Edgar Filing: POPULAR INC

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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 September 30, 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, 103,105,983 shares outstanding as of October 31, 2012.

POPULAR, INC.

INDEX


		Page

Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at September 30, 2012 and December 31, 2011		4

Unaudited Consolidated Statements of Operations for the quarters and nine months ended September 30, 2012 and 2011		5

Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2012 and 2011		6

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011		7

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 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		126

Item 3. Quantitative and Qualitative Disclosures about Market Risk		193

Item 4. Controls and Procedures		193

Part II – Other Information

Item 1. Legal Proceedings		193

Item 1A. Risk Factors		193

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		194

Item 6. Exhibits		195

Signatures		196

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 and the impact of proposed capital standards on our capital ratios;

•

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)	September 30, 2012			December 31, 2011
Assets:
Cash and due from banks	$	477,342		$	535,282

Money market investments:
Federal funds sold		38,358			75,000
Securities purchased under agreements to resell		240,761			252,668
Time deposits with other banks		646,544			1,048,506

Total money market investments		925,663			1,376,174

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		181,133			402,591
Other trading securities		45,785			33,740
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		1,464,402			1,737,868
Other investment securities available-for-sale		3,655,899			3,271,955
Investment securities held-to-maturity, at amortized cost (fair value at September 30, 2012—$124,102; December 31, 2011—$125,254)		122,072			125,383
Other investment securities, at lower of cost or realizable value (realizable value at September 30, 2012 - $215,140; December 31, 2011—$181,583)		213,389			179,880
Loans held-for-sale, at lower of cost or fair value		337,049			363,093

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		20,851,108			20,703,192
Loans covered under loss sharing agreements with the FDIC		3,903,867			4,348,703
Less – Unearned income		97,255			100,596
Allowance for loan losses		761,172			815,308

Total loans held-in-portfolio, net		23,896,548			24,135,991

FDIC loss share asset		1,559,057			1,915,128
Premises and equipment, net		525,733			538,486
Other real estate not covered under loss sharing agreements with the FDIC		252,024			172,497
Other real estate covered under loss sharing agreements with the FDIC		125,514			109,135
Accrued income receivable		133,943			125,209
Mortgage servicing assets, at fair value		158,367			151,323
Other assets		1,724,927			1,462,393
Goodwill		647,757			648,350
Other intangible assets		56,762			63,954

Total assets	$	36,503,366		$	37,348,432

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	5,404,470		$	5,655,474
Interest bearing		20,915,029			22,286,653

Total deposits		26,319,499			27,942,127

Assets sold under agreements to repurchase		1,944,564			2,141,097
Other short-term borrowings		1,206,200			296,200
Notes payable		1,866,377			1,856,372
Other liabilities		1,097,742			1,193,883

Total liabilities		32,434,382			33,429,679

Commitments and contingencies (See Note 19)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding		50,160			50,160
Common stock, $0.01 par value; 170,000,000 shares authorized;
103,112,305 shares issued at September 30, 2012 (December 31, 2011 – 102,634,640) and 103,097,143 shares outstanding (December 31, 2011 – 102,590,457)		1,031			1,026
Surplus		4,131,681			4,123,898
Accumulated deficit		(54,183	)		(212,726	)
Treasury stock – at cost, 15,162 shares at September 30, 2012 (December 31, 2011 – 44,183)		(270	)		(1,057	)
Accumulated other comprehensive loss, net of tax		(59,435	)		(42,548	)

Total stockholders’ equity		4,068,984			3,918,753

Total liabilities and stockholders’ equity	$	36,503,366		$	37,348,432

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarter ended September 30,						Nine months ended September 30,
(In thousands, except per share information)	2012			2011			2012			2011
Interest income:
Loans	$	387,381		$	428,999		$	1,164,665		$	1,294,834
Money market investments		862			886			2,774			2,759
Investment securities		39,945			51,085			128,828			157,183
Trading account securities		5,815			10,788			17,669			29,332

Total interest income		434,003			491,758			1,313,936			1,484,108

Interest expense:
Deposits		43,000			65,868			143,193			213,419
Short-term borrowings		9,876			13,744			36,503			41,478
Long-term debt		37,701			42,835			112,032			141,999

Total interest expense		90,577			122,447			291,728			396,896

Net interest income		343,426			369,311			1,022,208			1,087,212
Provision for loan losses—non-covered loans		83,589			150,703			247,846			306,177
Provision for loan losses—covered loans		22,619			25,573			78,284			89,735

Net interest income after provision for loan losses		237,218			193,035			696,078			691,300

Service charges on deposit accounts		45,858			46,346			138,577			138,778
Other service fees		64,784			62,664			192,850			179,623
Net gain (loss) on sale and valuation adjustments of investment securities		64			8,134			(285	)		8,044
Trading account (loss) profit		(2,266	)		2,912			(11,692	)		3,287
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		18,495			20,294			18,569			14,756
Adjustments (expense) to indemnity reserves on loans sold		(8,717	)		(10,285	)		(17,990	)		(29,587	)
FDIC loss share (expense) income		(6,707	)		(5,361	)		(19,387	)		49,344
Fair value change in equity appreciation instrument		—			—			—			8,323
Other operating income		4,198			(2,314	)		32,699			38,350

Total non-interest income		115,709			122,390			333,341			410,918

Operating expenses:
Personnel costs		111,550			111,724			349,377			328,823
Net occupancy expenses		24,409			25,885			73,534			76,428
Equipment expenses		11,447			10,517			33,688			33,314
Other taxes		12,666			12,391			38,178			38,986
Professional fees		53,412			48,756			153,644			144,923
Communications		6,500			6,800			20,276			21,198
Business promotion		14,924			14,650			44,754			35,842
FDIC deposit insurance		24,173			23,285			72,006			68,640
Loss on early extinguishment of debt		43			109			25,184			8,637
Other real estate owned (OREO) expenses		5,896			3,234			22,441			11,885
Other operating expenses		22,854			22,541			73,714			63,555
Amortization of intangibles		2,481			2,463			7,605			6,973

Total operating expenses		290,355			282,355			914,401			839,204

Income before income tax		62,572			33,070			115,018			263,014
Income tax expense (benefit)		15,384			5,537			(46,317	)		114,664

Net Income	$	47,188		$	27,533		$	161,335		$	148,350

Net Income Applicable to Common Stock	$	46,257		$	26,602		$	158,543		$	145,558

Net Income per Common Share – Basic	$	0.45		$	0.26		$	1.55		$	1.42

Net Income per Common Share – Diluted	$	0.45		$	0.26		$	1.55		$	1.42

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,						Nine months ended,
	September 30,						September 30,
(In thousands)	2012			2011			2012			2011
Net income	$	47,188		$	27,533		$	161,335		$	148,350

Other comprehensive (loss) income before tax:
Foreign currency translation adjustment		(120	)		(222	)		(1,066	)		(1,950	)
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			18,868			9,730
Amortization of prior service cost		(50	)		(240	)		(150	)		(720	)
Unrealized holding (losses) gains on securities available-for-sale arising during the period		(6,567	)		29,021			(33,022	)		59,822
Reclassification adjustment for (gains) losses included in net income		(64	)		(8,134	)		285			(8,044	)
Unrealized net losses on cash flow hedges		(6,285	)		(6,295	)		(12,612	)		(9,939	)
Reclassification adjustment for net losses (gains) included in net income		3,701			4,139			9,677			7,333

Other comprehensive (loss) income before tax		(3,096	)		21,512			(18,020	)		66,316
Income tax benefit (expense)		244			(708	)		1,133			(4,780	)

Total other comprehensive (loss) income, net of tax		(2,852	)		20,804			(16,887	)		61,536

Comprehensive income, net of tax	$	44,336		$	48,337		$	144,448		$	209,886


Tax effect allocated to each component of other comprehensive (loss) income:
	Quarter ended						Nine months ended,
	September 30,						September 30,
(In thousands)	2012			2011			2012			2011
Underfunding of pension and postretirement benefit plans	$	—		$	—		$	—		$	—
Amortization of net losses		(1,740	)		(965	)		(5,220	)		(2,896	)
Amortization of prior service cost		15			72			45			216
Unrealized holding (losses) gains on securities available-for-sale arising during the period		1,193			(1,611	)		5,428			(4,101	)
Reclassification adjustment for (gains) losses included in net income		—			1,233			—			1,219
Unrealized net losses on cash flow hedges		1,886			1,805			3,783			2,982
Reclassification adjustment for net losses (gains) included in net income		(1,110	)		(1,242	)		(2,903	)		(2,200	)

Income tax benefit (expense)	$	244		$	(708	)	$	1,133		$	(4,780	)

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Common		Preferred				Accumulated			Treasury		Accumulated other comprehensive
(In thousands)	stock		stock		Surplus		deficit			stock		income (loss)		Total
Balance at December 31, 2010	$	1,023	$	50,160	$	4,103,211	$	(347,328)		$	(574)	$	(5,961)	$	3,800,531
Net income								148,350							148,350
Issuance of stock		2				5,392									5,394
Dividends declared:
Preferred stock								(2,792	)						(2,792	)
Common stock purchases											(418)				(418)
Other comprehensive income, net of tax													61,536		61,536

Balance at September 30, 2011	$	1,025	$	50,160	$	4,108,603	$	(201,770)		$	(992)	$	55,575	$	4,012,601

Balance at December 31, 2011		$1,026	$	50,160	$	4,123,898	$	(212,726)		$	(1,057)	$	(42,548)	$	3,918,753
Net income								161,335							161,335
Issuance of stock		5				7,783									7,788
Dividends declared:
Preferred stock								(2,792	)						(2,792	)
Common stock purchases											(276)				(276)
Common stock reissuance											1,063				1,063
Other comprehensive loss, net of tax													(16,887)		(16,887)

Balance at September 30, 2012	$	1,031	$	50,160	$	4,131,681	$	(54,183)		$	(270)	$	(59,435)	$	4,068,984


Disclosure of changes in number of shares:	September 30, 2012			December 31, 2011			September 30, 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		102,634,640			102,292,916			102,292,916
Issuance of stock		477,665			341,724			194,110

Balance at end of the period		103,112,305			102,634,640			102,487,026
Treasury stock		(15,162	)		(44,183	)		(39,486	)

Common Stock – Outstanding		103,097,143			102,590,457			102,447,540

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended September 30,
(In thousands)	2012			2011
Cash flows from operating activities:
Net income	$	161,335		$	148,350

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		326,130			395,912
Amortization of intangibles		7,605			6,973
Depreciation and amortization of premises and equipment		34,953			34,864
Net accretion of discounts and amortization of premiums and deferred fees		(22,118	)		(97,668	)
Impairment losses on net assets to be disposed of		—			6,085
Fair value adjustments on mortgage servicing rights		7,217			26,373
Fair value change in equity appreciation instrument		—			(8,323	)
FDIC loss share expense (income)		19,387			(49,344	)
Amortization of prepaid FDIC assessment		30,157			68,640
Adjustments (expense) to indemnity reserves on loans sold		17,990			29,587
Losses from investments under the equity method		9,788			11,250
Deferred income tax (benefit) expense		(150,201	)		44,608
(Gain) loss on:
Disposition of premises and equipment		(8,253	)		(2,019	)
Early extinguishment of debt		24,950			—
Sale and valuation adjustments of investment securities		285			(8,044	)
Sale of loans, including valuation adjustments on loans held-for-sale		(18,569	)		(14,756	)
Sale of equity method investment		—			(16,907	)
Sale of other assets		(2,545	)		—
Acquisitions of loans held-for-sale		(288,844	)		(253,401	)
Proceeds from sale of loans held-for-sale		242,088			101,549
Net disbursements on loans held-for-sale		(860,804	)		(617,591	)
Net (increase) decrease in:
Trading securities		849,304			492,882
Accrued income receivable		(8,735	)		14,924
Other assets		65,944			(25,576	)
Net increase (decrease) in:
Interest payable		(7,553	)		(7,344	)
Pension and other postretirement benefit obligation		24,156			(128,802	)
Other liabilities		(48,062	)		(109,155	)

Total adjustments		244,270			(105,283	)

Net cash provided by operating activities		405,605			43,067

Cash flows from investing activities:
Net decrease (increase) in money market investments		450,511			(289,844	)
Purchases of investment securities:
Available-for-sale		(1,284,834	)		(1,198,613	)
Held-to-maturity		(250	)		(65,358	)
Other		(152,607	)		(116,582	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,166,618			979,868
Held-to-maturity		4,398			54,617
Other		119,098			104,231
Proceeds from sale of investment securities:
Available-for-sale		8,031			35,099
Other		—			2,294
Net repayments on loans		687,582			1,013,103
Proceeds from sale of loans		51,677			290,119
Acquisition of loan portfolios		(1,051,588	)		(985,675	)
Payments received from FDIC under loss sharing agreements		327,739			561,111
Cash paid related to business acquisitions		—			(500	)
Net proceeds from sale of equity method investment		—			31,503
Mortgage servicing rights purchased		(1,620	)		(1,251	)
Acquisition of premises and equipment		(34,336	)		(37,868	)
Proceeds from sale of:
Premises and equipment		20,612			12,314
Other productive assets		1,026			—
Foreclosed assets		142,019			133,017

Net cash provided by investing activities		454,076			521,585

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		(1,624,634	)		1,192,652
Federal funds purchased and assets sold under agreements to repurchase		(196,533	)		189,056
Other short-term borrowings		910,000			(198,022	)
Payments of notes payable		(72,815	)		(2,055,254	)
Proceeds from issuance of notes payable		61,331			419,500
Proceeds from issuance of common stock		7,788			5,394
Dividends paid		(2,482	)		(2,792	)
Treasury stock acquired		(276	)		(418	)

Net cash used in financing activities		(917,621	)		(449,884	)

Net (decrease) increase in cash and due from banks		(57,940	)		114,768
Cash and due from banks at beginning of period		535,282			452,373

Cash and due from banks at end of period	$	477,342		$	567,141

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			15
Note 4 - Pledged assets			16
Note 5 - Investment securities available-for-sale			17
Note 6 - Investment securities held-to-maturity			21
Note 7 - Loans			23
Note 8 - Allowance for loan losses			32
Note 9 - FDIC loss share asset and true-up payment obligation			57
Note 10 - Transfers of financial assets and mortgage servicing assets			58
Note 11 - Other assets			62
Note 12 - Goodwill and other intangible assets			62
Note 13 - Deposits			67
Note 14 - Borrowings			68
Note 15 - Trust preferred securities			70
Note 16 - Stockholders’ equity			72
Note 17 - Accumulated other comprehensive income (loss)			73
Note 18 - Guarantees			73
Note 19 - Commitments and contingencies			76
Note 20 - Non-consolidated variable interest entities			78
Note 21 - Related party transactions with affiliated company / joint venture			81
Note 22 - Fair value measurement			84
Note 23 - Fair value of financial instruments			92
Note 24 - Net income per common share			97
Note 25 - Other service fees			98
Note 26 - FDIC loss share income (expense)			98
Note 27 - Pension and postretirement benefits			99
Note 28 - Stock-based compensation			100
Note 29 - Income taxes			103
Note 30 - Supplemental disclosure on the consolidated statements of cash flows			107
Note 31 - Segment reporting			108
Note 32 - Subsequent events			114
Note 33 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities			115

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. The BPNA branches operate under the name of Popular Community Bank. Note 31 to the consolidated financial statements presents information about the Corporation’s business segments.

Principles of Consolidation and Basis of Presentation

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.

On May 29, 2012, the Corporation effected a 1-for-10 reverse split of its common stock. The reverse split is described further in Note 16 to these consolidated financial statements. All share and per share information in the consolidated financial statements and accompanying notes have been adjusted to retroactively reflect the 1-for-10 reverse stock split.

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 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (“ASU 2012-06”)

The FASB issued ASU 2012-06 in October 2012. ASU 2012-06 addresses the diversity in practice about how to interpret the terms “on the same basis” and “contractual limitations” when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). When a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently the cash flows expected to be collected on the indemnification asset changes, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement, that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets.

ASU 2012-06 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted.

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

FASB Accounting Standards Update 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”)

The FASB issued ASU 2012-02 in July 2012. ASU 2012-02 is intended to simplify how entities test indefinite-lived intangible assets, other than goodwill, for impairment. ASU 2012-02 permits an entity the option to first assess qualitative factors to determine whether it is “more likely than not” that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with ASC Subtopic 350-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This guidance results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. The previous guidance under ASC Subtopic 350-30 required an entity to test indefinite-lived intangible assets for impairment on at least an annual basis by comparing an asset’s fair value with its carrying amount and recording an impairment loss for an amount equal to the excess of the asset’s carrying amount over its fair value. Under the amendments in this ASU, an entity is not required to calculate the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. In addition the new qualitative indicators replace those currently used to determine whether indefinite-lived intangible assets should be tested for impairment on an interim basis.

ASU 2012-12 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual or interim impairment tests performed as of a date before July 27, 2012, as long as the financial statements have not yet been issued. The Corporation did not elect to adopt early the provisions of this ASU.

The provisions of this guidance simplify how entities test for indefinite-lived assets impairment and will not have an impact on the Corporation’s consolidated financial statements.

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 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.

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 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 has not impacted the Corporation’s consolidated financial statements as of September 30, 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 interim or annual periods 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 has not had a material impact on the Corporation’s consolidated financial statements as of September 30, 2012. Refer to Notes 22 and 23 for additional fair value disclosures included for the quarter and nine months ended September 30, 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 interim or annual periods 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 Corporation adopted this guidance on January 1, 2012. It has not had an impact on the Corporation’s consolidated financial statements as of September 30, 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 $900 million at September 30, 2012 (December 31, 2011—$838 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 September 30, 2012, the Corporation held $38 million in restricted assets in the form of cash and funds deposited in money market accounts (December 31, 2011—$36 million).

Note 4 – Pledged assets

Certain securities and loans 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:


(In thousands)	September 30, 2012		December 31, 2011
Investment securities available-for-sale, at fair value	$	1,757,309	$	1,894,651
Investment securities held-to-maturity, at amortized cost		25,000		25,000
Loans held-for-sale measured at lower of cost or fair value		132		5,286
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		476,061		—
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		8,544,687		8,571,268

Total pledged assets	$	10,803,189	$	10,496,205

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 September 30, 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).

At September 30, 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 to $2.8 billion (December 31, 2011—$2.0 billion). Refer to Note 14 to the consolidated financial statements for borrowings outstanding under these credit facilities. At September 30, 2012, the credit facilities authorized with the FHLB were collateralized by $ 4.0 billion in loans held-in-portfolio (December 31, 2011—$ 3.2 billion). Also, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $4.4 billion (December 31, 2011—$2.6 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 September 30, 2012, the credit facilities with the Fed discount window were collateralized by $ 4.7 billion in loans held-in-portfolio (December 31, 2011—$ 4.0 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 September 30, 2012 trades receivables from brokers and counterparties amounting to $267 million were pledged to secure repurchase agreements (December 31, 2011—$68 million).

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 September 30, 2012
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
U.S. Treasury securities
Within 1 year	$	7,016	$	43	$	—	$	7,059		1.50	%
After 1 to 5 years		27,423		3,225		—		30,648		3.82

Total U.S. Treasury securities		34,439		3,268		—		37,707		3.35

Obligations of U.S. Government sponsored entities
Within 1 year		539,000		11,603		—		550,603		3.93
After 1 to 5 years		190,521		2,661		—		193,182		1.57
After 5 to 10 years		317,543		3,811		172		321,182		1.93

Total obligations of U.S. Government sponsored entities		1,047,064		18,075		172		1,064,967		2.89

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		5,220		43		—		5,263		5.26
After 1 to 5 years		6,262		169		42		6,389		4.65
After 10 years		37,290		1,062		—		38,352		5.38

Total obligations of Puerto Rico, States and political subdivisions		48,772		1,274		42		50,004		5.27

Collateralized mortgage obligations—federal agencies
After 1 to 5 years		5,506		51		—		5,557		1.49
After 5 to 10 years		45,831		2,067		—		47,898		2.96
After 10 years		2,116,579		48,324		1,316		2,163,587		2.35

Total collateralized mortgage obligations—federal agencies		2,167,916		50,442		1,316		2,217,042		2.36

Collateralized mortgage obligations—private label
After 5 to 10 years		35		1		—		36		4.88
After 10 years		39,754		229		1,106		38,877		2.66

Total collateralized mortgage obligations—private label		39,789		230		1,106		38,913		2.66

Mortgage-backed securities
Within 1 year		600		24		—		624		3.80
After 1 to 5 years		3,705		196		—		3,901		3.94
After 5 to 10 years		89,364		7,258		—		96,622		4.71
After 10 years		1,461,674		116,479		40		1,578,113		4.21

Total mortgage-backed securities		1,555,343		123,957		40		1,679,260		4.24

Equity securities (without contractual maturity)		6,595		1,011		76		7,530		3.41

Other
After 5 to 10 years		18,032		2,363		—		20,395		11.00
After 10 years		4,342		141		—		4,483		3.61

Total other		22,374		2,504		—		24,878		9.57

Total investment securities available-for-sale	$	4,922,292	$	200,761	$	2,752	$	5,120,301		3.14	%


	At December 31, 2011
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		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	%

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 nine months ended September 30, 2012 were $ 8.0 million (September 30, 2011—$ 35.1 million). Gross realized gains and losses on the sale of investment securities available-for-sale were as follows:


	For the quarter ended September 30,						Nine months ended September 30,
(In thousands)	2012			2011			2012			2011
Gross realized gains	$	65		$	8,508		$	65		$	8,514
Gross realized losses		(1	)		(34	)		(350	)		(130	)

Net realized gains (losses) on sale of investment securities available-for-sale	$	64		$	8,474		$	(285	)	$	8,384

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 September 30, 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 U.S. Government sponsored entities	$	46,248	$	172	$	—	$	—	$	46,248	$	172
Obligations of Puerto Rico, States and political subdivisions		752		9		2,032		33		2,784		42
Collateralized mortgage obligations—federal agencies		218,129		1,312		2,491		4		220,620		1,316
Collateralized mortgage obligations—private label		—		—		10,263		1,106		10,263		1,106
Mortgage-backed securities		204		4		787		36		991		40
Equity securities		1,852		64		49		12		1,901		76

Total investment securities available-for-sale in an unrealized loss position	$	267,185	$	1,561	$	15,622	$	1,191	$	282,807	$	2,752


	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	$	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

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 September 30, 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 September 30, 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 September 30, 2012. No other-than-temporary impairment losses on equity securities were recorded during the quarter and nine months ended September 30, 2012 ($340 thousand recorded during the quarter and nine months ended September 30, 2011). Management has the intent and ability to hold the investments in equity securities that are at a loss position at September 30, 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 September 30, 2012, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses at September 30, 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 September 30, 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.


	September 30, 2012				December 31, 2011
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	1,372,644	$	1,412,195	$	1,049,315	$	1,089,069
FHLB		528,814		540,766		553,940		578,617
Freddie Mac		1,257,159		1,281,095		984,270		1,010,669

Note 6 – Investment securities held-to-maturity


	At September 30, 2012
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	7,420	$	20	$	—	$	7,440		2.63	%
After 1 to 5 years		11,335		619		—		11,954		5.86
After 5 to 10 years		18,780		1,046		—		19,826		6.03
After 10 years		57,890		698		384		58,204		3.96

Total obligations of Puerto Rico, States and political subdivisions		95,425		2,383		384		97,424		4.49

Collateralized mortgage obligations—federal agencies
After 10 years		147		6		—		153		5.45

Total collateralized mortgage obligations—federal agencies		147		6		—		153		5.45

Other
Within 1 year		250		—		—		250		1.05
After 1 to 5 years		26,250		25		—		26,275		3.41

Total other		26,500		25		—		26,525		3.39

Total investment securities held-to-maturity	$	122,072	$	2,414	$	384	$	124,102		4.25	%


	At December 31, 2011
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Fair		average
(In thousands)	cost		gains		losses		value		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	%

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 September 30, 2012 and December 31, 2011.


	At September 30, 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	$	—	$	—	$	19,161	$	384	$	19,161	$	384

Total investment securities held-to-maturity in an unrealized loss position	$	—	$	—	$	19,161	$	384	$	19,161	$	384


	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

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 September 30, 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 September 30, 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 September 30, 2012. At September 30, 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 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 September 30, 2012 and December 31, 2011.


	Non-covered loans		Non-covered loans
(In thousands)	HIP at September 30, 2012		HIP at December 31, 2011
Commercial multi-family	$	932,434	$	808,933
Commercial real estate non-owner occupied		2,643,533		2,665,499
Commercial real estate owner occupied		2,640,074		2,817,266
Commercial and industrial		3,412,590		3,681,629
Construction		258,453		239,939
Mortgage		6,022,422		5,518,460
Leasing		538,014		548,706
Legacy^[2]		465,848		648,409
Consumer:
Credit cards		1,195,413		1,230,029
Home equity lines of credit		506,206		557,894
Personal		1,357,441		1,130,593
Auto		546,481		518,476
Other		234,944		236,763

Total loans held-in-portfolio^[1]	$	20,753,853	$	20,602,596

[1]	Non-covered loans held-in-portfolio at September 30, 2012 are net of $97 million in unearned income and exclude $337 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 September 30, 2012 and December 31, 2011.


	Covered loans at		Covered loans at
(In thousands)	September 30, 2012		December 31, 2011
Commercial real estate	$	2,153,790	$	2,271,295
Commercial and industrial		170,572		241,447
Construction		393,101		546,826
Mortgage		1,106,851		1,172,954
Consumer		79,553		116,181

Total loans held-in-portfolio	$	3,903,867	$	4,348,703

The following table provides a breakdown of loans held-for-sale (“LHFS”) at September 30, 2012 and December 31, 2011 by main categories.


	Non-covered loans
(In thousands)	September 30, 2012		December 31, 2011
Commercial	$	17,696	$	25,730
Construction		88,030		236,045
Legacy		3,107		468
Mortgage		228,216		100,850

Total	$	337,049	$	363,093

During the quarter and nine months ended September 30, 2012, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $453 million and $1.1 billion, respectively (September 30, 2011—$177 million and $1.1 billion, respectively). Also, the Corporation recorded purchases of $230 million in consumer loans during the nine months ended September 30, 2012 (September 30, 2011—$130 million). In addition, during the quarter and nine months ended September 30, 2012, the Corporation recorded purchases of construction loans amounting to $0.1 million and $1 million, respectively, and none during 2011. There were no purchases of commercial loans during the quarter and nine months ended September 30, 2012 and 2011.

The Corporation performed whole-loan sales involving approximately $94 million and $238 million of residential mortgage loans during the quarter and nine months ended September 30, 2012, respectively (September 30, 2011- $39 million and $309 million, respectively). Also, the Corporation securitized approximately $ 181 million and $ 576 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2012, respectively (September 30, 2011—$ 194 million and $ 667 million, respectively). Furthermore, the Corporation securitized approximately $ 107 million and $ 238 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2012, respectively (September 30, 2011- $ 42 million and $ 163 million, respectively). Also, the Corporation securitized approximately $ 20 million of mortgage loans into Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities during the quarter and nine months ended September 30, 2012. There were no securitizations into FHLMC for the quarter and nine months ended September 30, 2011. The Corporation sold commercial and construction loans with a book value of approximately $9 million and $48 million during the quarter and nine months ended September 30, 2012, respectively (September 30, 2011- $13 million and $27 million, respectively). In addition, during the third quarter of 2011, other construction and commercial loans held-for-sale with a combined book value of $128 million were sold to a joint venture in which the Corporation holds minority interest.

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 September 30, 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 September 30, 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	$	24,031	$	—	$	17,714	$	—	$	41,745	$	—
Commercial real estate non-owner occupied		72,315		—		87,439		—		159,754		—
Commercial real estate owner occupied		361,955		—		38,789		—		400,744		—
Commercial and industrial		154,480		247		15,494		—		169,974		247
Construction		37,793		—		12,140		—		49,933		—
Mortgage		598,523		354,356		33,529		—		632,052		354,356
Leasing		4,837		—		—		—		4,837		—
Legacy		—		—		48,735		—		48,735		—
Consumer:
Credit cards		—		21,648		483		—		483		21,648
Home equity lines of credit		—		170		10,436		—		10,436		170
Personal		19,982		3		1,671		—		21,653		3
Auto		7,731		—		8		—		7,739		—
Other		2,379		546		36		—		2,415		546

Total^[1]	$	1,284,026	$	376,970	$	266,474	$	—	$	1,550,500	$	376,970

[1]	For purposes of this table non-performing loans exclude $ 109 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 September 30, 2012 and December 31, 2011 for non-covered loans held-in-portfolio (net of unearned income).


September 30, 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	$	427	$	—	$	24,031	$	24,458	$	94,829	$	119,287
Commercial real estate non-owner occupied		4,694		1,174		72,315		78,183		1,261,421		1,339,604
Commercial real estate owner occupied		23,205		7,032		361,955		392,192		1,708,447		2,100,639
Commercial and industrial		18,513		5,183		154,727		178,423		2,445,862		2,624,285
Construction		1,040		—		37,793		38,833		171,923		210,756
Mortgage		249,917		112,807		952,879		1,315,603		3,603,282		4,918,885
Leasing		6,680		1,739		4,837		13,256		524,758		538,014
Consumer:
Credit cards		15,644		10,174		21,648		47,466		1,133,339		1,180,805
Home equity lines of credit		47		241		170		458		16,788		17,246
Personal		14,467		8,615		19,985		43,067		1,172,033		1,215,100
Auto		25,302		7,319		7,731		40,352		505,170		545,522
Other		4,768		408		2,925		8,101		225,515		233,616

Total	$	364,704	$	154,692	$	1,660,996	$	2,180,392	$	12,863,367	$	15,043,759


September 30, 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	$	4,778	$	1,693	$	17,714	$	24,185	$	788,962	$	813,147
Commercial real estate non-owner occupied		21,266		9,387		87,439		118,092		1,185,837		1,303,929
Commercial real estate owner occupied		2,819		—		38,789		41,608		497,827		539,435
Commercial and industrial		5,361		1,986		15,494		22,841		765,464		788,305
Construction		6,317		—		12,140		18,457		29,240		47,697
Mortgage		15,307		13,002		33,529		61,838		1,041,699		1,103,537
Legacy		7,484		6,222		48,735		62,441		403,407		465,848
Consumer:
Credit cards		244		188		483		915		13,693		14,608
Home equity lines of credit		4,024		2,611		10,436		17,071		471,889		488,960
Personal		528		2,578		1,671		4,777		137,564		142,341
Auto		34		1		8		43		916		959
Other		3		13		36		52		1,276		1,328

Total	$	68,165	$	37,681	$	266,474	$	372,320	$	5,337,774	$	5,710,094


September 30, 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	$	5,205	$	1,693	$	41,745	$	48,643	$	883,791	$	932,434
Commercial real estate non-owner occupied		25,960		10,561		159,754		196,275		2,447,258		2,643,533
Commercial real estate owner occupied		26,024		7,032		400,744		433,800		2,206,274		2,640,074
Commercial and industrial		23,874		7,169		170,221		201,264		3,211,326		3,412,590
Construction		7,357		—		49,933		57,290		201,163		258,453
Mortgage		265,224		125,809		986,408		1,377,441		4,644,981		6,022,422
Leasing		6,680		1,739		4,837		13,256		524,758		538,014
Legacy		7,484		6,222		48,735		62,441		403,407		465,848
Consumer:
Credit cards		15,888		10,362		22,131		48,381		1,147,032		1,195,413
Home equity lines of credit		4,071		2,852		10,606		17,529		488,677		506,206
Personal		14,995		11,193		21,656		47,844		1,309,597		1,357,441
Auto		25,336		7,320		7,739		40,395		506,086		546,481
Other		4,771		421		2,961		8,153		226,791		234,944

Total	$	432,869	$	192,373	$	1,927,470	$	2,552,712	$	18,201,141	$	20,753,853


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

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company