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 September 30, 2013

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, 103,349,416 shares outstanding as of November 4, 2013.

POPULAR, INC.

INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Financial Condition at September 30, 2013 and December 31, 2012		5

Unaudited Consolidated Statements of Operations for the quarters and nine months ended September 30, 2013 and 2012		6

Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2013 and 2012		7

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012		8

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012		9

Notes to Unaudited Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		137

Item 3. Quantitative and Qualitative Disclosures about Market Risk		207

Item 4. Controls and Procedures		207

Part II – Other Information

Item 1. Legal Proceedings		207

Item 1A. Risk Factors		207

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		210

Item 6. Exhibits		211

Signatures		212

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;

•

the resolution of our dispute with the FDIC under our loss share agreement entered into in connection with the Westernbank-FDIC assisted transaction; 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, 2012 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, 2013			December 31, 2012
Assets:
Cash and due from banks	$	368,590		$	439,363

Money market investments:
Federal funds sold		—			33,515
Securities purchased under agreements to resell		222,396			213,462
Time deposits with other banks		739,392			838,603

Total money market investments		961,788			1,085,580

Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		311,597			271,624
Other trading securities		27,251			42,901
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		1,374,939			1,603,693
Other investment securities available-for-sale		3,761,679			3,480,508
Investment securities held-to-maturity, at amortized cost (fair value 2013 - $119,249; 2012 - $144,233)		140,355			142,817
Other investment securities, at lower of cost or realizable value (realizable value 2013 - $201,349; 2012 - $187,501)		198,864			185,443
Loans held-for-sale, at lower of cost or fair value		124,532			354,468

Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		21,520,054			21,080,005
Loans covered under loss sharing agreements with the FDIC		3,076,009			3,755,972
Less - Unearned income		92,871			96,813
Allowance for loan losses		642,928			730,607

Total loans held-in-portfolio, net		23,860,264			24,008,557

FDIC loss share asset		1,324,711			1,399,098
Premises and equipment, net		519,623			535,793
Other real estate not covered under loss sharing agreements with the FDIC		135,502			266,844
Other real estate covered under loss sharing agreements with the FDIC		159,968			139,058
Accrued income receivable		122,881			125,728
Mortgage servicing assets, at fair value		161,445			154,430
Other assets		1,803,478			1,569,578
Goodwill		647,757			647,757
Other intangible assets		46,892			54,295

Total assets	$	36,052,116		$	36,507,535

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	5,762,554		$	5,794,629
Interest bearing		20,632,500			21,205,984

Total deposits		26,395,054			27,000,613

Federal funds purchased and assets sold under agreements to repurchase		1,793,208			2,016,752
Other short-term borrowings		826,200			636,200
Notes payable		1,544,696			1,777,721
Other liabilities		1,099,073			966,249

Total liabilities		31,658,231			32,397,535

Commitments and contingencies (See Note 21)

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; 103,365,275 shares issued (2012 - 103,193,303) and 103,327,146 shares outstanding (2012 - 103,169,806)		1,034			1,032
Surplus		4,155,244			4,150,294
Retained earnings		445,330			11,826
Treasury stock - at cost, 38,129 shares (2012 - 23,497)		(877	)		(444	)
Accumulated other comprehensive loss, net of tax		(257,006	)		(102,868	)

Total stockholders’ equity		4,393,885			4,110,000

Total liabilities and stockholders’ equity	$	36,052,116		$	36,507,535

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarters ended September 30,						Nine months ended September 30,
(In thousands, except per share information)	2013			2012			2013			2012
Interest income:
Loans	$	392,195		$	387,949		$	1,173,046		$	1,166,393
Money market investments		848			862			2,632			2,774
Investment securities		33,561			40,412			107,490			130,212
Trading account securities		5,242			5,815			16,212			17,669

Total interest income		431,846			435,038			1,299,380			1,317,048

Interest expense:
Deposits		31,848			43,022			105,968			143,297
Short-term borrowings		9,564			9,876			29,113			36,503
Long-term debt		36,228			37,701			108,061			112,032

Total interest expense		77,640			90,599			243,142			291,832

Net interest income		354,206			344,439			1,056,238			1,025,216
Provision for loan losses - non-covered loans		55,230			83,589			485,438			247,846
Provision for loan losses - covered loans		17,433			22,619			60,489			78,284

Net interest income after provision for loan losses		281,543			238,231			510,311			699,086

Service charges on deposit accounts		43,096			45,858			130,755			138,577
Other service fees		58,584			57,954			173,559			172,582
Mortgage banking activities		18,896			21,847			57,281			60,418
Net gain (loss) and valuation adjustments on investment securities		—			64			5,856			(285	)
Trading account (loss) profit		(6,607	)		5,443			(11,936	)		6,040
Net gain (loss) on sale of loans, including valuation adjustments on loans held-for-sale		3,454			(1,205	)		(54,532	)		(30,459	)
Adjustments (expense) to indemnity reserves on loans sold		(2,387	)		(8,717	)		(30,162	)		(17,990	)
FDIC loss share (expense) income		(14,866	)		(6,707	)		(44,887	)		(19,387	)
Other operating income		191,789			16,837			393,445			71,236

Total non-interest income		291,959			131,374			619,379			380,732

Operating expenses:
Personnel costs		116,839			111,550			347,507			349,377
Net occupancy expenses		24,711			23,615			72,292			71,143
Equipment expenses		11,768			11,447			35,561			33,688
Other taxes		17,749			12,666			44,623			38,178
Professional fees		72,039			70,952			212,500			206,692
Communications		6,558			6,500			20,034			20,276
Business promotion		14,982			14,924			43,461			44,754
FDIC deposit insurance		16,100			24,173			44,883			72,006
Loss on early extinguishment of debt		3,388			43			3,388			25,184
Other real estate owned (OREO) expenses		17,175			5,896			69,678			22,441
Other operating expenses		22,822			22,786			68,553			73,456
Amortization of intangibles		2,468			2,481			7,403			7,605

Total operating expenses		326,599			307,033			969,883			964,800

Income before income tax		246,903			62,572			159,807			115,018
Income tax expense (benefit)		17,768			15,384			(276,489	)		(46,317	)

Net Income	$	229,135		$	47,188		$	436,296		$	161,335

Net Income Applicable to Common Stock	$	228,204		$	46,257		$	433,504		$	158,543

Net Income per Common Share - Basic	$	2.22		$	0.45		$	4.22		$	1.55

Net Income per Common Share - Diluted	$	2.22		$	0.45		$	4.21		$	1.55

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Quarters ended, September 30,						Nine months ended, September 30,
(In thousands)	2013			2012			2013			2012
Net income	$	229,135		$	47,188		$	436,296		$	161,335

Other comprehensive loss before tax:
Foreign currency translation adjustment		(2,013	)		(120	)		(3,942	)		(1,066	)
Amortization of net losses of pension and postretirement benefit plans		6,168			6,289			18,506			18,868
Amortization of prior service cost of pension and postretirement benefit plans		—			(50	)		—			(150	)
Unrealized holding losses on investments arising during the period		(33,091	)		(6,567	)		(177,560	)		(33,022	)
Reclassification adjustment for losses included in net income		—			(64	)		—			285
Unrealized net (losses) gains on cash flow hedges		(3,496	)		(6,285	)		2,286			(12,612	)
Reclassification adjustment for net (gains) losses included in net income		(1,456	)		3,701			(4,652	)		9,677

Other comprehensive loss before tax		(33,888	)		(3,096	)		(165,362	)		(18,020	)
Income tax benefit		2,921			244			11,224			1,133

Total other comprehensive loss, net of tax		(30,967	)		(2,852	)		(154,138	)		(16,887	)

Comprehensive income, net of tax	$	198,168		$	44,336		$	282,158		$	144,448

Tax effect allocated to each component of other comprehensive loss:


	Quarters ended September 30,						Nine months ended, September 30,
(In thousands)	2013			2012			2013			2012
Amortization of net losses of pension and postretirement benefit plans	$	(2,406	)	$	(1,740	)	$	(7,219	)	$	(5,220	)
Amortization of prior service cost of pension and postretirement benefit plans		—			15			—			45
Unrealized holding losses on investments arising during the period		3,588			1,193			17,479			5,428
Unrealized net (losses) gains on cash flow hedges		1,171			1,886			(850	)		3,783
Reclassification adjustment for net (gains) losses included in net income		568			(1,110	)		1,814			(2,903	)

Income tax benefit	$	2,921		$	244		$	11,224		$	1,133

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


(In thousands)	Common stock		Preferred stock		Surplus		(Accumulated deficit) retained earnings			Treasury stock			Accumulated other comprehensive loss			Total
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

Balance at December 31, 2012	$	1,032	$	50,160	$	4,150,294	$	11,826		$	(444	)	$	(102,868	)	$	4,110,000
Net income								436,296									436,296
Issuance of stock		2				4,950											4,952
Dividends declared:
Preferred stock								(2,792	)								(2,792	)
Common stock purchases											(466	)					(466	)
Common stock reissuance											33						33
Other comprehensive loss, net of tax														(154,138	)		(154,138	)

Balance at September 30, 2013	$	1,034	$	50,160	$	4,155,244	$	445,330		$	(877	)	$	(257,006	)	$	4,393,885


Disclosure of changes in number of shares:	September 30, 2013			September 30, 2012
Preferred Stock:
Balance at beginning and end of period		2,006,391			2,006,391

Common Stock - Issued:
Balance at beginning of period		103,193,303			102,634,640
Issuance of stock		171,972			477,665

Balance at end of the period		103,365,275			103,112,305
Treasury stock		(38,129	)		(15,162	)

Common Stock - Outstanding		103,327,146			103,097,143

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)	2013			2012
Cash flows from operating activities:
Net income	$	436,296		$	161,335

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		545,927			326,130
Amortization of intangibles		7,403			7,605
Depreciation and amortization of premises and equipment		37,056			34,953
Net accretion of discounts and amortization of premiums and deferred fees		(48,195	)		(22,118	)
Fair value adjustments on mortgage servicing rights		6,862			7,217
FDIC loss share expense		44,887			19,387
Amortization of prepaid FDIC assessment		—			30,157
Adjustments (expense) to indemnity reserves on loans sold		30,162			17,990
Earnings from investments under the equity method		(42,740	)		(28,748	)
Deferred income tax benefit		(303,038	)		(150,201	)
(Gain) loss on:
Disposition of premises and equipment		(3,060	)		(8,253	)
Sale and valuation adjustments of investment securities		—			285
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities		37,564			(18,569	)
Sale of stock in equity method investee		(312,589	)		—
Sale of other assets		—			(2,545	)
Sale of foreclosed assets, including write-downs		45,045			4,147
Acquisitions of loans held-for-sale		(15,335	)		(288,844	)
Proceeds from sale of loans held-for-sale		168,046			242,088
Net disbursements on loans held-for-sale		(1,169,094	)		(860,804	)
Net (increase) decrease in:
Trading securities		1,193,265			849,304
Accrued income receivable		2,847			(8,735	)
Other assets		(610	)		(30,247	)
Net increase (decrease) in:
Interest payable		(9,480	)		(7,553	)
Pension and other postretirement benefit obligation		6,459			24,156
Other liabilities		(22,590	)		(23,112	)

Total adjustments		198,792			113,690

Net cash provided by operating activities		635,088			275,025

Cash flows from investing activities:
Net decrease in money market investments		123,792			450,511
Purchases of investment securities:
Available-for-sale		(1,661,080	)		(1,284,834	)
Held-to-maturity		(250	)		(250	)
Other		(145,691	)		(152,607	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,576,112			1,166,618
Held-to-maturity		4,278			4,398
Other		132,270			119,098
Proceeds from sale of investment securities:
Available-for-sale		—			8,031
Net repayments on loans		1,014,907			687,582
Proceeds from sale of loans		310,767			51,677
Acquisition of loan portfolios		(1,727,454	)		(1,051,588	)
Net payments from FDIC under loss sharing agreements		52,758			327,739
Return of capital from equity method investments		438			130,580
Proceeds from sale of stock in equity method investee		363,492			—
Mortgage servicing rights purchased		(45	)		(1,620	)
Acquisition of premises and equipment		(27,214	)		(34,336	)
Proceeds from sale of:
Premises and equipment		9,438			20,612
Other productive assets		—			1,026
Foreclosed assets		200,546			142,019

Net cash provided by investing activities		227,064			584,656

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		(642,427	)		(1,624,634	)
Federal funds purchased and assets sold under agreements to repurchase		(223,544	)		(196,533	)
Other short-term borrowings		190,000			910,000
Payments of notes payable		(331,835	)		(72,815	)
Proceeds from issuance of notes payable		73,154			61,331
Proceeds from issuance of common stock		4,952			7,788
Dividends paid		(2,792	)		(2,482	)
Net payments for repurchase of common stock		(433	)		(276	)

Net cash used in financing activities		(932,925	)		(917,621	)

Net decrease in cash and due from banks		(70,773	)		(57,940	)
Cash and due from banks at beginning of period		439,363			535,282

Cash and due from banks at end of period	$	368,590		$	477,342

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	11
Note 2 -	New accounting pronouncements	12
Note 3 -	Restrictions on cash and due from banks and certain securities	14
Note 4 -	Pledged assets	15
Note 5 -	Investment securities available-for-sale	16
Note 6 -	Investment securities held-to-maturity	20
Note 7 -	Loans	22
Note 8 -	Allowance for loan losses	32
Note 9 -	FDIC loss share asset and true-up payment obligation	58
Note 10 -	Mortgage banking activities	60
Note 11 -	Transfers of financial assets and mortgage servicing assets	61
Note 12 -	Other assets	65
Note 13 -	Goodwill and other intangible assets	66
Note 14 -	Deposits	70
Note 15 -	Borrowings	71
Note 16 -	Offsetting of financial assets and liabilities	73
Note 17 -	Trust preferred securities	75
Note 18 -	Stockholders’ equity	77
Note 19 -	Other comprehensive loss	78
Note 20 -	Guarantees	80
Note 21 -	Commitments and contingencies	83
Note 22 -	Non-consolidated variable interest entities	86
Note 23 -	Related party transactions with affiliated company / joint venture	90
Note 24 -	Fair value measurement	96
Note 25 -	Fair value of financial instruments	103
Note 26 -	Net income per common share	110
Note 27 -	Other service fees	111
Note 28 -	FDIC loss share (expense) income	112
Note 29 -	Pension and postretirement benefits	113
Note 30 -	Stock-based compensation	114
Note 31 -	Income taxes	117
Note 32 -	Supplemental disclosure on the consolidated statements of cash flows	120
Note 33 -	Segment reporting	121
Note 34 -	Subsequent events	127
Note 35 -	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	128

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 mortgage, retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation 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 33 to the consolidated financial statements presents information about the Corporation’s business segments.

Effective December 31, 2012, Popular Mortgage, which was a wholly-owned subsidiary of BPPR prior to that date, was merged with and into BPPR as part of an internal reorganization. Popular Mortgage currently operates as a division of BPPR.

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, 2012 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 2012 consolidated financial statements and notes to the financial statements to conform with the 2013 presentation. During the second quarter of 2013, the Corporation discontinued the elimination of its proportionate ownership share of intercompany transactions with EVERTEC from their respective revenue and expense categories to reflect them as an equity pick-up adjustment in other operating income. Refer to Note 23 “Related party transactions with affiliated company / joint venture” for additional information.

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, 2012, included in the Corporation’s 2012 Annual Report (the “2012 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 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”)

The FASB issued ASU 2013-11 in July 2013 which requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. When a net operating loss, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. Currently, there is no explicit guidance under U.S. GAAP on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment of this guidance does not require new recurring disclosures.

ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments of this ASU should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2013-10”)

The FASB issued ASU 2013-10 in July 2013 which permits the use of the Overnight Index Swap Rate (OIS), also referred to as the Fed Funds Effective Swap Rate as a U.S. GAAP benchmark interest rate for hedge accounting purposes under Topic 815. Currently, only the interest rates on direct Treasury obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR) swap rate are considered benchmark interest rates in the United States. This update also removes the restriction on using different benchmark rates for similar hedges. Including the Fed Funds Effective Swap Rate as an acceptable U.S. benchmark interest rate in addition to UST and LIBOR will provide risk managers with a more comprehensive spectrum of interest rate resets to utilize as the designated interest risk component under the hedge accounting guidance in Topic 815.

The amendments of this ASU are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.

The adoption of this guidance has not had a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”)

The FASB issued ASU 2013-05 in March 2013 which clarifies the applicable guidance for the release of the cumulative translation adjustment. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets has resided.

For an equity method investment that is a foreign entity, the partial sale guidance in ASC 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

Additionally, the amendments in this ASU clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events.

ASU 2013-05 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments of this ASU it should apply them as of the beginning of the entity’s fiscal year of adoption.

The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.

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 $963 million at September 30, 2013 (December 31, 2012 - $952 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, 2013 the Corporation held $44 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2012 - $41 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

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, 2013		December 31, 2012
Investment securities available-for-sale, at fair value	$	1,421,432	$	1,606,683
Investment securities held-to-maturity, at amortized cost		35,000		25,000
Loans held-for-sale measured at lower of cost or fair value		1,108		132
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		441,933		452,631
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		8,936,504		8,358,456

Total pledged assets	$	10,835,977	$	10,442,902

Pledged securities 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, 2013, the Corporation had $ 1.0 billion in investment securities available-for-sale and $ 0.6 billion in loans that served as collateral to secure public funds (December 31, 2012 - $ 1.2 billion and $ 0.3 billion, respectively).

At September 30, 2013, 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, 2012 - $2.8 billion). Refer to Note 15 to the consolidated financial statements for borrowings outstanding under these credit facilities. At September 30, 2013, the credit facilities authorized with the FHLB were collateralized by $ 3.8 billion in loans held-in-portfolio (December 31, 2012 - $ 3.8 billion). Also, at September 30, 2013, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $3.4 billion, which remained unused as of such date ( December 31, 2012 - $3.1 billion). 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, 2013, the credit facilities with the Fed discount window were collateralized by $ 5.0 billion in loans held-in-portfolio (December 31, 2012 - $ 4.7 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, 2013 trades receivables from brokers and counterparties amounting to $62 million were pledged to secure repurchase agreements (December 31, 2012 - $133 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, 2013
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	15,000	$	—	$	—	$	15,000		0.07	%
After 1 to 5 years		26,669		2,259		—		28,928		3.85

Total U.S. Treasury securities		41,669		2,259		—		43,928		2.49

Obligations of U.S. Government sponsored entities
Within 1 year		43,130		182		—		43,312		1.47
After 1 to 5 years		506,739		1,951		4,661		504,029		1.38
After 5 to 10 years		736,292		157		19,785		716,664		1.53
After 10 years		23,000		—		1,606		21,394		3.11

Total obligations of U.S. Government sponsored entities		1,309,161		2,290		26,052		1,285,399		1.50

Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		6,234		45		99		6,180		4.67
After 5 to 10 years		7,820		—		107		7,713		4.88
After 10 years		54,585		—		12,551		42,034		5.92

Total obligations of Puerto Rico, States and political subdivisions		68,639		45		12,757		55,927		5.69

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		5,865		101		—		5,966		1.74
After 5 to 10 years		22,433		638		—		23,071		2.93
After 10 years		2,535,653		25,049		55,995		2,504,707		2.05

Total collateralized mortgage obligations - federal agencies		2,563,951		25,788		55,995		2,533,744		2.06

Collateralized mortgage obligations - private label
After 10 years		877		10		—		887		3.76

Total collateralized mortgage obligations - private label		877		10		—		887		3.76

Mortgage-backed securities
Within 1 year		756		45		—		801		3.40
After 1 to 5 years		7,235		348		—		7,583		4.85
After 5 to 10 years		76,962		3,786		1,106		79,642		4.21
After 10 years		1,053,560		56,873		2,855		1,107,578		3.96

Total mortgage-backed securities		1,138,513		61,052		3,961		1,195,604		3.98

Equity securities (without contractual maturity)		6,506		2,466		186		8,786		3.35

Other
After 1 to 5 years		9,727		—		263		9,464		1.68
After 10 years		2,802		77		—		2,879		3.60

Total other		12,529		77		263		12,343		2.11

Total investment securities available-for-sale	$	5,141,845	$	93,987	$	99,214	$	5,136,618		2.40	%


	At December 31, 2012
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
U.S. Treasury securities
Within 1 year	$	7,018	$	20	$	—	$	7,038		1.67	%
After 1 to 5 years		27,236		2,964		—		30,200		3.83

Total U.S. Treasury securities		34,254		2,984		—		37,238		3.39

Obligations of U.S. Government sponsored entities
Within 1 year		460,319		7,614		—		467,933		3.82
After 1 to 5 years		167,177		2,057		—		169,234		1.59
After 5 to 10 years		456,480		3,263		592		459,151		1.74

Total obligations of U.S. Government sponsored entities		1,083,976		12,934		592		1,096,318		2.60

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		5,220		26		—		5,246		3.08
After 1 to 5 years		6,254		130		39		6,345		4.65
After 5 to 10 years		5,513		—		36		5,477		3.79
After 10 years		37,265		648		—		37,913		5.38

Total obligations of Puerto Rico, States and political subdivisions		54,252		804		75		54,981		4.91

Collateralized mortgage obligations - federal agencies
After 1 to 5 years		4,927		35		—		4,962		1.48
After 5 to 10 years		39,897		1,794		—		41,691		2.94
After 10 years		2,270,184		50,740		512		2,320,412		2.21

Total collateralized mortgage obligations - federal agencies		2,315,008		52,569		512		2,367,065		2.22

Collateralized mortgage obligations - private label
After 10 years		2,414		59		—		2,473		4.59

Total collateralized mortgage obligations - private label		2,414		59		—		2,473		4.59

Mortgage-backed securities
Within 1 year		288		13		—		301		3.47
After 1 to 5 years		3,838		191		—		4,029		4.12
After 5 to 10 years		81,645		6,207		—		87,852		4.71
After 10 years		1,297,585		93,509		129		1,390,965		4.18

Total mortgage-backed securities		1,383,356		99,920		129		1,483,147		4.21

Equity securities (without contractual maturity)		6,507		909		10		7,406		3.46

Other
After 1 to 5 years		9,992		—		207		9,785		1.67
After 5 to 10 years		18,032		3,675		—		21,707		11.00
After 10 years		3,945		136		—		4,081		3.62

Total other		31,969		3,811		207		35,573		7.17

Total investment securities available-for-sale	$	4,911,736	$	173,990	$	1,525	$	5,084,201		2.94	%

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

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

There were no sales of investment securities available-for-sale during the nine months ended September 30, 2013. Proceeds from the sale of investments available-for-sale for the nine months ended September 30, 2012 were $8.0 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)	2013		2012			2013		2012

Gross realized gains	$	—	$	65		$	—	$	65

Gross realized losses		—		(2	)		—		(350	)


Net realized gains (losses) on sale of investment securities available-for-sale	$	—	$	63		$	—	$	(285	)

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, 2013
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of U.S. Government sponsored entities	$	999,439	$	25,867	$	3,252	$	185	$	1,002,691	$	26,052
Obligations of Puerto Rico, States and political subdivisions		50,477		12,683		1,971		74		52,448		12,757
Collateralized mortgage obligations - federal agencies		1,439,297		53,316		54,407		2,679		1,493,704		55,995
Mortgage-backed securities		57,035		3,928		902		33		57,937		3,961
Equity securities		1,642		186		—		—		1,642		186
Other		9,464		263		—		—		9,464		263

Total investment securities available-for-sale in an unrealized loss position	$	2,557,354	$	96,243	$	60,532	$	2,971	$	2,617,886	$	99,214


	At December 31, 2012
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of U.S. Government sponsored entities	$	139,278	$	592	$	—	$	—	$	139,278	$	592
Obligations of Puerto Rico, States and political subdivisions		6,229		44		2,031		31		8,260		75
Collateralized mortgage obligations - federal agencies		170,136		512		—		—		170,136		512
Mortgage-backed securities		7,411		90		983		39		8,394		129
Equity securities		—		—		51		10		51		10
Other		9,785		207		—		—		9,785		207

Total investment securities available-for-sale in an unrealized loss position	$	332,839	$	1,445	$	3,065	$	80	$	335,904	$	1,525

As of September 30, 2013, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $99 million, driven by obligations from the U.S. Government sponsored entities, US Agency Collateralized Mortgage Obligations, and Obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all US Agencies’ securities, management considers the US Agency guarantee. The portfolio of Obligations of the Puerto Rico Government is comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality review on these issuers.

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, 2013, 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, 2013, 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, 2013. No other-than-temporary impairment losses on equity securities were recorded during the quarters ended September 30, 2013 and September 30, 2012. Management has the intent and ability to hold the investments in equity securities that are at a loss position at September 30, 2013, for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

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, 2013				December 31, 2012
(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	2,307,890	$	2,277,592	$	1,594,933	$	1,634,927
FHLB		339,910		331,972		520,127		528,287
Freddie Mac		1,178,266		1,172,096		1,198,969		1,221,863

Note 6 – Investment securities held-to-maturity


	At September 30, 2013
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	2,570	$	—	$	33	$	2,537		5.80	%
After 1 to 5 years		22,060		—		1,143		20,917		3.73
After 5 to 10 years		20,015		—		5,354		14,661		6.06
After 10 years		69,088		54		13,721		55,421		2.43

Total obligations of Puerto Rico, States and political subdivisions		113,733		54		20,251		93,536		3.40

Collateralized mortgage obligations - federal agencies
After 10 years		122		7		—		129		5.45

Total collateralized mortgage obligations - federal agencies		122		7		—		129		5.45

Other
Within 1 year		26,000		—		913		25,087		3.41
After 1 to 5 years		500		—		3		497		1.39

Total other		26,500		—		916		25,584		3.37

Total investment securities held-to-maturity	$	140,355	$	61	$	21,167	$	119,249		3.40	%


	At December 31, 2012
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Weighted average yield
Obligations of Puerto Rico, States and political subdivisions
Within 1 year	$	2,420	$	8	$	—	$	2,428		5.74	%
After 1 to 5 years		21,335		520		19		21,836		3.63
After 5 to 10 years		18,780		866		5		19,641		6.03
After 10 years		73,642		449		438		73,653		5.35

Total obligations of Puerto Rico, States and political subdivisions		116,177		1,843		462		117,558		5.15

Collateralized mortgage obligations - federal agencies
After 10 years		140		4		—		144		5.00

Total collateralized mortgage obligations - federal agencies		140		4		—		144		5.00

Other
Within 1 year		250		—		—		250		0.86
After 1 to 5 years		26,250		31		—		26,281		3.40

Total other		26,500		31		—		26,531		3.38

Total investment securities held-to-maturity	$	142,817	$	1,878	$	462	$	144,233		4.82	%

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, 2013 and December 31, 2012.


	At September 30, 2013
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	61,797	$	13,515	$	12,039	$	6,736	$	73,836	$	20,251
Other		24,334		916		—		—		24,334		916

Total investment securities held-to-maturity in an unrealized loss position	$	86,131	$	14,431	$	12,039	$	6,736	$	98,170	$	21,167


	At December 31, 2012
	Less than 12 months				12 months or more				Total
(In thousands)	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
Obligations of Puerto Rico, States and political subdivisions	$	2,365	$	35	$	19,118	$	427	$	21,483	$	462

Total investment securities held-to-maturity in an unrealized loss position	$	2,365	$	35	$	19,118	$	427	$	21,483	$	462

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, 2013 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $64 million of securities issued by three Municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $40 million in securities for which the underlying source of payment is not the central government, but in which it provides a guarantee in the event of default. The Corporation performs periodic credit quality reviews on these issuers. 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 2012 Annual Report.

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at September 30, 2013 and December 31, 2012.


(In thousands)	September 30, 2013		December 31, 2012
Commercial multi-family	$	1,146,929	$	1,021,780
Commercial real estate non-owner occupied		2,881,959		2,634,432
Commercial real estate owner occupied		2,217,503		2,608,450
Commercial and industrial		3,599,086		3,593,540
Construction		293,220		252,857
Mortgage		6,613,133		6,078,507
Leasing		539,290		540,523
Legacy^[2]		235,645		384,217
Consumer:
Credit cards		1,174,330		1,198,213
Home equity lines of credit		485,614		491,035
Personal		1,361,340		1,388,911
Auto		658,826		561,084
Other		220,308		229,643

Total loans held-in-portfolio^[1]	$	21,427,183	$	20,983,192

[1]	Non-covered loans held-in-portfolio at September 30, 2013 are net of $93 million in unearned income and exclude $125 million in loans held-for-sale (December 31, 2012 - $97 million in unearned income and $354 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 segment.

The following table presents the composition of covered loans at September 30, 2013 and December 31, 2012.


(In thousands)	September 30, 2013		December 31, 2012
Commercial real estate	$	1,725,153	$	2,077,411
Commercial and industrial		128,698		167,236
Construction		201,437		361,396
Mortgage		965,779		1,076,730
Consumer		54,942		73,199

Total loans held-in-portfolio	$	3,076,009	$	3,755,972

The following table provides a breakdown of loans held-for-sale (“LHFS”) at September 30, 2013 and December 31, 2012 by main categories.


(In thousands)	September 30, 2013		December 31, 2012
Commercial	$	—	$	16,047
Construction		—		78,140
Legacy		1,680		2,080
Mortgage		122,852		258,201

Total loans held-for-sale	$	124,532	$	354,468

During the quarter and nine months ended September 30, 2013, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $199 million and $1.7 billion, respectively (September 30, 2012 - $453 million and $1.1 billion, respectively). Also, the Corporation recorded purchases of $42 million in consumer loans during the nine months ended September 30, 2013 (September 30, 2012 - $230 million). In addition, during the quarter and nine months ended September 30, 2013, the Corporation recorded purchases of commercial loans amounting to $5 million and $8 million, respectively, and there were no purchases during the quarter and nine months ended September 30, 2012. There were no purchases of construction loans during the quarter and nine months ended September 30, 2013 (September 30, 2012 - $0.1 million and $1 million, respectively).

The Corporation performed whole-loan sales involving approximately $60 million and $614 million of residential mortgage loans during the quarter and nine months ended September 30, 2013, respectively (September 30, 2012 - $94 million and $238 million, respectively). These sales included $435 million from the bulk sale of non-performing mortgage loans, completed during the quarter ended June 30, 2013. Also, the Corporation securitized approximately $ 200 million and $ 767 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2013, respectively (September 30, 2012 - $ 181 million and $ 576 million, respectively). Furthermore, the Corporation securitized approximately $ 102 million and $ 354 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter and nine months ended September 30, 2013, respectively (September 30, 2012 - $ 107 million and $ 238 million, respectively). Also, the Corporation securitized approximately $ 1 million and $ 28 million of mortgage loans into Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities during the quarter and nine months ended September 30, 2013 (September 30, 2012 - $ 20 million and $ 20 million, respectively). The Corporation sold commercial and construction loans with a book value of approximately $6 million and $413 million during the quarter and nine months ended September 30, 2013, respectively (September 30, 2012 - $9 million and $48 million, respectively). These sales included $401 million from the bulk sale of non-performing commercial and construction loans during the quarter ended March 31, 2013.

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, 2013 and December 31, 2012. 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, 2013
	Puerto Rico				U.S. mainland				Popular, Inc.
(In thousands)	Non-accrual loans		Accruing loans past-due 90 days or more		Non-accrual loans		Accruing loans past-due 90 days or more		Non-accrual loans		Accruing loans past-due 90 days or more
Commercial multi-family	$	9,394	$	—	$	21,779	$	—	$	31,173	$	—
Commercial real estate non-owner occupied		41,860		—		54,707		—		96,567		—
Commercial real estate owner occupied		97,237		—		26,792		—		124,029		—
Commercial and industrial		56,078		806		8,193		—		64,271		806
Construction		23,019		—		5,763		—		28,782		—
Mortgage^[2][3]		177,835		392,650		25,373		—		203,208		392,650
Leasing		3,716		—		—		—		3,716		—
Legacy		—		—		24,206		—		24,206		—
Consumer:
Credit cards		—		19,785		482		—		482		19,785
Home equity lines of credit		—		43		7,676		—		7,676		43
Personal		17,477		41		1,340		—		18,817		41
Auto		9,464		—		3		—		9,467		—
Other		5,173		547		6		—		5,179		547

Total^[1]	$	441,253	$	413,872	$	176,320	$	—	$	617,573	$	413,872

[1]	For purposes of this table non-performing loans exclude $ 2 million in non-performing loans held-for-sale.

[2]

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

[3]

It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $113 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of September 30, 2013. Furthermore, the Corporation has approximately $25 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.


At December 31, 2012
	Puerto Rico				U.S. mainland				Popular, Inc.
(In thousands)	Non-accrual loans		Accruing loans past-due 90 days or more		Non-accrual loans		Accruing loans past-due 90 days or more		Non-accrual loans		Accruing loans past-due 90 days or more
Commercial multi-family	$	15,816	$	—	$	18,435	$	—	$	34,251	$	—
Commercial real estate non-owner occupied		66,665		—		78,140		—		144,805		—
Commercial real estate owner occupied		315,534		—		31,931		—		347,465		—
Commercial and industrial		124,717		529		14,051		—		138,768		529
Construction		37,390		—		5,960		—		43,350		—
Mortgage		596,105		364,387		34,025		—		630,130		364,387
Leasing		4,865		—		—		—		4,865		—
Legacy		—		—		40,741		—		40,741		—
Consumer:
Credit cards		—		22,184		505		—		505		22,184
Home equity lines of credit		—		312		7,454		—		7,454		312
Personal		19,300		23		1,905		—		21,205		23
Auto		8,551		—		4		—		8,555		—
Other		3,036		469		3		—		3,039		469

Total^[1]	$	1,191,979	$	387,904	$	233,154	$	—	$	1,425,133	$	387,904

[1]	For purposes of this table non-performing loans exclude $ 96 million in non-performing loans held-for-sale.

The following tables present loans by past due status at September 30, 2013 and December 31, 2012 for non-covered loans held-in-portfolio (net of unearned income).


September 30, 2013
Puerto Rico
	Past due								Current		Non - covered loans HIP Puerto Rico
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Non - covered loans HIP Puerto Rico
Commercial multi-family	$	—	$	334	$	9,394	$	9,728	$	75,552	$	85,280
Commercial real estate non-owner occupied		1,485		3,815		41,860		47,160		1,664,650		1,711,810
Commercial real estate owner occupied		37,237		9,112		97,237		143,586		1,524,630		1,668,216
Commercial and industrial		19,991		16,809		56,884		93,684		2,696,034		2,789,718
Construction		640		1,580		23,019		25,239		226,631		251,870
Mortgage		302,671		143,631		606,332		1,052,634		4,291,048		5,343,682
Leasing		6,408		1,324		3,716		11,448		527,842		539,290
Consumer:
Credit cards		13,223		8,803		19,785		41,811		1,117,504		1,159,315
Home equity lines of credit		381		—		43		424		15,094		15,518
Personal		13,266		6,528		17,518		37,312		1,185,051		1,222,363
Auto		30,407		8,597		9,464		48,468		609,810		658,278
Other		1,658		1,004		5,720		8,382		210,665		219,047

Total	$	427,367	$	201,537	$	890,972	$	1,519,876	$	14,144,511	$	15,664,387


September 30, 2013
U.S. mainland
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	1,381	$	1,862	$	21,779	$	25,022	$	1,036,627	$	1,061,649
Commercial real estate non-owner occupied		3,270		—		54,707		57,977		1,112,172		1,170,149
Commercial real estate owner occupied		6,505		923		26,792		34,220		515,067		549,287
Commercial and industrial		5,408		2,206		8,193		15,807		793,561		809,368
Construction		—		—		5,763		5,763		35,587		41,350
Mortgage		9,448		6,936		25,373		41,757		1,227,694		1,269,451
Legacy		4,943		2,365		24,206		31,514		204,131		235,645
Consumer:
Credit cards		288		178		482		948		14,067		15,015
Home equity lines of credit		3,096		2,920		7,676		13,692		456,404		470,096
Personal		836		834		1,340		3,010		135,967		138,977
Auto		1		—		3		4		544		548
Other		6		20		6		32		1,229		1,261

Total	$	35,182	$	18,244	$	176,320	$	229,746	$	5,533,050	$	5,762,796


September 30, 2013
Popular, Inc.
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Popular, Inc.
Commercial multi-family	$	1,381	$	2,196	$	31,173	$	34,750	$	1,112,179	$	1,146,929
Commercial real estate non-owner occupied		4,755		3,815		96,567		105,137		2,776,822		2,881,959
Commercial real estate owner occupied		43,742		10,035		124,029		177,806		2,039,697		2,217,503
Commercial and industrial		25,399		19,015		65,077		109,491		3,489,595		3,599,086
Construction		640		1,580		28,782		31,002		262,218		293,220
Mortgage		312,119		150,567		631,705		1,094,391		5,518,742		6,613,133
Leasing		6,408		1,324		3,716		11,448		527,842		539,290
Legacy		4,943		2,365		24,206		31,514		204,131		235,645
Consumer:
Credit cards		13,511		8,981		20,267		42,759		1,131,571		1,174,330
Home equity lines of credit		3,477		2,920		7,719		14,116		471,498		485,614
Personal		14,102		7,362		18,858		40,322		1,321,018		1,361,340
Auto		30,408		8,597		9,467		48,472		610,354		658,826
Other		1,664		1,024		5,726		8,414		211,894		220,308

Total	$	462,549	$	219,781	$	1,067,292	$	1,749,622	$	19,677,561	$	21,427,183


December 31, 2012
Puerto Rico
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Puerto Rico
Commercial multi-family	$	1,005	$	—	$	15,816	$	16,821	$	98,272	$	115,093
Commercial real estate non-owner occupied		10,580		4,454		66,665		81,699		1,268,734		1,350,433
Commercial real estate owner occupied		28,240		13,319		315,534		357,093		1,685,393		2,042,486
Commercial and industrial		27,977		5,922		125,246		159,145		2,629,127		2,788,272
Construction		1,243		—		37,390		38,633		173,634		212,267
Mortgage		241,930		121,175		960,492		1,323,597		3,625,327		4,948,924
Leasing		6,493		1,555		4,865		12,913		527,610		540,523
Consumer:
Credit cards		14,521		10,614		22,184		47,319		1,135,753		1,183,072
Home equity lines of credit		124		—		312		436		16,370		16,806
Personal		13,208		7,392		19,323		39,923		1,205,859		1,245,782
Auto		24,128		6,518		8,551		39,197		521,119		560,316
Other		2,120		536		3,505		6,161		222,192		228,353

Total	$	371,569	$	171,485	$	1,579,883	$	2,122,937	$	13,109,390	$	15,232,327


December 31, 2012
U.S. mainland
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Loans HIP U.S. mainland
Commercial multi-family	$	6,828	$	5,067	$	18,435	$	30,330	$	876,357	$	906,687
Commercial real estate non-owner occupied		19,032		1,309		78,140		98,481		1,185,518		1,283,999
Commercial real estate owner occupied		9,979		100		31,931		42,010		523,954		565,964
Commercial and industrial		12,885		1,975		14,051		28,911		776,357		805,268
Construction		5,268		—		5,960		11,228		29,362		40,590
Mortgage		29,909		10,267		34,025		74,201		1,055,382		1,129,583
Legacy		15,765		20,112		40,741		76,618		307,599		384,217
Consumer:
Credit cards		305		210		505		1,020		14,121		15,141
Home equity lines of credit		3,937		2,506		7,454		13,897		460,332		474,229
Personal		2,757		1,585		1,905		6,247		136,882		143,129
Auto		38		3		4		45		723		768
Other		41		9		3		53		1,237		1,290

Total	$	106,744	$	43,143	$	233,154	$	383,041	$	5,367,824	$	5,750,865


December 31, 2012
Popular, Inc.
	Past due										Non-covered
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		loans HIP Popular, Inc.
Commercial multi-family	$	7,833	$	5,067	$	34,251	$	47,151	$	974,629	$	1,021,780
Commercial real estate non-owner occupied		29,612		5,763		144,805		180,180		2,454,252		2,634,432
Commercial real estate owner occupied		38,219		13,419		347,465		399,103		2,209,347		2,608,450
Commercial and industrial		40,862		7,897		139,297		188,056		3,405,484		3,593,540
Construction		6,511		—		43,350		49,861		202,996		252,857
Mortgage		271,839		131,442		994,517		1,397,798		4,680,709		6,078,507
Leasing		6,493		1,555		4,865		12,913		527,610		540,523
Legacy		15,765		20,112		40,741		76,618		307,599		384,217
Consumer:
Credit cards		14,826		10,824		22,689		48,339		1,149,874		1,198,213
Home equity lines of credit		4,061		2,506		7,766		14,333		476,702		491,035
Personal		15,965		8,977		21,228		46,170		1,342,741		1,388,911
Auto		24,166		6,521		8,555		39,242		521,842		561,084
Other		2,161		545		3,508		6,214		223,429		229,643

Total	$	478,313	$	214,628	$	1,813,037	$	2,505,978	$	18,477,214	$	20,983,192

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at September 30, 2013 and December 31, 2012 by main categories.


(In thousands)	September 30, 2013		December 31, 2012
Commercial	$	—	$	16,047
Construction		—		78,140
Legacy		1,680		2,080
Mortgage		419		53

Total	$	2,099	$	96,320

The outstanding principal balance of non-covered loans accounted pursuant to ASC Subtopic 310-30, including amounts charged off by the Corporation, amounted to $175 million at September 30, 2013. At September 30, 2013, none of the acquired non-covered loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the non-covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarter and nine months ended September 30, 2013 were as follows:


Activity in the accretable discount - Non-covered loans ASC 310-30
(In thousands)	For the quarter ended September 30, 2013			For the nine months ended September 30, 2013
Beginning balance	$	49,213		$	—
Additions		6,732			54,074
Accretion		(2,417	)		(5,029	)
Change in expected cash flows		(6,247	)		(1,764	)

Ending balance	$	47,281		$	47,281


Carrying amount of non-covered loans accounted for pursuant to ASC 310-30
(In thousands)	For the quarter ended September 30, 2013			For the nine months ended September 30, 2013
Beginning balance	$	138,632		$	—
Additions		18,789			175,100
Accretion		2,417			5,029
Collections and charge-offs		(4,213	)		(24,504	)

Ending balance	$	155,625		$	155,625
Allowance for loan losses ASC 310-30 non-covered loans		(3,511	)		(3,511	)

Ending balance, net of ALLL	$	152,114		$	152,114

Covered loans

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at September 30, 2013 and December 31, 2012.


	September 30, 2013				December 31, 2012
(In thousands)	Non-accrual loans		Accruing loans past due 90 days or more		Non-accrual loans		Accruing loans past due 90 days or more
Commercial real estate	$	12,877	$	—	$	14,628	$	—
Commercial and industrial		8,283		132		48,743		504
Construction		5,642		69		8,363		—
Mortgage		1,260		—		2,133		—
Consumer		323		116		543		265

Total^[1]	$	28,385	$	317	$	74,410	$	769

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

The following tables present loans by past due status at September 30, 2013 and December 31, 2012 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.


September 30, 2013
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP
Commercial real estate	$	18,765	$	11,876	$	469,107	$	499,748	$	1,225,405	$	1,725,153
Commercial and industrial		1,516		800		16,718		19,034		109,664		128,698
Construction		—		160		189,612		189,772		11,665		201,437
Mortgage		32,205		19,268		109,373		160,846		804,933		965,779
Consumer		1,072		689		2,699		4,460		50,482		54,942

Total covered loans	$	53,558	$	32,793	$	787,509	$	873,860	$	2,202,149	$	3,076,009


December 31, 2012
	Past due
(In thousands)	30-59 days		60-89 days		90 days or more		Total past due		Current		Covered loans HIP
Commercial real estate	$	81,386	$	41,256	$	545,241	$	667,883	$	1,409,528	$	2,077,411
Commercial and industrial		3,242		551		59,554		63,347		103,889		167,236
Construction		13		—		296,837		296,850		64,546		361,396
Mortgage		38,307		28,206		182,376		248,889		827,841		1,076,730
Consumer		1,382		1,311		11,094		13,787		59,412		73,199

Total covered loans	$	124,330	$	71,324	$	1,095,102	$	1,290,756	$	2,465,216	$	3,755,972

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


	September 30, 2013									December 31, 2012
	Carrying amount									Carrying amount
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Commercial real estate	$	1,485,109		$	153,590		$	1,638,699		$	1,778,594		$	185,386		$	1,963,980
Commercial and industrial		53,977			4,183			58,160			55,396			4,379			59,775
Construction		78,818			114,543			193,361			174,054			174,093			348,147
Mortgage		895,054			59,862			954,916			988,158			69,654			1,057,812
Consumer		42,648			3,265			45,913			55,762			6,283			62,045

Carrying amount		2,555,606			335,443			2,891,049			3,051,964			439,795			3,491,759
Allowance for loan losses		(49,744	)		(59,130	)		(108,874	)		(48,365	)		(47,042	)		(95,407	)

Carrying amount, net of allowance	$	2,505,862		$	276,313		$	2,782,175		$	3,003,599		$	392,753		$	3,396,352

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, including amounts charged off by the Corporation, amounted to $3.9 billion at September 30, 2013 (December 31, 2012 - $4.8 billion). At September 30, 2013, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarters and nine months ended September 30, 2013 and 2012, were as follows:


	Activity in the accretable discount
	Covered loans ASC 310-30
	For the quarters ended
	September 30, 2013									September 30, 2012
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,365,670		$	13,942		$	1,379,612		$	1,550,959		$	23,891		$	1,574,850
Accretion		(69,146	)		617			(68,529	)		(61,540	)		(4,628	)		(66,168	)
Change in expected cash flows		4,879			(6,344	)		(1,465	)		(29,029	)		(8,771	)		(37,800	)

Ending balance	$	1,301,403		$	8,215		$	1,309,618		$	1,460,390		$	10,492		$	1,470,882


	Activity in the accretable discount
	Covered loans ASC 310-30
	For the nine months ended
	September 30, 2013									September 30, 2012
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	1,446,381		$	5,288		$	1,451,669		$	1,428,764		$	41,495		$	1,470,259
Accretion		(190,607	)		(5,448	)		(196,055	)		(191,989	)		(17,504	)		(209,493	)
Change in expected cash flows		45,629			8,375			54,004			223,615			(13,499	)		210,116

Ending balance	$	1,301,403		$	8,215		$	1,309,618		$	1,460,390		$	10,492		$	1,470,882


	Carrying amount of covered loans accounted for pursuant to ASC 310-30
	For the quarters ended
	September 30, 2013									September 30, 2012
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	2,653,071		$	359,795		$	3,012,866		$	3,244,957		$	484,532		$	3,729,489
Accretion		69,146			(617	)		68,529			61,540			4,628			66,168
Collections and charge-offs		(166,611	)		(23,735	)		(190,346	)		(149,583	)		(18,865	)		(168,448	)

Ending balance	$	2,555,606		$	335,443		$	2,891,049		$	3,156,914		$	470,295		$	3,627,209
Allowance for loan losses
ASC 310-30 covered loans		(49,744	)		(59,130	)		(108,874	)		(64,015	)		(39,532	)		(103,547	)

Ending balance, net of ALLL	$	2,505,862		$	276,313		$	2,782,175		$	3,092,899		$	430,763		$	3,523,662


	Carrying amount of loans accounted for pursuant to ASC 310-30
	For the nine months ended
	September 30, 2013									September 30, 2012
(In thousands)	Non-credit impaired loans			Credit impaired loans			Total			Non-credit impaired loans			Credit impaired loans			Total
Beginning balance	$	3,051,964		$	439,795		$	3,491,759		$	3,446,451		$	590,020		$	4,036,471
Accretion		190,607			5,448			196,055			191,989			17,504			209,493
Collections and charge offs		(686,965	)		(109,800	)		(796,765	)		(481,526	)		(137,229	)		(618,755	)

Ending balance	$	2,555,606		$	335,443		$	2,891,049		$	3,156,914		$	470,295		$	3,627,209
Allowance for loan losses
ASC 310-30 covered loans		(49,744	)		(59,130	)		(108,874	)		(64,015	)		(39,532	)		(103,547	)

Ending balance, net of ALLL	$	2,505,862		$	276,313		$	2,782,175		$	3,092,899		$	430,763		$	3,523,662

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.2 billion at September 30, 2013 (September 30, 2012 - $0.3 billion).

Note 8 – Allowance for loan losses

The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically loss contingencies guidance in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.

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

•

Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 3-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.

•

Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate for the commercial, construction and legacy loan portfolios and 6-month average loss rate for the consumer and mortgage loan portfolios, when these trends are higher than the respective base loss rates, up to a determined cap in the case of consumer and mortgage loan portfolios. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process, while limiting excessive pro-cyclicality on changing economic periods using caps for the consumer and mortgage portfolios given the shorter six month look back window. These caps are calibrated annually at the end of each year and consistently applied until the next annual review. As part of the periodic review of the adequacy of the ALLL models and related assumptions, management monitors and reviews the loan segments for which the caps are being utilized in order to assess the reasonability of the cap in light of current credit and loss trends. Management makes reserve adjustments if warranted upon the completion of these reviews. The caps are determined by measuring historic periods in which the recent loss trend adjustment rates were higher than the base loss rates and setting the cap at a percentile of the historic trend loss rates.

For the period ended September 30, 2013, 12% of the ALLL for our BPPR non-covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, leasing, and auto loan portfolios. For the period ended September 30, 2013, 23% of the ALLL for our BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial real estate non-owner occupied, commercial and industrial, and legacy loan portfolios.

For the period ended December 31, 2012, 32% of the ALLL for our BPPR non-covered loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the commercial multi-family, commercial and industrial, construction, credit cards, and personal loan portfolios. For the period ended December 31, 2012, 8% of the ALLL for our BPNA loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the construction and legacy loan portfolios.

•

Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, were adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis was used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

During the second quarter of 2013, management revised the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses. The enhancements to the ALLL methodology, which is described in the paragraphs below, was implemented as of June 30, 2013 and resulted in a net increase to the allowance for loan losses of $11.8 million for the non-covered portfolio and $7.5 million for the covered portfolio.

Management made the following principal changes to the methodology during the second quarter of 2013:

•

Incorporated risk ratings to establish a more granular stratification of the commercial, construction and legacy loan portfolios to enhance the homogeneity of the loan classes. Prior to the second quarter enhancements, the Corporation’s loan segmentation was based on product type, line of business and legal entity. During the second quarter

of 2013, lines of business were simplified and a regulatory classification level was added. These changes increase the homogeneity of each portfolio and capture the higher potential for loan loss in the criticized and substandard accruing categories.

These refinements resulted in a decrease to the allowance for loan losses of $42.9 million at June 30, 2013, which consisted of a $35.7 million decrease in the non-covered BPPR segment and a $7.2 million reduction in the BPNA segment.

•

Recalibration and enhancements of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. Prior to the second quarter enhancements, these adjustments were applied in the form of a set of multipliers and weights assigned to credit and economic indicators. During the second quarter of 2013, the environmental factor models used to account for changes in current credit and macroeconomic conditions, were enhanced and recalibrated based on the latest applicable trends. Also, as part of these enhancements, environmental factors are directly applied to the adjusted base loss rates using regression models based on particular credit data for the segment and relevant economic factors. These enhancements results in a more precise adjustment by having recalibrated models with improved statistical analysis and eliminating the multiplier concept that ensures that environmental factors are sufficiently sensitive to changing economic conditions.

The combined effect of the aforementioned changes to the environmental factors adjustment resulted in an increase to the allowance for loan losses of $52.5 million at June 30, 2013, of which $56.1 million relate to the non-covered BPPR segment, offset in part by a $3.6 million reduction in the BPNA segment.

There were additional enhancements to the allowance for loan losses methodology which accounted for an increase of $9.7 million at June 30, 2013 at the BPPR segment. These enhancements included the elimination of the use of a cap for the commercial recent loss adjustment (12-month average), the incorporation of a minimum general reserve assumption for the commercial, construction and legacy portfolios with minimal or zero loss history, and the application of the enhanced ALLL framework to the covered loan portfolio.

The following tables present the changes in the allowance for loan losses for the quarters and nine months ended September 30, 2013 and 2012.


For the quarter ended September 30, 2013
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	112,152		$	9,072		$	122,915		$	8,923		$	140,514		$	393,576
Provision (reversal of provision)		7,297			(4,672	)		20,373			2,238			25,239			50,475
Charge-offs		(21,431	)		(1,456	)		(11,504	)		(1,098	)		(28,796	)		(64,285	)
Recoveries		5,286			6,362			111			628			7,220			19,607
Net write-down related to loans sold		—			—			—			—			—			—

Ending balance	$	103,304		$	9,306		$	131,895		$	10,691		$	144,177		$	399,373


For the quarter ended September 30, 2013
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing		Consumer			Total
Allowance for credit losses:
Beginning balance	$	65,557		$	7,353		$	27,001		$	—	$	6,546		$	106,457
Provision (reversal of provision)		(4,528	)		14,158			6,753			—		1,050			17,433
Charge-offs		(3,186	)		(7,395	)		(1,632	)		—		(65	)		(12,278	)
Recoveries		653			4,502			53			—		8			5,216

Ending balance	$	58,496		$	18,618		$	32,175		$	—	$	7,539		$	116,828


For the quarter ended September 30, 2013
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	52,329		$	338		$	33,065		$	19,978		$	29,476		$	135,186
Provision (reversal of provision)		6,222			(24	)		(1,903	)		(961	)		1,421			4,755
Charge-offs		(13,772	)		—			(1,778	)		(6,216	)		(5,991	)		(27,757	)
Recoveries		9,229			—			444			3,895			975			14,543

Ending balance	$	54,008		$	314		$	29,828		$	16,696		$	25,881		$	126,727


For the quarter ended September 30, 2013
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	230,038		$	16,763		$	182,981		$	19,978		$	8,923		$	176,536		$	635,219
Provision (reversal of provision)		8,991			9,462			25,223			(961	)		2,238			27,710			72,663
Charge-offs		(38,389	)		(8,851	)		(14,914	)		(6,216	)		(1,098	)		(34,852	)		(104,320	)
Recoveries		15,168			10,864			608			3,895			628			8,203			39,366
Net write-down related to loans sold		—			—			—			—			—			—			—

Ending balance	$	215,808		$	28,238		$	193,898		$	16,696		$	10,691		$	177,597		$	642,928


For the nine months ended September 30, 2013
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	217,615		$	5,862		$	119,027		$	2,894		$	99,899		$	445,297
Provision (reversal of provision)		117,410			(1,555	)		253,125			10,465			105,783			485,228
Charge-offs		(89,146	)		(5,276	)		(42,013	)		(4,485	)		(83,403	)		(224,323	)
Recoveries		18,722			12,121			1,258			1,817			21,898			55,816
Net write-downs related to loans sold		(161,297	)		(1,846	)		(199,502	)		—			—			(362,645	)

Ending balance	$	103,304		$	9,306		$	131,895		$	10,691		$	144,177		$	399,373


For the nine months ended September 30, 2013
Puerto Rico - Covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing		Consumer			Total
Allowance for credit losses:
Beginning balance	$	72,060		$	9,946		$	20,914		$	—	$	5,986		$	108,906
Provision		612			36,712			17,146			—		6,019			60,489
Charge-offs		(14,901	)		(33,178	)		(5,949	)		—		(4,526	)		(58,554	)
Recoveries		725			5,138			64			—		60			5,987

Ending balance	$	58,496		$	18,618		$	32,175		$	—	$	7,539		$	116,828


For the nine months ended September 30, 2013
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	80,067		$	1,567		$	30,348		$	33,102		$	31,320		$	176,404
Provision (reversal of provision)		(2,849	)		(1,253	)		6,622			(13,872	)		11,562			210
Charge-offs		(44,308	)		—			(9,172	)		(18,500	)		(20,029	)		(92,009	)
Recoveries		21,098			—			2,030			15,966			3,028			42,122

Ending balance	$	54,008		$	314		$	29,828		$	16,696		$	25,881		$	126,727


For the nine months ended September 30, 2013
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	369,742		$	17,375		$	170,289		$	33,102		$	2,894		$	137,205		$	730,607
Provision (reversal of provision)		115,173			33,904			276,893			(13,872	)		10,465			123,364			545,927
Charge-offs		(148,355	)		(38,454	)		(57,134	)		(18,500	)		(4,485	)		(107,958	)		(374,886	)
Recoveries		40,545			17,259			3,352			15,966			1,817			24,986			103,925
Net write-down related to loans sold		(161,297	)		(1,846	)		(199,502	)		—			—			—			(362,645	)

Ending balance	$	215,808		$	28,238		$	193,898		$	16,696		$	10,691		$	177,597		$	642,928


For the quarter ended September 30, 2012
Puerto Rico - Non-covered loans
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	203,846		$	7,464		$	120,339		$	2,957		$	111,951		$	446,557
Provision (reversal of provision)		34,597			(592	)		17,182			(111	)		18,662			69,738
Charge-offs		(47,572	)		(1,733	)		(12,468	)		(1,292	)		(29,307	)		(92,372	)
Recoveries		10,553			2,260			37			1,027			7,454			21,331

Ending balance	$	201,424		$	7,399		$	125,090		$	2,581		$	108,760		$	445,254


For the quarter ended September 30, 2012
Puerto Rico - Covered Loans
(In thousands)	Commercial			Construction			Mortgage			Leasing		Consumer			Total
Allowance for credit losses:
Beginning balance	$	75,592		$	23,628		$	11,617		$	—	$	6,658		$	117,495
Provision (reversal of provision)		11,041			11,078			2,005			—		(1,505	)		22,619
Charge-offs		(7,013	)		(7,483	)		(736	)		—		(9	)		(15,241	)
Recoveries		—			—			—			—		—			—

Ending balance	$	79,620		$	27,223		$	12,886		$	—	$	5,144		$	124,873


For the quarter ended September 30, 2012
U.S. Mainland
(In thousands)	Commercial			Construction		Mortgage			Legacy			Consumer			Total
Allowance for credit losses:
Beginning balance	$	92,918		$	1,678	$	29,483		$	44,011		$	33,888		$	201,978
Provision (reversal of provision)		1,311			59		3,800			(188	)		8,869			13,851
Charge-offs		(15,809	)		—		(3,757	)		(8,502	)		(8,642	)		(36,710	)
Recoveries		6,198			—		216			4,550			996			11,960
Net (write-down) recovery related to loans transferred to LHFS		(34	)		—		—			—			—			(34	)

Ending balance	$	84,584		$	1,737	$	29,742		$	39,871		$	35,111		$	191,045


For the quarter ended September 30, 2012
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Legacy			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	372,356		$	32,770		$	161,439		$	44,011		$	2,957		$	152,497		$	766,030
Provision (reversal of provision)		46,949			10,545			22,987			(188	)		(111	)		26,026			106,208
Charge-offs		(70,394	)		(9,216	)		(16,961	)		(8,502	)		(1,292	)		(37,958	)		(144,323	)
Recoveries		16,751			2,260			253			4,550			1,027			8,450			33,291
Net (write-down) recovery related to loans transferred to LHFS		(34	)		—			—			—			—			—			(34	)

Ending balance	$	365,628		$	36,359		$	167,718		$	39,871		$	2,581		$	149,015		$	761,172

For the nine months ended September 30, 2012

Puerto Rico - Non-covered loans

(In thousands)

Commercial

Construction

Mortgage

Leasing

Consumer

Total

Allowance for credit losses:

Beginning balance

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company