Edgar Filing: POPULAR INC

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2011

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specifies 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 change 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 1,024,137,020 shares outstanding as of July 27, 2011.

POPULAR, INC.

INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition at June 30, 2011, December 31, 2010 and June 30, 2010		4

Unaudited Consolidated Statements of Operations for the quarters and six months ended June 30, 2011 and 2010		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2011 and 2010		6

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2011 and 2010		7

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		8

Notes to Unaudited Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		116

Item 3. Quantitative and Qualitative Disclosures about Market Risk		182

Item 4. Controls and Procedures		182

Part II – Other Information

Item 1. Legal Proceedings		182

Item 1A. Risk Factors		185

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		186

Item 6. Exhibits		186

Signatures		187

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, 2010 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.

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)


(In thousands, except share information)	June 30, 2011			December 31, 2010			June 30, 2010
Assets
Cash and due from banks	$	587,965		$	452,373		$	744,769

Money market investments:
Federal funds sold		50,000			16,110			11,540
Securities purchased under agreements to resell		251,536			165,851			299,921
Time deposits with other banks		1,082,356			797,334			2,132,748

Total money market investments		1,383,892			979,295			2,444,209

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		734,826			492,183			371,619
Other trading securities		51,016			54,530			29,924
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		1,827,262			2,031,123			1,981,931
Other investment securities available-for-sale		3,562,229			3,205,729			4,499,256
Investment securities held-to-maturity, at amortized cost (fair value at June 30, 2011 - $136,959; December 31, 2010 - $120,873; June 30, 2010 - $209,207)		129,910			122,354			209,416
Other investment securities, at lower of cost or realizable value (realizable value at June 30, 2011 - $176,114; December 31, 2010 - $165,233; June 30, 2010 - $153,845)		174,560			163,513			152,562
Loans held-for-sale, at lower of cost or fair value		509,046			893,938			101,251

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		20,761,346			20,834,276			22,574,731
Loans covered under loss sharing agreements with the FDIC		4,616,575			4,836,882			5,055,750
Less – Unearned income		103,652			106,241			109,911
Allowance for loan losses		746,847			793,225			1,277,016

Total loans held-in-portfolio, net		24,527,422			24,771,692			26,243,554

FDIC loss share asset		2,350,176			2,318,183			2,330,406
Premises and equipment, net		537,870			545,453			573,941
Other real estate not covered under loss sharing agreements with the FDIC		162,419			161,496			142,372
Other real estate covered under loss sharing agreements with the FDIC		74,803			57,565			55,176
Accrued income receivable		141,980			150,658			151,245
Mortgage servicing assets, at fair value		162,619			166,907			171,994
Other assets		1,393,843			1,449,887			1,389,304
Goodwill		647,318			647,387			691,190
Other intangible assets		54,186			58,696			63,720

Total assets	$	39,013,342		$	38,722,962		$	42,347,839

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	5,364,004		$	4,939,321		$	4,793,338
Interest bearing		22,596,425			21,822,879			22,320,235

Total deposits		27,960,429			26,762,200			27,113,573

Federal funds purchased and assets sold under agreements to repurchase		2,570,322			2,412,550			2,307,194
Other short-term borrowings		151,302			364,222			1,263
Notes payable		3,423,286			4,170,183			8,238,277
Other liabilities		943,935			1,213,276			1,072,745

Total liabilities		35,049,274			34,922,431			38,733,052

Commitments and contingencies (See note 20)

Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding in all periods presented (aggregated liquidation preference value of $50,160)		50,160			50,160			50,160
Common stock, $0.01 par value; 1,700,000,000 shares authorized in all periods presented; 1,024,201,427 shares issued at June 30, 2011
(December 31, 2010 – 1,022,929,158; June 30, 2010 – 1,022,878,228) and 1,023,977,895 outstanding at June 30, 2011 (December 31, 2010 – 1,022,727,802; June 30, 2010 – 1,022,695,797)		10,242			10,229			10,229
Surplus		4,097,909			4,094,005			4,094,429
Accumulated deficit		(228,372	)		(347,328	)		(613,963	)
Treasury stock – at cost, 223,532 shares at June 30, 2011 (December 31, 2010 – 201,356 shares; June 30, 2010 – 182,431 shares)		(642	)		(574	)		(518	)
Accumulated other comprehensive (loss) income, net of tax of ($51,544) (December 31, 2010 – ($55,616); June 30, 2010 – ($17,744))		34,771			(5,961	)		74,450

Total stockholders’ equity		3,964,068			3,800,531			3,614,787

Total liabilities and stockholders’ equity	$	39,013,342		$	38,722,962		$	42,347,839

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarter ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2011			2010			2011			2010
Interest income:
Loans	$	442,460		$	421,010		$	865,835		$	775,659
Money market investments		926			1,893			1,873			2,935
Investment securities		53,723			62,915			106,098			127,841
Trading account securities		9,790			6,599			18,544			13,177

Total interest income		506,899			492,417			992,350			919,612

Interest expense:
Deposits		70,672			90,615			147,551			183,589
Short-term borrowings		13,719			15,552			27,734			30,811
Long-term debt		47,966			71,655			99,164			121,700

Total interest expense		132,357			177,822			274,449			336,100

Net interest income		374,542			314,595			717,901			583,512
Provision for loan losses		144,317			202,258			219,636			442,458

Net interest income after provision for loan losses		230,225			112,337			498,265			141,054

Service charges on deposit accounts		46,802			50,679			92,432			101,257
Other service fees		58,307			103,725			116,959			205,045
Net (loss) gain on sale and valuation adjustments of investment securities		(90	)		397			(90	)		478
Trading account profit		874			2,464			375			2,241
Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale		(12,782	)		5,078			(5,538	)		10,146
Adjustments (expense) to indemnity reserves on loans sold		(9,454	)		(14,389	)		(19,302	)		(31,679	)
FDIC loss share income (expense)		38,670			(15,037	)		54,705			(15,037	)
Fair value change in equity appreciation instrument		578			24,394			8,323			24,394
Other operating income		1,255			41,516			40,664			59,848

Total non-interest income		124,160			198,827			288,528			356,693

Operating expenses:
Personnel costs		110,959			138,032			217,099			258,964
Net occupancy expenses		25,957			29,058			50,543			57,934
Equipment expenses		10,761			25,346			22,797			48,799
Other taxes		14,623			12,459			26,595			24,763
Professional fees		49,479			34,225			96,167			61,274
Communications		7,188			11,342			14,398			22,114
Business promotion		11,332			10,204			21,192			18,499
FDIC deposit insurance		27,682			17,393			45,355			32,711
Loss on early extinguishment of debt		289			430			8,528			978
Other real estate owned (OREO) expenses		6,440			14,622			8,651			19,325
Other operating expenses		14,835			32,850			41,014			59,464
Amortization of intangibles		2,255			2,455			4,510			4,504

Total operating expenses		281,800			328,416			556,849			609,329

Income (loss) before income tax		72,585			(17,252	)		229,944			(111,582	)
Income tax (benefit) expense		(38,100	)		27,237			109,127			17,962

Net Income (Loss)	$	110,685		$	(44,489	)	$	120,817		$	(129,544	)

Net Income (Loss) Applicable to Common Stock	$	109,754		$	(236,156	)	$	118,956		$	(321,211	)

Net Income (Loss) per Common Share – Basic	$	0.11		$	(0.28	)	$	0.12		$	(0.43	)

Net Income (Loss) per Common Share – Diluted	$	0.11		$	(0.28	)	$	0.12		$	(0.43	)

Dividends Declared per Common Share		—			—			—			—

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 income (loss)			Total
Balance at December 31, 2009	$	6,380		$	50,160		$	2,804,238		$	(292,752	)	$	(29,209	)	$	2,538,817
Net loss											(129,544	)					(129,544	)
Issuance of stock		—			1,150,000	^[1]		—									1,150,000
Issuance of common stock upon conversion of preferred stock		3,834	^[1]		(1,150,000	)^[1]		1,337,833	^[1]								191,667
Issuance costs								(47,642	)^[2]								(47,642	)
Deemed dividend on preferred stock											(191,667	)					(191,667	)
Common stock purchases		(503	)														(503	)
Other comprehensive income, net of tax														103,659			103,659

Balance at June 30, 2010	$	9,711		$	50,160		$	4,094,429		$	(613,963	)	$	74,450		$	3,614,787

Balance at December 31, 2010	$	9,655		$	50,160		$	4,094,005		$	(347,328	)	$	(5,961	)	$	3,800,531
Net income											120,817						120,817
Issuance of stock		13						3,904									3,917
Dividends declared:
Preferred stock											(1,861	)					(1,861	)
Common stock purchases		(68	)														(68	)
Other comprehensive income, net of tax														40,732			40,732

Balance at June 30, 2011	$	9,600		$	50,160		$	4,097,909		$	(228,372	)	$	34,771		$	3,964,068

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

[2]	Issuance costs related to issuance and conversion of depository shares (Preferred Stock - Series D).


Disclosure of changes in number of shares:	June 30, 2011			December 31, 2010			June 30, 2010
Preferred Stock:
Balance at beginning of year		2,006,391			2,006,391			2,006,391
Issuance of stock		—			1,150,000	^[1]		1,150,000
Conversion of stock		—			(1,150,000	)^[1]		(1,150,000	)

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

Common Stock – Issued:
Balance at beginning of year		1,022,929,158			639,544,895			639,544,895
Issuance of stock		1,272,269			50,930			—
Issuance of stock upon conversion of preferred stock		—			383,333,333	^[1]		383,333,333	^[1]

Balance at end of the period		1,024,201,427			1,022,929,158			1,022,878,228
Treasury stock		(223,532	)		(201,356	)		(182,431	)

Common Stock – Outstanding		1,023,977,895			1,022,727,802			1,022,695,797

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

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Quarter ended,						Six months ended,
	June 30,						June 30,
(In thousands)	2011			2010			2011			2010
Net income (loss)	$	110,685		$	(44,489	)	$	120,817		$	(129,544	)

Other comprehensive income before tax:
Foreign currency translation adjustment		(1,137	)		(1,531	)		(1,728	)		(577	)
Reclassification adjustment for losses included in net income (loss)		—			—			10,084			—
Adjustment of pension and postretirement benefit plans		3,005			4,486			6,007			6,236
Unrealized holding gains on securities available-for-sale arising during the period		50,779			80,801			30,801			116,912
Reclassification adjustment for losses included in net income (loss)		90			6			90			16
Unrealized net gains (losses) on cash flow hedges		485			(1,509	)		434			(1,540	)
Reclassification adjustment for losses (gains) included in net income (loss)		51			31			(884	)		(1,168	)

Other comprehensive income before tax		53,273			82,284			44,804			119,879
Income tax expense		(5,500	)		(12,065	)		(4,072	)		(16,220	)

Total other comprehensive income, net of tax		47,773			70,219			40,732			103,659

Comprehensive income (loss), net of tax	$	158,458		$	25,730		$	161,549		$	(25,885	)

Tax effect allocated to each component of other comprehensive income:


	Quarter ended						Six months ended,
	June 30,						June 30,
(In thousands)	2011			2010			2011			2010
Underfunding of pension and postretirement benefit plans	$	(894	)	$	(882	)	$	(1,787	)	$	(1,765	)
Unrealized holding gains on securities available-for-sale arising during the period		(4,431	)		(11,759	)		(2,490	)		(15,507	)
Reclassification adjustment for losses included in net income (loss)		(14	)		—			(14	)		(4	)
Unrealized net (gains) losses on cash flow hedges		(146	)		588			(131	)		600
Reclassification adjustment for losses (gains) included in net income (loss)		(15	)		(12	)		350			456

Income tax expense	$	(5,500	)	$	(12,065	)	$	(4,072	)	$	(16,220	)

Disclosure of accumulated other comprehensive income (loss):


(In thousands)	June 30, 2011			December 31, 2010			June 30, 2010
Foreign currency translation adjustment	$	(27,795	)	$	(36,151	)	$	(41,253	)

Underfunding of pension and postretirement benefit plans		(204,928	)		(210,935	)		(121,550	)
Tax effect		79,068			80,855			46,801

Net of tax amount		(125,860	)		(130,080	)		(74,749	)

Unrealized holding gains on securities available-for-sale		215,465			184,574			221,018
Tax effect		(27,378	)		(24,874	)		(29,645	)

Net of tax amount		188,087			159,700			191,373

Unrealized gains (losses) on cash flow hedges		485			935			(1,509	)
Tax effect		(146	)		(365	)		588

Net of tax amount		339			570			(921	)

Accumulated other comprehensive income (loss)	$	34,771		$	(5,961	)	$	74,450

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
(In thousands)	2011			2010
Cash flows from operating activities:
Net income (loss)	$	120,817		$	(129,544	)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment		23,450			30,759
Provision for loan losses		219,636			442,458
Amortization of intangibles		4,510			4,504
Impairment losses on net assets to be disposed of		8,743			—
Fair value adjustments of mortgage servicing rights		16,249			9,577
Net (accretion of discounts) amortization of premiums and deferred fees		(64,498	)		(52,119	)
Net loss (gain) on sale and valuation adjustments of investment securities		90			(478	)
Fair value change in equity appreciation instrument		(8,323	)		(24,394	)
FDIC loss share (income) expense		(54,705	)		15,037
FDIC deposit insurance expense		45,355			32,711
Net gain on disposition of premises and equipment		(1,992	)		(2,071	)
Net loss (gain) on sale of loans, including valuation adjustments on loans held-for-sale		5,538			(10,146	)
Adjustments (expense) to indemnity reserves on loans sold		19,302			31,679
Losses (earnings) from investments under the equity method		218			(14,513	)
Gain on sale of equity method investment		(16,907	)		—
Net disbursements on loans held-for-sale		(417,220	)		(312,489	)
Acquisitions of loans held-for-sale		(173,549	)		(133,798	)
Proceeds from sale of loans held-for-sale		65,667			35,867
Net decrease in trading securities		319,024			396,940
Net decrease in accrued income receivable		8,676			10,729
Net increase in other assets		(16,965	)		(1,346	)
Net decrease in interest payable		(949	)		(17,566	)
Deferred income taxes		21,755			(8,503	)
Net (decrease) increase in pension and other postretirement benefit obligation		(123,084	)		1,627
Net decrease in other liabilities		(65,383	)		(12,028	)

Total adjustments		(185,362	)		422,437

Net cash (used in) provided by operating activities		(64,545	)		292,893

Cash flows from investing activities:
Net increase in money market investments		(404,598	)		(1,344,614	)
Purchases of investment securities:
Available-for-sale		(856,543	)		(542,506	)
Held-to-maturity		(64,358	)		(37,131	)
Other		(69,504	)		(13,076	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		707,567			818,380
Held-to-maturity		52,073			40,716
Other		56,162			83,272
Proceeds from sale of investment securities available-for-sale		19,143			19,484
Proceeds from sale of other investment securities		2,294			—
Net repayments on loans		779,606			1,024,846
Proceeds from sale of loans		225,698			10,878
Acquisition of loan portfolios		(744,390	)		(87,471	)
Cash received from acquisitions		—			261,311
Net proceeds from sale of equity method investments		31,503			—
Mortgage servicing rights purchased		(860	)		(364	)
Acquisition of premises and equipment		(25,548	)		(27,161	)
Proceeds from sale of premises and equipment		9,847			9,626
Proceeds from sale of foreclosed assets		94,759			69,058

Net cash (used in) provided by investing activities		(187,149	)		285,248

Cash flows from financing activities:
Net increase (decrease) in deposits		1,198,252			(1,202,219	)
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase		157,772			(325,596	)
Net decrease in other short-term borrowings		(212,920	)		(6,063	)
Payments of notes payable		(1,177,306	)		(189,780	)
Proceeds from issuance of notes payable		419,500			111,101
Net proceeds from issuance of depositary shares		—			1,102,358
Dividends paid		(1,861	)		—
Proceeds from issuance of common stock		3,917			—
Treasury stock acquired		(68	)		(503	)

Net cash provided by (used in) financing activities		387,286			(510,702	)

Net increase in cash and due from banks		135,592			67,439
Cash and due from banks at beginning of period		452,373			677,330

Cash and due from banks at end of period	$	587,965		$	744,769

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

Notes to Consolidated Financial

Statements (Unaudited)


Note 1 -	Summary of Significant Accounting Policies	10
Note 2 -	New Accounting Pronouncements	11
Note 3 -	Business Combination	14
Note 4 -	Related Party Transactions with Affiliated Company	16
Note 5 -	Restrictions on Cash and Due from Banks and Certain Securities	18
Note 6 -	Pledged Assets	18
Note 7 -	Investment Securities Available-For-Sale	19
Note 8 -	Investment Securities Held-to-Maturity	24
Note 9 -	Loans	26
Note 10 -	Allowance for Loan Losses	35
Note 11 -	FDIC Loss Share Asset	48
Note 12 -	Transfers of Financial Assets and Mortgage Servicing Rights	49
Note 13 -	Other Assets	53
Note 14 -	Goodwill and Other Intangible Assets	53
Note 15 -	Deposits	55
Note 16 -	Borrowings	55
Note 17 -	Trust Preferred Securities	58
Note 18 -	Stockholders’ Equity	60
Note 19 -	Guarantees	60
Note 20 -	Commitments and Contingencies	63
Note 21 -	Non-consolidated Variable Interest Entities	67
Note 22 -	Fair Value Measurement	68
Note 23 -	Fair Value of Financial Instruments	77
Note 24 -	Net Income (Loss) per Common Share	79
Note 25 -	Other Service Fees	80
Note 26 -	Pension and Postretirement Benefits	80
Note 27 -	Stock-Based Compensation	81
Note 28 -	Income Taxes	84
Note 29 -	Supplemental Disclosure on the Consolidated Statements of Cash Flows	88
Note 30 -	Segment Reporting	88
Note 31 -	Subsequent Events	96
Note 32 -	Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities	96

Note 1 – Summary of significant accounting policies

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. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of 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 condition data at December 31, 2010 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 2010 consolidated financial statements and notes to the financial statements to conform with the 2011 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, 2010, included in the Corporation’s 2010 Annual Report (the “2010 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.

Nature of Operations

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 continental United States, 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 auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA 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 Popular’s system infrastructures and transaction processing businesses.

On April 30, 2010, BPPR acquired certain assets and assumed certain deposits and liabilities of Westernbank Puerto Rico (“Westernbank”) from the Federal Deposit Insurance Corporation (the “FDIC”). The transaction is referred to herein as the “Westernbank FDIC-assisted transaction”. Refer to Note 3 to the consolidated financial statements and to the Corporation’s 2010 Annual Report for information on this business combination. Assets subject to loss sharing agreements with the FDIC, including loans and other real estate owned, are labeled “covered” on the consolidated statements of condition and applicable notes to the consolidated financial statements. Loans acquired in the Westernbank FDIC-assisted transaction, except for credit cards, and other real estate owned are considered “covered” because the Corporation will be reimbursed for 80% of any future losses on these assets subject to the terms of the FDIC loss sharing agreements.

Note 2 – New Accounting Pronouncements

FASB Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”)

The FASB issued Accounting Standards Update (“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. Under either method, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The amendments to the Codification in the 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. The ASU also do 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.

The amendments of this guidance are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011. ASU 2011-05 should be applied retrospectively. Early adoption is permitted.

The provisions of this guidance impact presentation disclosure only and will not have an impact on the Corporation’s consolidated financial statements.

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

The Corporation will be evaluating the potential impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

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 repo 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) eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The new guidance is 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 is not permitted.

The Corporation will be evaluating the potential impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

FASB Accounting Standards Update 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 2011-02”)

The FASB issued ASU 2011-02 in April 2011. This ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.

The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach. This Update clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties. Specifically this Update (1) provides additional guidance on determining whether a creditor has granted a concession, including guidance on collection of all amounts due, receipt of additional collateral or guarantees from the debtor, and restructuring the debt at a below-market rate; (2) includes examples for creditors to determine whether an insignificant delay in payment is considered a concession; (3) prohibits creditors from using the borrower’s effective rate test in ASC Subtopic 470-50 to evaluate whether a concession has been granted to the borrower; (4) adds factors for creditors to use to determine whether the debtor is experiencing financial difficulties; and (5) ends the deferral of the additional disclosures about TDR activities required by ASU 2010-20 and requires public companies to begin providing these disclosures in the period of adoption.

For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Early application is permitted. For purposes of measuring impairment for receivables that are newly considered impaired under the new guidance, an entity should apply the amendments prospectively in the first period of adoption and disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption.

The Corporation is evaluating the potential impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

FASB Accounting Standards Update 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”)

The FASB issued ASU 2010-29 in December 2010. The amendments in ASU 2010-29 affect any public entity that enters into business combinations that are material on an individual or aggregate basis. This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This guidance impacts disclosures only and has not had an impact on the Corporation’s consolidated statements of condition or results of operations at June 30, 2011.

FASB Accounting Standards Update 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”)

The amendments in ASU 2010-28, issued in December 2010, modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance has not had an impact on the Corporation’s consolidated statement of condition or results of operations at June 30, 2011.

Note 3 – Business combination

Westernbank FDIC-assisted transaction

As indicated in Note 1 to these consolidated financial statements, on April 30, 2010, the Corporation’s Puerto Rico banking subsidiary, BPPR, acquired certain assets and assumed certain deposits and liabilities of Westernbank Puerto Rico from the FDIC, as receiver for Westernbank.

The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the Corporation at the acquisition date. The Corporation recorded goodwill of $87 million at acquisition.


(In thousands)	Book value prior to purchase accounting adjustments		Fair value adjustments			Additional consideration		As recorded by Popular, Inc. on April 30, 2010
Assets:
Cash and money market investments	$	358,132	$	—		$	—	$	358,132
Investment in Federal Home Loan Bank stock		58,610		—			—		58,610
Loans		8,554,744		(3,354,287	)		—		5,200,457
FDIC loss share indemnification asset		—		2,337,748			—		2,337,748
Covered other real estate owned		125,947		(73,867	)		—		52,080
Core deposit intangible		—		24,415			—		24,415
Receivable from FDIC (associated to the note issued to the FDIC)		—		—			111,101		111,101
Other assets		44,926		—			—		44,926
Goodwill		—		86,841			—		86,841

Total assets	$	9,142,359	$	(979,150	)	$	111,101	$	8,274,310

Liabilities:
Deposits	$	2,380,170	$	11,465		$	—	$	2,391,635
Note issued to the FDIC (including a premium of $12,411 resulting from the fair value adjustment)		—		—			5,770,495		5,770,495
Equity appreciation instrument		—		—			52,500		52,500
Contingent liability on unfunded loan commitments		—		45,755			—		45,755
Accrued expenses and other liabilities		13,925		—			—		13,925

Total liabilities	$	2,394,095	$	57,220		$	5,822,995	$	8,274,310

During the fourth quarter of 2010, retrospective adjustments were made to the estimated fair values of assets acquired and liabilities assumed associated with the Westernbank FDIC-assisted transaction to reflect new information obtained during the measurement period (as defined by ASC Topic 805), about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. The retrospective adjustments were mostly driven by refinements in credit loss assumptions because of new information that became available after the closing of the transaction. The revisions principally resulted in a decrease in the estimated credit losses, thus increasing the fair value of acquired loans and reducing the FDIC loss share indemnification asset.

The following table presents the principal changes in fair value as previously reported in Form 10-Qs filed during 2010 and the revised amounts recorded during the measurement period with general explanations of the major changes.


(In thousands)	April 30, 2010 As recasted^[a]			April 30, 2010 As previously reported^[b]			Change
Assets:
Loans	$	8,554,744		$	8,554,744		$	—
Less: Discount		(3,354,287	)		(4,293,756	)		939,469	[c]

Net loans		5,200,457			4,260,988			939,469
FDIC loss share indemnification asset		2,337,748			3,322,561			(984,813	)[d]
Goodwill		86,841			106,230			(19,389	)
Other assets		649,264			670,419			(21,155	)[e]

Total assets	$	8,274,310		$	8,360,198		$	(85,888	)


Liabilities:
Deposits	$	2,391,635		$	2,391,635		$	—
Note issued to the FDIC		5,770,495			5,769,696			799	[f]
Equity appreciation instrument		52,500			52,500			—
Contingent liability on unfunded loan commitments		45,755			132,442			(86,687	)[g]
Other liabilities		13,925			13,925			—

Total liabilities	$	8,274,310		$	8,360,198		$	(85,888	)

[a]	Amounts reported include retrospective adjustments during the measurement period (ASC Topic 805) related to the Westernbank FDIC-assisted transaction.

[b]	Amounts are presented as previously reported.

[c]

Represents the increase in management’s best estimate of fair value mainly driven by lower expected future credit losses on the acquired loan portfolio based on facts and circumstances existent as of the acquisition date but known to management during the measurement period. The main factors that influenced the revised estimated credit losses included review of collateral, revised appraised values, and review of borrower’s payment capacity in more thorough due diligence procedures.

[d]	This reduction is directly related to the reduction in estimated future credit losses as they are substantially covered by the FDIC under the 80% FDIC loss sharing agreements.

[e]	Represents revisions to acquisition date estimated fair values of other real estate properties based on new appraisals obtained.

[f]	Represents an increase in the premium on the note issued to the FDIC, also influenced by the cash flow streams impacted by the revised loan payment estimates.

[g]	Reduction due to revised credit loss estimates and commitments.

The following table depicts the principal changes in the consolidated statement of operations as a result of the recasting for retrospective adjustments for the quarters ended June 30, 2010 and September 30, 2010.


	As previously			As previously						As previously		As previously
	recasted			reported						recasted		reported
	Quarter ended			Quarter ended						Quarter ended		Quarter ended
(In thousands)	June 30, 2010			June 30, 2010			Difference			September 30, 2010		September 30, 2010		Difference
Net interest income	$	314,595		$	278,976		$	35,619		$	356,778	$	386,918	$	(30,140	)
Provision for loan losses		202,258			202,258			—			215,013		215,013		—

Net interest income after provision for loan losses		112,337			76,718			35,619			141,765		171,905		(30,140	)
Non-interest income		198,827			215,858			(17,031	)		825,894		796,524		29,370
Operating expenses		328,416			328,416			—			371,541		371,547		(6	)

(Loss) income before income tax		(17,252	)		(35,840	)		18,588			596,118		596,882		(764	)
Income tax expense		27,237			19,988			7,249			102,032		102,388		(356	)

Net (loss) income	$	(44,489	)	$	(55,828	)	$	11,339		$	494,086	$	494,494	$	(408	)

Note 4 – Related party transactions with affiliated company

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in 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 (referred to as “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 was initially recorded at a fair value of $177 million at September 30, 2010, which was determined based on the third-party buyer’s enterprise value of EVERTEC as determined in an orderly transaction between market participants, reduced by the debt incurred, net of debt issue costs, utilized as part of the sale transaction. Prospectively, the investment in EVERTEC is accounted for under the equity method and 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 the Corporation’s 2010 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 $210 million at June 30, 2011 (December 31, 2010 - $197 million), and is included as part of “other assets” in the consolidated statements of condition. The increase in the investment balance from December 31, 2010 to June 30, 2011 is due to the recognition of the Corporation’s share of the earnings of EVERTEC, net of intra-entity profits and losses. The Corporation did not receive any distributions from EVERTEC during the period from January 1, 2011 through June 30, 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 Corporation recognized a $12.0 million loss in other operating income for the quarter ended June 30, 2011 as part of its equity method investment in EVERTEC ($14.0 million loss for the six months ended June 30, 2011), which consisted of $0.7 million of the Corporation’s share in EVERTEC’s net income ($12.5 million for the six months ended June 30, 2011), more than offset by $12.7 million of intercompany income eliminations (investor-investee transactions at 49%) ($26.5 million for the six months ended June 30, 2011). The unfavorable impact of the elimination in non-interest income was offset by the elimination of 49% of the professional fees (expense) paid by the Corporation to EVERTEC during the same period.

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 quarter and six months ended June 30, 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						Six months ended
	June 30, 2011						June 30, 2011
(In thousands)	100%			51% majority interest			100%			51% majority interest			Category
Interest income on loan to EVERTEC	$	881		$	450		$	1,937		$	988		Interest income
Interest income on investment securities issued by EVERTEC		962			491			1,925			982		Interest income
Interest expense on deposits		(107	)		(55	)		(402	)		(205	)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		7,279			3,712			14,072			7,177		Other service fees
Processing fees on services provided by EVERTEC		(37,122	)		(18,932	)		(75,800	)		(38,658	)	Professional fees
Rental income charged to EVERTEC		1,797			917			3,604			1,838		Net occupancy
Transition services provided to EVERTEC		297			152			666			340		Other operating expenses

The Corporation had the following financial condition accounts outstanding with EVERTEC at June 30, 2011 and December 31, 2010. The 51% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statement of condition.


	At June 30, 2011				At December 31, 2010
(In thousands)	100%		51% majority interest		100%		51% majority interest
Loans	$	53,202	$	27,133	$	58,126	$	29,644
Investment securities		35,000		17,850		35,000		17,850
Deposits		32,635		16,644		38,761		19,768
Accounts receivables (Other assets)		3,788		1,932		3,922		2,000
Accounts payable (Other liabilities)		17,083		8,712		17,416		8,882

Prior to the EVERTEC sale transaction on September 30, 2010, EVERTEC had certain performance bonds outstanding, which were guaranteed by the Corporation under a general indemnity agreement between the Corporation and the insurance companies issuing the bonds. The Corporation agreed to maintain, for a 5-year period following September 30, 2010, the guarantee of the performance bonds. The EVERTEC’s performance bonds guaranteed by the Corporation amounted to approximately $10.4 million at June 30, 2011. Also, EVERTEC had an existing letter of credit issued by BPPR, for an amount of $2.9 million. 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.

Furthermore, under the terms of the sale of EVERTEC, the Corporation was required for a period of twelve months following September 30, 2010 to sell its equity interests in Serfinsa and Consorcio de Tarjetas Dominicanas, S.A (“CONTADO”) to EVERTEC, subject to complying with certain rights of first refusal in favor of the Serfinsa and CONTADO shareholders. During the six months ended June 30, 2011, the Corporation sold its equity interest in CONTADO to CONTADO shareholders and EVERTEC and recognized a gain of $16.7 million, net of tax, upon the sale. The Corporation’s investment in CONTADO, accounted for under the equity method, amounted to $16 million at December 31, 2010. During the quarter ended June 30, 2011, the Corporation sold its equity investment in Serfinsa and recognized a gain of approximately $212 thousand, net of tax. The Corporation’s investment in Serfinsa, accounted for under the equity method, amounted to $1.8 million at December 31, 2010.

Note 5 – Restrictions on cash and due from banks and certain securities

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances were approximately $833 million at June 30, 2011 (December 31, 2010 - $835 million; June 30, 2010 - $788 million). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

As required by the Puerto Rico International Banking Center Law, at June 30, 2011, December 31, 2010 and June 30, 2010, the Corporation maintained separately for its two international banking entities (“IBEs”), $0.6 million in time deposits, equally split for the two IBEs, which were considered restricted assets.

At June 30, 2011, the Corporation maintained restricted cash of $2 million to support a letter of credit. The cash is being held in an interest-bearing money market account (December 31, 2010 - $5 million; June 30, 2010 - $6 million).

At June 30, 2011 and December 31, 2010, the Corporation maintained restricted cash of $1 million that represents funds deposited in an escrow account which are guaranteeing possible liens or encumbrances over the title and insured properties (June 30, 2010 - $2 million).

At June 30, 2011, the Corporation maintained restricted cash of $14 million to comply with the requirements of the credit card networks (December 31, 2010 and June 30, 2010 - $12 million).

Note 6 – 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, loan servicing agreements and the loss sharing agreements with the FDIC. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:


	June 30,		December 31,		June 30,
(In thousands)	2011		2010		2010
Investment securities available-for-sale, at fair value	$	2,184,884	$	1,867,249	$	2,384,829
Investment securities held-to-maturity, at amortized cost		37,312		25,770		125,770
Loans held-for-sale measured at lower of cost or fair value		1,539		2,862		3,069
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		4,347,453		4,787,002		4,893,577
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		10,326,448		9,695,200		9,392,857
Other real estate covered under loss sharing agreements with the FDIC		74,803		57,565		55,176

Total pledged assets	$	16,972,439	$	16,435,648	$	16,855,278

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

At June 30, 2011, investment securities available-for-sale and held-to-maturity totaling $ 1.7 billion, and loans of $ 0.4 billion, served as collateral to secure public funds (December 31, 2010 - $ 1.3 billion and $ 0.5 million, respectively; June 30, 2010 - $ 2.0 billion in investment securities available-for-sale).

At June 30, 2011, the Corporation’s banking subsidiaries had short-term and long-term credit facilities authorized with the FHLB aggregating $1.7 billion (December 31, 2010 - $1.6 billion; June 30, 2010- $1.7 billion). Refer to Note 16 to the consolidated financial statements for borrowings outstanding under these credit facilities. At June 30, 2011, the credit facilities authorized with the

FHLB were collateralized by $ 4.9 billion in loans held-in-portfolio (December 31, 2010 - $ 3.8 billion in loans held-in-portfolio; June 30, 2010 - $ 3.0 billion in loans held-in-portfolio and investment securities available-for-sale). Also, BPPR had a borrowing capacity at the Fed discount window of $2.5 billion (December 31, 2010 - $2.7 billion; June 30, 2010 - $2.7 billion), which remained unused as of such date. The amount available under this credit facility is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2011, the credit facilities with the Fed discount window were collateralized by $3.8 billion in loans held-in-portfolio (December 31, 2010- $4.2 billion; June 30, 2010 - $4.4 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statement of condition.

Loans held-in-portfolio and other real estate owned that are covered by loss sharing agreements with the FDIC amounting to $ 4.4 billion at June 30, 2011 (December 31, 2010 - $ 4.8 billion; June 30, 2010- $ 4.9 billion), serve as collateral to secure the note issued to the FDIC. Refer to Note 16 to the consolidated financial statements for descriptive information on the note issued to the FDIC.

Note 7 – Investment securities available for sale

The following table presents the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at June 30, 2011, December 31, 2010 and June 30, 2010.


	At June 30, 2011
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	35,334	$	2,858	$	—	$	38,192		3.35	%

Total U.S. Treasury securities		35,334		2,858		—		38,192		3.35

Obligations of U.S. Government sponsored entities
Within 1 year		106,724		494		—		107,218		2.91
After 1 to 5 years		914,238		45,355		73		959,520		3.67
After 5 to 10 years		180,000		1,950		—		181,950		2.66

Total obligations of U.S. Government sponsored entities		1,200,962		47,799		73		1,248,688		3.45

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,845		12		—		10,857		3.96
After 1 to 5 years		15,567		277		24		15,820		4.52
After 5 to 10 years		2,055		25		—		2,080		5.30
After 10 years		5,430		79		—		5,509		5.29

Total obligations of Puerto Rico, States and political subdivisions		33,897		393		24		34,266		4.51

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		2,728		93		—		2,821		4.67
After 5 to 10 years		78,595		1,077		339		79,333		2.45
After 10 years		1,489,248		41,876		216		1,530,908		2.95

Total collateralized mortgage obligations - federal agencies		1,570,571		43,046		555		1,613,062		2.93

Collateralized mortgage obligations - private label
After 5 to 10 years		7,224		3		308		6,919		0.72
After 10 years		68,472		—		4,905		63,567		2.27

Total collateralized mortgage obligations - private label		75,696		3		5,213		70,486		2.12

Mortgage - backed securities
Within 1 year		633		52		—		685		4.91
After 1 to 5 years		11,516		444		—		11,960		3.99
After 5 to 10 years		159,166		11,198		2		170,362		4.71
After 10 years		2,053,343		113,015		341		2,166,017		4.25

Total mortgage - backed securities		2,224,658		124,709		343		2,349,024		4.28

Equity securities (without contractual maturity)		7,795		748		278		8,265		3.44

Other
After 5 to 10 years		17,849		2,363		—		20,212		10.99
After 10 years		7,264		32		—		7,296		3.62

Total other		25,113		2,395		—		27,508		8.86

Total investment securities available-for-sale	$	5,174,026	$	221,951	$	6,486	$	5,389,491		3.66	%


	At December 31, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	7,001	$	122	$	—	$	7,123		1.50	%
After 5 to 10 years		28,676		2,337		—		31,013		3.81

Total U.S. Treasury securities		35,677		2,459		—		38,136		3.36

Obligations of U.S. Government sponsored entities
Within 1 year		153,738		2,043		—		155,781		3.39
After 1 to 5 years		1,000,955		53,681		661		1,053,975		3.72
After 5 to 10 years		1,512		36		—		1,548		6.30

Total obligations of U.S. Government sponsored entities		1,156,205		55,760		661		1,211,304		3.68

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,404		19		—		10,423		3.92
After 1 to 5 years		15,853		279		5		16,127		4.52
After 5 to 10 years		20,765		43		194		20,614		5.07
After 10 years		5,505		52		19		5,538		5.28

Total obligations of Puerto Rico, States and political subdivisions		52,527		393		218		52,702		4.70

Collateralized mortgage obligations - federal agencies
Within 1 year		77		1		—		78		3.88
After 1 to 5 years		1,846		105		—		1,951		4.77
After 5 to 10 years		107,186		1,507		936		107,757		2.50
After 10 years		1,096,271		32,248		11		1,128,508		2.87

Total collateralized mortgage obligations - federal agencies		1,205,380		33,861		947		1,238,294		2.84

Collateralized mortgage obligations - private label
After 5 to 10 years		10,208		31		158		10,081		1.20
After 10 years		79,311		78		4,532		74,857		2.29

Total collateralized mortgage obligations - private label		89,519		109		4,690		84,938		2.17

Mortgage - backed securities
Within 1 year		2,983		101		—		3,084		3.62
After 1 to 5 years		15,738		649		3		16,384		3.98
After 5 to 10 years		170,662		10,580		3		181,239		4.71
After 10 years		2,289,210		86,870		632		2,375,448		4.26

Total mortgage - backed securities		2,478,593		98,200		638		2,576,155		4.29

Equity securities (without contractual maturity)		8,722		855		102		9,475		3.43

Other
After 5 to 10 years		17,850		262		—		18,112		10.98
After 10 years		7,805		—		69		7,736		3.62

Total other		25,655		262		69		25,848		8.74

Total investment securities available-for-sale	$	5,052,278	$	191,899	$	7,325	$	5,236,852		3.78	%


	At June 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	107,776	$	1,311	$	—	$	109,087		1.47	%
After 5 to 10 years		29,023		2,577		—		31,600		3.80

Total U.S. Treasury securities		136,799		3,888		—		140,687		1.97

Obligations of U.S. Government sponsored entities
Within 1 year		384,536		5,504		—		390,040		3.52
After 1 to 5 years		1,254,234		65,786		—		1,320,020		3.41
After 5 to 10 years		11,928		83		—		12,011		5.30
After 10 years		26,887		517		—		27,404		5.68

Total obligations of U.S. Government sponsored entities		1,677,585		71,890		—		1,749,475		3.49

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		22,406		171		—		22,577		4.09
After 5 to 10 years		27,049		321		4		27,366		5.12
After 10 years		5,560		129		—		5,689		5.28

Total obligations of Puerto Rico, States and political subdivisions		55,015		621		4		55,632		4.72

Collateralized mortgage obligations - federal agencies
Within 1 year		159		3		—		162		4.06
After 1 to 5 years		4,714		136		—		4,850		4.61
After 5 to 10 years		98,717		1,507		88		100,136		2.65
After 10 years		1,310,206		32,005		2,341		1,339,870		2.93

Total collateralized mortgage obligations - federal agencies		1,413,796		33,651		2,429		1,445,018		2.92

Collateralized mortgage obligations - private label
After 5 to 10 years		16,737		21		522		16,236		2.08
After 10 years		92,212		116		6,577		85,751		2.37

Total collateralized mortgage obligations - private label		108,949		137		7,099		101,987		2.32

Mortgage - backed securities
Within 1 year		20,661		177		—		20,838		2.96
After 1 to 5 years		20,438		544		—		20,982		3.96
After 5 to 10 years		188,865		12,762		—		201,627		4.72
After 10 years		2,629,056		107,342		161		2,736,237		4.31

Total mortgage - backed securities		2,859,020		120,825		161		2,979,684		4.33

Equity securities		9,005		202		503		8,704		3.46

Total investment securities available-for-sale	$	6,260,169	$	231,214	$	10,196	$	6,481,187		3.70	%

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.

Proceeds from the sale of investment securities available-for-sale for the six months ended June 30, 2011 amounted to $19.1 million, with realized losses of $90 thousand. This compares with proceeds of $19.5 million for the six months ended June 30, 2010, with no realized gains or losses as the securities were sold at par value.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011, December 31, 2010 and June 30, 2010.


					At June 30, 2011
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of U.S. Government sponsored entities	$	9,927	$	73	$	—	$	—	$	9,927	$	73
Obligations of Puerto Rico, States and political subdivisions		9,983		17		300		7		10,283		24
Collateralized mortgage obligations - federal agencies		27,797		555		—		—		27,797		555
Collateralized mortgage obligations - private label		26,268		652		44,153		4,561		70,421		5,213
Mortgage-backed securities		31,685		89		9,154		254		40,839		343
Equity securities		2,846		182		53		96		2,899		278

Total investment securities available-for-sale in an unrealized loss position	$	108,506	$	1,568	$	53,660	$	4,918	$	162,166	$	6,486


					At December 31, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of U.S. Government sponsored entities	$	24,284	$	661	$	—	$	—	$	24,284	$	661
Obligations of Puerto Rico, States and political subdivisions		19,357		213		303		5		19,660		218
Collateralized mortgage obligations - federal agencies		40,212		945		2,505		2		42,717		947
Collateralized mortgage obligations - private label		21,231		292		52,302		4,398		73,533		4,690
Mortgage-backed securities		33,261		406		9,257		232		42,518		638
Equity securities		3		8		43		94		46		102
Other		7,736		69		—		—		7,736		69

Total investment securities available-for-sale in an unrealized loss position	$	146,084	$	2,594	$	64,410	$	4,731	$	210,494	$	7,325


					At June 30, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	305	$	4	$	305	$	4
Collateralized mortgage obligations - federal agencies		138,856		1,915		114,113		514		252,969		2,429
Collateralized mortgage obligations - private label		200		8		84,564		7,091		84,764		7,099
Mortgage-backed securities		8,174		109		1,465		52		9,639		161
Equity securities		22		18		7,191		485		7,213		503

Total investment securities available-for-sale in an unrealized loss position	$	147,252	$	2,050	$	207,638	$	8,146	$	354,890	$	10,196

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 June 30, 2011, 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 June 30, 2011, 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 June 30, 2011. During the quarter ended June 30, 2011, the Corporation did not record any other-than-temporary impairment losses on equity securities. Management has the intent and ability to hold the investments in equity securities that are at a loss position at June 30, 2011, for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized losses associated with “Collateralized mortgage obligations – private label” are primarily related to securities backed by residential mortgages. In addition to verifying the credit ratings for the private-label CMOs, management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in the securities. At June 30, 2011, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses at June 30, 2011, 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 June 30, 2011, 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.


	June 30, 2011				December 31, 2010				June 30, 2010
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
FNMA	$	1,008,700	$	1,045,160	$	757,812	$	789,838	$	963,714	$	996,966
FHLB		813,337		855,844		1,003,395		1,056,549		1,418,562		1,486,376
Freddie Mac		959,192		983,969		637,644		654,495		624,844		638,388

Note 8 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at June 30, 2011, December 31, 2010 and June 30, 2010.


	At June 30, 2011
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	12,362	$	1	$	—	$	12,363		0.09	%

Total U.S. Treasury securities		12,362		1		—		12,363		0.09

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		2,235		22		—		2,257		5.56
After 1 to 5 years		15,974		495		—		16,469		4.19
After 5 to 10 years		18,340		393		78		18,655		5.97
After 10 years		54,333		6,764		914		60,183		4.12

Total obligations of Puerto Rico, States and political subdivisions		90,882		7,674		992		97,564		4.54

Collateralized mortgage obligations - private label
After 10 years		166		—		9		157		5.43

Total collateralized mortgage obligations - private label		166		—		9		157		5.43

Other
Within 1 year		1,250		—		—		1,250		0.88
After 1 to 5 years		25,250		375		—		25,625		3.47

Total other		26,500		375		—		26,875		3.35

Total investment securities held-to-maturity	$	129,910	$	8,050	$	1,001	$	136,959		3.87	%


	At December 31, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	25,873	$	—	$	1	$	25,872		0.11	%

Total U.S. Treasury securities		25,873		—		1		25,872		0.11

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		2,150		6		—		2,156		5.33
After 1 to 5 years		15,529		333		—		15,862		4.10
After 5 to 10 years		17,594		115		268		17,441		5.96
After 10 years		56,702		—		1,649		55,053		4.25

Total obligations of Puerto Rico, States and political subdivisions		91,975		454		1,917		90,512		4.58

Collateralized mortgage obligations - private label
After 10 years		176		—		10		166		5.45

Total collateralized mortgage obligations - private label		176		—		10		166		5.45

Other
Within 1 year		4,080		—		—		4,080		1.15
After 1 to 5 years		250		—		7		243		1.20

Total other		4,330		—		7		4,323		1.15

Total investment securities held-to-maturity	$	122,354	$	454	$	1,935	$	120,873		3.51	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company


	At June 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	25,797	$	4	$	—	$	25,801		0.22	%

Total U.S. Treasury securities		25,797		4		—		25,801		0.22

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		7,110		13		—		7,123		2.12
After 1 to 5 years		109,820		509		—		110,329		5.52
After 5 to 10 years		17,808		289		75		18,022		5.94
After 10 years		46,050		63		1,000		45,113		3.88

Total obligations of Puerto Rico, States and political subdivisions		180,788		874		1,075		180,587		5.01

Collateralized mortgage obligations - private label
After 10 years		209		—		12		197		5.45

Total collateralized mortgage obligations - private label		209		—		12		197		5.45

Other
Within 1 year		1,372		—		—		1,372		1.91
After 1 to 5 years		1,250		—		—		1,250		0.84

Total other		2,622		—		—		2,622		1.40

Total investment securities held-to-maturity	$	209,416	$	878	$	1,087	$	209,207		4.38	%

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

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011, December 31, 2010 and June 30, 2010: