Triggers or Collateral Requirements

The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $21 million in deposits at March 31, 2012 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $52 million at March 31, 2012, with the Corporation providing collateral totaling $65 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 have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in the Guarantees section of this MD&A, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations approximated $139 million at March 31, 2012. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

Non-Performing Assets

Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 23.

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 of secured loans past due as to principal and interest is charged-off not later than 365 days past due. However, in the case of collateral dependent loans individually evaluated for impairment, the excess of the recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Overdrafts are generally charged-off no later than 60 days past their due date.

•

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. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 18 months delinquent as to principal or interest. The principal repayment on these loans is insured.

•

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. Overdrafts in excess of 60 days are generally charged-off no later than 60 days past their due date.

•

Troubled debt restructurings (“TDRs”)—loans classified as TDRs are typically in non-accrual status at the time of the

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modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.

•

Covered loans acquired in the Westernbank FDIC-assisted transaction, except for revolving lines of credit, 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.

Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. Given the significant amount of covered 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) would result in a significant distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the non-accretable balance, the net charge-off ratio including the acquired loans is lower for portfolios that have significant amounts of covered loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across periods, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures, excluding covered loans and related amounts from both the numerator and denominator, provides a better perspective into underlying trends related to the quality of its loan portfolio.

At March 31, 2012, non-performing loans held-in-portfolio secured by real estate, excluding covered loans, amounted to $1.3 billion in the Puerto Rico operations and $291 million in the U.S. mainland operations. These figures compare to $1.3 billion in the Puerto Rico operations and $324 million in the U.S. mainland operations at December 31, 2011.

In addition to the non-performing loans included in Table 23, there were $42 million of non-covered performing loans at March 31, 2012, mostly related to the commercial loan portfolio, which based on management’s opinion, are currently subject to potential future classification to non-performing and are considered impaired, compared with $27 million at December 31, 2011.

153


Table 23 - Non-Performing Assets
(Dollars in thousands)	March 31, 2012			As a percentage of loans HIP by category [2]			December 31, 2011			As a percentage of loans HIP by category [2]			March 31, 2011			As a percentage of loans HIP by category [2]
Commercial	$	818,678			8.3	%	$	830,092			8.3	%	$	699,993			6.7	%
Construction		69,470			29.4			96,286			40.1			126,549			43.7
Legacy		79,077			13.1			75,660			11.7			150,117			16.7
Lease financing		5,673			1.0			5,642			1.0			5,151			0.9
Mortgage		667,217			11.9			686,502			12.4			578,106			11.8
Consumer		41,688			1.1			43,668			1.2			53,896			1.5

Total non-performing loans held-in-portfolio, excluding covered loans		1,681,803			8.2	%		1,737,850			8.4	%		1,613,812			7.8	%
Non-performing loans held-for-sale [5]		232,293						262,302						464,577
Other real estate owned (“OREO”), excluding covered OREO		193,768						172,497						156,888

Total non-performing assets, excluding covered assets	$	2,107,864					$	2,172,649					$	2,235,277
Covered loans and OREO [1]		203,254						192,771						79,075

Total non-performing assets	$	2,311,118					$	2,365,420					$	2,314,352

Accruing loans past due 90 days or more [3]	$	328,757					$	316,614					$	332,384

Ratios excluding covered loans[4]:
Non-performing loans held-in-portfolio to loans held-in-portfolio		8.21	%					8.44	%					7.80	%
Allowance for loan losses to loans held-in-portfolio		3.25						3.35						3.52
Allowance for loan losses to non-performing loans, excluding held-for-sale		39.53						39.73						45.07

Ratios including covered loans:
Non-performing loans held-in-portfolio to loans held-in-portfolio		7.18	%					7.30	%					6.41	%
Allowance for loan losses to loans held-in-portfolio		3.25						3.27						2.90
Allowance for loan losses to non-performing loans, excluding held-for-sale		45.27						44.76						45.26

HIP = “held-in-portfolio”

[1]

The amount consists of $93 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $110 million in covered OREO as of March 31, 2012 (December 31, 2011—$84 million and $109 million, respectively; March 31, 2011—$13 million and $66 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

[2]	Loans held-in-portfolio used in the computation exclude $4.2 billion in covered loans at March 31, 2012 (December 31, 2011—$4.3 billion; March 31, 2011—$4.7 billion).

[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 $1.1 billion at March 31, 2012 (December 31, 2011—$1.2 billion; March 31, 2011—$1.1 billion). 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.

[4]

These asset quality ratios have been adjusted to remove the impact of covered loans and covered foreclosed property. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting.

[5]

Non-performing loans held-for-sale consist of $206 million in construction loans, $26 million in commercial loans and $53 thousand in mortgage loans as of March 31, 2012 (December 31, 2011—$236 million, $26 million and $59 thousand, respectively; March 31, 2011—$392 million $62 million, and $11 million, respectively).

154

Table 24 summarizes the activity in the allowance for loan losses and selected loan loss statistics for the quarters ended March 31, 2012 and 2011.

Table 24-Allowance for Loan Losses and Selected Loan Losses Statistics


	Quarters ended March 31,
(Dollars in thousands)	2012			2012		2012			2011			2011		2011
	Non-covered loans			Covered loans		Total			Non-covered loans			Covered loans		Total
Balance at beginning of period	$	690,363		$	124,945	$	815,308		$	793,225			—	$	793,225
Provision for loan losses		82,514			18,209		100,723			59,762		$	15,557		75,319

		772,877			143,154		916,031			852,987			15,557		868,544

Losses:
Commercial		67,246			4,102		71,348			65,564			1,707		67,271
Construction		1,676			264		1,940			10,736			4,345		15,081
Lease financing		1,217			—		1,217			1,946			—		1,946
Legacy		8,473			—		8,473			23,504			—		23,504
Mortgage		18,823			203		19,026			9,562			—		9,562
Consumer		42,596			89		42,685			53,391			346		53,737

		140,031			4,658		144,689			164,703			6,398		171,101

Recoveries:
Commercial		12,863			—		12,863			9,552			—		9,552
Construction		1,881			—		1,881			1,951			—		1,951
Lease financing		1,063			—		1,063			767			—		767
Legacy		4,915			—		4,915			3,255			—		3,255
Mortgage		1,369			—		1,369			1,315			—		1,315
Consumer		9,831			—		9,831			8,415			—		8,415

		31,922			—		31,922			25,255			—		25,255

Net loans charged-off:
Commercial		54,383			4,102		58,485			56,012			1,707		57,719
Construction		(205	)		264		59			8,785			4,345		13,130
Lease financing		154			—		154			1,179			—		1,179
Legacy		3,558			—		3,558			20,249			—		20,249
Mortgage		17,454			203		17,657			8,247			—		8,247
Consumer		32,765			89		32,854			44,976			346		45,322

		108,109			4,658		112,767			139,448			6,398		145,846

Net (recoveries) write-downs related to loans transferred to loans held-for-sale		—			—		—			13,807			—		13,807

Balance at end of period	$	664,768		$	138,496	$	803,264		$	727,346		$	9,159	$	736,505

Ratios:
Annualized net charge-offs to average loans held-in-portfolio		2.13	%				1.83	%		2.74	%				2.31	%
Provision for loan losses to net charge-offs		0.76 x					0.89 x			0.43 x					0.52 x

Refer to the “Allowance for Loan Losses” subsection in this MD&A for tables detailing the composition of the allowance for loan losses between general and specific reserves and for qualitative information on the main factors driving the variances.

155

Table 25 presents annualized net charge-offs to average loans held-in-portfolio (“HIP”) for the non-covered portfolio by loan category for the quarters ended March 31, 2012 and 2011.

Table 25 - Annualized Net Charge-offs to Average Loans HIP (non-covered loans)


	Quarter ended March 31,
	2012			2011
Commercial		2.21	%		2.16	%
Construction		(0.35	)		11.58
Lease financing		0.11			0.84
Legacy		2.23			8.31
Mortgage		1.29			0.74
Consumer		3.58			4.90

Total annualized net charge-offs to average loans held-in-portfolio		2.13	%		2.74	%

Note: Average loans held-in-portfolio excludes 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 Corporation’s annualized net charge-offs to average non-covered loans held-in-portfolio ratio decreased 61 basis points, from 2.74% for the quarter ended March 31, 2011 to 2.13% for the quarter ended March 31, 2012. Excluding covered loans, net charge-offs for the first quarter of 2012 declined by $31.3 million, compared with the quarter ended March 31, 2011, driven principally by improved credit performance at both the BPPR and BPNA reportable segments.

Improvements in credit quality metrics are mainly driven by steps taken by the Corporation to address problem loans and reduce the overall credit risks of its loan portfolios, as well as certain stabilization in the general economic conditions. These actions included (i) the loan portfolio reclassifications to held-for-sale that took place in the fourth quarter of 2010, (ii) a lower volume of commercial and construction loans, mainly related to certain lending products exited by the Corporation at the BPNA reportable segment, and (iii) intensification of loss mitigation efforts.

Commercial loans

As shown in Table 23, the level of non-performing commercial non-covered loans held-in-portfolio at March 31, 2012, compared to December 31, 2011, decreased on a consolidated basis by $11 million, driven by a decrease of $10 million in the BPPR reportable segment and a decrease of $1 million in the BPNA reportable segment. The percentage of non-performing commercial non-covered loans held-in-portfolio to commercial non-covered loans held-in-portfolio remained unchanged at 8.3% at December 31, 2011 and March 31, 2012. The ratio of non-performing commercial loans to commercial loans held-in-portfolio was 6.7% at March 31, 2011. This increase was mainly attributed to the economic conditions in Puerto Rico, which impacted the commercial loan portfolio. Nevertheless, certain credit quality metrics have been trending in a positive direction at the BPPR reportable segment suggesting the economic conditions are gradually improving.

Commercial non-performing loans held-in-portfolio in the BPPR reportable segment decreased by $10 million from December 31, 2011 to March 31, 2012. This decrease is mostly attributed to one commercial loan with an outstanding principal balance of $20.1 million classified as a troubled-debt restructuring (“TDR”) in 2011, which was returned to accrual status. Although, non-performing commercial loans held-in-portfolio remained at high levels, most credit quality metrics, such as delinquencies and net charge-offs, showed improvements during the first quarter of 2012. The level of non-performing commercial loans held-in-portfolio in the BPNA reportable segment remained stable from December 31, 2011, as the U.S. mainland continued to reflect signs of stabilization.

156

Table 26 provides information on commercial non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 26 - Commercial Non-Performing Loans and Net Charge-offs


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPPR Reportable Segment:
Non-performing commercial loans	$	620,916		$	631,171		$	526,930
Non-performing commercial loans to commercial loans HIP, both excluding covered loans and loans held-for-sale		9.66	%		9.75	%		7.91	%
Commercial loan net charge-offs	$	37,518					$	38,528
Commercial loan net charge-offs (annualized) to average commercial loans HIP, excluding covered loans and loans held-for-sale		2.34	%					2.32	%
BPNA Reportable Segment:
Non-performing commercial loans	$	197,762		$	198,921		$	173,063
Non-performing commercial loans to commercial loans HIP, excluding loans held-for-sale		5.75	%		5.68	%		4.63	%
Commercial loan net charge-offs	$	16,865					$	17,484
Commercial loan net charge-offs (annualized) to average commercial loans HIP, excluding loans held-for-sale		1.96	%					1.86	%

For the quarter ended March 31, 2012, additions to commercial loans in non-performing status at the BPPR and BPNA reportable segments amounted to $86 million and $31 million, respectively. At the BPPR reportable segment, inflows to non-performing status declined by $37 million, when compared to the quarter ended March 31, 2011, while the BPNA reportable segment continued to show stabilization in terms of delinquencies. As explained before, the commercial loan portfolio for the BPPR reportable segment reflected positive trends due to a moderate improvement in the economic conditions.

Table 27 presents the changes in non-performing commercial non-covered loans held in-portfolio for the quarter ended March 31, 2012 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 27 - Commercial Loans HIP


	For the quarter ended March 31, 2012
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance	$	631,171		$	198,921		$	830,092
Plus:
New non-performing loans		86,446			30,608			117,054
Advances on existing non-performing loans		—			227			227
Less:
Non-performing loans transferred to OREO		(5,481	)		(10,434	)		(15,915	)
Non-performing loans charged-off		(37,924	)		(15,121	)		(53,045	)
Loans returned to accrual status / loan collections		(53,296	)		(6,439	)		(59,735	)

Ending balance March 31, 2012	$	620,916		$	197,762		$	818,678

In the non-covered loans held-in-portfolio, there were 7 commercial loan relationships greater than $10 million in non-accrual status with an aggregate outstanding balance of approximately $96 million at March 31, 2012, compared with 6 commercial loan relationships with an outstanding balance of approximately $113 million at December 31, 2011.

The Corporation’s commercial loan net charge-offs, excluding net charge-offs for covered loans, for the quarter ended March 31, 2012, decreased by $1.6 million, when compared with the quarter ended March 31, 2011.The decrease is mainly driven by a slight reduction of $1.0 million in the BPPR reportable segment. Commercial net charge-offs at both reportable segments remained relatively stable attributed to lower levels of problem loans and certain stabilization in the economic conditions, evidenced by lower inflows to non-performing loans. For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent commercial loans amounted to approximately $18.0 million in the BPPR reportable segment and $13.2 million in the BPNA reportable segment.

157

The allowance for loan losses corresponding to commercial loans held-in-portfolio, excluding covered loans, amounted to $314 million or 3.18% of that portfolio at March 31, 2012, compared with $369 million or 3.70% at December 31, 2011. The ratio of allowance to non-performing loans held-in portfolio in the commercial loan category was 38.30% at March 31, 2012, compared with 44.50% at December 31, 2011. The decrease in the ratio was principally driven by a lower allowance for loan losses for the commercial loan portfolio at both the BPPR and BPNA reportable segments. The decrease in the allowance for loan losses was mainly related to the enhancement to the allowance for loan losses methodology, during the first quarter of 2012, coupled with a lower loss trend.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $6.5 billion at March 31, 2012, of which $3.0 billion was secured with owner occupied properties, compared with $6.7 billion and $3.1 billion, respectively, at December 31, 2011. CRE non-performing loans, excluding covered loans amounted to $671 million at March 31, 2012, compared with $636 million at December 31, 2011. The CRE non-performing loans ratios for the Corporation’s Puerto Rico and U.S. mainland operations were 13.90% and 6.08%, respectively, at March 31, 2012, compared with 12.58% and 5.91%, respectively, at December 31, 2011.

Commercial and industrial loans held-in-portfolio modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving lines of credit to long term loans. Commercial real estate loans held-in-portfolio modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. At March 31, 2012, the Corporation’s commercial loans held-in-portfolio, excluding covered loans, included a total of $195 million of loan modifications for the BPPR reportable segment and $13 million for the BPNA reportable segment, which were considered TDRs since they involved granting a concession to borrowers under financial difficulties. The outstanding commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings amounted to $3 million in the BPPR reportable segment and no commitments outstanding in the BPNA reportable segment at March 31, 2012.

The commercial loan TDRs in non-performing status for the BPPR and BPNA reportable segments at March 31, 2012 amounted to $138 million and $13 million, respectively. Commercial loans that have been modified as part of loss mitigation efforts were evaluated for impairment, resulting in a specific reserve of $7 million for the BPPR reportable segment and none for the BPNA reportable segment at March 31, 2012.

Construction loans

As shown in Table 23, non-performing construction loans held-in-portfolio decreased by $27 million from December 31, 2011 to March 31, 2012 mostly related to the BPNA reportable segment, which decreased by $29 million when compared with December 31, 2011. This decrease was principally driven by the resolution of three large construction loans, unit sales on several projects and minimal inflows of new construction non-performing loans. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, decreased from 40.1% at December 31, 2011 to 29.4% at March 31, 2012. The ratio of non-performing construction loans to construction loans held-in-portfolio was 43.7% at March 31, 2011.

For the quarter ended March 31, 2012, non-covered construction loans held-in-portfolio newly classified to non-performing status at the BPPR reportable segment amounted to $6 million, which represented a decrease of $6 million, when compared to the additions for quarter ended March 31, 2011. There were no additions to construction loans held-in-portfolio to non-performing status at the BPNA reportable segment, decreasing by $7 million when compared to the quarter ended March 31, 2011. The decline in non-performing loans inflows is attributable to a lower level of problem loans remaining in the portfolio, principally prompted by a significant portion of the BPPR reportable segment construction non-covered loans being classified as held-for-sale and the downsizing of the construction loan portfolio at the BPNA reportable segment.

158

Table 28 presents the changes in non-performing construction loans held in-portfolio for the quarter ended March 31, 2012 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 28 - Construction Loans HIP


	For the quarter ended March 31, 2012
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance	$	53,859		$	42,427		$	96,286
Plus:
New non-performing loans		6,372			—			6,372
Advances on existing non-performing loans		—			125			125
Less:
Non-performing loans charged-off		(371	)		(1,380	)		(1,751	)
Loans returned to accrual status / loan collections		(3,613	)		(17,617	)		(21,230	)
Loans transferred to held-for-sale		—			(10,332	)		(10,332	)

Ending balance March 31, 2012	$	56,247		$	13,223		$	69,470

In the non-covered loans held-in-portfolio, there were no construction loan relationships greater than $10 million in non-performing status at March 31, 2012, compared with 3 construction loan relationships with an aggregate outstanding principal balance of $38 million at December 31, 2011. Although the portfolio balance of construction loans held-in-portfolio has decreased considerably, the construction loan portfolio is considered one of the high-risk portfolios of the Corporation as it continues to be impacted by current economic and real estate market conditions, particularly in Puerto Rico.

Construction loans net charge-offs for the quarter ended March 31, 2012, compared with the quarter ended March 31, 2011, decreased by $9.0 million, mostly driven by the BPPR, which decreased by $8.4 million. As explained above, this decrease is driven by lower problem loans as a result from the steps taken by the Corporation to mitigate the overall credit risk, and to lower portfolio balances. For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent construction loans amounted to approximately $0.2 million and $1.2 million in the BPPR and BPNA reportable segments, respectively. Management has identified construction loans considered impaired and has charged-off specific reserves based on the value of the collateral.

Tables 29 and 30 provide information on construction non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 29 - Construction Non-Performing Loans and Net Charge-offs (BPPR)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPPR Reportable Segment:
Non-performing construction loans	$	56,247		$	53,859		$	57,176
Non-performing construction loans to construction loans HIP, both excluding covered loans and loans held-for-sale		32.00	%		33.47	%		38.30	%
Construction loan net charge-offs	$	(371	)				$	8,021
Construction loan net charge-offs (annualized) to average construction loans HIP, excluding covered loans and loans held-for-sale		(0.89	)%					22.74	%

159

Table 30 - Construction Non-Performing Loans and Net Charge-offs (BPNA)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPNA Reportable Segment:
Non-performing construction loans	$	13,223		$	42,427		$	69,373
Non-performing construction loans to construction loans HIP, excluding loans held-for-sale		21.74	%		53.71	%		49.34	%
Construction loan net charge-offs	$	166					$	764
Construction loan net charge-offs (annualized) to average construction loans HIP, excluding loans held-for-sale		0.97	%					1.88	%

The allowance for loan losses corresponding to construction loans, represented 3.86% of that portfolio, excluding covered loans, at March 31, 2012, compared with 3.53% at December 31, 2011. The ratio of allowance to non-performing loans held-in-portfolio in the construction loans category was 13.15% at March 31, 2012, compared with 8.81% at December 31, 2011. The increase in the ratio was mostly driven by a lower level of non-performing loans, particularly at the BPNA reportable segment, due to the resolution of certain large impaired construction loans for which no allowance for loan losses was required at December 31, 2011.

The allowance for loan losses corresponding to the construction loan portfolio for the BPPR reportable segment, excluding the allowance for covered loans, totaled $7 million or 3.80% of construction loans held-in-portfolio, excluding covered loans, at March 31, 2012, compared with $6 million or 3.63% at December 31, 2011. At the BPNA reportable segment, the allowance for loan losses corresponding to the construction loan portfolio totaled $2.5 million or 4.05% of construction loans held-in-portfolio at March 31, 2012, compared to $2.6 million or 3.33% at December 31, 2011.

The construction loans held-in-portfolio, excluding covered loans, included $6 million in TDRs for the BPPR reportable segment and $13 million for the BPNA reportable segment at March 31, 2012. These TDRs were in non-performing status as of such date. The outstanding commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings amounted to $97 thousand in the BPPR reportable segment and $348 thousand in the BPNA reportable segment at March 31, 2012. These construction TDR loans from the BPPR and BPNA reportable segments were evaluated for impairment, resulting in a specific reserve of $336 thousand for the BPPR reportable segment and none for the BPNA reportable segment at March 31, 2012.

In the current 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.

Legacy loans

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

Legacy non-performing loans held-in-portfolio increased by $3 million from December 31, 2011 to March 31, 2012, which included an increase of $6 million in commercial loans, offset by a decline of $3 million in construction loans. Although problem loans have trended downward, reflecting relative improvements in the economic conditions, some borrowers within this portfolio may continue to face business challenges as a result of the economic environment. The percentage of non-performing legacy loans held-in-portfolio to legacy loans held-in-portfolio increased from 11.67% at December 31, 2011 to 13.09% at March 31, 2012. The ratio of non-performing legacy loans to legacy loans held-in-portfolio was 16.70% at March 31, 2011.

For the quarter ended March 31, 2012, additions to legacy loans in non-performing status at the BPNA reportable segment amounted to $17 million, a decrease of $6 million compared with the same quarter in 2011. The decrease in the inflows of non-performing legacy loans is principally driven by lower loan portfolio balance and problem loan resolutions, coupled with certain credit stabilization.

160

Table 31 presents the changes in non-performing legacy loans held in-portfolio for the quarter ended March 31, 2012 for the BPNA reportable segment.

Table 31 - Legacy Loans HIP


(Dollars in thousands)	BPNA
Beginning Balance	$	75,660
Plus:
New non-performing loans		17,373
Advances on existing non-performing loans		16
Less:
Non-performing loans transferred to OREO		(3,370	)
Non-performing loans charged-off		(8,489	)
Loans returned to accrual status / loan collections		(1,441	)
Loans transferred to held-for-sale		(672	)

Ending balance March 31, 2012	$	79,077

In the loans held-in-portfolio, there was one legacy loan relationship greater than $10 million in non-accrual status with an aggregate outstanding balance of approximately $16 million at both March 31, 2012 and December 31, 2011.

For the quarter ended March 31, 2012, legacy net charge-offs decreased by $16.7 million when compared with the quarter ended March 31, 2011, which consisted of commercial and construction loans by $10.4 million and $6.3 million, respectively. The decrease was mainly driven by the fact that prior periods were severely impacted by the U.S. mainland market conditions, as a result of decreases in property values, oversupply in certain areas and reduced absorption rates.

For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent legacy loans amounted to approximately $0.4 million.

As explained above, the legacy loan portfolio has reflected improvements in the credit quality trends, when compared to the same period in 2011, prompted by the run-off of the portfolio, and by certain stabilization observed in the U.S. economic environment.

Table 32 provides information on legacy non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPNA reportable segment.

Table 32 - Legacy Non-Performing Loans and Net Charge-offs


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPNA Reportable Segment:
Non-performing legacy loans	$	79,077		$	75,660		$	150,117
Non-performing legacy loans to legacy loans HIP, excluding loans held-for-sale		13.09	%		11.67	%		16.70	%
Legacy loan net charge-offs	$	3,558					$	20,249
Legacy loan net charge-offs (annualized) to average legacy loans HIP, excluding loans held-for-sale		2.23	%					8.31	%

The BPNA reportable segment legacy loan portfolio totaled $604 million at March 31, 2012, compared with $648 million at December 31, 2011. The allowance for loan losses related to legacy loans held-in-portfolio represented 9.06% of that portfolio at March 31, 2012, compared with 7.13% at December 31, 2011. The ratio of allowance to non-performing loans held-in portfolio in the legacy loan category was 69.20% at March 31, 2012, compared with 61.10% at December 31, 2011. Despite improvements in key credit quality metrics, a slow economic recovery at the U.S. mainland can still challenge the legacy loan portfolio, as this portfolio is considered of a higher-risk profile.

Legacy loans held-in-portfolio modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. At March 31, 2012, the Corporation’s legacy loans held-in-portfolio

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included a total of $26 million of loan modifications for the BPNA reportable segment, which were considered TDRs since they involved granting a concession to borrowers under financial difficulties. There were no commitments outstanding for these legacy loan TDRs in the BPNA reportable segment at March 31, 2012.

The legacy loan TDRs in non-performing status for the BPNA reportable segments at March 31, 2012 amounted to $26 million. Legacy loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The legacy loan TDRs were evaluated for impairment requiring no specific reserves at March 31, 2012.

Mortgage loans

Non-performing mortgage loans held-in-portfolio decreased by $19 million from December 31, 2011 to March 31, 2012, primarily as a result of a decrease of $16 million in the BPPR reportable segment, and a decrease of $3 million in the BPNA reportable segment. The decrease in the BPPR reportable segment was principally driven by (i) a reduction of loan repurchases under credit recourse arrangements, (ii) a higher level of residential mortgage TDRs returned to accrual status, and (iii) higher charge-offs. Nonetheless, the mortgage loan portfolio continues to be impacted by the economic conditions in Puerto Rico, as evidenced by high levels of non-performing mortgage loans and delinquency rates.

At March 31, 2012, additions to mortgage non-performing loans at the BPPR and BPNA reportable segments amounted to $187 million and $6 million, respectively. Although the state of the economy in Puerto Rico appears to be gradually improving, the residential real estate market remains distressed.

Table 33 presents the activity in non-performing mortgage loans held-in-portfolio for the BPPR and BPNA segments, and for the Corporation as a whole, for the quarter ended March 31, 2012.

Table 33 - Mortgage Loans HIP


	For the quarter ended March 31, 2012
(Dollars in thousands)	BPPR			BPNA			Popular, Inc.
Beginning Balance	$	649,279		$	37,223		$	686,502
Plus:
New non-performing loans		186,510			6,256			192,766
Less:
Non-performing loans transferred to OREO		(21,573	)		(1,064	)		(22,637	)
Non-performing loans charged-off		(20,427	)		(3,496	)		(23,923	)
Loans returned to accrual status / loan collections		(160,272	)		(5,219	)		(165,491	)

Ending balance March 31, 2012	$	633,517		$	33,700		$	667,217

For the quarter ended March 31, 2012, the Corporation’s mortgage loan net charge-offs to average mortgage loans held-in-portfolio ratio increased to 1.29%, compared with 0.74% for the quarter ended March 31, 2011. The increase in the mortgage loans net charge-off ratio was mainly due to higher losses in the BPPR and the BPNA reportable segments.

At the BPPR reportable segment, the mortgage loan net charge-offs for the quarter ended March 31, 2012 amounted to $12.2 million, an increase of $4.5 million, when compared to same period in 2011. This increased was not caused by deterioration in the inherent credit quality of this portfolio, but was principally due to revisions to the charge-off policy. During the first quarter of 2012, the Corporation enhanced its charge-off policy for the residential mortgage loan portfolio by including historical losses on recent other real estate owned (“OREO”) sales to determine the net realizable value to assess charge-offs once a loan becomes 180 days past due; previously, this was only done once the loan was foreclosed.

The BPPR reportable segment’s mortgage loans held-in-portfolio totaled $4.8 billion at March 31, 2012, compared with $4.7 billion at December 31, 2011. This slight increase is mainly associated with (i) loans repurchased under credit recourse arrangements and (ii) loans purchased and originated during the quarter ended March 31, 2012. The allowance for loan losses corresponding to the mortgage loan portfolio for the BPPR reportable segment totaled $97 million or 2.03% of mortgage loans held-in-portfolio, excluding covered loans, at March 31, 2012 compared to $72 million or 1.54%, respectively, at December 31, 2011. This increase is principally driven by increases in the general reserve component due to higher level of net charge-offs and higher specific reserves component for residential mortgage loans restructured under loss mitigation programs.

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Tables 34 and 35 provide information on non-performing mortgage loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012 and March 31, 2011 for the both the BPPR (excluding covered loans) and BPNA reportable segments.

Table 34 - Mortgage Non-Performing Loans and Net Charge-offs (BPPR)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPPR Reportable Segment:
Non-performing mortgage loans	$	633,517		$	649,279		$	551,756
Non-performing mortgage loans to mortgage loans HIP, both excluding covered loans and loans held-for-sale		13.31	%		13.85	%		13.69	%
Mortgage loan net charge-offs	$	12,226					$	7,677
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP, excluding covered loans and loans held-for-sale		1.07	%					0.85	%

Table 35 - Mortgage Non-Performing Loans and Net Charge-offs (BPNA)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPNA Reportable Segment:
Non-performing mortgage loans	$	33,700		$	37,223		$	26,350
Non-performing mortgage loans to mortgage loans HIP, excluding loans held-for-sale		4.05	%		4.49	%		3.05	%
Mortgage loan net charge-offs	$	5,228					$	570
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP, excluding loans held-for-sale		2.53	%					0.26	%

The net charge-offs for BPNA’s mortgage loan portfolio amounted to approximately $5.2 million for the quarter ended March 31, 2012, an increase of $4.7 million when compared to the same quarter in 2011. For the quarter ended March 31, 2011, there were low levels of net charge-offs for BPNA’s non-conventional mortgage loans held in portfolio since most of the non-performing portfolio was classified as held-for-sale and adjusted to fair value in December 2010, and subsequently sold during first quarter of 2011. The increase in BPNA’s mortgage loan net charge-offs for the first quarter of 2012 was due to the normal flow of loans into late stage delinquency.

The BPNA reportable segment mortgage loan portfolio totaled $831 million at March 31, 2012, compared with $829 million at December 31, 2011. BPNA’s non-conventional mortgage loan portfolio outstanding at March 31, 2012 amounted to approximately $483 million with a related allowance for loan losses of $22 million, which represents 4.63% of that particular loan portfolio, compared with $490 million with a related allowance for loan losses of $24 million or 4.81%, respectively, at December 31, 2011. The Corporation is no longer originating non-conventional mortgage loans at BPNA.

The net charge-offs for BPNA’s non-conventional mortgage loan portfolio amounted to approximately $3.5 million or 2.85% of net charge-offs to average non-conventional mortgage loans held-in-portfolio for the quarter ended March 31, 2012. There were no net charge-offs for BPNA’s non-conventional mortgage loan portfolio for the quarter ended March 31, 2011, since this portfolio was classified as held-for-sale and adjusted to fair value in December 31, 2010.

Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally five to ten years, depending on the borrower’s payment capacity. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. At March 31, 2012, the mortgage loan TDRs for the BPPR and BPNA reportable segments amounted to $461 million (including $96 million guaranteed by U.S. sponsored entities) and $52 million, respectively, of which $223 million and $9 million, respectively, were in non-performing status. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $27 million and $14 million for the BPPR and BPNA reportable segments, respectively, at March 31, 2012, compared to $15 million and $14 million, respectively, at December 31, 2011.

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Consumer loans

Non-performing consumer loans, excluding covered loans, decreased by $2 million from December 31, 2011 to March 31, 2012, as a result of a decrease of $4 million in the BPPR reportable segment, partially offset by a slight increase of $2 million in the BPNA reportable segment. The decrease in the BPPR reportable segment was principally related to an overall improvement in the consumer lines of business, mainly personal and auto loans, as the portfolios continue to reflect signs of a more stable credit performance. The slight increase 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. In overall, this portfolio has experienced improvements in terms of delinquencies and net charge-offs.

Additions to consumer non-performing loans for the quarter ended March 31, 2012 amounted to $27 million and $14 million for the BPPR and BPNA reportable segments, respectively. When compared to the same quarter in 2011, additions to consumer non-performing loans at the BPPR reportable segment increased slightly by $1 million, while additions to consumer non-performing loans at the BPNA reportable segment increased by $3 million, driven principally by the HELOCs portfolio.

The Corporation’s consumer loan net charge-offs as a percentage of average consumer loans held-in-portfolio decreased from 4.90% for the quarter ended March 31, 2011 to 3.58% for the quarter ended March 31, 2012. The decrease in the ratio of consumer loans net charge-offs to average consumer loans held-in-portfolio in both segments was attributable to an improvement in the delinquency levels, as the portfolios continue to reflect signs of a more stable credit performance.

The consumer loans held-in-portfolio, excluding covered loans, included $138 million in TDRs for the BPPR reportable segment and $2 million for the BPNA reportable segment, which were considered TDRs at March 31, 2012. There were $5 million in consumer TDR loans in non-performing status for the BPPR reportable segment and $1 million at the BPNA reportable segment at March 31, 2012.

Tables 36 and 37 provide information on consumer non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012 and March 31, 2011 for the BPPR and BPNA reportable segments.

Table 36 - Consumer Non-Performing Loans and Net Charge-offs (BPPR)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPPR Reportable Segment:
Non-performing consumer loans	$	27,128		$	31,291		$	34,585
Non-performing consumer loans to consumer loans HIP, both excluding covered loans and loans held-for-sale		0.92	%		1.05	%		1.21	%
Consumer loan net charge-offs	$	24,131					$	28,414
Consumer loan net charge-offs (annualized) to average consumer loans HIP, excluding covered loans and loans held-for-sale		3.25	%					3.95	%

Table 37 - Consumer Non-Performing Loans and Net Charge-offs (BPNA)


	For the quarters ended
(Dollars in thousands)	March 31, 2012			December 31, 2011			March 31, 2011
BPNA Reportable Segment:
Non-performing consumer loans	$	14,560		$	12,377		$	19,311
Non-performing consumer loans to consumer loans HIP, excluding loans held-for-sale		2.13	%		1.76	%		2.50	%
Consumer loan net charge-offs	$	8,634					$	16,562
Consumer loan net charge-offs (annualized) to average consumer loans HIP, excluding loans held-for-sale		4.97	%					8.34	%

Combined net charge-offs for E-LOAN’s home equity lines of credit and closed-end second mortgages amounted to approximately $4.9 million or 5.45% of those particular average loan portfolios for the quarter ended March 31, 2012, compared with $11.3 million or 10.52%, respectively, for the quarter ended March 31, 2011. With the downsizing of E-LOAN, this subsidiary ceased originating these types of loans in 2008. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is

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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 at 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 at March 31, 2012 totaled $353 million with a related allowance for loan losses of $22 million, representing 6.32% of that particular portfolio. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding at December 31, 2011 totaled $365 million with a related allowance for loan losses of $24 million, representing 6.56% of that particular portfolio. At March 31, 2012, home equity lines of credit and closed-end second mortgages in which E-LOAN holds both the first and second lien amounted to $270 thousand and $529 thousand, respectively, representing 0.04% and 0.08%, respectively, of the consumer loan portfolio of the BPNA reportable segment. At March 31, 2012, 42% are paying the minimum amount due on the home equity lines of credit. At March 31, 2012, all closed-end second mortgages in which E-LOAN holds the first lien mortgage were in performing status.

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 $21 million from December 31, 2011 to March 31, 2012. The increase, driven by the impact of the economic conditions, was experienced at both reportable segments and included both residential and commercial 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.

Other real estate covered under loss sharing agreements with the FDIC, comprised principally of repossessed commercial real estate properties, amounted to $111 million at March 31, 2012, compared with $109 million at December 31, 2011. The increase was principally from repossessed commercial real estate properties. Generally, 80% of the write-downs taken on these properties based on appraisals or losses on the sale are covered under the loss sharing agreements.

During the first quarter of 2012, the Corporation recorded additions of $53 million to other real estate, sold $17 million of foreclosed properties, recorded write-downs of $13 million and recognized other negative adjustments of approximately $1 million.

Updated appraisals or third-party opinions of value (“BPOs”) are obtained to adjust the values of the other real estate assets. Commencing in 2011, the appraisal for a commercial or construction other real estate property with a book value greater than $1 million is updated annually and if lower than $1 million it is updated at least every two years. For residential other real estate property, the Corporation requests third-party BPOs or appraisals generally on an annual basis. Appraisals may be adjusted due to age, collateral inspections and property profiles or due to general marked conditions. The adjustments applied are based upon internal information like other appraisals for the type of properties and loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions.

For commercial and construction other real estate properties at the BPPR reportable segment, depending on the type of property and/or the age of the appraisal, downward adjustments currently may range between 10% to 45%, including estimated cost to sell. For commercial and construction properties at the BPNA reportable segment, the most typically applied collateral discount rate is 30%. This discount was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the property or project.

In the case of the BPPR reportable segment, appraisals and BPOs of the subject residential properties were subject to downward adjustments of up to approximately 24.26%, including cost to sell of 5%. In the case of the U.S. mainland residential properties, the downward adjustment approximated up to 30%, including cost to sell of 5%.

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Troubled debt restructurings

Tables 38 and 39 present the loans classified as TDRs according to their accruing status at March 31, 2012 and December 31, 2011.

Table 38 - TDRs (March 31, 2012)


			March 31, 2012
(In thousands)	Accruing		Non-Accruing		Total
Commercial	$	56,633	$	151,050	$	207,683
Construction		—		18,713		18,713
Legacy		—		26,117		26,117
Mortgage		281,570		231,535		513,105
Leases		2,503		2,910		5,413
Consumer		135,086		5,323		140,409

	$	475,792	$	435,648	$	911,440


Table 39 - TDRs (December 31, 2011)

			December 31, 2011
(In thousands)	Accruing		Non-Accruing		Total
Commercial	$	36,848	$	171,520	$	208,368
Construction		—		28,024		28,024
Legacy		—		26,906		26,906
Mortgage		252,277		218,715		470,992
Leases		3,085		3,118		6,203
Consumer		134,409		5,848		140,257

	$	426,619	$	454,131	$	880,750

The Corporation’s TDR loans totaled $911 million at March 31, 2012, an increase of $31 million, or 3%, from December 31, 2011. The increase was mainly due to the intensification of loss mitigation efforts on the mortgage loan portfolio. Mortgage TDRs increased by $42 million, or 9%, during the quarter ended on March 31, 2012, including $29 million of accruing loans of which $7 million were guaranteed by U.S. sponsored agencies.

Refer to Note 8 to the consolidated financial statements for additional information on modifications considered troubled debt restructurings, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.

Allowance for Loan Losses

Non-Covered loan portfolio

The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis. In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors.

The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. As explained in the Critical Accounting Policies / Estimates section of this MD&A, during the first quarter of 2012, the Corporation revised the estimation process for evaluating the adequacy of its allowance for loan losses for the Corporation’s commercial and construction loan portfolios by by (i) establishing a more granular stratification of the commercial and construction loan portfolios to enhance the homogeneity of the loan classes and (ii) increasing the look-back period for assessing the recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months.

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Tables 40 to 42 set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) at March 31, 2012, December 31, 2011, and March 31, 2011 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 40 - Composition of ALLL (March 31, 2012)

March 31, 2012
(Dollars in thousands)	Commercial			Construction			Legacy			Leasing			Mortgage			Consumer			Total ^[2]
Specific ALLL	$	12,998		$	1,013		$	765		$	1,344		$	40,946		$	18,990		$	76,056
Impaired loans ^[1]	$	552,152		$	64,149		$	47,731		$	5,412		$	450,754		$	138,200		$	1,258,398

Specific ALLL to impaired loans ^[1]		2.35	%		1.58	%		1.60	%		24.83	%		9.08	%		13.74	%		6.04	%

General ALLL	$	300,581		$	8,120		$	53,960		$	3,623		$	84,533		$	137,895		$	588,712
Loans held-in-portfolio, excluding impaired loans ^[1]	$	9,316,090		$	172,430		$	556,143		$	537,902		$	5,140,991		$	3,496,720		$	19,220,276
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		3.23	%		4.71	%		9.70	%		0.67	%		1.64	%		3.94	%		3.06	%

Total ALLL	$	313,579		$	9,133		$	54,725		$	4,967		$	125,479		$	156,885		$	664,768
Total non-covered loans held-in-portfolio ^[1]	$	9,868,242		$	236,579		$	603,874		$	543,314		$	5,591,745		$	3,634,920		$	20,478,674

ALLL to loans held-in-portfolio ^[1]		3.18	%		3.86	%		9.06	%		0.91	%		2.24	%		4.32	%		3.25	%

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

[2]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At March 31, 2012, the general allowance on the covered loans amounted to $106 million while the specific reserve amounted to $32 million.


Table 41 - Composition of ALLL (December 31, 2011)

December 31, 2011
(Dollars in thousands)	Commercial			Construction			Legacy			Leasing			Mortgage			Consumer			Total ^[2]
Specific ALLL	$	11,738		$	289		$	57		$	793		$	29,063		$	17,046		$	58,986
Impaired loans ^[1]	$	556,329		$	91,710		$	48,890		$	6,104		$	382,880		$	140,108		$	1,226,021

Specific ALLL to impaired loans ^[1]		2.11	%		0.32	%		0.12	%		12.99	%		7.59	%		12.17	%		4.81	%

General ALLL	$	357,694		$	8,192		$	46,171		$	3,858		$	73,198		$	142,264		$	631,377
Loans held-in-portfolio, excluding impaired loans ^[1]	$	9,416,998		$	148,229		$	599,519		$	542,602		$	5,135,580		$	3,533,647		$	19,376,575
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		3.80	%		5.53	%		7.70	%		0.71	%		1.43	%		4.03	%		3.26	%

Total ALLL	$	369,432		$	8,481		$	46,228		$	4,651		$	102,261		$	159,310		$	690,363
Total non-covered loans held-in-portfolio ^[1]	$	9,973,327		$	239,939		$	648,409		$	548,706		$	5,518,460		$	3,673,755		$	20,602,596

ALLL to loans held-in-portfolio ^[1]		3.70	%		3.53	%		7.13	%		0.85	%		1.85	%		4.34	%		3.35	%

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

[2]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2011, the general allowance on the covered loans amounted to $98 million while the specific reserve amounted to $27 million.

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Table 42 - Composition of ALLL (March 31, 2011)

March 31, 2011
(Dollars in thousands)	Commercial			Construction			Legacy			Leasing			Mortgage			Consumer			Total ^[2]
Specific ALLL	$	9,726		$	—		$	—		$	—		$	8,166		$	—		$	17,892
Impaired loans ^[1]	$	449,079		$	124,824		$	104,017		$	—		$	147,026		$	—		$	824,946

Specific ALLL to impaired loans ^[1]		2.17	%		—	%		—	%		—	%		5.55	%		—	%		2.17	%

General ALLL	$	337,565		$	33,577		$	69,911		$	6,608		$	71,944		$	189,849		$	709,454
Loans held-in-portfolio, excluding impaired loans ^[1]	$	9,952,206		$	165,059		$	794,755		$	565,881		$	4,748,656		$	3,625,286		$	19,851,843
General ALLL to loans held-in-portfolio, excluding impaired loans ^[1]		3.39	%		20.34	%		8.80	%		1.17	%		1.52	%		5.24	%		3.57	%

Total ALLL	$	347,291		$	33,577		$	69,911		$	6,608		$	80,110		$	189,849		$	727,346
Total non-covered loans held-in-portfolio ^[1]	$	10,401,285		$	289,883		$	898,772		$	565,881		$	4,895,682		$	3,625,286		$	20,676,789

ALLL to loans held-in-portfolio ^[1]		3.34	%		11.58	%		7.78	%		1.17	%		1.64	%		5.24	%		3.52	%

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

[2]	Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At March 31, 2011 the general allowance on the covered loans amounted to $9 million while there was no specific reserve.

At March 31, 2012, the allowance for loan losses, excluding covered loans, decreased by approximately $26 million from December 31, 2011. It represented 3.25% of non-covered loans held-in-portfolio at March 31, 2012, compared with 3.35% at December 31, 2011. This decrease in the allowance for loan losses considers reductions in the Corporation’s general reserves of approximately $43 million, offset by an increase of $17 million in the specific reserves. The decrease in the Corporation’s allowance for loan losses from December 31, 2011 to March 31, 2012 was primarily driven by the revisions made to the general reserve estimation process for the commercial and construction loan portfolios, as described above. The net effect of these changes amounted to a $24.8 million reduction in the Corporation’s allowance for loan losses, resulting from a reduction of $40.5 million due to the enhancements to the allowance for loan losses methodology, offset in part by a $15.7 million increase in environmental factor reserves due to the Corporation’s decision to monitor recent trends in its commercial loan portfolio at the BPPR reportable segment that although improving, continue to warrant additional scrutiny. The increase from December 31, 2011 to March 31, 2012 in the Corporation’s recorded investment in loans that were individually evaluated for impairment and their specific allowance for loan losses was mainly related to consumer and mortgage TDRs, due to the intensification of loss mitigation efforts.

At March 31, 2012, the allowance for loan losses for non-covered loans of the BPPR reportable segment totaled $448 million or 3.01% of non-covered loans held-in-portfolio, compared with $453 million or 3.06% of non-covered loans held in portfolio at December 31, 2011. The decrease was mainly driven by a reduction of $22 million in the general reserve component, when compared to December 31, 2011, mainly due to a lower net charge-off trend in the commercial loan portfolio. The reduction also includes the aforementioned net benefit of $7.1 million related to the revisions made to the general reserve estimation process for the commercial and construction loan portfolios, net of the increase due to environmental factor reserves. These improvements were partially offset by higher reserve requirements for the consumer and residential mortgage loan portfolios due to higher net charge-offs and specific reserve requirements for loans restructured under loss mitigation programs.

The allowance for loan losses of the BPNA reportable segment totaled $217 million or 3.87% of loans held in portfolio, compared with $237 million or 4.11% of loans held-in-portfolio at December 31, 2011. The decrease was mainly driven by a reduction of $21 million in the general reserve component, when compared to December 31, 2011. This reduction considers a $17.7 million impact related to the enhancements to the allowance for loan losses methodology, coupled with lower loss trends across all portfolios, as the U.S. mainland continues to reflect improved credit performance.

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Table 43 presents the Corporation’s recorded investment in loans, excluding covered loans, that were considered impaired and the related valuation allowance at March 31, 2012, December 31, 2011, and March 31, 2011.


Table 43 - Impaired Loans (Non-covered loans)

	March 31, 2012				December 31, 2011				March 31, 2011
(In millions)	Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance
Impaired loans:
Valuation allowance	$	692.3	$	76.1	$	632.9	$	59.0	$	187.6	$	17.9
No valuation allowance required		566.1		—		593.1		—		637.3		—

Total impaired loans	$	1,258.4	$	76.1	$	1,226.0	$	59.0	$	824.9	$	17.9

With respect to the $566 million portfolio of impaired loans for which no allowance for loan losses was required at March 31, 2012, 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 $566 million impaired loans with no valuation allowance were mostly collateral dependent loans for which management performed an 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 inherent losses at March 31, 2012.

Average impaired loans during the quarters ended March 31, 2012 and March 31, 2011 were $1.2 billion and $812 million, respectively. The Corporation recognized interest income on impaired loans of $8.0 million and $3.3 million for the quarters ended March 31, 2012 and 2011, respectively. This increase was mainly driven by interest income from residential mortgage TDRs of the BPPR reportable segment.

Tables 44 and 45 set forth the activity in the specific reserves for impaired loans, excluding covered loans, for the quarters ended March 31, 2012 and 2011.


Table 44 - Activity in Specific ALLL for the Quarter Ended March 31, 2012

(In thousands)	Commercial Loans			Construction Loans			Mortgage Loans			Legacy Loans			Consumer Loans		Leasing		Total
Specific allowance for loan losses at December 31, 2011	$	11,738		$	289		$	29,063		$	57		$	17,046	$	793	$	58,986
Provision for impaired loans		32,494			2,079			13,457			1,065			1,944		551		51,590
Less: Net charge-offs		(31,234	)		(1,355	)		(1,574	)		(357	)		—		—		(34,520	)

Specific allowance for loan losses at March 31, 2012	$	12,998		$	1,013		$	40,946		$	765		$	18,990	$	1,344	$	76,056


Table 45 - Activity in Specific ALLL for the Quarter Ended March 31, 2011

(In thousands)	Commercial Loans			Construction Loans			Mortgage Loans			Legacy Loans			Total
Specific allowance for loan losses at December 21, 2010	$	8,550		$	216		$	5,004		$	—		$	13,770
Provision for impaired loans		38,934			9,203			17,618			1,738			67,493
Recoveries related to loans transferred to LHFS		—			—			(13,807	)		—			(13,807	)
Less: Net charge-offs		(37,758	)		(9,419	)		(649	)		(1,738	)		(49,564	)

Specific allowance for loan losses at March 31, 2011	$	9,726		$	—		$	8,166		$	—		$	17,892

For the quarter ended March 31, 2012, total net charge-offs for individually evaluated impaired loans amounted to approximately $34.5 million, of which $19.8 million pertained to the BPPR reportable segment and $14.7 million to the BPNA reportable segment. Most of these net charge-offs were related both BPPR and BPNA reportable segments commercial loan portfolios. As compared to the quarter ended March 31, 2011, the decrease in charge-offs for construction loans considered impaired was mainly to lower level of problem loans in the remaining portfolio.

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The Corporation requests updated appraisal reports from pre-approved appraisers for loans that are considered impaired, and individually analyzes them following the Corporation’s reappraisal policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the borrower. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired. Generally, the specialized appraisal review unit of the Corporation’s Credit Risk Management Division internally reviews appraisals following certain materiality benchmarks. In addition to evaluating the reasonability of the appraisal reports, these reviews monitor that appraisals are performed following the Uniform Standards of Professional Appraisal Practice (“USPAP”).

Appraisals may be adjusted due to age or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss severity information that can provide historical trends in the real estate market. Specifically, in commercial and construction impaired loans for the BPPR reportable segment, and depending on the type of property and/or the age of the appraisal, downward adjustments currently range from 10% to 45% (including costs to sell). At March 31, 2012, the weighted average discount rate for the BPPR reportable segment was 21%.

For commercial and construction loans at the BPNA reportable segment, downward adjustments to the collateral value currently range from 30% to 50% depending on the age of the appraisals and the type, location and condition of the property. This discount used was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the project. Factors are based on appraisal changes and/or trends in loss severities. Discount rates discussed above include costs to sell and may change from time to time based on market conditions. At March 31, 2012, the weighted average discount rate for the BPNA reportable segment was 34%.

For mortgage loans secured by residential real estate properties, a current assessment of value is made not later than 180 days past the contractual due date. Any outstanding balance in excess of the estimated value of the collateral property, less estimated costs to sell, is charged-off. For this purpose, the Corporation requests third-party Broker Price Opinion of Value “BPOs” of the subject collateral property at least annually. In the case of the mortgage loan portfolio for the BPPR reportable segment, BPOs of the subject collateral properties are currently subject to downward adjustment (cost to sell) of 5%. In the case of the U.S. mortgage loan portfolio, a 30% haircut is taken, which includes costs to sell.

Discount rates discussed above include costs to sell and may change from time to time based on market conditions.

Table 46 presents the approximate amount and percentage of non-covered impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at March 31, 2012.

Table 46 - Non-covered Impaired Loans with Appraisals Dated 1 year or Older


March 31, 2012
	Total Impaired Loans – Held-in-portfolio (HIP)				Impaired Loans with Appraisals Over One- Year Old [1]
(In thousands)	# of Loans		Outstanding Principal Balance		Impaired Loans with Appraisals Over One- Year Old [1]
Total commercial		366	$	498,427		28	%
Total construction		25	$	61,448		17	%
Total legacy		35	$	47,731		27

[1]	Based on outstanding balance of total impaired loans.

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The percentage of the Corporation’s impaired construction loans that were relied upon “as developed” and “as is” for the period ended March 31, 2012 is presented in Table 47.

Table 47 - Impaired Construction Loans Relied Upon “As is” or “As Developed”


	March 31, 2012
	“As is”							“As developed”
(In thousands)	Count		Amount in $		As a % of total construction impaired loans HIP			Count		Amount in $		As a % of total construction impaired loans HIP			Average % of completion
Loans held-in-portfolio [1]		27	$	51,253		56	%		9	$	40,697		44	%		91	%

[1]	Includes $27.8 million of constructions loans from the BPNA legacy portfolio.

At March 31, 2012, the Corporation accounted for $41 million impaired construction loans under the “as developed” value. This approach is used since the current plan is that the project will be completed and it reflects the best strategy to reduce potential losses based on the prospects of the project. The costs to complete the project and the related increase in debt are considered an integral part of the individual reserve determination.

Costs to complete are deducted from the subject “as developed” collateral value on impaired construction loans. Impairment determinations are calculated following the collateral dependent method, comparing the outstanding principal balance of the respective impaired construction loan against the expected realizable value of the subject collateral. Realizable values of subject collaterals have been defined as the “as developed” appraised value less costs to complete, costs to sell and discount factors. Costs to complete represent an estimate of the amount of money to be disbursed to complete a particular phase of a construction project. Costs to sell have been determined as a percentage of the subject collateral value, to cover related collateral disposition costs (e.g. legal and commission fees). As discussed previously, discount factors may be applied to the appraised amounts due to age or general market conditions.

Allowance for loan losses – Covered loan portfolio

The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $138 million at March 31, 2012, compared to $125 million at December 31, 2011. This allowance covers the estimated credit loss exposure related to: (i) acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $95 million at March 31, 2012; and (ii) acquired loans accounted for under ASC Subtopic 310-20, which required an allowance for loan losses of $43 million at March 31, 2012. Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of loan commitments assumed, the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for loans individually evaluated for impairment. Concurrently, the Corporation records an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements.

Geographic and government risk

The Corporation is exposed to geographical and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 30 to the consolidated financial statements. A significant portion of the Corporation’s financial activities and credit exposure is concentrated in Puerto Rico. The Puerto Rico economy has experienced recessionary conditions since 2006. Based on preliminary information published by the Puerto Rico Planning Board (the “Planning Board”), the Puerto Rico real gross national product decreased an estimated 1.5% during fiscal year ended June 30, 2011.

The Planning Board forecasts positive growth in fiscal 2012 and fiscal 2013 with estimates of 0.9% and 1.1%, respectively. Total employment, including self-employed and agriculture, amounted to 1.092 million jobs as of March 2012, compared with 1.097 million jobs in February 2012 and 1.064 million jobs in March 2011. The unemployment rate amounted to 15%, unchanged from February 2012 and down from 16.2% in March 2011.

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Economic growth is still challenged by a lack of job growth and a housing sector that remains under pressure, 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.

During 2011, the Puerto Rico government signed into law several economic and fiscal measures to help counter the prolonged recession. The implementation of a temporary excise tax on certain multinational manufacturers allowed the government to implement a reduction in individual taxes that is expected to add nearly $1 billion annually to consumers’ purchasing power. The marginal corporate tax rate in Puerto Rico was also reduced from 39% to 30% in January 2011.

General fund net revenues of the government during the first eight months of fiscal year 2012 (July 2011 to February 2012) amounted to $4.95 billion, a 15.2% year-over-year increase. Proceeds slated for infrastructure work from government bond issues held in the fourth quarter of 2011 amounted to approximately $1.5 billion, according to the GDB.

Investment in construction for fiscal year 2011 reached $3.842 billion or 4.7% above fiscal year 2010, according to the Planning Board. In real prices this represented a 2.2% increase during the same period of the previous fiscal year, making it the first positive fiscal year for investment in construction after the values at constant prices fell for seven consecutive years.

In 2010, the government also enacted a housing-incentive law that put into effect temporary measures that seek to stimulate demand for housing and reduce the significant excess supply of new homes. The incentives, which were extended until December 2012 with minor modifications, 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. The incentives, together with the current environment of low interest rates, continue to attract home buyers into the market.

Tourism reflected a significant pickup in visitors during 2011. The monthly average of 183,224 in tourist hotel registrations for 2011 marked a 10-year high. Hotel registrations increased 6.7% on an annual basis during the year 2011, compared with a 4% increase in 2010.

While the higher number of visitors has yet to produce significant job gains in that sector, it has paved the way for more investments in the high-end sector of the market, including The Dorado Beach Ritz Reserve hotel, which is scheduled to open in late 2012.

The Puerto Rico economy, however, continues to be susceptible to fluctuations in the price of crude oil due to its high dependence on fuel oil for energy production. Lingering effects from the prolonged recession are still reflected in limited loan demand and in high levels of non-performing assets, loan loss provisions and charge-offs. If the price of crude oil increases and if global economic conditions worsen, those adverse effects could continue. Also, a potential reduction in consumer spending may also impact growth in the Corporation’s other interest and non-interest revenues.

On April 17, 2012, Moody’s Investors Service placed the ratings of the Puerto Rico Sales Tax Financing Corporation’s (COFINA) outstanding senior and subordinated sales tax revenue bonds on review for possible downgrade. The review falls within the framework of the rating agency’s recently published US Public Finance Special Tax Methodology. The senior and subordinated COFINA bonds are currently rated Aa2 and A1, respectively.

On August 8, 2011, Moody’s Investors Service downgraded the rating of the outstanding general obligation (GO) bonds of the Commonwealth of Puerto Rico from ‘A3’ to ‘Baa1’, with negative outlook. Moody’s new Baa1 rating is at par with Fitch’s BBB+ and one notch above the BBB rating Puerto Rico received from S&P last March when the latter upgraded Puerto Rico’s credit rating for the first time in 28 years.

At March 31, 2012, the Corporation had $1.1 billion of credit facilities granted to or guaranteed by the Puerto Rico Government and its political subdivisions, of which $0.3 billion were uncommitted lines of credit. Of these total credit facilities granted, $0.9 billion were outstanding at March 31, 2012. 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, in most cases, 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.

172

Furthermore, at March 31, 2012, the Corporation had outstanding $155 million in obligations of Puerto Rico, States and political subdivisions as part of its investment securities portfolio. Of that total, $151 million was exposed to the creditworthiness of the Puerto Rico Government and its municipalities.

As further detailed in Notes 5 and 6 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $641 million of residential mortgages and $204 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2012. On August 5, 2011, Standard & Poor’s lowered its long-term sovereign credit rating on the United States of America from AAA to AA+ and on August 8, 2011, Standard & Poor’s lowered its credit ratings of the obligations of certain U.S. Government sponsored entities, including FNMA, FHLB and FHLMC, and other agencies with securities linked to long-term U.S. government debt. These downgrades could have a material adverse impact on global financial markets and economic conditions, and its ultimate impact is unpredictable and may not be immediately apparent. The Corporation does not have any exposure to European sovereign debt.

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

FASB Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

173

The provisions of this guidance impact presentation disclosure only and will not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (“ASU 2011-10”)

The FASB issued ASU 2011-10 in December 2011. The objective of this ASU is to resolve the diversity in practice about whether the guidance in ASC Subtopic 360-20, “Property, Plant, and Equipment Real Estate Sales” applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. ASU 2011-10 provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in ASC Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under ASC Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.

The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”)

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The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively and early application was not permitted.

FASB Accounting Standards Update 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”)

The adoption of this guidance on January 1, 2012 did not have an impact on the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in the Corporation’s 2011 Annual Report.

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.

175

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 March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

For a discussion of Legal Proceedings, see Note 18, “Commitments and Contingencies”, to the Consolidated Financial Statements.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I -Item 1A - Risk Factors” in our 2011 Annual Report. 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 2011 Annual Report.

There have been no material changes to the risk factors previously disclosed under Item 1A. of the Corporation’s 2011 Annual Report, except for risks relating to the reverse stock split which are included in the disclosures below.

The risks described in our 2011 Annual Report 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 RELATING TO THE REVERSE STOCK SPLIT

There can be no assurance that the total market capitalization of our Common Stock (the aggregate value of all Common Stock at the then market price) after the reverse stock split will be equal to or greater than the total market capitalization before the reverse stock split or that the per share market price of Common Stock following the reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split.

On April 27, 2012, the stockholders of the Corporation approved an amendment to the Corporation’s Restated Certificate of Incorporation to effect a reverse stock split of the Corporation’s Common Stock of 1-for-10, together with a corresponding reduction in the number of authorized shares of its Common Stock. The amendment will become effective upon the filing of a certificate of amendment to the Restated Certificate of Incorporation with the Puerto Rico Department of State or at such later date and time specified in that certificate of amendment (the “effective date”). The reverse split is expected to become effective at 11:59 p.m. Atlantic Standard Time on May 29, 2012. If effective on that date, the Corporation’s Common Stock will begin trading on a split-adjusted basis when the market opens on May 30, 2012. There can be no assurance that the market price per new share of Common Stock after the reverse stock split will increase in proportion to the reduction in the number of shares of Common Stock outstanding before the reverse stock split. For example, based on the closing price of Common Stock on March 31, 2012 of $2.05 per share, following the effectiveness of the 1-for-10 reverse stock split, there can be no assurance that the post-split market price of Common Stock would be $20.50 per share or greater.

A decline in the market price of our Common Stock after a reverse stock split may result in a greater percentage decline than would occur in the absence of a reverse stock split.

If the market price of our Common Stock declines following the effectiveness of the reverse stock split, the percentage decline may be greater than would occur in the absence of the reverse stock split. However, the market price of our Common Stock will also be based on our performance and other factors, which are unrelated to the number of shares of Common Stock outstanding.

176

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.

In connection with the Corporation’s participation in the Capital Purchase Program under the Troubled Asset Relief Program, the consent of the U.S. Department of the Treasury will be required for the Corporation to repurchase its common stock other than in connection with benefit plans consistent with past practice and certain other specified circumstances.

The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2012 under the 2004 Omnibus Incentive Plan.


Not in thousands	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs [a]
January 1 - January 31		—		—		—		—
February 1 - February 29		1,575,655	$	1.68		—		—
March 1 - March 31		—		—		—		—

Total March 31, 2012		1,575,655	$	1.68		—		—

Item 6. Exhibits


Exhibit No.		Exhibit Description

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

177

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: May 10, 2012	By:	/s/ Jorge A. Junquera
		Jorge A. Junquera
		Senior Executive Vice President &
		Chief Financial Officer

178

TABLE OF CONTENTS

Note 1 Organization, Consolidation and Basis Of Presentationprint Note 2 New Accounting Pronouncementsprint Note 3 Restrictions on Cash and Due From Banks and Certain Securitiesprint Note 4 Pledged Assetsprint Note 5 Investment Securities Available-for-saleprint Note 6 Investment Securities Held-to-maturityprint Note 7 Loansprint Note 8 Allowance For Loan Lossesprint Note 9 Fdic Loss Share Asset and True-up Payment Obligationprint Note 10 Transfers Of Financial Assets and Mortgage Servicing Rightsprint Note 11 Other Assetsprint Note 12 Goodwill and Other Intangible Assetsprint Note 13 Depositsprint Note 14 Borrowingsprint Note 15 Trust Preferred Securitiesprint Note 16 Stockholders Equityprint Note 17 Guaranteesprint Note 18 Commitments and Contingenciesprint Note 19 Non-consolidated Variable Interest Entitiesprint Note 20 Related Party Transactions with Affiliated Company / Joint Ventureprint Note 21 Fair Value Measurementprint Note 22 Fair Value Of Financial Instrumentsprint Note 23 Net Income Per Common Shareprint Note 24 Other Service Feesprint Note 25 Fdic Loss Share (expense) Incomeprint Note 26 Pension and Postretirement Benefitsprint Note 27 Stock-based Compensationprint Note 28 Income Taxesprint Note 29 Supplemental Disclosure on The Consolidated Statements Of Cash Flowsprint Note 30 Segment Reportingprint Note 31 Subsequent Eventsprint Note 32 Condensed Consolidating Financial Information Of Guarantor and Issuers Of Registered Guaranteed Securitiesprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II - Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

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