UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2011

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specifies in its charter)

Puerto Rico	66-0667416
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification Number)
Popular Center Building
209 Muñoz Rivera Avenue
Hato Rey, Puerto Rico	00918
(Address of principal executive offices)	(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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

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

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $0.01 par value 1,024,137,020 shares outstanding as of July 27, 2011.

POPULAR, INC.

INDEX

	Page
Part I – Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition at June 30, 2011, December 31, 2010 and June  30, 2010		4
Unaudited Consolidated Statements of Operations for the quarters and six months ended June  30, 2011 and 2010		5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2011 and 2010		6
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2011 and 2010		7
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		8
Notes to Unaudited Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		116
Item 3. Quantitative and Qualitative Disclosures about Market Risk		182
Item 4. Controls and Procedures		182
Part II – Other Information
Item 1. Legal Proceedings		182
Item 1A. Risk Factors		185
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		186
Item 6. Exhibits		186
Signatures		187

2

Forward-Looking Information

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

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

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

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

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

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

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

• the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

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

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

• the performance of the stock and bond markets;

• competition in the financial services industry;

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

• possible legislative, tax or regulatory changes.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

3

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

(In thousands, except share information)	June 30, 2011			December 31, 2010			June 30, 2010
Assets
Cash and due from banks	$	587,965		$	452,373		$	744,769
Money market investments:
Federal funds sold		50,000			16,110			11,540
Securities purchased under agreements to resell		251,536			165,851			299,921
Time deposits with other banks		1,082,356			797,334			2,132,748
Total money market investments		1,383,892			979,295			2,444,209
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		734,826			492,183			371,619
Other trading securities		51,016			54,530			29,924
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		1,827,262			2,031,123			1,981,931
Other investment securities available-for-sale		3,562,229			3,205,729			4,499,256
Investment securities held-to-maturity, at amortized cost (fair value at June 30, 2011 - $136,959; December 31, 2010 - $120,873; June 30, 2010 - $209,207)		129,910			122,354			209,416
Other investment securities, at lower of cost or realizable value (realizable value at June 30, 2011 - $176,114; December 31, 2010 - $165,233; June 30, 2010 - $153,845)		174,560			163,513			152,562
Loans held-for-sale, at lower of cost or fair value		509,046			893,938			101,251
Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		20,761,346			20,834,276			22,574,731
Loans covered under loss sharing agreements with the FDIC		4,616,575			4,836,882			5,055,750
Less – Unearned income		103,652			106,241			109,911
Allowance for loan losses		746,847			793,225			1,277,016
Total loans held-in-portfolio, net		24,527,422			24,771,692			26,243,554
FDIC loss share asset		2,350,176			2,318,183			2,330,406
Premises and equipment, net		537,870			545,453			573,941
Other real estate not covered under loss sharing agreements with the FDIC		162,419			161,496			142,372
Other real estate covered under loss sharing agreements with the FDIC		74,803			57,565			55,176
Accrued income receivable		141,980			150,658			151,245
Mortgage servicing assets, at fair value		162,619			166,907			171,994
Other assets		1,393,843			1,449,887			1,389,304
Goodwill		647,318			647,387			691,190
Other intangible assets		54,186			58,696			63,720
Total assets	$	39,013,342		$	38,722,962		$	42,347,839
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	5,364,004		$	4,939,321		$	4,793,338
Interest bearing		22,596,425			21,822,879			22,320,235
Total deposits		27,960,429			26,762,200			27,113,573
Federal funds purchased and assets sold under agreements to repurchase		2,570,322			2,412,550			2,307,194
Other short-term borrowings		151,302			364,222			1,263
Notes payable		3,423,286			4,170,183			8,238,277
Other liabilities		943,935			1,213,276			1,072,745
Total liabilities		35,049,274			34,922,431			38,733,052
Commitments and contingencies (See note 20)
Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding in all periods presented (aggregated liquidation preference value of $50,160)		50,160			50,160			50,160
Common stock, $0.01 par value; 1,700,000,000 shares authorized in all periods presented; 1,024,201,427 shares issued at June 30, 2011
(December 31, 2010 – 1,022,929,158; June 30, 2010 – 1,022,878,228) and 1,023,977,895 outstanding at June 30, 2011 (December 31, 2010 – 1,022,727,802; June 30, 2010 – 1,022,695,797)		10,242			10,229			10,229
Surplus		4,097,909			4,094,005			4,094,429
Accumulated deficit		(228,372	)		(347,328	)		(613,963	)
Treasury stock – at cost, 223,532 shares at June 30, 2011 (December 31, 2010 – 201,356 shares; June 30, 2010 – 182,431 shares)		(642	)		(574	)		(518	)
Accumulated other comprehensive (loss) income, net of tax of ($51,544) (December 31, 2010 – ($55,616); June 30, 2010 – ($17,744))		34,771			(5,961	)		74,450
Total stockholders’ equity		3,964,068			3,800,531			3,614,787
Total liabilities and stockholders’ equity	$	39,013,342		$	38,722,962		$	42,347,839

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

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarter ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2011			2010			2011			2010
Interest income:
Loans	$	442,460		$	421,010		$	865,835		$	775,659
Money market investments		926			1,893			1,873			2,935
Investment securities		53,723			62,915			106,098			127,841
Trading account securities		9,790			6,599			18,544			13,177
Total interest income		506,899			492,417			992,350			919,612
Interest expense:
Deposits		70,672			90,615			147,551			183,589
Short-term borrowings		13,719			15,552			27,734			30,811
Long-term debt		47,966			71,655			99,164			121,700
Total interest expense		132,357			177,822			274,449			336,100
Net interest income		374,542			314,595			717,901			583,512
Provision for loan losses		144,317			202,258			219,636			442,458
Net interest income after provision for loan losses		230,225			112,337			498,265			141,054
Service charges on deposit accounts		46,802			50,679			92,432			101,257
Other service fees		58,307			103,725			116,959			205,045
Net (loss) gain on sale and valuation adjustments of investment securities		(90	)		397			(90	)		478
Trading account profit		874			2,464			375			2,241
Net (loss) gain on sale of loans, including valuation adjustments on loans held-for-sale		(12,782	)		5,078			(5,538	)		10,146
Adjustments (expense) to indemnity reserves on loans sold		(9,454	)		(14,389	)		(19,302	)		(31,679	)
FDIC loss share income (expense)		38,670			(15,037	)		54,705			(15,037	)
Fair value change in equity appreciation instrument		578			24,394			8,323			24,394
Other operating income		1,255			41,516			40,664			59,848
Total non-interest income		124,160			198,827			288,528			356,693
Operating expenses:
Personnel costs		110,959			138,032			217,099			258,964
Net occupancy expenses		25,957			29,058			50,543			57,934
Equipment expenses		10,761			25,346			22,797			48,799
Other taxes		14,623			12,459			26,595			24,763
Professional fees		49,479			34,225			96,167			61,274
Communications		7,188			11,342			14,398			22,114
Business promotion		11,332			10,204			21,192			18,499
FDIC deposit insurance		27,682			17,393			45,355			32,711
Loss on early extinguishment of debt		289			430			8,528			978
Other real estate owned (OREO) expenses		6,440			14,622			8,651			19,325
Other operating expenses		14,835			32,850			41,014			59,464
Amortization of intangibles		2,255			2,455			4,510			4,504
Total operating expenses		281,800			328,416			556,849			609,329
Income (loss) before income tax		72,585			(17,252	)		229,944			(111,582	)
Income tax (benefit) expense		(38,100	)		27,237			109,127			17,962
Net Income (Loss)	$	110,685		$	(44,489	)	$	120,817		$	(129,544	)
Net Income (Loss) Applicable to Common Stock	$	109,754		$	(236,156	)	$	118,956		$	(321,211	)
Net Income (Loss) per Common Share – Basic	$	0.11		$	(0.28	)	$	0.12		$	(0.43	)
Net Income (Loss) per Common Share – Diluted	$	0.11		$	(0.28	)	$	0.12		$	(0.43	)
Dividends Declared per Common Share		—			—			—			—

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

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)	Common stock, including treasury stock			Preferred stock			Surplus			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
Balance at December 31, 2009	$	6,380		$	50,160		$	2,804,238		$	(292,752	)	$	(29,209	)	$	2,538,817
Net loss											(129,544	)					(129,544	)
Issuance of stock		—			1,150,000	[1]		—									1,150,000
Issuance of common stock upon conversion of preferred stock		3,834	[1]		(1,150,000	)[1]		1,337,833	[1]								191,667
Issuance costs								(47,642	)[2]								(47,642	)
Deemed dividend on preferred stock											(191,667	)					(191,667	)
Common stock purchases		(503	)														(503	)
Other comprehensive income, net of tax														103,659			103,659
Balance at June 30, 2010	$	9,711		$	50,160		$	4,094,429		$	(613,963	)	$	74,450		$	3,614,787
Balance at December 31, 2010	$	9,655		$	50,160		$	4,094,005		$	(347,328	)	$	(5,961	)	$	3,800,531
Net income											120,817						120,817
Issuance of stock		13						3,904									3,917
Dividends declared:
Preferred stock											(1,861	)					(1,861	)
Common stock purchases		(68	)														(68	)
Other comprehensive income, net of tax														40,732			40,732
Balance at June 30, 2011	$	9,600		$	50,160		$	4,097,909		$	(228,372	)	$	34,771		$	3,964,068

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

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

Disclosure of changes in number of shares:	June 30, 2011			December 31, 2010			June 30, 2010
Preferred Stock:
Balance at beginning of year		2,006,391			2,006,391			2,006,391
Issuance of stock		—			1,150,000	[1]		1,150,000
Conversion of stock		—			(1,150,000	)[1]		(1,150,000	)
Balance at end of the period		2,006,391			2,006,391			2,006,391
Common Stock – Issued:
Balance at beginning of year		1,022,929,158			639,544,895			639,544,895
Issuance of stock		1,272,269			50,930			—
Issuance of stock upon conversion of preferred stock		—			383,333,333	[1]		383,333,333	[1]
Balance at end of the period		1,024,201,427			1,022,929,158			1,022,878,228
Treasury stock		(223,532	)		(201,356	)		(182,431	)
Common Stock – Outstanding		1,023,977,895			1,022,727,802			1,022,695,797

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

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

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Quarter ended,						Six months ended,
	June 30,						June 30,
(In thousands)	2011			2010			2011			2010
Net income (loss)	$	110,685		$	(44,489	)	$	120,817		$	(129,544	)
Other comprehensive income before tax:
Foreign currency translation adjustment		(1,137	)		(1,531	)		(1,728	)		(577	)
Reclassification adjustment for losses included in net income (loss)		—			—			10,084			—
Adjustment of pension and postretirement benefit plans		3,005			4,486			6,007			6,236
Unrealized holding gains on securities available-for-sale arising during the period		50,779			80,801			30,801			116,912
Reclassification adjustment for losses included in net income (loss)		90			6			90			16
Unrealized net gains (losses) on cash flow hedges		485			(1,509	)		434			(1,540	)
Reclassification adjustment for losses (gains) included in net income (loss)		51			31			(884	)		(1,168	)
Other comprehensive income before tax		53,273			82,284			44,804			119,879
Income tax expense		(5,500	)		(12,065	)		(4,072	)		(16,220	)
Total other comprehensive income, net of tax		47,773			70,219			40,732			103,659
Comprehensive income (loss), net of tax	$	158,458		$	25,730		$	161,549		$	(25,885	)

Tax effect allocated to each component of other comprehensive income:

	Quarter ended						Six months ended,
	June 30,						June 30,
(In thousands)	2011			2010			2011			2010
Underfunding of pension and postretirement benefit plans	$	(894	)	$	(882	)	$	(1,787	)	$	(1,765	)
Unrealized holding gains on securities available-for-sale arising during the period		(4,431	)		(11,759	)		(2,490	)		(15,507	)
Reclassification adjustment for losses included in net income (loss)		(14	)		—			(14	)		(4	)
Unrealized net (gains) losses on cash flow hedges		(146	)		588			(131	)		600
Reclassification adjustment for losses (gains) included in net income (loss)		(15	)		(12	)		350			456
Income tax expense	$	(5,500	)	$	(12,065	)	$	(4,072	)	$	(16,220	)

Disclosure of accumulated other comprehensive income (loss):

(In thousands)	June 30, 2011			December 31, 2010			June 30, 2010
Foreign currency translation adjustment	$	(27,795	)	$	(36,151	)	$	(41,253	)
Underfunding of pension and postretirement benefit plans		(204,928	)		(210,935	)		(121,550	)
Tax effect		79,068			80,855			46,801
Net of tax amount		(125,860	)		(130,080	)		(74,749	)
Unrealized holding gains on securities available-for-sale		215,465			184,574			221,018
Tax effect		(27,378	)		(24,874	)		(29,645	)
Net of tax amount		188,087			159,700			191,373
Unrealized gains (losses) on cash flow hedges		485			935			(1,509	)
Tax effect		(146	)		(365	)		588
Net of tax amount		339			570			(921	)
Accumulated other comprehensive income (loss)	$	34,771		$	(5,961	)	$	74,450

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

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended June 30,
(In thousands)	2011			2010
Cash flows from operating activities:
Net income (loss)	$	120,817		$	(129,544	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment		23,450			30,759
Provision for loan losses		219,636			442,458
Amortization of intangibles		4,510			4,504
Impairment losses on net assets to be disposed of		8,743			—
Fair value adjustments of mortgage servicing rights		16,249			9,577
Net (accretion of discounts) amortization of premiums and deferred fees		(64,498	)		(52,119	)
Net loss (gain) on sale and valuation adjustments of investment securities		90			(478	)
Fair value change in equity appreciation instrument		(8,323	)		(24,394	)
FDIC loss share (income) expense		(54,705	)		15,037
FDIC deposit insurance expense		45,355			32,711
Net gain on disposition of premises and equipment		(1,992	)		(2,071	)
Net loss (gain) on sale of loans, including valuation adjustments on loans held-for-sale		5,538			(10,146	)
Adjustments (expense) to indemnity reserves on loans sold		19,302			31,679
Losses (earnings) from investments under the equity method		218			(14,513	)
Gain on sale of equity method investment		(16,907	)		—
Net disbursements on loans held-for-sale		(417,220	)		(312,489	)
Acquisitions of loans held-for-sale		(173,549	)		(133,798	)
Proceeds from sale of loans held-for-sale		65,667			35,867
Net decrease in trading securities		319,024			396,940
Net decrease in accrued income receivable		8,676			10,729
Net increase in other assets		(16,965	)		(1,346	)
Net decrease in interest payable		(949	)		(17,566	)
Deferred income taxes		21,755			(8,503	)
Net (decrease) increase in pension and other postretirement benefit obligation		(123,084	)		1,627
Net decrease in other liabilities		(65,383	)		(12,028	)
Total adjustments		(185,362	)		422,437
Net cash (used in) provided by operating activities		(64,545	)		292,893
Cash flows from investing activities:
Net increase in money market investments		(404,598	)		(1,344,614	)
Purchases of investment securities:
Available-for-sale		(856,543	)		(542,506	)
Held-to-maturity		(64,358	)		(37,131	)
Other		(69,504	)		(13,076	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		707,567			818,380
Held-to-maturity		52,073			40,716
Other		56,162			83,272
Proceeds from sale of investment securities available-for-sale		19,143			19,484
Proceeds from sale of other investment securities		2,294			—
Net repayments on loans		779,606			1,024,846
Proceeds from sale of loans		225,698			10,878
Acquisition of loan portfolios		(744,390	)		(87,471	)
Cash received from acquisitions		—			261,311
Net proceeds from sale of equity method investments		31,503			—
Mortgage servicing rights purchased		(860	)		(364	)
Acquisition of premises and equipment		(25,548	)		(27,161	)
Proceeds from sale of premises and equipment		9,847			9,626
Proceeds from sale of foreclosed assets		94,759			69,058
Net cash (used in) provided by investing activities		(187,149	)		285,248
Cash flows from financing activities:
Net increase (decrease) in deposits		1,198,252			(1,202,219	)
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase		157,772			(325,596	)
Net decrease in other short-term borrowings		(212,920	)		(6,063	)
Payments of notes payable		(1,177,306	)		(189,780	)
Proceeds from issuance of notes payable		419,500			111,101
Net proceeds from issuance of depositary shares		—			1,102,358
Dividends paid		(1,861	)		—
Proceeds from issuance of common stock		3,917			—
Treasury stock acquired		(68	)		(503	)
Net cash provided by (used in) financing activities		387,286			(510,702	)
Net increase in cash and due from banks		135,592			67,439
Cash and due from banks at beginning of period		452,373			677,330
Cash and due from banks at end of period	$	587,965		$	744,769

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

8

Notes to Consolidated Financial

Statements (Unaudited)

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

9

Note 1 – Summary of significant accounting policies

Principles of Consolidation and Basis of Presentation

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

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

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

The consolidated interim financial statements have been prepared without audit. The consolidated statement of condition data at December 31, 2010 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain reclassifications have been made to the 2010 consolidated financial statements and notes to the financial statements to conform with the 2011 presentation.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2010, included in the Corporation’s 2010 Annual Report (the “2010 Annual Report”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

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

10

Nature of Operations

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the continental United States, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments. The Corporation has a 49% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of Popular’s system infrastructures and transaction processing businesses.

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

Note 2 – New Accounting Pronouncements

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

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

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

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

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

The FASB issued ASU 2011-04 in May 2011. The amendment of this ASU provides a consistent definition of fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU modifies some fair value measurement principles and disclosure requirements including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, measuring the fair value of financial instruments that

11

are managed within a portfolio, application of premiums and discounts in a fair value measurement, disclosing quantitative information about unobservable inputs used in Level 3 fair value measurements, and other additional disclosures about fair value measurements.

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

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

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

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

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

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

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

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

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

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

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

12

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

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

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

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

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

13

Note 3 – Business combination

Westernbank FDIC-assisted transaction

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

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

(In thousands)	Book value prior to purchase accounting adjustments		Fair value adjustments			Additional consideration		As recorded by Popular, Inc. on April 30, 2010
Assets:
Cash and money market investments	$	358,132	$	—		$	—	$	358,132
Investment in Federal Home Loan Bank stock		58,610		—			—		58,610
Loans		8,554,744		(3,354,287	)		—		5,200,457
FDIC loss share indemnification asset		—		2,337,748			—		2,337,748
Covered other real estate owned		125,947		(73,867	)		—		52,080
Core deposit intangible		—		24,415			—		24,415
Receivable from FDIC (associated to the note issued to the FDIC)		—		—			111,101		111,101
Other assets		44,926		—			—		44,926
Goodwill		—		86,841			—		86,841
Total assets	$	9,142,359	$	(979,150	)	$	111,101	$	8,274,310
Liabilities:
Deposits	$	2,380,170	$	11,465		$	—	$	2,391,635
Note issued to the FDIC (including a premium of $12,411 resulting from the fair value adjustment)		—		—			5,770,495		5,770,495
Equity appreciation instrument		—		—			52,500		52,500
Contingent liability on unfunded loan commitments		—		45,755			—		45,755
Accrued expenses and other liabilities		13,925		—			—		13,925
Total liabilities	$	2,394,095	$	57,220		$	5,822,995	$	8,274,310

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

14

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

(In thousands)	April 30, 2010 As recasted[a]			April 30, 2010 As previously reported[b]			Change
Assets:
Loans	$	8,554,744		$	8,554,744		$	—
Less: Discount		(3,354,287	)		(4,293,756	)		939,469	[c]
Net loans		5,200,457			4,260,988			939,469
FDIC loss share indemnification asset		2,337,748			3,322,561			(984,813	)[d]
Goodwill		86,841			106,230			(19,389	)
Other assets		649,264			670,419			(21,155	)[e]
Total assets	$	8,274,310		$	8,360,198		$	(85,888	)
Liabilities:
Deposits	$	2,391,635		$	2,391,635		$	—
Note issued to the FDIC		5,770,495			5,769,696			799	[f]
Equity appreciation instrument		52,500			52,500			—
Contingent liability on unfunded loan commitments		45,755			132,442			(86,687	)[g]
Other liabilities		13,925			13,925			—
Total liabilities	$	8,274,310		$	8,360,198		$	(85,888	)

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

[b] Amounts are presented as previously reported.

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

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

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

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

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

15

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

	As previously			As previously						As previously		As previously
	recasted			reported						recasted		reported
	Quarter ended			Quarter ended						Quarter ended		Quarter ended
(In thousands)	June 30, 2010			June 30, 2010			Difference			September 30, 2010		September 30, 2010		Difference
Net interest income	$	314,595		$	278,976		$	35,619		$	356,778	$	386,918	$	(30,140	)
Provision for loan losses		202,258			202,258			—			215,013		215,013		—
Net interest income after provision for loan losses		112,337			76,718			35,619			141,765		171,905		(30,140	)
Non-interest income		198,827			215,858			(17,031	)		825,894		796,524		29,370
Operating expenses		328,416			328,416			—			371,541		371,547		(6	)
(Loss) income before income tax		(17,252	)		(35,840	)		18,588			596,118		596,882		(764	)
Income tax expense		27,237			19,988			7,249			102,032		102,388		(356	)
Net (loss) income	$	(44,489	)	$	(55,828	)	$	11,339		$	494,086	$	494,494	$	(408	)

Note 4 – Related party transactions with affiliated company

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in EVERTEC to an unrelated third-party, including the Corporation’s merchant acquiring and processing and technology businesses (the “EVERTEC transaction”), and retained a 49% ownership interest in Carib Holdings (referred to as “EVERTEC”). EVERTEC continues to provide various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. The investment in EVERTEC was initially recorded at a fair value of $177 million at September 30, 2010, which was determined based on the third-party buyer’s enterprise value of EVERTEC as determined in an orderly transaction between market participants, reduced by the debt incurred, net of debt issue costs, utilized as part of the sale transaction. Prospectively, the investment in EVERTEC is accounted for under the equity method and evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. Refer to the Corporation’s 2010 Annual Report for details on this sale to an unrelated third-party.

The Corporation’s investment in EVERTEC, including the impact of intra-entity eliminations, amounted to $210 million at June 30, 2011 (December 31, 2010 - $197 million), and is included as part of “other assets” in the consolidated statements of condition. The increase in the investment balance from December 31, 2010 to June 30, 2011 is due to the recognition of the Corporation’s share of the earnings of EVERTEC, net of intra-entity profits and losses. The Corporation did not receive any distributions from EVERTEC during the period from January 1, 2011 through June 30, 2011.

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations since October 1, 2010. The Corporation recognized a $12.0 million loss in other operating income for the quarter ended June 30, 2011 as part of its equity method investment in EVERTEC ($14.0 million loss for the six months ended June 30, 2011), which consisted of $0.7 million of the Corporation’s share in EVERTEC’s net income ($12.5 million for the six months ended June 30, 2011), more than offset by $12.7 million of intercompany income eliminations (investor-investee transactions at 49%) ($26.5 million for the six months ended June 30, 2011). The unfavorable impact of the elimination in non-interest income was offset by the elimination of 49% of the professional fees (expense) paid by the Corporation to EVERTEC during the same period.

The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarter and six months ended June 30, 2011. Items that represent expenses to the Corporation are presented with parenthesis. For consolidation purposes, the Corporation eliminates 49% of the

16

income (expense) between EVERTEC and the Corporation from the corresponding categories in the consolidated statements of operations and the net effect of all items at 49% is eliminated against other operating income, which is the category used to record the Corporation’s share of income (loss) as part of its equity method investment in EVERTEC. The 51% majority interest in the table that follows represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s results of operations.

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

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

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

Prior to the EVERTEC sale transaction on September 30, 2010, EVERTEC had certain performance bonds outstanding, which were guaranteed by the Corporation under a general indemnity agreement between the Corporation and the insurance companies issuing the bonds. The Corporation agreed to maintain, for a 5-year period following September 30, 2010, the guarantee of the performance bonds. The EVERTEC’s performance bonds guaranteed by the Corporation amounted to approximately $10.4 million at June 30, 2011. Also, EVERTEC had an existing letter of credit issued by BPPR, for an amount of $2.9 million. As part of the merger agreement, the Corporation also agreed to maintain outstanding this letter of credit for a 5-year period. EVERTEC and the Corporation entered into a Reimbursement Agreement, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant.

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

17

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

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

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

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

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

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

Note 6 – Pledged assets

Certain securities, loans and other real estate owned were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, loan servicing agreements and the loss sharing agreements with the FDIC. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:

	June 30,		December 31,		June 30,
(In thousands)	2011		2010		2010
Investment securities available-for-sale, at fair value	$	2,184,884	$	1,867,249	$	2,384,829
Investment securities held-to-maturity, at amortized cost		37,312		25,770		125,770
Loans held-for-sale measured at lower of cost or fair value		1,539		2,862		3,069
Loans held-in-portfolio covered under loss sharing agreements with the FDIC		4,347,453		4,787,002		4,893,577
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC		10,326,448		9,695,200		9,392,857
Other real estate covered under loss sharing agreements with the FDIC		74,803		57,565		55,176
Total pledged assets	$	16,972,439	$	16,435,648	$	16,855,278

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

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

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

18

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

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

Note 7 – Investment securities available for sale

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

	At June 30, 2011
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	35,334	$	2,858	$	—	$	38,192		3.35	%
Total U.S. Treasury securities		35,334		2,858		—		38,192		3.35
Obligations of U.S. Government sponsored entities
Within 1 year		106,724		494		—		107,218		2.91
After 1 to 5 years		914,238		45,355		73		959,520		3.67
After 5 to 10 years		180,000		1,950		—		181,950		2.66
Total obligations of U.S. Government sponsored entities		1,200,962		47,799		73		1,248,688		3.45
Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,845		12		—		10,857		3.96
After 1 to 5 years		15,567		277		24		15,820		4.52
After 5 to 10 years		2,055		25		—		2,080		5.30
After 10 years		5,430		79		—		5,509		5.29
Total obligations of Puerto Rico, States and political subdivisions		33,897		393		24		34,266		4.51
Collateralized mortgage obligations - federal agencies
After 1 to 5 years		2,728		93		—		2,821		4.67
After 5 to 10 years		78,595		1,077		339		79,333		2.45
After 10 years		1,489,248		41,876		216		1,530,908		2.95
Total collateralized mortgage obligations - federal agencies		1,570,571		43,046		555		1,613,062		2.93
Collateralized mortgage obligations - private label
After 5 to 10 years		7,224		3		308		6,919		0.72
After 10 years		68,472		—		4,905		63,567		2.27
Total collateralized mortgage obligations - private label		75,696		3		5,213		70,486		2.12
Mortgage - backed securities
Within 1 year		633		52		—		685		4.91
After 1 to 5 years		11,516		444		—		11,960		3.99
After 5 to 10 years		159,166		11,198		2		170,362		4.71
After 10 years		2,053,343		113,015		341		2,166,017		4.25
Total mortgage - backed securities		2,224,658		124,709		343		2,349,024		4.28
Equity securities (without contractual maturity)		7,795		748		278		8,265		3.44
Other
After 5 to 10 years		17,849		2,363		—		20,212		10.99
After 10 years		7,264		32		—		7,296		3.62
Total other		25,113		2,395		—		27,508		8.86
Total investment securities available-for-sale	$	5,174,026	$	221,951	$	6,486	$	5,389,491		3.66	%

19

	At December 31, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	7,001	$	122	$	—	$	7,123		1.50	%
After 5 to 10 years		28,676		2,337		—		31,013		3.81
Total U.S. Treasury securities		35,677		2,459		—		38,136		3.36
Obligations of U.S. Government sponsored entities
Within 1 year		153,738		2,043		—		155,781		3.39
After 1 to 5 years		1,000,955		53,681		661		1,053,975		3.72
After 5 to 10 years		1,512		36		—		1,548		6.30
Total obligations of U.S. Government sponsored entities		1,156,205		55,760		661		1,211,304		3.68
Obligations of Puerto Rico, States and political subdivisions
Within 1 year		10,404		19		—		10,423		3.92
After 1 to 5 years		15,853		279		5		16,127		4.52
After 5 to 10 years		20,765		43		194		20,614		5.07
After 10 years		5,505		52		19		5,538		5.28
Total obligations of Puerto Rico, States and political subdivisions		52,527		393		218		52,702		4.70
Collateralized mortgage obligations - federal agencies
Within 1 year		77		1		—		78		3.88
After 1 to 5 years		1,846		105		—		1,951		4.77
After 5 to 10 years		107,186		1,507		936		107,757		2.50
After 10 years		1,096,271		32,248		11		1,128,508		2.87
Total collateralized mortgage obligations - federal agencies		1,205,380		33,861		947		1,238,294		2.84
Collateralized mortgage obligations - private label
After 5 to 10 years		10,208		31		158		10,081		1.20
After 10 years		79,311		78		4,532		74,857		2.29
Total collateralized mortgage obligations - private label		89,519		109		4,690		84,938		2.17
Mortgage - backed securities
Within 1 year		2,983		101		—		3,084		3.62
After 1 to 5 years		15,738		649		3		16,384		3.98
After 5 to 10 years		170,662		10,580		3		181,239		4.71
After 10 years		2,289,210		86,870		632		2,375,448		4.26
Total mortgage - backed securities		2,478,593		98,200		638		2,576,155		4.29
Equity securities (without contractual maturity)		8,722		855		102		9,475		3.43
Other
After 5 to 10 years		17,850		262		—		18,112		10.98
After 10 years		7,805		—		69		7,736		3.62
Total other		25,655		262		69		25,848		8.74
Total investment securities available-for-sale	$	5,052,278	$	191,899	$	7,325	$	5,236,852		3.78	%

20

	At June 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
After 1 to 5 years	$	107,776	$	1,311	$	—	$	109,087		1.47	%
After 5 to 10 years		29,023		2,577		—		31,600		3.80
Total U.S. Treasury securities		136,799		3,888		—		140,687		1.97
Obligations of U.S. Government sponsored entities
Within 1 year		384,536		5,504		—		390,040		3.52
After 1 to 5 years		1,254,234		65,786		—		1,320,020		3.41
After 5 to 10 years		11,928		83		—		12,011		5.30
After 10 years		26,887		517		—		27,404		5.68
Total obligations of U.S. Government sponsored entities		1,677,585		71,890		—		1,749,475		3.49
Obligations of Puerto Rico, States and political subdivisions
After 1 to 5 years		22,406		171		—		22,577		4.09
After 5 to 10 years		27,049		321		4		27,366		5.12
After 10 years		5,560		129		—		5,689		5.28
Total obligations of Puerto Rico, States and political subdivisions		55,015		621		4		55,632		4.72
Collateralized mortgage obligations - federal agencies
Within 1 year		159		3		—		162		4.06
After 1 to 5 years		4,714		136		—		4,850		4.61
After 5 to 10 years		98,717		1,507		88		100,136		2.65
After 10 years		1,310,206		32,005		2,341		1,339,870		2.93
Total collateralized mortgage obligations - federal agencies		1,413,796		33,651		2,429		1,445,018		2.92
Collateralized mortgage obligations - private label
After 5 to 10 years		16,737		21		522		16,236		2.08
After 10 years		92,212		116		6,577		85,751		2.37
Total collateralized mortgage obligations - private label		108,949		137		7,099		101,987		2.32
Mortgage - backed securities
Within 1 year		20,661		177		—		20,838		2.96
After 1 to 5 years		20,438		544		—		20,982		3.96
After 5 to 10 years		188,865		12,762		—		201,627		4.72
After 10 years		2,629,056		107,342		161		2,736,237		4.31
Total mortgage - backed securities		2,859,020		120,825		161		2,979,684		4.33
Equity securities		9,005		202		503		8,704		3.46
Total investment securities available-for-sale	$	6,260,169	$	231,214	$	10,196	$	6,481,187		3.70	%

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

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

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

21

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

					At June 30, 2011
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of U.S. Government sponsored entities	$	9,927	$	73	$	—	$	—	$	9,927	$	73
Obligations of Puerto Rico, States and political subdivisions		9,983		17		300		7		10,283		24
Collateralized mortgage obligations - federal agencies		27,797		555		—		—		27,797		555
Collateralized mortgage obligations - private label		26,268		652		44,153		4,561		70,421		5,213
Mortgage-backed securities		31,685		89		9,154		254		40,839		343
Equity securities		2,846		182		53		96		2,899		278
Total investment securities available-for-sale in an unrealized loss position	$	108,506	$	1,568	$	53,660	$	4,918	$	162,166	$	6,486
					At December 31, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of U.S. Government sponsored entities	$	24,284	$	661	$	—	$	—	$	24,284	$	661
Obligations of Puerto Rico, States and political subdivisions		19,357		213		303		5		19,660		218
Collateralized mortgage obligations - federal agencies		40,212		945		2,505		2		42,717		947
Collateralized mortgage obligations - private label		21,231		292		52,302		4,398		73,533		4,690
Mortgage-backed securities		33,261		406		9,257		232		42,518		638
Equity securities		3		8		43		94		46		102
Other		7,736		69		—		—		7,736		69
Total investment securities available-for-sale in an unrealized loss position	$	146,084	$	2,594	$	64,410	$	4,731	$	210,494	$	7,325
					At June 30, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of Puerto Rico, States and political subdivisions	$	—	$	—	$	305	$	4	$	305	$	4
Collateralized mortgage obligations - federal agencies		138,856		1,915		114,113		514		252,969		2,429
Collateralized mortgage obligations - private label		200		8		84,564		7,091		84,764		7,099
Mortgage-backed securities		8,174		109		1,465		52		9,639		161
Equity securities		22		18		7,191		485		7,213		503
Total investment securities available-for-sale in an unrealized loss position	$	147,252	$	2,050	$	207,638	$	8,146	$	354,890	$	10,196

22

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

At June 30, 2011, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. At June 30, 2011, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis. Also, management evaluated the Corporation’s portfolio of equity securities at June 30, 2011. During the quarter ended June 30, 2011, the Corporation did not record any other-than-temporary impairment losses on equity securities. Management has the intent and ability to hold the investments in equity securities that are at a loss position at June 30, 2011, for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized losses associated with “Collateralized mortgage obligations – private label” are primarily related to securities backed by residential mortgages. In addition to verifying the credit ratings for the private-label CMOs, management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in the securities. At June 30, 2011, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses at June 30, 2011, credit impairment was assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows through the current period and then projects the expected cash flows using a number of assumptions, including default rates, loss severity and prepayment rates. Management’s assessment also considered tests using more stressful parameters. Based on the assessments, management concluded that the tranches of the private-label CMOs held by the Corporation were not other-than-temporarily impaired at June 30, 2011, thus management expects to recover the amortized cost basis of the securities.

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

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

23

Note 8 – Investment securities held-to-maturity

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

	At June 30, 2011
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	12,362	$	1	$	—	$	12,363		0.09	%
Total U.S. Treasury securities		12,362		1		—		12,363		0.09
Obligations of Puerto Rico, States and political subdivisions
Within 1 year		2,235		22		—		2,257		5.56
After 1 to 5 years		15,974		495		—		16,469		4.19
After 5 to 10 years		18,340		393		78		18,655		5.97
After 10 years		54,333		6,764		914		60,183		4.12
Total obligations of Puerto Rico, States and political subdivisions		90,882		7,674		992		97,564		4.54
Collateralized mortgage obligations - private label
After 10 years		166		—		9		157		5.43
Total collateralized mortgage obligations - private label		166		—		9		157		5.43
Other
Within 1 year		1,250		—		—		1,250		0.88
After 1 to 5 years		25,250		375		—		25,625		3.47
Total other		26,500		375		—		26,875		3.35
Total investment securities held-to-maturity	$	129,910	$	8,050	$	1,001	$	136,959		3.87	%
	At December 31, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	25,873	$	—	$	1	$	25,872		0.11	%
Total U.S. Treasury securities		25,873		—		1		25,872		0.11
Obligations of Puerto Rico, States and political subdivisions
Within 1 year		2,150		6		—		2,156		5.33
After 1 to 5 years		15,529		333		—		15,862		4.10
After 5 to 10 years		17,594		115		268		17,441		5.96
After 10 years		56,702		—		1,649		55,053		4.25
Total obligations of Puerto Rico, States and political subdivisions		91,975		454		1,917		90,512		4.58
Collateralized mortgage obligations - private label
After 10 years		176		—		10		166		5.45
Total collateralized mortgage obligations - private label		176		—		10		166		5.45
Other
Within 1 year		4,080		—		—		4,080		1.15
After 1 to 5 years		250		—		7		243		1.20
Total other		4,330		—		7		4,323		1.15
Total investment securities held-to-maturity	$	122,354	$	454	$	1,935	$	120,873		3.51	%

24

	At June 30, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized				Average
(In thousands)	Cost		Gains		Losses		Fair Value		Yield
U.S. Treasury securities
Within 1 year	$	25,797	$	4	$	—	$	25,801		0.22	%
Total U.S. Treasury securities		25,797		4		—		25,801		0.22
Obligations of Puerto Rico, States and political subdivisions
Within 1 year		7,110		13		—		7,123		2.12
After 1 to 5 years		109,820		509		—		110,329		5.52
After 5 to 10 years		17,808		289		75		18,022		5.94
After 10 years		46,050		63		1,000		45,113		3.88
Total obligations of Puerto Rico, States and political subdivisions		180,788		874		1,075		180,587		5.01
Collateralized mortgage obligations - private label
After 10 years		209		—		12		197		5.45
Total collateralized mortgage obligations - private label		209		—		12		197		5.45
Other
Within 1 year		1,372		—		—		1,372		1.91
After 1 to 5 years		1,250		—		—		1,250		0.84
Total other		2,622		—		—		2,622		1.40
Total investment securities held-to-maturity	$	209,416	$	878	$	1,087	$	209,207		4.38	%

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

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

	At June 30, 2011
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
Obligations of Puerto Rico, States and political subdivisions	$	15,820	$	270	$	31,108	$	722	$	46,928	$	992
Collateralized mortgage obligations - private label		—		—		157		9		157		9
Total investment securities held-to-maturity in an unrealized loss position	$	15,820	$	270	$	31,265	$	731	$	47,085	$	1,001
	At December 31, 2010
	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury securities	$	25,872	$	1	$	—	$	—	$	25,872	$	1
Obligations of Puerto Rico, States and political subdivisions		51,995		1,915		773		2		52,768		1,917
Collateralized mortgage obligations- private label		—		—		166		10		166		10
Other		243		7		—		—		243		7
Total investment securities held-to-maturity in an unrealized loss position	$	78,110	$	1,923	$	939	$	12	$	79,049	$	1,935

25

	At June 30, 2010
	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	$	—	$	—	$	45,460	$	1,075	$	45,460	$	1,075
Collateralized mortgage obligations - private label		—		—		197		12		197		12
Total investment securities held-to-maturity in an unrealized loss position	$	—	$	—	$	45,657	$	1,087	$	45,657	$	1,087

As indicated in Note 7 to these consolidated financial statements, management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at June 30, 2011 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. The Corporation performs periodic credit quality reviews on these issuers. The decline in fair value at June 30, 2011 was attributable to changes in interest rates and not credit quality, thus no other-than-temporary decline in value was necessary to be recorded in these held-to-maturity securities at June 30, 2011. At June 30, 2011, 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 9 – Loans

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

For a summary of the accounting policy related to loans and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to the consolidated financial statements included in the Corporation’s 2010 Annual Report.

The following tables present the composition of loans held-in-portfolio (“HIP”), net of unearned income at June 30, 2011 and December 31, 2010.

(In thousands)	Non-covered loans at June 30, 2011		Covered loans at June 30, 2011		Total loans HIP at June 30, 2011
Commercial real estate	$	6,840,778	$	2,337,389	$	9,178,167
Commercial and industrial		3,895,555		258,376		4,153,931
Construction		393,759		645,160		1,038,919
Mortgage		5,347,512		1,238,228		6,585,740
Lease financing		586,056		—		586,056
Consumer:
Credit cards		1,114,147		—		1,114,147
Home equity lines of credit		595,027		—		595,027
Personal		1,137,983		—		1,137,983
Auto		507,839		—		507,839
Other		239,038		137,422		376,460
Total loans held-in-portfolio[a]	$	20,657,694	$	4,616,575	$	25,274,269

[a] Loans held-in-portfolio at June 30, 2011 are net of $ 104 million in unearned income and exclude $ 509 million in loans held-for-sale.

26

(In thousands)	Non-covered loans  at December 31, 2010		Covered loans at December 31, 2010		Total loans HIP at December 31, 2010
Commercial real estate	$	7,006,676	$	2,463,549	$	9,470,225
Commercial and industrial		4,386,809		303,632		4,690,441
Construction		500,851		640,492		1,141,343
Mortgage		4,524,722		1,259,459		5,784,181
Lease financing		602,993		—		602,993
Consumer:
Credit cards		1,132,308		—		1,132,308
Home equity lines of credit		568,353		—		568,353
Personal		1,236,067		—		1,236,067
Auto		503,757		—		503,757
Other		265,499		169,750		435,249
Total loans held-in-portfolio[a]	$	20,728,035	$	4,836,882	$	25,564,917

[a] Loans held-in-portfolio at December 31, 2010 are net of $106 million in unearned income and exclude $894 million in loans held-for-sale.

The following table provides a breakdown of loans held-for-sale (“LHFS”) at June 30, 2011 and December 31, 2010 by main categories.

(In thousands)	June 30, 2011		December 31, 2010
Commercial	$	57,998	$	60,528
Construction		340,687		412,744
Mortgage		110,361		420,666
Total	$	509,046	$	893,938

Non-covered loans

The following tables present non-covered loans held-in-portfolio that are in non-performing status and accruing loans past due 90 days or more by loan class at June 30, 2011 and December 31, 2010. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (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 other financial institutions that, although delinquent, the Corporation has received timely payment from the sellers / servicers, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from other financial institutions, which are in the process of foreclosure, are classified as non-performing mortgage loans.

27

At June 30, 2011
	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 real estate	$	411,478	$	—	$	175,711	$	—	$	587,189	$	—
Commercial and industrial		145,943		—		51,455		—		197,398		—
Construction		58,691		—		139,544		—		198,235		—
Mortgage		583,231		286,588		32,531		—		615,762		286,588
Leasing		4,206		—		251		—		4,457		—
Consumer:
Credit cards		—		25,041		—		—		—		25,041
Home equity lines of credit		123		—		13,428		—		13,551		—
Personal		20,573		—		1,155		—		21,728		—
Auto		5,086		—		70		—		5,156		—
Other		8,369		636		620		—		8,989		636
Total[a]	$	1,237,700	$	312,265	$	414,765	$	—	$	1,652,465	$	312,265

[a] For purposes of this table non-performing loans exclude $400 million in non-performing loans held-for-sale.

At December 31, 2010
	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 real estate	$	370,677	$	—	$	182,456	$	—	$	553,133	$	—
Commercial and industrial		114,792		—		57,102		—		171,894		—
Construction		64,678		—		173,876		—		238,554		—
Mortgage		518,446		292,387		23,587		—		542,033		292,387
Leasing		5,674		—		263		—		5,937		—
Consumer:
Credit cards		—		33,514		—		—		—		33,514
Home equity lines of credit		—		—		17,562		—		17,562		—
Personal		22,816		—		5,369		—		28,185		—
Auto		7,528		—		135		—		7,663		—
Other		6,892		1,442		—		—		6,892		1,442
Total[a]	$	1,111,503	$	327,343	$	460,350	$	—	$	1,571,853	$	327,343

[a] For purposes of this table non-performing loans exclude $672 million in non-performing loans held-for-sale.

At June 30, 2011 non-covered loans held-in-portfolio on which the accrual of interest income had been discontinued amounted to $1.7 billion (December 31, 2010—$1.6 billion). Non-accruing loans at June 30, 2011 include $49 million in consumer loans (December 31, 2010—$60 million).

28

The following tables present loans by past due status at June 30, 2011 and December 31, 2010 for non-covered loans held-in-portfolio (net of unearned income).

June 30, 2011
Puerto Rico
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio Puerto  Rico
Commercial real estate	$	66,458	$	37,660	$	411,478	$	515,596	$	3,083,574	$	3,599,170
Commercial and industrial		75,963		15,262		145,943		237,168		2,566,603		2,803,771
Construction		7,725		2,587		58,691		69,003		93,038		162,041
Mortgage		198,933		99,302		869,819		1,168,054		3,332,884		4,500,938
Leasing		10,974		1,976		4,206		17,156		547,133		564,289
Consumer:
Credit cards		15,358		10,961		25,041		51,360		1,048,926		1,100,286
Home equity lines of credit		283		196		123		602		21,959		22,561
Personal		18,796		10,926		20,573		50,295		932,661		982,956
Auto		20,667		5,901		5,086		31,654		471,885		503,539
Other		3,831		1,160		9,005		13,996		223,090		237,086
Total	$	418,988	$	185,931	$	1,549,965	$	2,154,884	$	12,321,753	$	14,476,637

June 30, 2011
U.S. Mainland
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio U.S.  Mainland
Commercial real estate	$	21,736	$	17,377	$	175,711	$	214,824	$	3,026,784	$	3,241,608
Commercial and industrial		5,693		16,137		51,455		73,285		1,018,499		1,091,784
Construction		3,099		—		139,544		142,643		89,075		231,718
Mortgage		23,756		13,395		32,531		69,682		776,892		846,574
Leasing		503		77		251		831		20,936		21,767
Consumer:
Credit cards		292		233		—		525		13,336		13,861
Home equity lines of credit		6,358		5,915		13,428		25,701		546,765		572,466
Personal		341		1,641		1,155		3,137		151,890		155,027
Auto		153		42		70		265		4,035		4,300
Other		79		34		620		733		1,219		1,952
Total	$	62,010	$	54,851	$	414,765	$	531,626	$	5,649,431	$	6,181,057

29

June 30, 2011
Popular, Inc.
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio Popular, Inc.
Commercial real estate	$	88,194	$	55,037	$	587,189	$	730,420	$	6,110,358	$	6,840,778
Commercial and industrial		81,656		31,399		197,398		310,453		3,585,102		3,895,555
Construction		10,824		2,587		198,235		211,646		182,113		393,759
Mortgage		222,689		112,697		902,350		1,237,736		4,109,776		5,347,512
Leasing		11,477		2,053		4,457		17,987		568,069		586,056
Consumer:
Credit cards		15,650		11,194		25,041		51,885		1,062,262		1,114,147
Home equity lines of credit		6,641		6,111		13,551		26,303		568,724		595,027
Personal		19,137		12,567		21,728		53,432		1,084,551		1,137,983
Auto		20,820		5,943		5,156		31,919		475,920		507,839
Other		3,910		1,194		9,625		14,729		224,309		239,038
Total	$	480,998	$	240,782	$	1,964,730	$	2,686,510	$	17,971,184	$	20,657,694

December 31, 2010
Puerto Rico
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio Puerto Rico
Commercial real estate	$	47,064	$	25,547	$	370,677	$	443,288	$	3,412,310	$	3,855,598
Commercial and industrial		34,703		23,695		114,792		173,190		2,688,228		2,861,418
Construction		6,356		3,000		64,678		74,034		94,322		168,356
Mortgage		188,468		83,789		810,833		1,083,090		2,566,610		3,649,700
Leasing		10,737		2,274		5,674		18,685		554,102		572,787
Consumer:
Credit cards		16,073		12,758		33,514		62,345		1,054,081		1,116,426
Personal		21,004		11,830		22,816		55,650		965,610		1,021,260
Auto		22,076		5,301		7,528		34,905		459,745		494,650
Other		3,799		1,318		8,334		13,451		252,048		265,499
Total	$	350,280	$	169,512	$	1,438,846	$	1,958,638	$	12,047,056	$	14,005,694

30

December 31, 2010
U.S. Mainland
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio U.S. Mainland
Commercial real estate	$	68,903	$	10,322	$	182,456	$	261,681	$	2,889,397	$	3,151,078
Commercial and industrial		30,372		15,079		57,102		102,553		1,422,838		1,525,391
Construction		30,105		292		173,876		204,273		128,222		332,495
Mortgage		38,550		12,751		23,587		74,888		800,134		875,022
Leasing		1,008		224		263		1,495		28,711		30,206
Consumer:
Credit cards		343		357		—		700		15,182		15,882
Home equity lines of credit		6,116		6,873		17,562		30,551		537,802		568,353
Personal		5,559		2,689		5,369		13,617		201,190		214,807
Auto		375		98		135		608		8,499		9,107
Total	$	181,331	$	48,685	$	460,350	$	690,366	$	6,031,975	$	6,722,341
December 31, 2010
Popular, Inc.
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Loans held- in-portfolio Popular, Inc.
Commercial real estate	$	115,967	$	35,869	$	553,133	$	704,969	$	6,301,707	$	7,006,676
Commercial and industrial		65,075		38,774		171,894		275,743		4,111,066		4,386,809
Construction		36,461		3,292		238,554		278,307		222,544		500,851
Mortgage		227,018		96,540		834,420		1,157,978		3,366,744		4,524,722
Leasing		11,745		2,498		5,937		20,180		582,813		602,993
Consumer:
Credit cards		16,416		13,115		33,514		63,045		1,069,263		1,132,308
Home equity lines of credit		6,116		6,873		17,562		30,551		537,802		568,353
Personal		26,563		14,519		28,185		69,267		1,166,800		1,236,067
Auto		22,451		5,399		7,663		35,513		468,244		503,757
Other		3,799		1,318		8,334		13,451		252,048		265,499
Total	$	531,611	$	218,197	$	1,899,196	$	2,649,004	$	18,079,031	$	20,728,035

Covered 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 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 on non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

31

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at June 30, 2011 and December 31, 2010.

	June 30, 2011				December 31, 2010
(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	$	7,374	$	562	$	14,172	$	—
Commercial and industrial		5,476		263		10,635		60
Construction		739		4,154		1,168		—
Mortgage		563		6,783		—		8,648
Consumer		827		3,268		—		2,308
Total[a]	$	14,979	$	15,030	$	25,975	$	11,016

[a] 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 June 30, 2011 and December 31, 2010 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

June 30, 2011
Covered Loans
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Covered loans held-in- portfolio
Commercial real estate	$	48,627	$	33,921	$	471,955	$	554,503	$	1,782,886	$	2,337,389
Commercial and industrial		7,529		6,719		23,928		38,176		220,200		258,376
Construction		14,068		12,180		459,613		485,861		159,299		645,160
Mortgage		63,582		31,156		204,098		298,836		939,392		1,238,228
Consumer		7,942		3,793		17,302		29,037		108,385		137,422
Total covered loans	$	141,748	$	87,769	$	1,176,896	$	1,406,413	$	3,210,162	$	4,616,575
December 31, 2010
Covered Loans
	Past Due
(In thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Covered loans held-in- portfolio
Commercial real estate	$	108,244	$	89,403	$	434,956	$	632,603	$	1,830,946	$	2,463,549
Commercial and industrial		12,091		5,491		32,585		50,167		253,465		303,632
Construction		23,445		11,906		351,386		386,737		253,755		640,492
Mortgage		80,978		34,897		119,745		235,620		1,023,839		1,259,459
Consumer		8,917		4,483		14,612		28,012		141,738		169,750
Total covered loans	$	233,675	$	146,180	$	953,284	$	1,333,139	$	3,503,743	$	4,836,882

Acquired loans in an FDIC-assisted transaction

The following table presents loans acquired as part of the Westernbank FDIC-assisted transaction accounted for pursuant to ASC Subtopic 310-30 at the April 30, 2010 acquisition date. The information presented includes loans determined to be impaired at the time of acquisition (“credit impaired loans”), and loans that were considered to be performing at the acquisition date and are accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”). Refer to Note 1 to the consolidated financial

32

statements and the Critical Accounting Policies / Estimated section of the 2010 Annual Report for a description of the Corporation’s significant accounting policies related to acquired loans and criteria considered by management to apply ASC 310-30 by analogy to non-credit impaired loans.

	April 30, 2010
(In thousands)	Non-credit Impaired Loans		Credit Impaired Loans		Total
Contractually-required principal and interest	$	7,855,033	$	1,995,580	$	9,850,613
Non-accretable difference		2,154,542		1,248,365		3,402,907
Cash flows expected to be collected		5,700,491		747,215		6,447,706
Accretable yield		1,487,634		50,425		1,538,059
Fair value of loans accounted for under
ASC Subtopic 310-30	$	4,212,857	$	696,790	$	4,909,647

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments. The unpaid principal balance of the acquired loans from the Westernbank FDIC-assisted transaction that are accounted under ASC Subtopic 310-30 amounted to $8.1 billion at the April 30, 2010 transaction date.

The carrying amount of the loans acquired as part of the Westernbank FDIC-assisted transaction at June 30, 2011 and December 31, 2010 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 tables.

	June 30, 2011						December 31, 2010
	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	$	1,973,389	$	223,946	$	2,197,335	$	2,133,600	$	247,654	$	2,381,254
Commercial and industrial		86,444		3,860		90,304		117,869		8,257		126,126
Construction		320,443		313,339		633,782		341,866		292,341		634,207
Mortgage		1,132,690		88,051		1,220,741		1,156,879		87,062		1,243,941
Consumer		113,669		9,234		122,903		144,165		10,235		154,400
Carrying amount		3,626,635		638,430		4,265,065		3,894,379		645,549		4,539,928
Less: Allowance for loan losses		38,633		9,624		48,257		—		—		—
Carrying amount, net of allowance	$	3,588,002	$	628,806	$	4,216,808	$	3,894,379	$	645,549	$	4,539,928

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, including amounts charged off by the Corporation, amounted to $6.8 billion at June 30, 2011 (December 31, 2010 - $7.7 billion). At June 30, 2011, 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.

33

Changes in the carrying amount and the accretable yield for the acquired loans in the Westernbank FDIC-assisted transaction at and for the year ended December 31, 2010 and at and for the six months ended June 30, 2011, and which are accounted pursuant to the ASC Subtopic 310-30, were as follows:

	Non-credit Impaired loans						Credit impaired loans						Total
(In thousands)	Accretable yield			Carrying amount of loans			Accretable yield			Carrying amount of loans			Accretable yield			Carrying amount of loans
Balance at January 1, 2010	$		—	$	—		$	—		$	—		$	—		$	—
Additions[1]		1,487,634			4,212,857			50,425			696,790			1,538,059			4,909,647
Accretion		(179,707	)		179,707			(27,244	)		27,244			(206,951	)		206,951
Collections		—			(498,185	)		—			(78,485	)		—			(576,670	)
Balance at December 31, 2010	$	1,307,927		$	3,894,379		$	23,181		$	645,549		$	1,331,108		$	4,539,928
Accretion		(136,875	)		136,875			(36,242	)		36,242			(173,117	)		173,117
Decrease in cash flow estimates		—			(38,633	)		—			(14,049	)		—			(52,682	)
Reclassifications from nonaccretable balance		375,181						83,747						458,928
Collections		—			(404,619	)		—			(38,936	)		—			(443,555	)
Balance at June 30, 2011, net of allowance for loan losses	$	1,546,233		$	3,588,002		$	70,686		$	628,806		$	1,616,919		$	4,216,808

[1] Amount presented in the “Carrying amount of loans” column represents the estimated fair value of the loans at the date of acquisition.

During the quarter and six months ended June 30, 2011, the Corporation recorded an allowance for loan losses related to the acquired covered loans that are accounted for under ASC Subtopic 310-30 as certain pools reflected lower expected cash flows. The following table provides the activity in the allowance for loan losses related to these acquired loans for the quarter and six months ended June 30, 2011.

	ASC 310-30 loans
(In thousands)	For the quarter ended June 30, 2011		For the six months ended June 30, 2011
Balance at beginning of period	$	5,297	$	—
Provision for loan losses		43,555		52,682
Charge-offs		595		4,425
Balance at end of period	$	48,257	$	48,257

There was no need to record an allowance for loan losses related to the covered loans at December 31, 2010 and June 30, 2010.

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

(In thousands)
Fair value of loans accounted under ASC Subtopic 310-20	$	290,810
Gross contractual amounts receivable (principal and interest)	$	457,201
Estimate of contractual cash flows not expected to be collected	$	164,427

The cash flows expected to be collected consider the estimated remaining life of the underlying loans and include the effects of estimated prepayments.

34

Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.4 billion at June 30, 2011 (December 31, 2010 and June 30, 2010 - $0.3 billion).

Note 10 – Allowance for loan losses

The following tables present the changes in the allowance for loan losses for the quarters and six months ended June 30, 2011 and 2010.

	For the quarters ended
	June 30, 2011									June 30, 2010
(In thousands)	Non-covered loans			Covered loans			Total			Total
Balance at beginning of period	$	727,346		$	9,159		$	736,505		$	1,277,036
Provision for loan losses		95,712			48,605			144,317			202,258
Recoveries		37,874			—			37,874			31,839
Charge-offs		(171,254	)		(595	)		(171,849	)		(234,117	)
Balance at end of period	$	689,678		$	57,169		$	746,847		$	1,277,016
	For the six months ended
	June 30, 2011									June 30, 2010
(In thousands)	Non-covered loans			Covered loans			Total			Total
Balance at beginning of period	$	793,225		$	—		$	793,225		$	1,261,204
Provision for loan losses		155,474			64,162			219,636			442,458
Recoveries		63,129			—			63,129			51,312
Charge-offs		(335,957	)		(6,993	)		(342,950	)		(477,958	)
Recoveries related to loans transferred to loans held-for-sale		13,807			—			13,807			—
Balance at end of period	$	689,678		$	57,169		$	746,847		$	1,277,016

The Corporation’s allowance for loan losses at June 30, 2011 includes $57 million related to the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction. This allowance covers the estimated credit loss exposure related to: (i) acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $48 million at quarter end, as nine pools reflected a higher than expected credit deterioration; and (ii) acquired loans accounted for under ASC Subtopic 310-20, which required an allowance for loan losses of $9 million. Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC 310-20 and new loans originated as a result of loan commitments assumed, the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for individually impaired loans. Concurrently, the Corporation recorded an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements.

35

The following tables present the changes in the allowance for loan losses and the loan balance by portfolio segments for the quarter and six months ended June 30, 2011.

For the quarter ended June 30, 2011
Puerto Rico
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	221,149		$	18,372		$	55,926		$	6,608		$	130,415		$	432,470
Charge-offs		(57,290	)		(283	)		(7,166	)		(1,510	)		(34,475	)		(100,724	)
Recoveries		7,104			6,227			15			878			6,780			21,004
Provision		103,999			(7,952	)		6,400			(931	)		17,806			119,322
Ending balance	$	274,962		$	16,364		$	55,175		$	5,045		$	120,526		$	472,072
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	7,704		$	116		$	8,226		$	—		$	—		$	16,046
Ending balance: non-covered loans collectively evaluated for impairment	$	219,429		$	6,957		$	46,914		$	5,045		$	120,512		$	398,857
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	1,000		$	—		$	—		$	—		$	—		$	1,000
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	46,829		$	9,291		$	35		$	—		$	14		$	56,169
Loans held-in-portfolio:
Ending balance - Total	$	8,998,706		$	807,201		$	5,739,166		$	564,289		$	2,983,850		$	19,093,212
Ending balance: non-covered loans individually evaluated for impairment	$	346,893		$	65,885		$	195,650		$	—		$	—		$	608,428
Ending balance: non-covered loans collectively evaluated for impairment	$	6,056,048		$	96,156		$	4,305,288		$	564,289		$	2,846,428		$	13,868,209
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	3,626		$	—		$	—		$	—		$	—		$	3,626
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	2,592,139		$	645,160		$	1,238,228		$	—		$	137,422		$	4,612,949

36

For the quarter ended June 30, 2011
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	188,626		$	27,766		$	24,243		$	3,735		$	59,665		$	304,035
Charge-offs		(43,755	)		(6,822	)		(4,996	)		(291	)		(15,261	)		(71,125	)
Recoveries		11,750			2,234			966			166			1,754			16,870
Provision		28,011			(10,466	)		2,619			(2,885	)		7,716			24,995
Ending balance	$	184,632		$	12,712		$	22,832		$	725		$	53,874		$	274,775
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	51		$	270		$	3,439		$	—		$	—		$	3,760
Ending balance: non-covered loans collectively evaluated for impairment	$	184,581		$	12,442		$	19,393		$	725		$	53,874		$	271,015
Loans held-in-portfolio:
Ending balance - Total	$	4,333,392		$	231,718		$	846,574		$	21,767		$	747,606		$	6,181,057
Ending balance: non-covered loans individually evaluated for impairment	$	139,114		$	134,034		$	10,103		$	—		$	—		$	283,251
Ending balance: non-covered loans collectively evaluated for impairment	$	4,194,278		$	97,684		$	836,471		$	21,767		$	747,606		$	5,897,806

37

For the quarter ended June 30, 2011
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	409,775		$	46,138		$	80,169		$	10,343		$	190,080		$	736,505
Charge-offs		(101,045	)		(7,105	)		(12,162	)		(1,801	)		(49,736	)		(171,849	)
Recoveries		18,854			8,461			981			1,044			8,534			37,874
Provision		132,010			(18,418	)		9,019			(3,816	)		25,522			144,317
Ending balance	$	459,594		$	29,076		$	78,007		$	5,770		$	174,400		$	746,847
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	7,755		$	386		$	11,665		$	—		$	—		$	19,806
Ending balance: non-covered loans collectively evaluated for impairment	$	404,010		$	19,399		$	66,307		$	5,770		$	174,386		$	669,872
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	1,000		$	—		$	—		$	—		$	—		$	1,000
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	46,829		$	9,291		$	35		$	—		$	14		$	56,169
Loans held-in-portfolio:
Ending balance - Total	$	13,332,098		$	1,038,919		$	6,585,740		$	586,056		$	3,731,456		$	25,274,269
Ending balance: non-covered loans individually evaluated for impairment	$	486,007		$	199,919		$	205,753		$	—		$	—		$	891,679
Ending balance: non-covered loans collectively evaluated for impairment	$	10,250,326		$	193,840		$	5,141,759		$	586,056		$	3,594,034		$	19,766,015
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	3,626		$	—		$	—		$	—		$	—		$	3,626
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	2,592,139		$	645,160		$	1,238,228		$	—		$	137,422		$	4,612,949

38

For the six months ended June 30, 2011
Puerto Rico
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	256,643		$	16,074		$	42,029		$	7,154		$	133,531		$	455,431
Charge-offs		(105,029	)		(14,382	)		(15,370	)		(3,456	)		(70,298	)		(208,535	)
Recoveries		14,608			7,960			542			1,645			13,843			38,598
Provision		108,740			6,712			27,974			(298	)		43,450			186,578
Ending balance	$	274,962		$	16,364		$	55,175		$	5,045		$	120,526		$	472,072
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	7,704		$	116		$	8,226		$	—		$	—		$	16,046
Ending balance: non-covered loans collectively evaluated for impairment	$	219,429		$	6,957		$	46,914		$	5,045		$	120,512		$	398,857
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	1,000		$	—		$	—		$	—		$	—		$	1,000
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	46,829		$	9,291		$	35		$	—		$	14		$	56,169
Loans held-in-portfolio:
Ending balance - Total	$	8,998,706		$	807,201		$	5,739,166		$	564,289		$	2,983,850		$	19,093,212
Ending balance: non-covered loans individually evaluated for impairment	$	346,893		$	65,885		$	195,650		$	—		$	—		$	608,428
Ending balance: non-covered loans collectively evaluated for impairment	$	6,056,048		$	96,156		$	4,305,288		$	564,289		$	2,846,428		$	13,868,209
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	3,626		$	—		$	—		$	—		$	—		$	3,626
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	2,592,139		$	645,160		$	1,238,228		$	—		$	137,422		$	4,612,949

39

For the six months ended June 30, 2011
U.S. Mainland
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	205,748		$	31,650		$	28,839		$	5,999		$	65,558		$	337,794
Charge-offs		(82,012	)		(12,255	)		(6,354	)		(619	)		(33,175	)		(134,415	)
Recoveries		16,709			2,520			1,754			442			3,106			24,531
Recoveries related to loans transferred to LHFS		—			—			13,807			—			—			13,807
Provision		44,187			(9,203	)		(15,214	)		(5,097	)		18,385			33,058
Ending balance	$	184,632		$	12,712		$	22,832		$	725		$	53,874		$	274,775
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	51		$	270		$	3,439		$	—		$	—		$	3,760
Ending balance: non-covered loans collectively evaluated for impairment	$	184,581		$	12,442		$	19,393		$	725		$	53,874		$	271,015
Loans held-in-portfolio:
Ending balance - Total	$	4,333,392		$	231,718		$	846,574		$	21,767		$	747,606		$	6,181,057
Ending balance: non-covered loans individually evaluated for impairment	$	139,114		$	134,034		$	10,103		$	—		$	—		$	283,251
Ending balance: non-covered loans collectively evaluated for impairment	$	4,194,278		$	97,684		$	836,471		$	21,767		$	747,606		$	5,897,806

40

For the six months ended June 30, 2011
Popular, Inc.
(In thousands)	Commercial			Construction			Mortgage			Leasing			Consumer			Total
Allowance for credit losses:
Beginning balance	$	462,391		$	47,724		$	70,868		$	13,153		$	199,089		$	793,225
Charge-offs		(187,041	)		(26,637	)		(21,724	)		(4,075	)		(103,473	)		(342,950	)
Recoveries		31,317			10,480			2,296			2,087			16,949			63,129
Recoveries related to loans transferred to LHFS		—			—			13,807			—			—			13,807
Provision		152,927			(2,491	)		12,760			(5,395	)		61,835			219,636
Ending balance	$	459,594		$	29,076		$	78,007		$	5,770		$	174,400		$	746,847
Allowance for credit losses:
Ending balance: non-covered loans individually evaluated for impairment	$	7,755		$	386		$	11,665		$	—		$	—		$	19,806
Ending balance: non-covered loans collectively evaluated for impairment	$	404,010		$	19,399		$	66,307		$	5,770		$	174,386		$	669,872
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	1,000		$	—		$	—		$	—		$	—		$	1,000
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	46,829		$	9,291		$	35		$	—		$	14		$	56,169
Loans held-in-portfolio:
Ending balance - Total	$	13,332,098		$	1,038,919		$	6,585,740		$	586,056		$	3,731,456		$	25,274,269
Ending balance: non-covered loans individually evaluated for impairment	$	486,007		$	199,919		$	205,753		$	—		$	—		$	891,679
Ending balance: non-covered loans collectively evaluated for impairment	$	10,250,326		$	193,840		$	5,141,759		$	586,056		$	3,594,034		$	19,766,015
Ending balance: covered loans individually evaluated for impairment accounted for under ASC 310-20	$	3,626		$	—		$	—		$	—		$	—		$	3,626
Ending balance: covered loans collectively evaluated for impairment accounted for under ASC 310-30 and ASC 310-20	$	2,592,139		$	645,160		$	1,238,228		$	—		$	137,422		$	4,612,949

Impaired loans

Disclosures related to loans that were considered impaired based on ASC Section 310-10-35 are included in the table below.

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Impaired loans with related allowance	$	226,681	$	154,349	$	1,349,536
Impaired loans that do not require an allowance		668,624		644,150		389,536
Total impaired loans	$	895,305	$	798,499	$	1,739,072
Allowance for impaired loans	$	20,806	$	13,770	$	383,439
Average balance of impaired loans during the quarter	$	860,127			$	1,747,025
Interest income recognized on impaired loans during the quarter	$	3,708			$	4,769
Average balance of impaired loans during the six months ended June 30,	$	839,584			$	1,236,004
Interest income recognized on impaired loans during the six months ended June 30,	$	7,056			$	9,232

41

The following tables present commercial, construction, mortgage and covered loans individually evaluated for impairment at June 30, 2011 and December 31, 2010.

June 30, 2011
Puerto Rico
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	9,568	$	11,509	$	2,039	$	247,711	$	299,397	$	257,279	$	310,906	$	2,039
Commercial and industrial		9,888		9,888		5,665		79,726		101,109		89,614		110,997		5,665
Construction		1,777		2,120		116		64,108		117,016		65,885		119,136		116
Mortgage		190,906		193,062		8,226		4,744		4,744		195,650		197,806		8,226
Covered Loans		—		1,000		1,000		3,626		3,642		3,626		4,642		1,000
Total Puerto Rico	$	212,139	$	217,579	$	17,046	$	399,915	$	525,908	$	612,054	$	743,487	$	17,046
June 30, 2011
U.S. Mainland
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	—	$	—	$	—	$	115,539	$	145,998	$	115,539	$	145,998	$	—
Commercial and industrial		1,319		1,319		51		22,256		31,648		23,575		32,967		51
Construction		3,120		4,340		270		130,914		185,244		134,034		189,584		270
Mortgage		10,103		10,103		3,439		—		—		10,103		10,103		3,439
Total U.S. Mainland	$	14,542	$	15,762	$	3,760	$	268,709	$	362,890	$	283,251	$	378,652	$	3,760
June 30, 2011
Popular, Inc.
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	9,568	$	11,509	$	2,039	$	363,250	$	445,395	$	372,818	$	456,904	$	2,039
Commercial and industrial		11,207		11,207		5,716		101,982		132,757		113,189		143,964		5,716
Construction		4,897		6,460		386		195,022		302,260		199,919		308,720		386
Mortgage		201,009		203,165		11,665		4,744		4,744		205,753		207,909		11,665
Covered Loans		—		1,000		1,000		3,626		3,642		3,626		4,642		1,000
Total Popular, Inc.	$	226,681	$	233,341	$	20,806	$	668,624	$	888,798	$	895,305	$	1,122,139	$	20,806

42

December 31, 2010
Puerto Rico
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	11,403	$	13,613	$	3,590	$	208,891	$	256,858	$	220,294	$	270,471	$	3,590
Commercial and industrial		23,699		28,307		4,960		66,589		79,917		90,288		108,224		4,960
Construction		4,514		10,515		216		61,184		99,016		65,698		109,531		216
Mortgage		114,733		115,595		5,004		6,476		6,476		121,209		122,071		5,004
Total Puerto Rico	$	154,349	$	168,030	$	13,770	$	343,140	$	442,267	$	497,489	$	610,297	$	13,770
December 31, 2010
U.S. Mainland
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	—	$	—	$	—	$	101,856	$	152,876	$	101,856	$	152,876	$	—
Commercial and industrial		—		—		—		33,530		44,443		33,530		44,443		—
Construction		—		—		—		165,624		248,955		165,624		248,955		—
Total U.S. Mainland	$	—	$	—	$	—	$	301,010	$	446,274	$	301,010	$	446,274	$	—

There were no mortgage loans individually evaluated for impairment in the U.S. Mainland portfolio at December 31, 2010.

December 31, 2010
Popular, Inc.
	Impaired Loans – With an Allowance						Impaired Loans With No Allowance				Impaired Loans - Total
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Commercial real estate	$	11,403	$	13,613	$	3,590	$	310,747	$	409,734	$	322,150	$	423,347	$	3,590
Commercial and industrial		23,699		28,307		4,960		100,119		124,360		123,818		152,667		4,960
Construction		4,514		10,515		216		226,808		347,971		231,322		358,486		216
Mortgage		114,733		115,595		5,004		6,476		6,476		121,209		122,071		5,004
Total Popular, Inc.	$	154,349	$	168,030	$	13,770	$	644,150	$	888,541	$	798,499	$	1,056,571	$	13,770

43

The following table presents the average recorded investment and interest income recognized on impaired loans for the quarter and six months ended June 30, 2011.

For the quarter ended June 30, 2011
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	244,152	$	625	$	102,012	$	354	$	346,164	$	979
Commercial and industrial		91,832		326		35,022		180		126,854		506
Construction		61,246		—		147,660		—		208,906		—
Mortgage		168,735		2,092		7,655		131		176,390		2,223
Covered Loans		1,813		—		—		—		1,813		—
Total Popular, Inc.	$	567,778	$	3,043	$	292,349	$	665	$	860,127	$	3,708

For the six months ended June 30, 2011
	Puerto Rico				U.S. Mainland				Popular, Inc.
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	236,199	$	1,294	$	101,960	$	449	$	338,159	$	1,743
Commercial and industrial		91,317		578		34,525		397		125,842		975
Construction		62,730		49		153,648		152		216,378		201
Mortgage		152,893		4,006		5,103		131		157,996		4,137
Covered Loans		1,209		—		—		—		1,209		—
Total Popular, Inc.	$	544,348	$	5,927	$	295,236	$	1,129	$	839,584	$	7,056

Troubled debt restructurings related to non-covered loans portfolio amounted to $673 million at June 30, 2011 (December 31, 2010 - $561 million). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted to $486 thousand related to the construction loan portfolio and $1 million related to the commercial loan portfolio at June 30, 2011 (December 31, 2010 - $3 million and $1 million, respectively).

Credit Quality

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

44

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

Pass Credit Classifications:

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

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

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

Adversely Classified Classifications:

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

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

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

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

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

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

45

The following table presents the outstanding balance, net of unearned, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at June 30, 2011 and December 31, 2010.

June 30, 2011
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Total		Pass/ Unrated		Total
Puerto Rico[1]
Commercial real estate	$	376,010	$	359,809	$	630,376	$	6,911	$	—	$	1,373,106	$	2,226,064	$	3,599,170
Commercial and industrial		368,955		211,961		366,149		2,655		1,438		951,158		1,852,613		2,803,771
Total Commercial		744,965		571,770		996,525		9,566		1,438		2,324,264		4,078,677		6,402,941
Construction		4,310		33,108		65,708		13,013		—		116,139		45,902		162,041
Mortgage		—		—		619,147		—		—		619,147		3,881,791		4,500,938
Leasing		—		—		19,323		—		5,832		25,155		539,134		564,289
Consumer		—		—		38,063		—		4,650		42,713		2,803,715		2,846,428
Total Puerto Rico	$	749,275	$	604,878	$	1,738,766	$	22,579	$	11,920	$	3,127,418	$	11,349,219	$	14,476,637
U.S. Mainland
Commercial real estate	$	345,346	$	83,835	$	588,306	$	—	$	—	$	1,017,487	$	2,224,121	$	3,241,608
Commercial and industrial		54,387		31,912		154,991		—		—		241,290		850,494		1,091,784
Total Commercial		399,733		115,747		743,297		—		—		1,258,777		3,074,615		4,333,392
Construction		13,893		26,188		184,742		—		—		224,823		6,895		231,718
Mortgage		—		—		32,584		—		—		32,584		813,990		846,574
Leasing		—		—		—		—		—		—		21,767		21,767
Consumer		—		—		6,525		—		22,383		28,908		718,698		747,606
Total U.S. Mainland	$	413,626	$	141,935	$	967,148	$	—	$	22,383	$	1,545,092	$	4,635,965	$	6,181,057
Popular, Inc.
Commercial real estate	$	721,356	$	443,644	$	1,218,682	$	6,911	$	—	$	2,390,593	$	4,450,185	$	6,840,778
Commercial and industrial		423,342		243,873		521,140		2,655		1,438		1,192,448		2,703,107		3,895,555
Total Commercial		1,144,698		687,517		1,739,822		9,566		1,438		3,583,041		7,153,292		10,736,333
Construction		18,203		59,296		250,450		13,013		—		340,962		52,797		393,759
Mortgage		—		—		651,731		—		—		651,731		4,695,781		5,347,512
Leasing		—		—		19,323		—		5,832		25,155		560,901		586,056
Consumer		—		—		44,588		—		27,033		71,621		3,522,413		3,594,034
Total Popular, Inc.	$	1,162,901	$	746,813	$	2,705,914	$	22,579	$	34,303	$	4,672,510	$	15,985,184	$	20,657,694

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

Weighted average obligor risk rating	(Scales 11 and 12) Substandard		(Scales 1 through 8) Pass
Puerto Rico:[1]
Commercial real estate		11.63		6.71
Commercial and industrial		11.34		6.61
Total Commercial		11.52		6.67
Construction		11.83		7.71
	Substandard		Pass
U.S. Mainland:
Commercial real estate		11.29		7.11
Commercial and industrial		11.26		6.95
Total Commercial		11.28		7.07
Construction		11.75		8.00

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

46

December 31, 2010
(In thousands)	Watch		Special Mention		Substandard		Doubtful		Loss		Total		Pass/ Unrated		Total
Puerto Rico[1]
Commercial real estate	$	439,004	$	346,985	$	622,675	$	6,302	$	—	$	1,414,966	$	2,440,632	$	3,855,598
Commercial and industrial		608,250		245,250		345,266		3,112		1,436		1,203,314		1,658,104		2,861,418
Total Commercial		1,047,254		592,235		967,941		9,414		1,436		2,618,280		4,098,736		6,717,016
Construction		38,921		12,941		67,271		15,939		—		135,072		33,284		168,356
Mortgage		—		—		550,933		—		—		550,933		3,098,767		3,649,700
Leasing		—		—		5,539		—		5,969		11,508		561,279		572,787
Consumer		—		—		47,907		—		4,227		52,134		2,845,701		2,897,835
Total Puerto Rico	$	1,086,175	$	605,176	$	1,639,591	$	25,353	$	11,632	$	3,367,927	$	10,637,767	$	14,005,694
U.S. Mainland
Commercial real estate	$	302,347	$	93,564	$	650,118	$	—	$	—	$	1,046,029	$	2,105,049	$	3,151,078
Commercial and industrial		62,552		81,224		250,843		—		—		394,619		1,130,772		1,525,391
Total Commercial		364,899		174,788		900,961		—		—		1,440,648		3,235,821		4,676,469
Construction		30,021		40,022		257,651		—		—		327,694		4,801		332,495
Mortgage		—		—		23,587		—		—		23,587		851,435		875,022
Leasing		—		—		—		—		—		—		30,206		30,206
Consumer		—		—		14,240		—		8,825		23,065		785,084		808,149
Total U.S. Mainland	$	394,920	$	214,810	$	1,196,439	$	—	$	8,825	$	1,814,994	$	4,907,347	$	6,722,341
Popular, Inc.
Commercial real estate	$	741,351	$	440,549	$	1,272,793	$	6,302	$	—	$	2,460,995	$	4,545,681	$	7,006,676
Commercial and industrial		670,802		326,474		596,109		3,112		1,436		1,597,933		2,788,876		4,386,809
Total Commercial		1,412,153		767,023		1,868,902		9,414		1,436		4,058,928		7,334,557		11,393,485
Construction		68,942		52,963		324,922		15,939		—		462,766		38,085		500,851
Mortgage		—		—		574,520		—		—		574,520		3,950,202		4,524,722
Leasing		—		—		5,539		—		5,969		11,508		591,485		602,993
Consumer		—		—		62,147		—		13,052		75,199		3,630,785		3,705,984
Total Popular, Inc.	$	1,481,095	$	819,986	$	2,836,030	$	25,353	$	20,457	$	5,182,921	$	15,545,114	$	20,728,035

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

Weighted average obligor risk rating	(Scales 11 and 12) Substandard		(Scales 1 through 8) Pass
Puerto Rico:[1]
Commercial real estate		11.64		6.68
Commercial and industrial		11.24		6.76
Total Commercial		11.49		6.71
Construction		11.77		7.49
	Substandard		Pass
United States:
Commercial real estate		11.29		7.11
Commercial and industrial		11.17		6.98
Total Commercial		11.25		7.07
Construction		11.66		8.00

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

47

Note 11 – FDIC loss share asset

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss sharing agreements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC will reimburse BPPR for 80% of losses with respect to covered assets, and BPPR will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid BPPR 80% reimbursement under the loss sharing agreements. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years. The loss sharing agreement applicable to commercial and consumer loans provides for FDIC loss sharing for five years and BPPR reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

In addition, as disclosed in the 2010 Annual Report, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated true-up payment is recorded as a reduction of the FDIC loss share asset. As of June 30, 2011, the carrying amount (discounted value) of the true-up provision was estimated at approximately $95 million (December 31, 2010 - $92 million; June 30, 2010 - $89 million).

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

(In thousands)	2011			2010
Balance at beginning of year	$	2,318,183		$	—
FDIC loss share indemnification asset recorded at business combination		—			2,337,748
Accretion of loss share indemnification asset, net		31,389			17,665
Credit impairment losses to be covered under loss sharing agreements		51,329			—
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments accounted for under ASC Subtopic 310-20		(30,003	)		(32,702	)
Credit impairment losses reclassified to claims receivables, net of recoveries		(579,294	)		—
Other net benefits attributable to FDIC loss sharing agreements		13,156			7,695
Claims receivables filed with FDIC and outstanding [1]		545,416			—
Balance at June 30	$	2,350,176		$	2,330,406

[1] Represent claims filed with the FDIC for losses on covered assets and reimbursable expenses. The Corporation received payment from the FDIC amounting to $545 million in July 2011.

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

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

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

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

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

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

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

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

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

48

Under the loss share agreements, BPPR is also required to maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.

Note 12 – Transfers of financial assets and mortgage servicing assets

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in accordance with the agencies’ servicing guidelines and standards. Substantially, all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 19 to the consolidated financial statements for a description of such arrangements.

During the quarter ended June 30, 2011, the Corporation obtained as proceeds $270 million of assets as result of securitization transactions with FNMA and GNMA, consisting of $265 million in mortgage-backed securities and $5 million in servicing rights. During the six months ended June 30, 2011, the Corporation obtained as proceeds $ 605 million of assets as result of securitization transactions with FNMA and GNMA, consisting of $ 594 million in mortgage-backed securities and $ 11 million in servicing rights. During the quarter ended June 30, 2010, the Corporation obtained as proceeds $ 210 million of assets as result of securitization transactions with FNMA and GNMA, consisting of $ 206 million in mortgage-backed securities and $ 4 million in servicing rights. During the six months ended June 30, 2010, the Corporation obtained as proceeds $ 419 million of assets as result of securitization transactions with FNMA and GNMA, consisting of $ 411 million in mortgage-backed securities and $ 8 million in servicing rights. No liabilities were incurred as a result of these transfers during the quarters and six months ended June 30, 2011 and 2010 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain $4.1 million and $5.0 million, respectively, during the quarters ended June 30, 2011 and 2010 related to these residential mortgage loans securitized. The Corporation recorded a net gain $10.4 million and $10.3 million, respectively, during the six months ended June 30, 2011 and 2010 related to these residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the quarters and six months ended June 30, 2011 and 2010:

	Proceeds Obtained During the Quarter Ended June 30, 2011
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA		—	$	217,296		—	$	217,296
Mortgage-backed securities - FNMA		—		48,229		—		48,229
Total trading account securities		—	$	265,525		—	$	265,525
Mortgage servicing rights		—		—	$	4,890	$	4,890
Total		—	$	265,525	$	4,890	$	270,415
	Proceeds Obtained During the Six Months Ended June 30,  2011
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA		—	$	472,870		—	$	472,870
Mortgage-backed securities - FNMA		—		121,247		—		121,247
Total trading account securities		—	$	594,117		—	$	594,117
Mortgage servicing rights		—		—	$	10,839	$	10,839
Total		—	$	594,117	$	10,839	$	604,956

49

	Proceeds Obtained During the Quarter Ended June 30, 2010
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA		—	$	165,675	$	2,518	$	168,193
Mortgage-backed securities - FNMA		—		37,814		—		37,814
Total trading account securities		—	$	203,489	$	2,518	$	206,007
Mortgage servicing rights		—		—	$	3,794	$	3,794
Total		—	$	203,489	$	6,312	$	209,801
	Proceeds Obtained During the Six Months Ended June 30,  2010
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Investments securities available for sale:
Mortgage-backed securities - GNMA		—		—	$	2,810	$	2,810
Mortgage-backed securities - FNMA		—		—		—		—
Total investment securities available-for-sale		—		—	$	2,810	$	2,810
Trading account securities:
Mortgage-backed securities - GNMA		—	$	327,600	$	4,147	$	331,747
Mortgage-backed securities - FNMA		—		76,506		—		76,506
Total trading account securities		—	$	404,106	$	4,147	$	408,253
Mortgage servicing rights		—		—	$	7,535	$	7,535
Total		—	$	404,106	$	14,492	$	418,598

During the six months ended June 30, 2011, the Corporation retained servicing rights on whole loan sales involving approximately $53 million in principal balance outstanding (June 30, 2010 - $41 million), with realized gains of approximately $1.1 million (June 30, 2010 - gains of $0.8 million). All loan sales performed during the six months ended June 30, 2011 were without credit recourse agreements.

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

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

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

50

The following table presents the changes in MSRs measured using the fair value method for the six months ended June 30, 2011 and 2010.

Residential MSRs
(In thousands)	June 30, 2011			June 30, 2010
Fair value at beginning of period	$	166,907		$	169,747
Purchases		860			4,015
Servicing from securitizations or asset transfers		11,292			7,809
Changes due to payments on loans [1]		(8,397	)		(7,932	)
Changes in fair value due to changes in valuation model inputs or assumptions		(7,852	)		(1,645	)
Other disposals		(191	)		—
Fair value at end of period	$	162,619		$	171,994

[1] Represents the change in the market value of the MSR asset principally due to the impact of portfolio principal runoff during the period. It is computed as the sum of the monthly loan principal collections, curtailments, cancellations and repurchases multiplied by the MSR fair value percentage. A reduction in the loan portfolio balance causes a reduction in the contractual servicing fees for future periods.

Residential mortgage loans serviced for others were $17.4 billion at June 30, 2011 (December 31, 2010 - $18.4 billion; June 30, 2010 - $17.9 billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter and six months ended June 30, 2011 amounted to $12.4 million and $24.8 million, respectively (June 30, 2010 - $11.9 million and $23.8 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At June 30, 2011, those weighted average mortgage servicing fees were 0.26% (June 30, 2010 – 0.27%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

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

Key economic assumptions used in measuring the servicing rights retained at the date of the residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during the quarter ended June 30, 2011 and the year ended December 31, 2010 were as follows:

	June 30, 2011			December 31, 2010
Prepayment speed		4.9	%		5.9	%
Weighted average life		20.3 years			17.1 years
Discount rate (annual rate)		11.5	%		11.4	%

51

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions at June 30, 2011 and December 31, 2010 were as follows:

Originated MSRs

(In thousands)	June 30, 2011			December 31, 2010
Fair value of retained interests	$	102,427		$	101,675
Weighted average life		11.7 years			12.5 years
Weighted average prepayment speed (annual rate)		8.6	%		8.0	%
Impact on fair value of 10% adverse change	$	(3,671	)	$	(3,413	)
Impact on fair value of 20% adverse change	$	(7,113	)	$	(6,651	)
Weighted average discount rate (annual rate)		12.6	%		12.8	%
Impact on fair value of 10% adverse change	$	(4,541	)	$	(4,479	)
Impact on fair value of 20% adverse change	$	(8,690	)	$	(8,605	)

The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions at June 30, 2011 and December 31, 2010 were as follows:

Purchased MSRs

(In thousands)	June 30, 2011			December 31, 2010
Fair value of retained interests	$	60,192		$	65,232
Weighted average life		11.7 years			12.7 years
Weighted average prepayment speed (annual rate)		8.6	%		7.9	%
Impact on fair value of 10% adverse change	$	(2,502	)	$	(1,963	)
Impact on fair value of 20% adverse change	$	(4,417	)	$	(3,956	)
Weighted average discount rate (annual rate)		11.5	%		11.5	%
Impact on fair value of 10% adverse change	$	(2,789	)	$	(2,353	)
Impact on fair value of 20% adverse change	$	(4,935	)	$	(4,671	)

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

At June 30, 2011 the Corporation serviced $3.7 billion (December 31, 2010 - $4.0 billion; June 30, 2010 - $4.2 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At June 30, 2011 the Corporation had recorded $156 million in mortgage loans on its financial statements related to this buy-back option program (December 31, 2010 - $168 million; June 30, 2010 - $141 million). During the six months ended June 30, 2011 and 2010, the Corporation did not exercise its option to repurchase delinquency loans that meet the criteria indicated above. As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation.

52

Note 13 - Other assets

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

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Net deferred tax assets (net of valuation allowance)	$	362,036	$	388,466	$	340,146
Investments under the equity method		299,316		299,185		98,234
Bank-owned life insurance program		240,314		237,997		235,499
Prepaid FDIC insurance assessment		101,919		147,513		179,130
Other prepaid expenses		99,833		75,149		161,963
Derivative assets		68,376		72,510		79,571
Trade receivables from brokers and counterparties		37,196		347		73,110
Others		184,853		228,720		221,651
Total other assets	$	1,393,843	$	1,449,887	$	1,389,304

Note 14 – Goodwill and other intangible assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2011 and 2010, allocated by reportable segments and corporate group, were as follows (refer to Note 30 for the definition of the Corporation’s reportable segments):

2011
(In thousands)	Balance at January 1, 2011		Goodwill on acquisition		Purchase accounting adjustments			Other		Balance at June 30, 2011
Banco Popular de Puerto Rico	$	245,309	$	—	$	(69	)	$	—	$	245,240
Banco Popular North America		402,078		—		—			—		402,078
Total Popular, Inc.	$	647,387	$	—	$	(69	)	$	—	$	647,318
2010
(In thousands)	Balance at January 1, 2010		Goodwill on acquisition		Purchase accounting adjustments			Other		Balance at June 30, 2010
Banco Popular de Puerto Rico	$	157,025	$	86,841	$	—		$	—	$	243,866
Banco Popular North America		402,078		—		—			—		402,078
Corporate		45,246		—		—			—		45,246
Total Popular, Inc.	$	604,349	$	86,841	$	—		$	—	$	691,190

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

The goodwill recognized in the BPPR reportable segment during the 2010 relates to the Westernbank FDIC-assisted transaction.

53

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

2011
(In thousands)	Balance at January 1, 2011 (gross amounts)		Accumulated impairment losses		Balance at January  1, 2011 (net amounts)		Balance at June 30, 2011 (gross amounts)		Accumulated impairment losses		Balance at June 30, 2011 (net amounts)
Banco Popular de Puerto Rico	$	245,309	$	—	$	245,309	$	245,240	$	—	$	245,240
Banco Popular North America		566,489		164,411		402,078		566,489		164,411		402,078
Total Popular, Inc.	$	811,798	$	164,411	$	647,387	$	811,729	$	164,411	$	647,318
2010
(In thousands)	Balance at January 1, 2010 (gross amounts)		Accumulated impairment losses		Balance at January 1, 2010 (net amounts)		Balance at June 30, 2010 (gross amounts)		Accumulated impairment losses		Balance at June 30, 2010 (net amounts)
Banco Popular de Puerto Rico	$	157,025	$	—	$	157,025	$	243,866	$	—	$	243,866
Banco Popular North America		566,489		164,411		402,078		566,489		164,411		402,078
Corporate		45,429		183		45,246		45,429		183		45,246
Total Popular, Inc.	$	768,943	$	164,594	$	604,349	$	855,784	$	164,594	$	691,190

At June 30, 2011, December 31, 2010 and June 30, 2010, the Corporation had $6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark.

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

	June 30, 2011				December 31, 2010				June 30, 2010
(In thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Core deposits	$	80,591	$	34,008	$	80,591	$	29,817	$	80,591	$	25,625
Other customer relationships		5,092		3,726		5,092		3,430		8,743		6,372
Other intangibles		189		66		189		43		125		90
Total	$	85,872	$	37,800	$	85,872	$	33,290	$	89,459	$	32,087

During the quarter ended June 30, 2011, the Corporation recognized $2.2 million in amortization expense related to other intangible assets with definite useful lives (June 30, 2010 - $2.5 million). During the six months ended June 30, 2011 and June 30, 2010, the Corporation recognized $4.5 million in amortization related to other intangible assets within definite useful lives.

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

(In thousands)
Remaining 2011	$	4,510
Year 2012		8,493
Year 2013		8,309
Year 2014		7,666
Year 2015		5,522
Year 2016		5,252

54

Note 15 – Deposits

Total interest bearing deposits consisted of:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Savings accounts	$	6,234,503	$	6,177,074	$	6,093,088
NOW, money market and other interest bearing demand deposits		5,460,763		4,756,615		5,133,317
Total savings, NOW, money market and other interest bearing demand deposits		11,695,266		10,933,689		11,226,405
Certificates of deposit:
Under $100,000		6,508,218		6,238,229		6,476,312
$100,000 and over		4,392,941		4,650,961		4,617,518
Total certificates of deposit		10,901,159		10,889,190		11,093,830
Total interest bearing deposits	$	22,596,425	$	21,822,879	$	22,320,235

A summary of certificates of deposit by maturity at June 30, 2011, follows:

(In thousands)
2011	$	4,738,977
2012		3,047,402
2013		1,185,669
2014		666,430
2015		811,465
2016 and thereafter		451,216
Total certificates of deposit	$	10,901,159

At June 30, 2011, the Corporation had brokered certificates of deposit amounting to $2.7 billion (December 31, 2010 - $2.3 billion; June 30, 2010 - $2.0 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $25 million at June 30, 2011 (December 31, 2010 - $52 million; June 30, 2010 - $34 million).

Note 16 – Borrowings

The composition of federal funds purchased and assets sold under agreements to repurchase were as follows:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Federal funds purchased		—		—	$	9,900
Assets sold under agreements to repurchase	$	2,570,322	$	2,412,550		2,297,294
Total federal funds purchased and assets sold under agreements to repurchase	$	2,570,322	$	2,412,550	$	2,307,194

The repurchase agreements outstanding at June 30, 2011 were collateralized by $ 1.9 billion in investment securities available-for-sale, $ 735 million in trading securities and $ 37 million in other assets. At December 31, 2010 and June 30, 2010, the repurchase agreements were collateralized by investment securities available-for-sale and trading securities of $ 2.1 billion and $ 492 million; and $ 2.0 billion and $ 372 million; respectively. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of condition.

55

In addition, there were repurchase agreements outstanding collateralized by $ 264 million in securities purchased underlying agreements to resell to which the Corporation has the right to repledge (December 31, 2010 - $ 172 million; June 30, 2010 - $ 177 million). It is the Corporation’s policy to take possession of securities purchased under agreements to resell. However, the counterparties to such agreements maintain effective control over such securities, and accordingly are not reflected in the Corporation’s consolidated statements of condition.

Other short-term borrowings consisted of:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Advances with the FHLB paying interest at maturity, at fixed rates of 0.35%	$	150,000	$	300,000	$	—
Term funds purchased paying interest at maturity, at fixed rates of 0.65%		102		52,500		—
Securities sold not yet purchased		—		10,459		—
Others		1,200		1,263		1,263
Total other short-term borrowings	$	151,302	$	364,222	$	1,263

56

Notes payable consisted of:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Advances with the FHLB:
-with maturities ranging from 2011 through 2021 paying interest at monthly fixed rates ranging from 0.66% to 4.95% (June 30, 2010 - 1.48% to 5.10%)	$	704,500	$	385,000	$	1,032,873
-maturing in 2010 paying interest quarterly at a fixed rate of 5.10%		—		—		20,000
Note issued to the FDIC, including unamortized premium of $1,202; paying interest monthly at an annual fixed rate of 2.50%; maturing on April 30, 2015 or such earlier date as such amount may become due and payable pursuant to the terms of the note		1,517,843		2,492,928		5,728,954
Term notes with maturities ranging from 2012 to 2016 paying interest semiannually at fixed rates ranging from 5.25% to 7.86% (June 30, 2010 - 5.25% to 13.00%)		278,255		381,133		380,995
Term notes with maturities ranging from 2011 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate		801		1,010		1,217
Term notes maturing in 2011 paying interest quarterly at a floating rate of 9.75% over the 3-month LIBOR rate		—		—		175,000
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Note 17)		439,800		439,800		439,800
Junior subordinated deferrable interest debentures (related to trust preferred securities) ($936,000 less discount of $478,995 as of June 30, 2011 and $502,113 at June 30, 2010) with no stated maturity and a fixed interest rate of 5.00% until, but excluding December 5, 2013 and 9.00% thereafter (Refer to Note 17)		457,005		444,981		433,887
Others		25,082		25,331		25,551
Total notes payable	$	3,423,286	$	4,170,183	$	8,238,277

Note: Refer to the Corporation’s 2010 Annual Report, for rates and maturity information corresponding to the borrowings outstanding at December 31, 2010. Key index rates as of June 30, 2011 and June 30, 2010, respectively, were as follows: 3-month LIBOR rate = 0.25% and 0.53%; 10-year U.S. Treasury note = 3.16% and 2.93%.

On June 30, 2011, Popular North America, Inc. (“PNA”), the parent bank holding company of all of the Corporation’s U.S. mainland operations, modified $233.2 million in aggregate principal amount of the $275 million 6.85% Senior Notes due 2012, fully and unconditionally guaranteed by the Corporation, issued by PNA on December 21, 2007 for (1) $78.0 million aggregate principal amount of 7.47% Senior Notes due 2014, (2) $35.2 million aggregate principal amount of 7.66% Senior Notes due 2015 and (3) $120.0 million aggregate principal amount of 7.86% Senior Notes due 2016 issued by PNA, also fully and unconditionally guaranteed by the Corporation.

In consideration for the excess assets acquired over liabilities assumed as part of the Westernbank FDIC-assisted transaction, BPPR issued to the FDIC a secured note (the “note issued to the FDIC”) in the amount of $5.8 billion at April 30, 2010, which has full recourse to BPPR. As indicated in Note 6 to the consolidated financial statements, the note issued to the FDIC is collateralized by the loans (other than certain consumer loans) and other real estate acquired in the agreement with the FDIC and all proceeds

57

derived from such assets, including cash inflows from claims to the FDIC under the loss sharing agreements. Proceeds received from such sources are used to pay the note under the conditions stipulated in the agreement. The entire outstanding principal balance of the note issued to the FDIC is due five years from issuance (April 30, 2015), or such date as such amount may become due and payable pursuant to the terms of the note. Borrowings under the note bear interest at an annual fixed rate of 2.50% and are paid monthly. If the Corporation fails to pay any interest as and when due, such interest shall accrue interest at the note interest rate plus 2.00% per annum. The Corporation may repay the note in whole or in part without any penalty subject to certain notification requirements indicated in the agreement. During the six months ended June 30, 2011, the Corporation prepaid $480 million of the note issued to the FDIC from funds unrelated to the assets securing the note.

A breakdown of borrowings by contractual maturities at June 30, 2011 is included in the table below. Given its nature, the maturity of the note issued to the FDIC was based on expected repayment dates and not on its April 30, 2015 contractual maturity date. The expected repayments consider the timing of expected cash inflows on the loans, OREO and claims on the loss sharing agreements that will be applied to repay the note during the period that the note payable to the FDIC is outstanding.

(In thousands)	Assets sold under agreements to repurchase		Short-term borrowings		Notes payable		Total
Year
2011	$	1,458,132	$	151,302	$	1,593,692	$	3,203,126
2012		75,000		—		214,782		289,782
2013		49,000		—		98,744		147,744
2014		350,000		—		189,380		539,380
2015		174,135		—		35,991		210,126
Later years		464,055		—		833,692		1,297,747
No stated maturity		—		—		936,000		936,000
Subtotal		2,570,322		151,302		3,902,281		6,623,905
Less: Discount		—		—		478,995		478,995
Total borrowings	$	2,570,322	$	151,302	$	3,423,286	$	6,144,910

Note 17 – Trust Preferred Securities

At June 30, 2011, December 31, 2010 and June 30, 2010, four statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. In August 2009, the Corporation established the Popular Capital Trust III for the purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury at the time for trust preferred securities issued by this trust. In connection with this exchange, the trust used the Series C preferred stock, together with the proceeds of issuance and sale of common securities of the trust, to purchase junior subordinated debentures issued by the Corporation.

The sole assets of the five trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America.

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

58

The following table presents financial data pertaining to the different trusts at June 30, 2011, December 31, 2010 and June 30, 2010.

(Dollars in thousands)
Issuer	BanPonce Trust I			Popular Capital Trust I			Popular North America Capital Trust I			Popular Capital Trust Il			Popular Capital Trust III
Capital securities	$	52,865		$	181,063		$	91,651		$	101,023		$	935,000
Distribution rate		8.327	%		6.700	%		6.564	%		6.125	%		5.000% until, but excluding December 5, and 2013 9.000% thereafter
Common securities	$	1,637		$	5,601		$	2,835		$	3,125		$	1,000
Junior subordinated debentures aggregate liquidation amount	$	54,502		$	186,664		$	94,486		$	104,148		$	936,000
Stated maturity date		February 2027			November 2033			September 2034			December 2034			Perpetual
Reference notes		[1],[3],[6]			[2],[4],[5]			[1],[3],[5]			[2],[4],[5]			[2],[4],[7],[8]

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

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

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

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

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

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

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

[8] Carrying value of junior subordinates debentures of $457 million at June 30, 2011 ($936 million aggregate liquidation amount, net of $479 million discount) and $445 million at December 31, 2010 ($936 million aggregate liquidation amount, net of $491 million discount) and $434 million at June 30, 2010 ($936 million aggregate liquidation amount, net of $502 million discount)

In accordance with the Federal Reserve Board guidance, the trust preferred securities represent restricted core capital elements and qualify as Tier 1 capital, subject to certain quantitative limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1 capital of a banking organization must not exceed 25% of the sum of all core capital elements (including cumulative perpetual preferred stock and trust preferred securities). At June 30, 2011, December 31, 2010, and June 30, 2010 the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed as Tier 1 capital. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital, subject to further limitations. Effective March 31, 2011, the Federal Reserve Board revised the quantitative limit which would limit restricted core capital elements included in the Tier 1 capital of a bank holding company to 25% of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. Furthermore, the Dodd-Frank Act, enacted in July 2010, has a provision to effectively phase out the use of trust preferred securities issued before May 19, 2010 as Tier 1 capital over a 3-year period commencing on January 1, 2013. Trust preferred securities issued on or after May 19, 2010 no longer qualify as Tier 1 capital. At June 30, 2011, the Corporation had $ 427 million in trust preferred securities (capital securities) that are subject to the phase-out. The Corporation has not issued any trust preferred securities since May 19, 2010. At June 30, 2011, the remaining $935 million of trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008, which are exempt from the phase-out provision.

59

Note 18 – Stockholders’ equity

BPPR statutory reserve

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $402 million at June 30, 2011 (December 31, 2010 - $402 million; June 30, 2010 - $402 million). There were no transfers between the statutory reserve account and the retained earnings account during the six months ended June 30, 2011 and June 30, 2010.

Note 19 – Guarantees

At June 30, 2011 the Corporation recorded a liability of $0.4 million (December 31, 2010 - $0.5 million and June 30, 2010 - $0.5 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.

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

At June 30, 2011 the Corporation serviced $3.7 billion (December 31, 2010 - $4.0 billion; June 30, 2010 - $4.2 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter and six months ended June 30, 2011 the Corporation repurchased approximately $53 million and $115 million, respectively, of unpaid principal balance in mortgage loans subject to the credit recourse provisions (June 30, 2010 - $38 million for the quarter and $55 million for six-month period). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At June 30, 2011 the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $55 million (December 31, 2010 - $54 million; June 30, 2010 - $37 million).

The following table shows the changes in the Corporation’s liability of estimated losses from these credit recourses agreements, included in the consolidated statements of condition for the quarters and six months ended June 30, 2011 and 2010.

	Quarters ended June 30,						Six months ended June 30,
(in thousands)	2011			2010			2011			2010
Balance as of beginning of period	$	55,318		$	29,041		$	53,729		$	15,584
Additions for new sales		—			—			—			—
Provision for recourse liability		10,059			12,015			19,824			27,716
Net charge-offs / terminations		(10,050	)		(4,449	)		(18,226	)		(6,693	)
Balance as of end of period	$	55,327		$	36,607		$	55,327		$	36,607

60

The probable losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value rates, loan aging, among others.

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporation’s mortgage operations in the Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or may sell the loans directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. For the six-month period ended June 30, 2011, repurchases under representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans approximated $10 million in unpaid principal balance with losses amounting to $0.7 million for the six months ended June 30, 2011. A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended June 30, 2011, the Corporation’s banking subsidiary, BPPR, reached an agreement (the “June 2011 agreement”) with the FDIC, as receiver for a local Puerto Rico institution, and the financial institution with respect to a loan servicing portfolio that BPPR services since 2008, related to FHLMC and GNMA pools. The loans were originated and sold by the financial institution and the servicing rights were transferred to BPPR in 2008. As part of the 2008 servicing agreement, the financial institution was required to repurchase from BPPR any loans that BPPR, as servicer, was required to repurchase from the investors under representation and warranty obligations. As part of the June 2011 agreement, the Corporation received $15 million to discharge the financial institution from any repurchase obligation and other claims over the serviced portfolio of approximately $3.7 billion. The Corporation recorded a representation and warranty reserve for the amount of the proceeds received from the third-party financial institution.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At June 30, 2011, the Corporation serviced $17.4 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2010 - $18.4 billion; June 30, 2010 - $17.9 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At June 30, 2011 the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $29 million (December 31, 2010 - $24 million; June 30, 2010 - $26 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

At June 30, 2011 the Corporation has reserves for customary representation and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. These loans had been sold to investors on a servicing released basis subject to certain representation and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain representations relating to borrower creditworthiness, loan documentation and collateral, which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At June 30, 2011 the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $29

61

million, which was included as part of other liabilities in the consolidated statement of condition (December 31, 2010 - $31 million; June 30, 2010 - $33 million). E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008. On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to E-LOAN’s customary representation and warranty arrangements. The analysis incorporates expectations on future disbursements based on quarterly repurchases and make-whole events. The analysis also considers factors such as the average length-time between the loan’s funding date and the loan repurchase date, as observed in the historical loan data. Make-whole events are typically defaulted cases in which the investor attempts to recover by collateral or guarantees, and the seller is obligated to cover any impaired or unrecovered portion of the loan. Claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation. The following table presents the changes in the Corporation’s liability for estimated losses associated with customary representations and warranties related to loans sold by E-LOAN, included in the consolidated statement of condition for the quarters and six months ended June 30, 2011 and 2010.

	Quarters ended June 30,						Six months ended June 30,
(in thousands)	2011			2010			2011			2010
Balance as of beginning of period	$	30,688		$	31,937		$	30,659		$	33,294
Additions for new sales		—			—			—			—
(Reversal) provision for representation and warranties		(605	)		5,197			(522	)		6,430
Net charge-offs / terminations		(1,067	)		(3,651	)		(1,121	)		(6,241	)
Balance as of end of period	$	29,016		$	33,483		$	29,016		$	33,483

During 2008, the Corporation provided indemnification for the breach of certain representations or warranties in connection with certain sales of assets by the discontinued operations of Popular Financial Holdings (“PFH”). The sales were on a non-credit recourse basis. At June 30, 2011, the agreements primarily include indemnification for breaches of certain key representations and warranties, some of which expire within a definite time period; others survive until the expiration of the applicable statute of limitations, and others do not expire. Certain of the indemnifications are subject to a cap or maximum aggregate liability defined as a percentage of the purchase price. The indemnification agreements outstanding at June 30, 2011 are related principally to make-whole arrangements. At June 30, 2011, the Corporation’s reserve related to PFH’s indemnity arrangements amounted to $4 million (December 31, 2010 - $8 million; June 30, 2010 - $7 million), and is included as other liabilities in the consolidated statement of condition. The reserve balance at June 30, 2011 contemplates historical indemnity payments. Popular, Inc. Holding Company (“PIHC”) and PNA have agreed to guarantee certain obligations of PFH with respect to the indemnification obligations. The following table presents the changes in the Corporation’s liability for estimated losses associated to loans sold by the discontinued operations of PFH, included in the consolidated statement of condition for the quarters and six months ended June 30, 2011, and 2010.

	Quarters ended June 30,						Six months ended June 30,
(in thousands)	2011			2010			2011			2010
Balance as of beginning of period	$	4,261		$	9,626		$	8,058		$	9,405
Additions for new sales		—			—			—			—
(Reversal) provision for representations and warranties		—			(1,796	)		—			(1,118	)
Net charge-offs / terminations		(50	)		(1,080	)		(50	)		(1,537	)
Other - settlements paid		—			—			(3,797	)		—
Balance as of end of period	$	4,211		$	6,750		$	4,211		$	6,750

PIHC fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $0.7 billion at June 30, 2011 (December 31, 2010 and June 30, 2010 - $0.6 billion). In addition, at June 30, 2011, December 31, 2010 and June 30, 2010, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4 billion of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 17 to the consolidated financial statements for further information on the trust preferred securities.

62

Note 20 – Commitments and Contingencies

Off-balance sheet risk

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

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

Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk were as follows:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Commitments to extend credit:
Credit card lines	$	3,858,639	$	3,583,430	$	3,781,827
Commercial lines of credit		2,399,225		1,920,056		2,346,902
Other unused credit commitments		368,459		375,565		394,058
Commercial letters of credit		18,729		12,532		16,451
Standby letters of credit		136,754		140,064		141,893
Commitments to originate mortgage loans		35,829		47,493		45,889

At June 30, 2011, the Corporation maintained a reserve of approximately $11 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit (December 31, 2010 - $21 million; June 30, 2010 - $34 million), including $3 million of the unamortized balance of the contingent liability on unfunded loan commitments recorded with the Westernbank FDIC-assisted transaction (December 31, 2010 - $6 million; June 30, 2010 - $24 million).

Other commitments

At June 30, 2011, the Corporation also maintained other non-credit commitments for $10 million, primarily for the acquisition of other investments (December 31, 2010 and June 30, 2010 - $10 million).

Business concentration

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

The Corporation’s loan portfolio is diversified by loan category. However, approximately $12.6 billion, or 61% of the Corporation’s loan portfolio not covered under the FDIC loss sharing agreements, excluding loans held-for-sale, at June 30, 2011, consisted of real estate related loans, including residential mortgage loans, construction loans and commercial loans secured by commercial real estate (December 31, 2010 - $12.0 billion, or 58%; June 30, 2010 - $13.4 billion, or 60%).

Except for the Corporation’s exposure to the Puerto Rico Government sector, no individual or single group of related accounts is considered material in relation to our total assets or deposits, or in relation to our overall business. At June 30, 2011, the Corporation had approximately $894 million of credit facilities granted to or guaranteed by the Puerto Rico Government, its municipalities and public corporations, of which $140 million were uncommitted lines of credit (December 31, 2010 - $1.4 billion and $199 million, respectively; June 30, 2010 - $972 million and $215 million, respectively). Of the total credit facilities granted, $754 million was outstanding at June 30, 2011 (December 31, 2010 - $1.1 billion; June 30, 2010 - $754 million). Furthermore, at June 30, 2011, the Corporation had $121 million in obligations issued or guaranteed by the Puerto Rico Government, its municipalities and public corporations as part of its investment securities portfolio (December 31, 2010 - $145 million; June 30, 2010 - $232 million).

63

Other contingencies

As indicated in Note 11 to the consolidated financial statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The true-up payment contingency (undiscounted estimated true-up payment) was estimated at $176 million at June 30, 2011 (December 31, 2010 - $169 million; June 30, 2010 - $169 million).

Legal Proceedings

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

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

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates the aggregate range of reasonably possible losses for those matters where a range may be determined, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $30.0 million at June 30, 2011. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

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

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

On October 19, 2009, plaintiffs in the Hoff case filed a consolidated class action complaint which included as defendants the underwriters in the May 2008 offering of Series B Preferred Stock, among others. The consolidated action purported to be on behalf of purchasers of Popular’s securities between January 24, 2008 and February 19, 2009 and alleged that the defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading. The consolidated action also alleged that the defendants violated Section 11, Section 12(a)(2) and Section 15 of the Securities Act by making allegedly untrue statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading in connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities class action complaint sought class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. On January 11, 2010, Popular, the underwriter defendants and the individual defendants moved to dismiss the consolidated securities class action complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court also dismissed the Section 11 claim brought against Popular’s directors on statute of limitations grounds and the

64

Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing. The Court declined to dismiss the claims brought against Popular and certain of its officers under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder), Section 20(a) of the Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately alleged that defendants made materially false and misleading statements with the requisite state of mind.

On November 30, 2009, plaintiffs in the ERISA case filed a consolidated class action complaint. The consolidated complaint purported to be on behalf of employees participating in the Popular, Inc. U.S.A. 401(k) Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment Plan from January 24, 2008 to the date of the Complaint to recover losses pursuant to Sections 409 and 502(a)(2) of ERISA against Popular, certain directors, officers and members of plan committees, each of whom was alleged to be a plan fiduciary. The consolidated complaint alleged that defendants breached their alleged fiduciary obligations by, among other things, failing to eliminate Popular stock as an investment alternative in the plans. The complaint sought to recover alleged losses to the plans and equitable relief, including injunctive relief and a constructive trust, along with costs and attorneys’ fees. On December 21, 2009, and in compliance with a scheduling order issued by the Court, Popular and the individual defendants submitted an answer to the amended complaint. Shortly thereafter, on December 31, 2009, Popular and the individual defendants filed a motion to dismiss the consolidated class action complaint or, in the alternative, for judgment on the pleadings. On May 5, 2010, a magistrate judge issued a report and recommendation in which he recommended that the motion to dismiss be denied except with respect to Banco Popular de Puerto Rico, as to which he recommended that the motion be granted. On May 19, 2010, Popular filed objections to the magistrate judge’s report and recommendation. On September 30, 2010, the Court issued an order without opinion granting in part and denying in part the motion to dismiss and providing that the Court would issue an opinion and order explaining its decision. No opinion was, however, issued prior to the settlement in principle discussed below.

The derivative actions (García v. Carrión, et al. and Díaz v. Carrión, et al.) were brought purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers and directors and alleged breaches of fiduciary duty, waste of assets and abuse of control in connection with Popular’s issuance of allegedly false and misleading financial statements and financial reports and the offering of the Series B Preferred Stock. The derivative complaints sought a judgment that the action was a proper derivative action, an award of damages, restitution, costs and disbursements, including reasonable attorneys’ fees, costs and expenses. On October 9, 2009, the Court coordinated for purposes of discovery the García action and the consolidated securities class action. On October 15, 2009, Popular and the individual defendants moved to dismiss the García complaint for failure to make a demand on the Board of Directors prior to initiating litigation. On November 20, 2009, plaintiffs filed an amended complaint, and on December 21, 2009, Popular and the individual defendants moved to dismiss the García amended complaint. At a scheduling conference held on January 14, 2010, the Court stayed discovery in both the Hoff and García matters pending resolution of their respective motions to dismiss. On August 11, 2010, the Court granted in part and denied in part the motion to dismiss the Garcia action. The Court dismissed the gross mismanagement and corporate waste claims, but declined to dismiss the breach of fiduciary duty claim. The Díaz case, filed in the Puerto Rico Court of First Instance, San Juan, was removed to the U.S. District Court for the District of Puerto Rico. On October 13, 2009, Popular and the individual defendants moved to consolidate the García and Díaz actions. On October 26, 2009, plaintiff moved to remand the Diaz case to the Puerto Rico Court of First Instance and to stay defendants’ consolidation motion pending the outcome of the remand proceedings. On September 30, 2010, the Court issued an order without opinion remanding the Diaz case to the Puerto Rico Court of First Instance. On October 13, 2010, the Court issued a Statement of Reasons In Support of Remand Order. On October 28, 2010, Popular and the individual defendants moved for reconsideration of the remand order. The court denied Popular’s request for reconsideration shortly thereafter.

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

At the Court’s request, the parties to the Hoff and García cases discussed the prospect of mediation and agreed to nonbinding mediation in an attempt to determine whether the cases could be settled. On January 18 and 19, 2011, the parties to the Hoff and García cases engaged in nonbinding mediation before the Honorable Nicholas Politan. As a result of the mediation, the Corporation and the other named defendants to the Hoff matter entered into a memorandum of understanding to settle this matter. Under the terms of the memorandum of understanding, subject to certain customary conditions including court approval of a final settlement agreement in consideration for the full settlement and release of all defendants, the parties agreed that the amount of $37.5 million

65

would be paid by or on behalf of defendants. On June 17, 2011, the parties filed a stipulation of settlement and a joint motion for preliminary approval of such settlement. On June 20, 2011, the Court entered an order granting preliminary approval of the settlement and set a settlement conference for November 1, 2011, which was subsequently moved to November 2, 2011. On or before July 5, 2011, the amount of $37.5 million was paid to the settlement fund by or on behalf of defendants. Specifically, the amount of $26 million was paid by insurers and the amount of $11.5 million was paid by Popular (after which approximately $4.7 million was reimbursed by insurers per the terms of the relevant insurance agreement).

In addition, the Corporation is aware that a suit asserting similar claims on behalf of certain individual shareholders under the federal securities laws was filed on January 18, 2011. On June 19, 2011, such shareholders sought leave to intervene in the securities class action. On June 28, 2011, the Court denied their motion to intervene as untimely.

A separate memorandum of understanding was subsequently entered by the parties to the García and Diaz actions in April 2011. Under the terms of this memorandum of understanding, subject to certain customary conditions, including court approval of a final settlement agreement, and in consideration for the full and final settlement and release of all defendants, Popular agreed, for a period of three years, to maintain or implement certain corporate governance practices, measures and policies, as set forth in the memorandum of understanding. Aside from the payment by or on behalf of Popular of approximately $2.1 million of attorneys’ fees and expenses of counsel for the plaintiffs (of which management expects $1.6 million will be covered by insurance), the settlement does not require any cash payments by or on behalf of Popular or the defendants. On June 14, 2011, a motion for preliminary approval of settlement was filed. On July 8, 2011, the Court granted preliminary approval of such settlement and set the final approval hearing date for September 12, 2011.

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

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

At this point, the settlement agreements are not final and are subject to a number of future events, including approval of the settlements by the relevant courts.

In addition to the foregoing, Banco Popular is a defendant in two lawsuits arising from its consumer banking and trust-related activities. On October 7, 2010, a putative class action for breach of contract and damages captioned Almeyda-Santiago v. Banco Popular de Puerto Rico, was filed in the Puerto Rico Court of First Instance against Banco Popular de Puerto Rico. The complaint essentially asserts that plaintiff has suffered damages because of Banco Popular’s allegedly fraudulent overdraft fee practices in connection with debit card transactions. Such practices allegedly consist of: (a) the reorganization of electronic debit transactions in high-to-low order so as to multiply the number of overdraft fees assessed on its customers; (b) the assessment of overdraft fees even when clients have not overdrawn their accounts; (c) the failure to disclose, or to adequately disclose, its overdraft policy to its customers; and (d) the provision of false and fraudulent information regarding its clients’ account balances at point of sale transactions and on its website. Plaintiff seeks damages, restitution and provisional remedies against Banco Popular for breach of contract, abuse of trust, illegal conversion and unjust enrichment. On January 13, 2011, Banco Popular submitted a motion to dismiss the complaint, which is still pending resolution.

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

More specifically, plaintiffs - Guillermo García Lamadrid and Benito del Cueto Figueras - are suing Defendant BPPR for the losses they (and others) experienced through their investment in the RG Financial Corporation-backed Conservation Trust Fund securities. Plaintiffs essentially claim that Banco Popular allegedly breached its fiduciary duties to them by failing to keep all relevant parties informed of any developments that could affect the Conservation Trust notes or that could become an event of default under the relevant trust agreements; and that in so doing, it acted imprudently, unreasonably and grossly negligently. Popular and the other defendants submitted separate motions to dismiss on or about February 28, 2011. Plaintiffs submitted a consolidated opposition thereto on April 15, 2011. The parties were allowed to submit replies and surreplies to such motions, and the motion has now been deemed submitted by the Court and is pending resolution.

66

Note 21 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. Also, it established Popular Capital Trust III for the purpose of exchanging Series C preferred stock shares held by the U.S. Treasury for trust preferred securities issued by this trust. These trusts are deemed to be VIEs since the equity investors at risk have no substantial decision-making rights. The Corporation does not have a significant variable interest in these trusts. Neither the residual interest held, since it was never funded in cash, nor the loan payable to the trusts is considered a variable interest since they create variability.

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

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the primary beneficiary of any of the variable interest entities (“VIEs”) it is involved with. The conclusion on the assessment of these trusts and guaranteed mortgage securitization transactions has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, are not required to be consolidated in the Corporation’s financial statements at June 30, 2011.

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

The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 22 to the consolidated financial statements for additional information on the debt securities outstanding at June 30, 2011, December 31, 2010 and June 30, 2010, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statement of condition. In addition, the Corporation may retain the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. Pursuant to ASC Subtopic 810-10, the servicing fees that the Corporation receives for its servicing role are considered variable interests in the VIEs since the servicing fees are subordinated to the principal and interest that first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies.

67

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer with non-consolidated VIEs at June 30, 2011, December 31, 2010 and June 30, 2010.

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Assets
Servicing assets:
Mortgage servicing rights	$	106,326	$	107,313	$	106,428
Total servicing assets	$	106,326	$	107,313	$	106,428
Other assets:
Servicing advances	$	2,799	$	2,706	$	2,894
Total other assets	$	2,799	$	2,706	$	2,894
Total	$	109,125	$	110,019	$	109,322
Maximum exposure to loss	$	109,125	$	110,019	$	109,322

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $9.4 billion at June 30, 2011 ($9.3 billion at December 31, 2010 and June 30, 2010).

Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at June 30, 2011, December 31, 2010 and June 30, 2010, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

Note 22 – Fair value measurement

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

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

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

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

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

68

The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results.

Fair Value on a Recurring Basis

The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at June 30, 2011, December 31, 2010 and June 30, 2010:

At June 30, 2011
(In thousands)	Level 1		Level 2			Level 3		Balance at June 30, 2011
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	38,192		$	—	$	38,192
Obligations of U.S. Government sponsored entities		—		1,248,688			—		1,248,688
Obligations of Puerto Rico, States and political subdivisions		—		34,266			—		34,266
Collateralized mortgage obligations - federal agencies		—		1,613,062			—		1,613,062
Collateralized mortgage obligations - private label		—		70,486			—		70,486
Mortgage-backed securities		—		2,341,390			7,634		2,349,024
Equity securities		3,779		4,486			—		8,265
Other		—		27,508			—		27,508
Total investment securities available-for-sale	$	3,779	$	5,378,078		$	7,634	$	5,389,491
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	10,315		$	—	$	10,315
Collateralized mortgage obligations		—		710			2,638		3,348
Residential mortgage-backed securities - federal agencies		—		721,731			27,079		748,810
Other		—		18,942			3,571		22,513
Total trading account securities	$	—	$	751,698		$	33,288	$	784,986
Mortgage servicing rights	$	—	$	—		$	162,619	$	162,619
Derivatives		—		69,232			—		69,232
Total	$	3,779	$	6,199,008		$	203,541	$	6,406,328
Liabilities
Derivatives	$	—	$	(68,766	)	$	—	$	(68,766	)
Total	$	—	$	(68,766	)	$	—	$	(68,766	)

69

At December 31, 2010
(In thousands)	Level 1		Level 2			Level 3		Balance at December 31, 2010
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	38,136		$	—	$	38,136
Obligations of U.S. Government sponsored entities		—		1,211,304			—		1,211,304
Obligations of Puerto Rico, States and political subdivisions		—		52,702			—		52,702
Collateralized mortgage obligations - federal agencies		—		1,238,294			—		1,238,294
Collateralized mortgage obligations - private label		—		84,938			—		84,938
Mortgage-backed securities		—		2,568,396			7,759		2,576,155
Equity securities		3,952		5,523			—		9,475
Other		—		25,848			—		25,848
Total investment securities available-for-sale	$	3,952	$	5,225,141		$	7,759	$	5,236,852
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	16,438		$	—	$	16,438
Collateralized mortgage obligations		—		769			2,746		3,515
Residential mortgage-backed securities - federal agencies		—		472,806			20,238		493,044
Other		—		30,423			2,810		33,233
Total trading account securities	$	—	$	520,436		$	25,794	$	546,230
Mortgage servicing rights	$	—	$	—		$	166,907	$	166,907
Derivatives		—		72,993			—		72,993
Total	$	3,952	$	5,818,570		$	200,460	$	6,022,982
Liabilities
Derivatives	$	—	$	(76,344	)	$	—	$	(76,344	)
Trading liabilities		—		(10,459	)		—		(10,459	)
Equity appreciation instrument		—		(9,945	)		—		(9,945	)
Total	$	—	$	(96,748	)	$	—	$	(96,748	)

70

At June 30, 2010
(In thousands)	Level 1		Level 2			Level 3		Balance at June 30, 2010
Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	—	$	140,687		$	—	$	140,687
Obligations of U.S. Government sponsored entities		—		1,749,475			—		1,749,475
Obligations of Puerto Rico, States and political subdivisions		—		55,632			—		55,632
Collateralized mortgage obligations - federal agencies		—		1,445,018			—		1,445,018
Collateralized mortgage obligations - private label		—		101,987			—		101,987
Mortgage-backed securities		—		2,947,312			32,372		2,979,684
Equity securities		3,469		5,235			—		8,704
Total investment securities available-for-sale	$	3,469	$	6,445,346		$	32,372	$	6,481,187
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	—	$	9,726		$	—	$	9,726
Collateralized mortgage obligations		—		908			2,667		3,575
Residential mortgage-backed securities - federal agencies		—		261,150			114,281		375,431
Other		—		9,539			3,232		12,771
Total trading account securities	$	—	$	281,323		$	120,180	$	401,503
Mortgage servicing rights	$	—	$	—		$	171,994	$	171,994
Derivatives		—		79,611			—		79,611
Total	$	3,469	$	6,806,280		$	324,546	$	7,134,295
Liabilities
Derivatives	$	—	$	(86,846	)	$	—	$	(86,846	)
Total	$	—	$	(86,846	)	$	—	$	(86,846	)

71

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and six months ended June 30, 2011 and 2010.

Quarter ended June 30, 2011
(In millions)	Balance at March 31, 2011		Gains (losses) included in earnings/ OCI			Purchases		Sales			Settlements			Balance at June 30, 2011		Changes  in unrealized gains (losses) included in earnings/OCI related to assets still held at June 30, 2011
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	8	$	—		$	—	$	—		$	—		$	8	$	—
Total investment securities available-for-sale	$	8	$	—		$	—	$	—		$	—		$	8	$	—
Trading account securities:
Collateralized mortgage obligations	$	3	$	—		$	—	$	—		$	—		$	3	$	—
Residential mortgage-backed securities - federal agencies		21		1			8		(2	)		(1	)		27		—
Other		3		—			1		(1	)		—			3		1
Total trading account securities	$	27	$	1		$	9	$	(3	)	$	(1	)	$	33	$	1	[a]
Mortgage servicing rights	$	168	$	(10	)	$	5	$	—		$	—		$	163	$	(6	)[b]
Total	$	203	$	(9	)	$	14	$	(3	)	$	(1	)	$	204	$	(5	)

[a] Gains (losses) are included in “Trading account profit” in the Statement of Operations.

[b] Gains (losses) are included in “Other services fees” in the Statement of Operations.

Six months ended June 30, 2011
(In millions)	Balance at December 31, 2010		Gains (losses) included in earnings/ OCI			Purchases		Sales			Settlements			Balance at June 30, 2011		Changes in unrealized gains (losses) included in earnings/OCI related to assets still held at June 30, 2011
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	8	$	—		$	—	$	—		$	—		$	8	$	—
Total investment securities available-for-sale	$	8	$	—		$	—	$	—		$	—		$	8	$	—
Trading account securities:
Collateralized mortgage obligations	$	3	$	—		$	—	$	—		$	—		$	3	$	—
Residential mortgage-backed securities - federal agencies		20		1			10		(3	)		(1	)		27		—
Other		3		—			1		(1	)		—			3		1
Total trading account securities	$	26	$	1		$	11	$	(4	)	$	(1	)	$	33	$	1	[a]
Mortgage servicing rights	$	167	$	(16	)	$	12	$	—		$	—		$	163	$	(8	)[b]
Total	$	201	$	(15	)	$	23	$	(4	)	$	(1	)	$	204	$	(7	)

[a] Gains (losses) are included in “Trading account profit” in the Statement of Operations.

[b] Gains (losses) are included in “Other services fees” in the Statement of Operations.

72

Quarter ended June 30, 2010
(In millions)	Balance at March 31, 2010		Gains (losses) included in earnings/ OCI			Issuances		Purchases		Sales			Paydowns			Transfers in (out) of Level 3			Balance at June 30, 2010		Changes in unrealized gains (losses) included in earnings/OCI related to assets still held at June 30, 2010
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	36	$	—		$	—	$	—	$	—		$	(1	)	$	(3	)	$	32	$	—
Total investment securities available-for-sale	$	36	$	—		$	—	$	—	$	—		$	(1	)	$	(3	)	$	32	$	—
Trading account securities:
Collateralized mortgage obligations	$	3	$	—		$	—	$	—	$	—		$	—		$	—		$	3	$	—
Residential mortgage-backed securities - federal agencies		197		(5	)		—		4		(4	)		(2	)		(76	)		114		1
Other		3		—			—		—		—			—			—			3		—
Total trading account securities	$	203	$	(5	)	$	—	$	4	$	(4	)	$	(2	)	$	(76	)	$	120	$	1	[a]
Mortgage servicing rights	$	173	$	(9	)	$	—	$	8	$	—		$	—		$	—		$	172	$	(5	)[b]
Total	$	412	$	(14	)	$	—	$	12	$	(4	)	$	(3	)	$	(79	)	$	324	$	(4	)

[a] Gains (losses) are included in “Trading account profit” in the Statement of Operations.

[b] Gains (losses) are included in “Other services fees” in the Statement of Operations.

73

Six months ended June 30, 2010
(In millions)	Balance at December 31, 2009		Gains (losses) included in earnings/ OCI			Issuances		Purchases		Sales			Paydowns			Transfers in (out) of Level 3			Balance at June 30, 2010		Changes in unrealized gains (losses) included in earnings/OCI related to assets still held at June 30, 2010
Assets
Investment securities available-for-sale:
Mortgage-backed securities	$	34	$	—		$	2	$	—	$	—		$	(1	)	$	(3	)	$	32	$	—
Total investment securities available-for-sale	$	34	$	—		$	2	$	—	$	—		$	(1	)	$	(3	)	$	32	$	—
Trading account securities:
Collateralized mortgage obligations	$	3	$	—		$	—	$	—	$	—		$	—		$	—		$	3	$	—
Residential mortgage-backed securities - federal agencies		224		(5	)		—		14		(37	)		(6	)		(76	)		114		1
Other		3		—			—		—		—			—			—			3		—
Total trading account securities	$	230	$	(5	)	$	—	$	14	$	(37	)	$	(6	)	$	(76	)	$	120	$	1	[a]
Mortgage servicing rights	$	170	$	(10	)	$	—	$	12	$	—		$	—		$	—		$	172	$	(2	)[b]
Total	$	434	$	(15	)	$	2	$	26	$	(37	)	$	(7	)	$	(79	)	$	324	$	(1	)

[a] Gains (losses) are included in “Trading account profit” in the Statement of Operations.

[b] Gains (losses) are included in “Other services fees” in the Statement of Operations.

There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarters and six months ended June 30, 2011. There were $79 million in transfers out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarter and six months ended June 30, 2010. These transfers resulted from exempt FNMA mortgage-backed securities, which were transferred out of Level 3 and into Level 2, as a result of a change in valuation methodology from an internally-developed matrix pricing to pricing them based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. Pursuant to the Corporation’s policy, these transfers were recognized as of the end of the reporting period. There were no transfers in and/or out of Level 1 during the quarters and six months ended June 30, 2011 and 2010.

Gains and losses (realized and unrealized) included in earnings for the quarter and six months ended June 30, 2011 and 2010 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

	Quarter ended June 30, 2011						Six months ended June 30, 2011
(In millions)	Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date			Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date
Other service fees	$	(10	)	$	(6	)	$	(16	)	$	(8	)
Trading account profit		1			1			1			1
Total	$	(9	)	$	(5	)	$	(15	)	$	(7	)

74

	Quarter ended June 30, 2010						Six months ended June 30, 2010
(In millions)	Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date			Total gains (losses) included in earnings			Changes in unrealized to gains (losses) relating assets still held at reporting date
Other service fees	$	(9	)	$	(5	)	$	(10	)	$	(2	)
Trading account profit		(5	)		1			(5	)		1
Total	$	(14	)	$	(4	)	$	(15	)	$	(1	)

Additionally, in accordance with generally accepted accounting principles, the Corporation may be required to measure certain assets at fair value on a nonrecurring basis in periods subsequent to their initial recognition. The adjustments to fair value usually result from the application of lower of cost or fair value accounting, identification of impaired loans requiring specific reserves under ASC Section 310-10-35 “Accounting by Creditors for Impairment of a Loan”, or write-downs of individual assets. The following tables present financial and non-financial assets that were subject to a fair value measurement on a nonrecurring basis during the six months ended June 30, 2011 and 2010, and which were still included in the consolidated statement of condition as of such dates. The amounts disclosed represent the aggregate fair value measurements of those assets as of the end of the reporting period.

Carrying value at June 30, 2011
(In millions)	Level 1		Level 2		Level 3		Total		Write- downs
Loans[1]		—		—	$	25	$	25	$	(4	)
Loans held-for-sale [2]		—		—		139		139		(14	)
Other real estate owned [3]		—		—		25		25		(9	)
Total		—		—	$	189	$	189	$	(27	)

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

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

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

Carrying value at June 30, 2010
(In millions)	Level 1		Level 2		Level 3		Total		Write- downs
Loans[1]		—		—	$	610	$	610	$	(240	)
Loans held-for-sale[2]		—		—		2		2		(11	)
Other real estate owned[3]		—		—		42		42		(18	)
Total		—		—	$	654	$	654	$	(269	)

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

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

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

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

75

Trading Account Securities and Investment Securities Available-for-Sale

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

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

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

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

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

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

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

Mortgage servicing rights

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

Derivatives

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

76

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

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

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

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

Other real estate owned and other foreclosed assets

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

Note 23 – Fair Value of Financial Instruments

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

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

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

The fair values reflected herein have been determined based on the prevailing interest rate environment at June 30, 2011 and December 31, 2010, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The methods and assumptions used to estimate the fair values of significant financial instruments are described in the paragraphs below.

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

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

77

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

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW, and money market accounts was, for purposes of this disclosure, equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit was based on the discounted value of contractual cash flows using interest rates being offered on certificates with similar maturities. The value of these deposits in a transaction between willing parties is in part dependent of the buyer’s ability to reduce the servicing cost and the attrition that sometimes occurs. Therefore, the amount a buyer would be willing to pay for these deposits could vary significantly from the presented fair value.

Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments at June 30, 2011 and December 31, 2010.

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

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

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

78

The following table presents the carrying or notional amounts, as applicable, and estimated fair values for financial instruments.

	June 30, 2011				December 31, 2010
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and money market investments	$	1,971,857	$	1,971,857	$	1,431,668	$	1,431,668
Trading account securities		785,842		785,842		546,713		546,713
Investment securities available-for-sale		5,389,491		5,389,491		5,236,852		5,236,852
Investment securities held-to-maturity		129,910		136,959		122,354		120,873
Other investment securities		174,560		176,114		163,513		165,233
Loans held-for-sale		509,046		512,144		893,938		902,371
Loans not covered under loss sharing agreement with the FDIC		19,971,267		17,100,724		19,934,810		17,137,805
Loans covered under loss sharing agreements with the FDIC		4,556,155		4,215,746		4,836,882		4,744,680
FDIC loss share asset		2,350,176		2,278,222		2,318,183		2,383,122
Financial Liabilities:
Deposits	$	27,960,429	$	28,082,567	$	26,762,200	$	26,873,408
Federal funds purchased and assets sold under agreements to repurchase		2,570,322		2,704,531		2,412,550		2,503,320
Other short-term borrowings		151,302		151,302		364,222		364,222
Notes payable		3,423,286		3,336,391		4,170,183		4,067,818
Equity appreciation instrument		—		—		9,945		9,945
(In thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Commitments to extend credit	$	6,626,323	$	2,693	$	5,879,051	$	983
Letters of credit		155,483		2,924		152,596		3,318

Note 24 – Net income (loss) per common share

The following table sets forth the computation of net income (loss) per common share (“EPS”), basic and diluted, for the quarters and six months ended June 30, 2011 and 2010:

	Quarter ended June 30,						Six months ended June 30,
(In thousands, except per share information)	2011			2010			2011			2010
Net income (loss)	$	110,685		$	(44,489	)	$	120,817		$	(129,544	)
Preferred stock dividends		(931	)		—			(1,861	)		—
Deemed dividend on preferred stock[1]		—			(191,667	)		—			(191,667	)
Net income (loss) applicable to common stock	$	109,754		$	(236,156	)	$	118,956		$	(321,211	)
Average common shares outstanding		1,021,225,911			853,010,208			1,021,380,199			746,598,082
Average potential dilutive common shares		670,230			—			1,162,996			—
Average common shares outstanding - assuming dilution		1,021,896,141			853,010,208			1,022,543,195			746,598,082
Basic and dilutive EPS	$	0.11		$	(0.28	)	$	0.12		$	(0.43	)

[1] Non-cash beneficial conversion, resulting from the conversion of contingently convertible perpetual non-cumulative preferred stock into shares of the Corporation’s common stock. The beneficial conversion was recorded as a deemed dividend to the preferred stockholders reducing retained earnings, with a corresponding offset to surplus (paid in capital), and thus did not affect total stockholders’ equity or the book value of the common stock.

79

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

For the quarter ended and six months ended June 30, 2011, there were 2,103,034 and 2,112,275 weighted average antidilutive stock options outstanding, respectively (June 30, 2010 – 1,272,058 and 2,541,337). Additionally, the Corporation has outstanding a warrant issued to the U.S. Treasury to purchase 20,932,836 shares of common stock, which have an antidilutive effect at June 30, 2011.

Note 25 – Other service fees

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

	Quarter ended June 30,				Six months ended June 30,
(In thousands)	2011		2010		2011		2010
Debit card fees	$	13,795	$	29,176	$	26,720	$	55,769
Insurance fees		12,208		12,084		24,134		23,074
Credit card fees and discounts		11,792		26,013		22,368		49,310
Sale and administration of investment products		7,657		10,245		14,787		17,412
Mortgage servicing fees, net of fair value adjustments		2,269		2,822		8,529		14,181
Trust fees		4,110		3,651		7,605		6,634
Processing fees		1,740		14,170		3,437		28,132
Other fees		4,736		5,564		9,379		10,533
Total other services fees	$	58,307	$	103,725	$	116,959	$	205,045

Note 26 – Pension and postretirement benefits

The Corporation has a noncontributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries. At June 30, 2011, the accrual of benefits under the plans was frozen to all participants.

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

	Pension Plan Quarters ended June 30,						Benefit Restoration Plans Quarters ended June 30,
(In thousands)	2011			2010			2011			2010
Interest cost	$	7,784		$	7,953		$	395		$	385
Expected return on plan assets		(10,840	)		(7,777	)		(450	)		(404	)
Amortization of net loss		2,829			2,206			148			99
Settlement loss		—			3,380			—			—
Total net periodic pension cost	$	(227	)	$	5,762		$	93		$	80

80

	Pension Plans Six months ended June 30,						Benefit Restoration Plans Six months ended June 30,
(In thousands)	2011			2010			2011			2010
Interest cost	$	15,569		$	15,906		$	790		$	769
Expected return on plan assets		(21,680	)		(15,553	)		(901	)		(807	)
Amortization of net loss		5,657			4,412			296			198
Settlement loss		—			3,380			—			—
Total net periodic pension cost	$	(454	)	$	8,145		$	185		$	160

The Corporation made contributions to the pension and benefit restoration plans for the quarter and six months ended June 30, 2011 amounting to $39 thousand and $124.6 million, respectively. The total contributions expected to be paid during the year 2011 for the pension and benefit restoration plans amount to approximately $126.7 million.

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

	Postretirement Benefit Plan
	Quarters ended June 30,						Six months ended June 30,
(In thousands)	2011			2010			2011			2010
Service cost	$	504		$	432		$	1,008		$	864
Interest cost		2,135			1,608			4,271			3,217
Amortization of prior service cost		(240	)		(261	)		(480	)		(523	)
Amortization of net loss (gain)		267			(294	)		534			(588	)
Total net periodic postretirement benefit cost	$	2,666		$	1,485		$	5,333		$	2,970

Contributions made to the postretirement benefit plan for the quarter and six months ended June 30, 2011, amounted to approximately $1.6 million and $3.6 million, respectively. The total contributions expected to be paid during the year 2011 for the postretirement benefit plan amount to approximately $6.6 million.

Note 27 – Stock-based compensation

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

Stock Option Plan

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

81

(Not in thousands)
Exercise Price Range per Share	Options Outstanding		Weighted- Average Exercise Price of Options Outstanding		Weighted-Average Remaining Life of Options Outstanding in Years		Options Exercisable (fully vested)		Weighted-Average Exercise Price of Options Exercisable
$ 14.39 - $ 18.50		1,014,053	$	15.84		1.24		1,014,053	$	15.84
$ 19.25 - $ 27.20		1,088,981	$	25.27		3.01		1,088,981	$	25.27
$ 14.39 - $ 27.20		2,103,034	$	20.72		2.16		2,103,034	$	20.72

There was no intrinsic value of options outstanding at June 30, 2011 and 2010. There was no intrinsic value of options exercisable at June 30, 2011 and 2010.

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

(Not in thousands)	Options Outstanding			Weighted-Average Exercise Price
Outstanding at December 31, 2009		2,552,663		$	20.64
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(277,497	)		20.43
Outstanding at December 31, 2010		2,275,166		$	20.67
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired		(172,132	)		20.03
Outstanding at June 30, 2011		2,103,034		$	20.72

The stock options exercisable at June 30, 2011 totaled 2,103,034 (June 30, 2010 – 2,530,137). There were no stock options exercised during the quarters and six months ended June 30, 2011 and 2010. Thus, there was no intrinsic value of options exercised during the quarters and six months ended June 30, 2011 and 2010.

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2010 and 2011.

There was no stock option expense recognized for the quarters and six months ended June 30, 2011 and 2010.

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan.

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

82

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

(Not in thousands)	Restricted Stock			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2009		138,512		$	23.62
Granted		1,525,416			2.70
Vested		(340,879	)		7.87
Forfeited		(191,313	)		3.24
Non-vested at December 31, 2010		1,131,736		$	3.61
Granted		1,559,463			3.24
Vested		(41,832	)		10.18
Forfeited		(2,000	)		5.10
Non-vested at June 30, 2011		2,647,367		$	3.28

During the quarter ended June 30, 2011, 636,889 shares of restricted stock were awarded to management under the Incentive Plan, from which 187,880 shares were awarded to management consistent with the requirements of the TARP Interim Final Rule. For the six-month period ended June 30, 2011, 1,559,463 shares of restricted stock were awarded to management under the Incentive Plan, from which 1,110,454 shares were awarded to management consistent with the requirements of the TARP Interim Final Rule.

During the quarter ended June 30, 2010, 563,043 shares of restricted stock were awarded to management under the Incentive Plan, from which 360,527 shares were awarded to management consistent with the requirements of the TARP Interim Final Rule. For the six-month period ended June 30, 2010, 1,525,416 shares of restricted stock were awarded to management under the Incentive Plan, from which 1,246,755 shares were awarded to management consistent with the requirements of the TARP Interim Final Rule.

Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards consist of the opportunity to receive shares of Popular Inc.’s common stock provided that the Corporation achieves certain performance goals during a three-year performance cycle. The compensation cost associated with the performance shares is recorded ratably over a three-year performance period. The performance shares are granted at the end of the three-year period and vest at grant date, except when the participant’s employment is terminated by the Corporation without cause. In such case, the participant would receive a pro-rata amount of shares calculated as if the Corporation would have met the performance goal for the performance period. During the six months ended June 30, 2011, no performance shares were granted under this plan (June 30, 2010 – 12,426).

During the quarter ended June 30, 2011, the Corporation recognized $0.8 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (June 30, 2010 - credit of $0.2 million, with an income tax expense of $56 thousand). For the six-month period ended June 30, 2011, the Corporation recognized $1.3 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.3 million (June 30, 2010 - $0.1 million, with a tax benefit of $71 thousand). The fair market value of the restricted stock vested was $90 thousand at grant date and $74 thousand at vesting date. This triggers a shortfall of $3 thousand that was recorded as an additional income tax expense at the applicable income tax rate. No additional income tax expense was recorded for the U.S. employees due to the valuation allowance of the deferred tax asset. There was no performance share expense recognized for the quarter ended June 30, 2011 and June 30, 2010. There was no performance share expense recognized for the six months ended June 30, 2011 (June 30, 2010 - $0.1 million, with a tax benefit of $60 thousand). The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at June 30, 2011 was $5.5 million and is expected to be recognized over a weighted-average period of 2 years.

83

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

(Not in thousands)	Restricted Stock			Weighted-Average Grant Date Fair Value
Non-vested at December 31, 2009		—			—
Granted		305,898		$	2.95
Vested		(305,898	)		2.95
Forfeited		—			—
Non-vested at December 31, 2010		—			—
Granted		218,707		$	2.93
Vested		(218,707	)		2.93
Forfeited		—			—
Non-vested at June 30, 2011		—			—

During the quarter ended June 30, 2011, the Corporation granted 195,423 shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (June 30, 2010 – 207,261). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $35 thousand (June 30, 2010 - $0.1 million, with a tax benefit of $60 thousand). For the six-month period ended June 30, 2011, the Corporation granted 218,707 shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (June 30, 2010 – 242,394). During this period, the Corporation recognized $0.2 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $70 thousand (June 30, 2010 - $0.3 million, with a tax benefit of $0.1 million). The fair value at vesting date of the restricted stock vested during the six months ended June 30, 2011 for directors was $0.6 million.

Note 28 – Income taxes

The reasons for the difference between the income tax (benefit) expense applicable to income before taxes and the amount computed by applying the statutory tax rate in Puerto Rico are included in the following tables.

	Quarters ended
	June 30, 2011						June 30, 2010
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax at statutory rates	$	21,776			30	%	$	(7,065	)		41	%
Net benefit of net tax exempt interest income		(15,206	)		(21	)		(2,331	)		13
Effect of income subject to preferential tax rate		(100	)		—			(693	)		4
Deferred tax asset valuation allowance		3,945			5			28,449			(165	)
Non-deductible expenses		5,400			7			6,984			(40	)
Difference in tax rates due to multiple jurisdictions		(1,866	)		(2	)		2,226			(13	)
Recognition of tax benefits from previous years [1]		(53,615	)		(74	)		—			—
State taxes and others		1,566			2			(333	)		2
Income tax (benefit) expense	$	(38,100	)		(53	)%	$	27,237			(158	)%

[1] Due to ruling and closing agreement discussed below

84

	Six months ended
	June 30, 2011						June 30, 2010
(In thousands)	Amount			% of pre-tax income			Amount			% of pre-tax income
Computed income tax at statutory rates	$	68,984			30	%	$	(45,693	)		41	%
Net benefit of net tax exempt interest income		(17,613	)		(8	)		(12,036	)		11
Effect of income subject to preferential tax rate		(332	)		—			(1,106	)		1
Deferred tax asset valuation allowance		(1,360	)		(1	)		61,728			(55	)
Non-deductible expenses		10,726			5			13,882			(12	)
Difference in tax rates due to multiple jurisdictions		(4,344	)		(2	)		6,320			(6	)
Initial adjustment in deferred tax due to change in tax rate		103,287			45			—			—
Recognition of tax benefits from previous years [1]		(53,615	)		(23	)		—			—
State taxes and others		3,394			1			(5,133	)		4
Income tax expense	$	109,127			47	%	$	17,962			(16	)%

[1] Due to ruling and closing agreement discussed below

The results for the second quarter of 2011 reflect a tax benefit of $59.6 million related to the timing of loan charge-offs for tax purposes. In May 2011, the Puerto Rico Department of the Treasury (the “P.R. Treasury”) issued a private ruling to the Corporation (the “Ruling”) creating an agreement to establish the criteria to determine when a charge-off for accounting and financial reporting purposes should be reported as a deduction for tax purposes. On June 30, 2011, the P.R. Treasury and the Corporation signed a closing agreement in which both parties agreed that for tax purposes the deductions related to certain charge-offs recorded on the financial statements of the Corporation for the years 2009 and 2010 will be deferred until 2013, 2014, 2015 and 2016. As a result of the agreement, the Corporation made a payment of $89.4 million to the P.R. Treasury and recorded a tax benefit on its financial statements of $143 million, or $53.6 net of the payment made to the P.R. Treasury, resulting from the recovery of certain tax benefits not previously recorded during years 2009 (the benefit of reduced tax rates for capital gains) and 2010 (the benefit of exempt income) that were previously unavailable to the Corporation as a result of being in a loss position for tax purposes in such years. Also, the Corporation recorded a tax benefit of $6.0 million related to the tax benefit of the exempt income for the first quarter of 2011. The effective tax rate for the Corporation’s Puerto Rico banking operations for 2011 is estimated at 22%.

On January 31, 2011, the Governor of Puerto Rico signed into law a new Internal Revenue Code for Puerto Rico (the “2011 Tax Code”) which resulted in a reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense of $103.3 million due to a reduction in the marginal corporate income tax rate. Under the provisions of the 2011 Tax Code, the maximum marginal corporate income tax rate is 30% for years commenced after December 31, 2010. Prior to the 2011 Tax Code, the maximum marginal corporate income tax rate in Puerto Rico was 39%, which had increased to 40.95% due to a temporary 5% surtax approved in March 2009 for years beginning on January 1, 2009 through December 31, 2011. The 2011 Tax Code, however, eliminated the special 5% surtax on corporations for tax year 2011.

85

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

(In thousands)	June 30, 2011		December 31, 2010
Deferred tax assets:
Tax credits available for carryforward	$	3,423	$	5,833
Net operating loss and other carryforward available		1,112,849		1,222,717
Postretirement and pension benefits		92,934		131,508
Deferred loan origination fees		6,842		8,322
Allowance for loan losses		554,187		393,289
Deferred gains		12,376		13,056
Accelerated depreciation		6,850		7,108
Intercompany deferred gains		4,822		5,480
Other temporary differences		20,074		26,063
Total gross deferred tax assets	$	1,814,357	$	1,813,376
Deferred tax liabilities:
Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations		30,447		31,846
Difference in outside basis between financial and tax reporting on sale of a business		11,809		11,120
FDIC-assisted transaction		94,931		64,049
Unrealized net gain on trading and available-for-sale securities		63,192		52,186
Deferred loan origination costs		4,669		6,911
Other temporary differences		3,330		1,392
Total gross deferred tax liabilities		208,378		167,504
Valuation allowance		1,257,619		1,268,589
Net deferred tax asset	$	348,360	$	377,283

The net deferred tax asset shown in the table above at June 30, 2011 is reflected in the consolidated statements of condition as $362 million in net deferred tax assets (in the “Other assets” caption) (December 31, 2010 - $388 million) and $14 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2010 - $11 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

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

The Corporation’s U.S. mainland operations are in a cumulative loss position for the three-year period ended June 30, 2011. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland, this cumulative taxable loss position is considered significant negative evidence and has caused management to conclude that it is more likely than not that the Corporation will not be able to realize the associated deferred tax assets in the future. At June 30, 2011, the Corporation recorded a valuation allowance of approximately $1.3 billion on the deferred tax assets of its U.S. operations (December 31, 2010 - $1.3 billion).

At June 30, 2011, the Corporation’s deferred tax assets related to its Puerto Rico operations amounted to $371 million. The Corporation assessed the realization of the Puerto Rico portion of the net deferred tax asset based on the weighting of all available evidence. The Corporation’s Puerto Rico Banking operation is in a cumulative loss position for the three-year period ended June 30, 2011. This situation is mainly due to the performance of the construction loan portfolio, including the charges related to the proposed sale of the portfolio. The Corporation’s banking operations in Puerto Rico has been historically profitable, and it is management’s view, based on that history, that the event causing this loss is not a continuing condition of the operations. In addition, as a result of the Ruling described above, the realization of the Puerto Rico net deferred tax asset has further improved. Accordingly, there is enough positive evidence to outweigh the negative evidence of the cumulative loss. As indicated

86

earlier, in May 2011, the Corporation received a Ruling from the P.R. Treasury establishing the treatment of the loan charge-offs for tax purposes. In summary, the government ruled that the criteria to have a loan loss for taxes are more rigorous than the criteria to have a loan loss for accounting and financial reporting purposes. Based on Puerto Rico law and regulations, the P.R. Treasury ruled that if the Corporation decides to take a loan loss deduction in the tax return for the loan charge-off taken for accounting reporting purposes during the same year, a conclusive presumption is made as to the non-collectability of the loan. On the other hand, if the tax deduction is not taken in the same accounting period, eventually it will have to prove the non-collectability of the loan based on stated criteria. On June 30, 2011, the Corporation entered into a Closing Agreement with the P.R. Treasury, in which both parties agreed that pursuant to the Ruling, the Corporation’s Puerto Rico Banking operation would not take any tax deduction for bad debts related to the construction and commercial loans portfolio on the tax returns for 2009 and 2010. It was also agreed that such deferred deductions will be taken evenly over taxable years 2013 through 2016, even if the loans are sold in the future. As a result of the agreement, the Corporation adjusted its Puerto Rico banking operation taxable income previously reported to the P.R. Treasury on the 2009 return. On the other hand, the Corporation reduced its deferred tax asset related to the carryover of net operating losses previously recorded in the year 2010 and for the six months period ended June 30, 2011 and increased the deferred tax asset related to the allowance for loan losses as a result of the deferral of the construction and commercial loans charge offs. Based on the facts explained above, the Corporation has concluded that it is more likely than not that the net deferred tax asset of its Puerto Rico operations will be realized. Management reassesses the realization of the deferred tax assets each reporting period.

The reconciliation of unrecognized tax benefits was as follows:

(In millions)	2011			2010
Balance at January 1	$	26.3		$	41.8
Additions for tax positions - January through March		2.2			0.4
Reduction as a result of settlements - January through March		(4.4	)		(14.3	)
Balance at March 31	$	24.1		$	27.9
Additions for tax positions - April through June		0.8			0.2
Additions for tax positions taken in prior years - April through June		2.1			—
Reduction for tax positions - April through June		—			(1.6	)
Balance at June 30	$	27.0		$	26.5

At June 30, 2011, the related accrued interest approximated $7.2 million (December 31, 2010 - $6.1 million; June 30, 2010 - $7.1 million). Management determined that at June 30, 2011, December 31, 2010 and June 30, 2010 there was no need to accrue for the payment of penalties.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation’s effective tax rate, was approximately $33.4 million at June 30, 2011 (December 31, 2010 - $31.6 million, June 30, 2010 - $32.1 million).

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

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. At June 30, 2011, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008 and thereafter; and in the Puerto Rico jurisdiction, 2006 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $8 million.

87

Note 29 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the six months ended June 30, 2011 and June 30, 2010 are listed in the following table:

(In thousands)	June 30, 2011		June 30, 2010
Non-cash activities:
Loans transferred to other real estate	$	96,481	$	77,919
Loans transferred to other property		14,299		19,968
Total loans transferred to foreclosed assets		110,780		97,887
Transfers from loans held-in-portfolio to loans held-for-sale		18,061		23,159
Transfers from loans held-for-sale to loans held-in-portfolio		26,873		6,292
Loans securitized into investment securities [1]		594,117		411,063
Recognition of mortgage servicing rights on securitizations or asset transfers		11,292		7,809
Conversion of preferred stock to common stock:
Preferred stock converted		—		(1,150,000	)
Common stock issued		—		1,341,667

[1] Includes loans securitized into trading securities and subsequently sold before quarter end.

For the six months ended June 30, 2010 the changes in operating assets and liabilities included in the reconciliation of net income to net cash provided by operating activities, as well as the changes in assets and liabilities presented in the investing and financing sections are net of the effect of the assets acquired and liabilities assumed from the Westernbank FDIC-assisted transaction. Refer to Note 3 to the consolidated financial statements for the composition and balances of the assets and liabilities recorded at fair value by the Corporation on April 30, 2010.

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

Note 30 – Segment Reporting

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

On September 30, 2010, the Corporation completed the sale of a 51% ownership interest in EVERTEC, which included the merchant acquiring business of BPPR. EVERTEC was reported as a reportable segment prior to such date, while the merchant acquiring business was originally included in the BPPR reportable segment through June 30, 2010. As a result of the sale, the Corporation no longer presents EVERTEC as a reportable segment and therefore, historical financial information for the processing and merchant acquiring businesses have been reclassified under the Corporate group for all periods presented. Additionally, the Corporation retained Tarjetas y Transacciones en Red Tranred, C.A. (“TRANRED”) (formerly EVERTEC DE VENEZUELA, C.A). and its equity investments in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Serfinsa, which were included in the EVERTEC reportable segment through June 30, 2010. As indicated in Note 4 to the consolidated financial statements, the Corporation sold its equity investments in CONTADO and Serfinsa during 2011. In 2011, the Corporation recorded $8.7 million in operating expenses because of the write-off of its investment in TRANRED as the Corporation determined to wind-down these operations. The results for TRANRED and the equity investments are included in the Corporate group for all periods presented. Revenue from the 49% ownership interest in EVERTEC is reported as non-interest income in the Corporate group.

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

88

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at June 30, 2011, additional disclosures are provided for the business areas included in this reportable segment, as described below:

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

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

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

Banco Popular North America:

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

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

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

89

The tables that follow present the results of operations and total assets by reportable segments:

2011

For the quarter ended June 30, 2011
(In thousands)	Banco Popular de Puerto Rico			Banco Popular North America		Intersegment Eliminations
Net interest income	$	325,167		$	74,601	$	—
Provision for loan losses		119,324			24,993		—
Non-interest income		113,144			19,127		—
Amortization of intangibles		1,575			680		—
Depreciation expense		9,101			1,853		—
Loss on early extinguishment of debt		289			—		—
Other operating expenses		205,666			62,708		—
Income tax (benefit) expense		(37,476	)		934		—
Net income	$	139,832		$	2,560	$	—
Segment assets	$	29,790,465		$	8,895,036	$	(53,482	)

For the quarter ended June 30, 2011
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (loss)	$	399,768		$	(25,441	)	$	215		$	374,542
Provision for loan losses		144,317			—			—			144,317
Non-interest income		132,271			9,781			(17,892	)		124,160
Amortization of intangibles		2,255			—			—			2,255
Depreciation expense		10,954			436			—			11,390
Loss on early extinguishment of debt		289			—			—			289
Other operating expenses		268,374			17,028			(17,536	)		267,866
Income tax benefit		(36,542	)		(1,556	)		(2	)		(38,100	)
Net income (loss)	$	142,392		$	(31,568	)	$	(139	)	$	110,685
Segment assets	$	38,632,019		$	5,368,602		$	(4,987,279	)	$	39,013,342

For the six months ended June 30, 2011
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America		Intersegment Eliminations
Net interest income	$	620,612	$	149,415	$	—
Provision for loan losses		186,580		33,056		—
Non-interest income		234,871		36,544		—
Amortization of intangibles		3,150		1,360		—
Depreciation expense		18,733		3,844		—
Loss on early extinguishment of debt		528		—		—
Other operating expenses		394,396		120,935		—
Income tax expense		108,668		1,872		—
Net income	$	143,428	$	24,892	$	—

90

For the six months ended June 30, 2011
(In thousands)	Reportable Segments		Corporate			Eliminations			Total Popular, Inc.
Net interest income (loss)	$	770,027	$	(52,648	)	$	522		$	717,901
Provision for loan losses		219,636		—			—			219,636
Non-interest income		271,415		52,023			(34,910	)		288,528
Amortization of intangibles		4,510		—			—			4,510
Depreciation expense		22,577		873			—			23,450
Loss on early extinguishment of debt		528		8,000			—			8,528
Other operating expenses		515,331		40,121			(35,091	)		520,361
Income tax expense (benefit)		110,540		(1,714	)		301			109,127
Net income (loss)	$	168,320	$	(47,905	)	$	402		$	120,817

2010

For the quarter ended June 30, 2010
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	267,665	$	75,323		$	—
Provision for loan losses		122,267		79,991			—
Non-interest income		129,283		15,926			—
Amortization of intangibles		1,358		910			—
Depreciation expense		9,158		2,450			—
Loss on early extinguishment of debt		430		—			—
Other operating expenses		209,181		64,923			—
Income tax expense		21,466		798			—
Net income (loss)	$	33,088	$	(57,823	)	$	—
Segment assets	$	32,183,595	$	9,857,865		$	(29,074	)

For the quarter ended June 30, 2010
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (loss)	$	342,988		$	(28,556	)	$	163		$	314,595
Provision for loan losses		202,258			—			—			202,258
Non-interest income		145,209			88,900			(35,282	)		198,827
Amortization of intangibles		2,268			187			—			2,455
Depreciation expense		11,608			3,760			—			15,368
Loss on early extinguishment of debt		430			—			—			430
Other operating expenses		274,104			69,671			(33,612	)		310,163
Income tax expense		22,264			4,970			3			27,237
Net loss	$	(24,735	)	$	(18,244	)	$	(1,510	)	$	(44,489	)
Segment assets	$	42,012,386		$	5,160,641		$	(4,825,188	)	$	42,347,839

91

For the six months ended June 30, 2010
(In thousands)	Banco Popular de Puerto Rico		Banco Popular North America			Intersegment Eliminations
Net interest income	$	486,962	$	154,177		$	—
Provision for loan losses		230,639		211,819			—
Non-interest income		217,952		32,485			—
Amortization of intangibles		2,309		1,820			—
Depreciation expense		18,433		4,881			—
Loss on early extinguishment of debt		978		—			—
Other operating expenses		374,659		128,551			—
Income tax expense		20,557		1,584			—
Net income (loss)	$	57,339	$	(161,993	)	$	—

For the six months ended June 30, 2010
(In thousands)	Reportable Segments			Corporate			Eliminations			Total Popular, Inc.
Net interest income (loss)	$	641,139		$	(57,952	)	$	325		$	583,512
Provision for loan losses		442,458			—			—			442,458
Non-interest income		250,437			174,563			(68,307	)		356,693
Amortization of intangibles		4,129			375			—			4,504
Depreciation expense		23,314			7,445			—			30,759
Loss on early extinguishment of debt		978			—			—			978
Other operating expenses		503,210			137,043			(67,165	)		573,088
Income tax expense (benefit)		22,141			(4,399	)		220			17,962
Net loss	$	(104,654	)	$	(23,853	)	$	(1,037	)	$	(129,544	)

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

2011

For the quarter ended June 30, 2011
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking			Consumer and Retail Banking			Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	138,859		$	183,694		$	2,574	$	40		$	325,167
Provision for loan losses		104,291			15,033			—		—			119,324
Non-interest income		41,981			46,507			24,542		114			113,144
Amortization of intangibles		26			1,396			153		—			1,575
Depreciation expense		4,165			4,698			238		—			9,101
Loss on early extinguishment of debt		289			—			—		—			289
Other operating expenses		60,357			130,356			14,996		(43	)		205,666
Income tax (benefit) expense		(18,850	)		(21,481	)		2,778		77			(37,476	)
Net income	$	30,562		$	100,199		$	8,951	$	120		$	139,832
Segment assets	$	14,601,062		$	21,109,988		$	928,437	$	(6,849,022	)	$	29,790,465

92

For the six months ended June 30, 2011
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking		Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	258,419	$	357,164	$	4,948	$	81		$	620,612
Provision for loan losses		132,186		54,394		—		—			186,580
Non-interest income		87,339		101,408		46,065		59			234,871
Amortization of intangibles		52		2,790		308		—			3,150
Depreciation expense		8,544		9,714		475		—			18,733
Loss on early extinguishment of debt		528		—		—		—			528
Other operating expenses		115,265		248,583		30,646		(98	)		394,396
Income tax expense		57,990		45,363		5,222		93			108,668
Net income	$	31,193	$	97,728	$	14,362	$	145		$	143,428

2010

For the quarter ended June 30, 2010
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking			Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	105,450		$	159,762	$	2,387	$	66		$	267,665
Provision for loan losses		77,546			44,721		—		—			122,267
Non-interest income		40,506			60,485		28,361		(69	)		129,283
Amortization of intangibles		172			1,044		142		—			1,358
Depreciation expense		4,081			4,775		302		—			9,158
Loss on early extinguishment of debt		430			—		—		—			430
Other operating expenses		71,432			121,218		16,600		(69	)		209,181
Income tax (benefit) expense		(2,709	)		19,069		5,079		27			21,466
Net (loss) income	$	(4,996	)	$	29,420	$	8,625	$	39		$	33,088
Segment assets	$	16,376,017		$	23,431,824	$	622,672	$	(8,246,918	)	$	32,183,595

For the six months ended June 30, 2010
Banco Popular de Puerto Rico
(In thousands)	Commercial Banking			Consumer and Retail Banking		Other Financial Services		Eliminations			Total Banco Popular de Puerto Rico
Net interest income	$	176,512		$	305,428	$	4,890	$	132		$	486,962
Provision for loan losses		150,717			79,922		—		—			230,639
Non-interest income		66,030			103,338		48,475		109			217,952
Amortization of intangibles		200			1,828		281		—			2,309
Depreciation expense		8,043			9,783		607		—			18,433
Loss on early extinguishment of debt		978			—		—		—			978
Other operating expenses		117,917			226,049		30,834		(141	)		374,659
Income tax (benefit) expense		(17,521	)		30,032		7,890		156			20,557
Net (loss) income	$	(17,792	)	$	61,152	$	13,753	$	226		$	57,339

93

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

2011

For the quarter ended June 30, 2011
Banco Popular North America
(In thousands)	Banco Popular North America		E-LOAN			Eliminations			Total Banco Popular North America
Net interest income	$	74,201	$	400		$	—		$	74,601
Provision for loan losses		18,306		6,687			—			24,993
Non-interest income		18,354		773			—			19,127
Amortization of intangibles		680		—			—			680
Depreciation expense		1,853		—			—			1,853
Other operating expenses		58,085		4,623			—			62,708
Income tax expense		934		—			—			934
Net income ( loss)	$	12,697	$	(10,137	)	$	—		$	2,560
Segment assets	$	9,578,377	$	451,472		$	(1,134,813	)	$	8,895,036

For the six months ended June 30, 2011
Banco Popular North America
(In thousands)	Banco Popular North America		E-LOAN			Eliminations		Total Banco Popular North America
Net interest income	$	148,501	$	914		$	—	$	149,415
Provision for loan losses		18,911		14,145			—		33,056
Non-interest income		35,728		816			—		36,544
Amortization of intangibles		1,360		—			—		1,360
Depreciation expense		3,844		—			—		3,844
Other operating expenses		114,040		6,895			—		120,935
Income tax expense		1,872		—			—		1,872
Net income ( loss)	$	44,202	$	(19,310	)	$	—	$	24,892

2010

For the quarter ended June 30, 2010
Banco Popular North America
(In thousands)	Banco Popular North America			E-LOAN			Eliminations			Total Banco Popular North America
Net interest income	$	74,664		$	659		$	—		$	75,323
Provision for loan losses		66,285			13,706			—			79,991
Non-interest income (loss)		20,882			(4,956	)		—			15,926
Amortization of intangibles		910			—			—			910
Depreciation expense		2,174			276			—			2,450
Other operating expenses		63,347			1,576			—			64,923
Income tax expense		798			—			—			798
Net loss	$	(37,968	)	$	(19,855	)	$	—		$	(57,823	)
Segment assets	$	10,518,983		$	494,622		$	(1,155,740	)	$	9,857,865

94

For the six months ended June 30, 2010
Banco Popular North America
(In thousands)	Banco Popular North America			E-LOAN			Eliminations			Total Banco Popular North America
Net interest income	$	152,040		$	2,193		$	(56	)	$	154,177
Provision for loan losses		185,991			25,828			—			211,819
Non-interest income (loss)		39,067			(6,582	)		—			32,485
Amortization of intangibles		1,820			—			—			1,820
Depreciation expense		4,354			527			—			4,881
Other operating expenses		125,068			3,483			—			128,551
Income tax expense		1,584			—			—			1,584
Net loss	$	(127,710	)	$	(34,227	)	$	(56	)	$	(161,993	)

Geographic Information

	Quarter ended				Six months ended
(In thousands)	June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010
Revenues:[1]
Puerto Rico	$	387,091	$	397,087	$	783,340	$	705,667
United States		87,809		87,334		176,213		176,972
Other		23,802		29,001		46,876		57,566
Total consolidated revenues	$	498,702	$	513,422	$	1,006,429	$	940,205

[1] Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain on sale and valuation adjustments of investment securities, trading account profit, net gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share income, fair value change in equity appreciation instrument and other operating income.

Selected Balance Sheet Information:

(In thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Puerto Rico
Total assets	$	28,711,644	$	28,464,243	$	31,111,794
Loans		18,708,521		18,729,654		18,858,989
Deposits		20,393,713		19,149,753		18,784,350
United States
Total assets	$	9,041,616	$	9,087,737	$	9,974,846
Loans		6,240,633		6,978,007		7,921,222
Deposits		6,443,794		6,566,710		7,250,120
Other
Total assets	$	1,260,082	$	1,170,982	$	1,261,199
Loans		834,161		751,194		841,610
Deposits [1]		1,122,922		1,045,737		1,079,103

[1] Represents deposits from BPPR operations located in the US and British Virgin Islands.

95

Note 31 – Subsequent events

Subsequent events are events and transactions that occur after the balance sheet date but before financial statements are issued. The effects of subsequent events and transactions are recognized in the financial statements when they provide additional evidence about conditions that existed at the balance sheet date. The Corporation has evaluated events and transactions occurring subsequent to June 30, 2011. Such evaluation resulted in no adjustments in the consolidated financial statements for the quarter ended June 30, 2011.

Certain Regulatory Matters

On July 25, 2011 the Corporation and Banco Popular de Puerto Rico (“BPPR”) entered into a Memorandum of Understanding (the “Corporation/BPPR MOU”) with the Federal Reserve Bank of New York (the “FRB-NY”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the “Office of the Commissioner”). On July 25, 2011 Banco Popular North America (“BPNA”) entered into a Memorandum of Understanding (the “BPNA MOU” and collectively with the Corporation/BPPR MOU, the “MOUs”) with the FRB-NY and the New York State Banking Department (the “Banking Department”). The MOUs provide, among other things, for the Corporation and BPPR to take steps to improve their credit risk management practices, for BPNA to take steps to improve its asset quality, and for the Corporation, BPPR, and BPNA to develop strategic plans to improve earnings and to develop capital plans. The Corporation does not expect the capital plans to require the Corporation to maintain capital ratios in excess of those it currently has achieved. The MOUs require BPPR to obtain approval from the Office of the Commissioner and the Federal Reserve System prior to declaring or paying dividends or incurring, increasing or guaranteeing debt, require BPNA to obtain approval from the Banking Department and the Federal Reserve System prior to declaring or paying dividends, and require the Corporation to obtain approval from the Federal Reserve System prior to declaring or paying dividends, incurring, increasing or guaranteeing debt, or making any distributions on its Trust Preferred Securities or subordinated debt.

In connection with the resumption of payment of monthly dividends on its Preferred Stock, in December 2010, the Corporation committed to the Federal Reserve System to fund the dividend payments out of newly-issued Common Stock issued to employees under the Corporation’s existing savings and investment plans or, if such issuances are insufficient, other common equity capital raised by the Corporation. It is currently anticipated that the Corporation will receive approval from the Federal Reserve System to make dividend payments on its Preferred Stock subject to the same commitments in the future, but there can be no assurance that such approvals will continue to be received. It is anticipated that sufficient Common Stock will be issued under those plans to cover the dividend payments.

Subsequent to entering into the MOU the Corporation received approval from the Federal Reserve System to pay regularly scheduled dividends on its Preferred Stock and distributions on its Trust Preferred Securities through September 30, 2011. The Corporation has no current intention to seek approval to resume dividend payments on its Common Stock.

Note 32 – Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”) and all other subsidiaries of the Corporation at June 30, 2011, December 31, 2010 and June 30, 2010, and the results of their operations and cash flows for periods ended June 30, 2011 and 2010.

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Popular Insurance V.I., Inc; Tarjetas y Transacciones en Red Tranred, C.A.; and PNA. Prior to the internal reorganization and sale of the ownership interest in EVERTEC, ATH Costa Rica S.A., and T.I.I. Smart Solutions Inc. were also wholly-owned subsidiaries of PIBI.

PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries: Equity One, Inc.; and Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.

PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.

A source of income for PIHC consists of dividends from BPPR. Under the existing federal banking regulations, the prior approval of the Federal Reserve System is required for any dividend from BPPR or BPNA to the PIHC if the total of all dividends declared by each entity during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. Under this test, at June 30, 2011, BPPR could have declared a dividend of approximately $197 million (June 30, 2010 - $96 million; December 31, 2010 - $78 million). However, as disclosed in Note 31, on July 25, 2011, PIHC

96

and BPPR entered into a Memorandum of Understanding with the Federal Reserve Bank of New York and the Office of the Commissioner of Financial Institutions of Puerto Rico that requires the prior approval of these entities prior to the payment of any dividends by BPPR to PIHC. BPNA could not declare any dividends without the approval of the Federal Reserve Board.

97

Condensed Consolidated Statement of Condition (Unaudited)

	At June 30, 2011
(In thousands)	Popular, Inc. Holding Co.		PIBI Holding Co.		PNA Holding Co.		All other subsidiaries and eliminations		Elimination entries			Popular, Inc. Consolidated
ASSETS
Cash and due from banks	$	4,781	$	1,426	$	273	$	588,171	$	(6,686	)	$	587,965
Money market investments		64		12,778		262		1,383,750		(12,962	)		1,383,892
Trading account securities, at fair value		—		—		—		785,842		—			785,842
Investment securities available-for-sale, at fair value		37,362		3,660		—		5,366,431		(17,962	)		5,389,491
Investment securities held-to-maturity, at amortized cost		197,362		1,000		—		116,548		(185,000	)		129,910
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		159,217		—			174,560
Investment in subsidiaries		4,020,454		1,152,668		1,614,772		—		(6,787,894	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		509,046		—			509,046
Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		291,393		—		—		20,730,222	($	260,269	)		20,761,346
Loans covered under loss sharing agreements with the FDIC		—		—		—		4,616,575		—			4,616,575
Less - Unearned income		—		—		—		103,652		—			103,652
Allowance for loan losses		8		—		—		746,839		—			746,847
Total loans held-in-portfolio, net		291,385		—		—		24,496,306		(260,269	)		24,527,422
FDIC loss share asset		—		—		—		2,350,176		—			2,350,176
Premises and equipment, net		2,741		—		120		535,009		—			537,870
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		162,419		—			162,419
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		74,803		—			74,803
Accrued income receivable		1,258		8		112		140,633		(31	)		141,980
Mortgage servicing assets, at fair value		—		—		—		162,619		—			162,619
Other assets		225,728		71,395		15,290		1,100,723		(19,293	)		1,393,843
Goodwill		—		—		—		647,318		—			647,318
Other intangible assets		554		—		—		53,632		—			54,186
Total assets	$	4,792,539	$	1,242,936	$	1,635,321	$	38,632,643	$	(7,290,097	)	$	39,013,342
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	5,386,528	$	(22,524	)	$	5,364,004
Interest bearing		—		—		—		22,609,540		(13,115	)		22,596,425
Total deposits		—		—		—		27,996,068		(35,639	)		27,960,429
Federal funds purchased and assets sold under agreements to repurchase		—		—		—		2,570,322		—			2,570,322
Other short-term borrowings		—		—		13,400		372,102		(234,200	)		151,302
Notes payable		747,817		—		427,243		2,248,226		—			3,423,286
Subordinated notes		—		—		—		185,000		(185,000	)		—
Other liabilities		80,654		5,346		42,803		861,724		(46,592	)		943,935

98

Total liabilities		828,471			5,346			483,446			34,233,442			(501,431	)		35,049,274
Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,242			4,066			2			51,564			(55,632	)		10,242
Surplus		4,089,382			4,092,743			4,103,208			5,857,287			(14,044,711	)		4,097,909
Accumulated deficit		(219,845	)		(2,874,741	)		(2,994,502	)		(1,570,058	)		7,430,774			(228,372	)
Treasury stock, at cost		(642	)		—			—			—			—			(642	)
Accumulated other comprehensive income, net of tax		34,771			15,522			43,167			60,408			(119,097	)		34,771
Total stockholders’ equity		3,964,068			1,237,590			1,151,875			4,399,201			(6,788,666	)		3,964,068
Total liabilities and stockholders’ equity	$	4,792,539		$	1,242,936		$	1,635,321		$	38,632,643		$	(7,290,097	)	$	39,013,342

99

Condensed Consolidated Statement of Condition (Unaudited)

	At December 31, 2010
(In thousands)	Popular, Inc. Holding Co.		PIBI Holding Co.		PNA Holding Co.		All other subsidiaries and eliminations		Elimination entries			Popular, Inc. Consolidated
ASSETS
Cash and due from banks	$	1,638	$	618	$	1,576	$	451,723	$	(3,182	)	$	452,373
Money market investments		1		7,512		261		979,232		(7,711	)		979,295
Trading account securities, at fair value		—		—		—		546,713		—			546,713
Investment securities available-for-sale, at fair value		35,263		3,863		—		5,216,013		(18,287	)		5,236,852
Investment securities held-to-maturity, at amortized cost		210,872		1,000		—		95,482		(185,000	)		122,354
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		148,170		—			163,513
Investment in subsidiaries		3,836,258		1,096,907		1,578,986		—		(6,512,151	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		893,938		—			893,938
Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		476,082		1,285		—		20,798,876		(441,967	)		20,834,276
Loans covered under loss sharing agreements with the FDIC		—		—		—		4,836,882		—			4,836,882
Less - Unearned income		—		—		—		106,241		—			106,241
Allowance for loan losses		60		—		—		793,165		—			793,225
Total loans held-in-portfolio, net		476,022		1,285		—		24,736,352		(441,967	)		24,771,692
FDIC loss share asset		—		—		—		2,318,183		—			2,318,183
Premises and equipment, net		2,830		—		122		542,501		—			545,453
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		161,496		—			161,496
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		57,565		—			57,565
Accrued income receivable		1,510		33		111		149,101		(97	)		150,658
Mortgage servicing assets, at fair value		—		—		—		166,907		—			166,907
Other assets		246,209		86,116		15,105		1,127,870		(25,413	)		1,449,887
Goodwill		—		—		—		647,387		—			647,387
Other intangible assets		554		—		—		58,142		—			58,696
Total assets	$	4,822,007	$	1,197,335	$	1,600,653	$	38,296,775	$	(7,193,808	)	$	38,722,962
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	4,961,417	$	(22,096	)	$	4,939,321
Interest bearing		—		—		—		21,830,669		(7,790	)		21,822,879
Total deposits		—		—		—		26,792,086		(29,886	)		26,762,200
Federal funds purchased and assets sold under agreements to repurchase		—		—		—		2,412,550		—			2,412,550
Other short-term borrowings		—		—		32,500		743,922		(412,200	)		364,222
Notes payable		835,793		—		430,121		2,905,554		(1,285	)		4,170,183
Subordinated notes		—		—		—		185,000		(185,000	)		—

100

Other liabilities		185,683			3,921			47,169			1,028,614			(52,111	)		1,213,276
Total liabilities		1,021,476			3,921			509,790			34,067,726			(680,482	)		34,922,431
Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,229			4,066			2			51,633			(55,701	)		10,229
Surplus		4,085,478			4,158,157			4,066,208			5,862,091			(14,077,929	)		4,094,005
Accumulated deficit		(338,801	)		(2,958,347	)		(3,000,682	)		(1,714,659	)		7,665,161			(347,328	)
Treasury stock, at cost		(574	)		—			—			—			—			(574	)
Accumulated other comprehensive (loss) income, net of tax		(5,961	)		(10,462	)		25,335			29,984			(44,857	)		(5,961	)
Total stockholders’ equity		3,800,531			1,193,414			1,090,863			4,229,049			(6,513,326	)		3,800,531
Total liabilities and stockholders’ equity	$	4,822,007		$	1,197,335		$	1,600,653		$	38,296,775		$	(7,193,808	)	$	38,722,962

101

Condensed Consolidated Statement of Condition (Unaudited)

	At June 30, 2010
(In thousands)	Popular, Inc. Holding Co.		PIBI Holding Co.		PNA Holding Co.		All other subsidiaries and eliminations		Elimination entries			Popular, Inc. Consolidated
ASSETS
Cash and due from banks	$	825	$	295	$	735	$	744,990	$	(2,076	)	$	744,769
Money market investments		51		5,903		299		2,444,104		(6,148	)		2,444,209
Trading account securities, at fair value		—		—		—		401,543		—			401,543
Investment securities available-for-sale, at fair value		—		3,373		—		6,479,276		(1,462	)		6,481,187
Investment securities held-to-maturity, at amortized cost		395,797		1,000		—		182,619		(370,000	)		209,416
Other investment securities, at lower of cost or realizable value		10,850		1		4,492		137,219		—			152,562
Investment in subsidiaries		3,820,737		812,321		1,269,857		—		(5,902,915	)		—
Loans held-for-sale, at lower of cost or fair value		—		—		—		101,251		—			101,251
Loans held-in-portfolio:
Loans not covered under loss sharing agreements with the FDIC		366,632		—		—		22,568,799		(360,700	)		22,574,731
Loans covered under loss sharing agreements with the FDIC		—		—		—		5,055,750		—			5,055,750
Less - Unearned income		—		—		—		109,911		—			109,911
Allowance for loan losses		60		—		—		1,276,956		—			1,277,016
Total loans held-in-portfolio, net		366,572		—		—		26,237,682		(360,700	)		26,243,554
FDIC loss share asset		—		—		—		2,330,406		—			2,330,406
Premises and equipment, net		3,166		—		123		570,652		—			573,941
Other real estate not covered under loss sharing agreements with the FDIC		—		—		—		142,372		—			142,372
Other real estate covered under loss sharing agreements with the FDIC		—		—		—		55,176		—			55,176
Accrued income receivable		131		5		111		151,039		(41	)		151,245
Mortgage servicing assets, at fair value		—		—		—		171,994		—			171,994
Other assets		44,262		77,812		17,984		1,287,668		(38,422	)		1,389,304
Goodwill		—		—		—		691,190		—			691,190
Other intangible assets		554		—		—		63,166		—			63,720
Total assets	$	4,642,945	$	900,710	$	1,293,601	$	42,192,347	$	(6,681,764	)	$	42,347,839
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	—	$	—	$	—	$	4,795,414	$	(2,076	)	$	4,793,338
Interest bearing		—		—		—		22,326,383		(6,148	)		22,320,235
Total deposits		—		—		—		27,121,797		(8,224	)		27,113,573
Federal funds purchased and assets sold under agreements to repurchase		—		—		—		2,307,194		—			2,307,194
Other short-term borrowings		1,500		—		20,000		340,463		(360,700	)		1,263
Notes payable		999,698		—		429,983		6,808,596		—			8,238,277
Subordinated notes		—		—		—		370,000		(370,000	)		—
Other liabilities		26,960		1,838		43,955		1,040,194		(40,202	)		1,072,745

102

Total liabilities		1,028,158			1,838			493,938			37,988,244			(779,126	)		38,733,052
Stockholders’ equity:
Preferred stock		50,160			—			—			—			—			50,160
Common stock		10,229			3,961			2			53,351			(57,314	)		10,229
Surplus		4,085,901			3,666,984			3,566,208			5,485,877			(12,710,541	)		4,094,429
Accumulated deficit		(605,435	)		(2,764,377	)		(2,797,501	)		(1,445,380	)		6,998,730			(613,963	)
Treasury stock, at cost		(518	)		—			—			—			—			(518	)
Accumulated other comprehensive income (loss), net of tax		74,450			(7,696	)		30,954			110,255			(133,513	)		74,450
Total stockholders’ equity		3,614,787			898,872			799,663			4,204,103			(5,902,638	)		3,614,787
Total liabilities and stockholders’ equity	$	4,642,945		$	900,710		$	1,293,601		$	42,192,347		$	(6,681,764	)	$	42,347,839

103

Condensed Statement of Operations (Unaudited)

	Quarter ended June 30, 2011
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.		PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
INTEREST INCOME:
Loans	$	2,038		$	—	$	—		$	441,940		$	(1,518	)	$	442,460
Money market investments		5			31		2			954			(66	)		926
Investment securities		4,031			15		80			52,817			(3,220	)		53,723
Trading account securities		—			—		—			9,790			—			9,790
Total interest income		6,074			46		82			505,501			(4,804	)		506,899
INTEREST EXPENSE:
Deposits		—			—		—			70,758			(86	)		70,672
Short-term borrowings		28			—		242			14,554			(1,105	)		13,719
Long-term debt		22,784			—		7,687			20,419			(2,924	)		47,966
Total interest expense		22,812			—		7,929			105,731			(4,115	)		132,357
Net interest (expense) income		(16,738	)		46		(7,847	)		399,770			(689	)		374,542
Provision for loan losses		—			—		—			144,317			—			144,317
Net interest (expense) income after provision for loan losses		(16,738	)		46		(7,847	)		255,453			(689	)		230,225
Service charges on deposit accounts		—			—		—			46,802			—			46,802
Other service fees		—			—		—			62,993			(4,686	)		58,307
Net loss on sale and valuation adjustments of investment securities		—			—		—			(90	)		—			(90	)
Trading account profit		—			—		—			874			—			874
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			—		—			(12,782	)		—			(12,782	)
Adjustments (expense) to indemnity reserves on loans sold		—			—		—			(9,454	)		—			(9,454	)
FDIC loss share income		—			—		—			38,670			—			38,670
Fair value change in equity appreciation instrument		—			—		—			578			—			578
Other operating income (loss)		2,169			5,304		(308	)		6,812			(12,722	)		1,255
Total non-interest income (loss)		2,169			5,304		(308	)		134,403			(17,408	)		124,160
OPERATING EXPENSES:
Personnel costs		7,006			89		—			103,864			—			110,959
Net occupancy expenses		898			9		—			24,169			881			25,957
Equipment expenses		808			1		—			9,952			—			10,761
Other taxes		332			—		—			14,291			—			14,623
Professional fees		3,846			92		4			63,778			(18,241	)		49,479
Communications		112			—		4			7,072			—			7,188
Business promotion		385			—		—			10,947			—			11,332
FDIC deposit insurance		—			—		—			27,682			—			27,682
Loss on early extinguishment of debt		—			—		—			289			—			289
Other real estate owned (OREO) expenses		—			—		—			6,440			—			6,440
Other operating expenses		(14,036	)		100		111			29,256			(596	)		14,835
Amortization of intangibles		—			—		—			2,255			—			2,255
Total operating expenses		(649	)		291		119			299,995			(17,956	)		281,800

104

(Loss) income before income tax and equity in earnings (losses) of subsidiaries		(13,920	)		5,059			(8,274	)		89,861			(141	)		72,585
Income tax expense (benefit)		1,111			1,000			—			(40,208	)		(3	)		(38,100	)
(Loss) income before equity in earnings (losses) of subsidiaries		(15,031	)		4,059			(8,274	)		130,069			(138	)		110,685
Equity in undistributed earnings (losses) of subsidiaries		125,716			(8,946	)		(955	)		—			(115,815	)		—
NET INCOME (LOSS)	$	110,685		$	(4,887	)	$	(9,229	)	$	130,069		$	(115,953	)	$	110,685

105

Condensed Statement of Operations

(Unaudited)

	Six months ended June 30, 2011
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.		PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
INTEREST INCOME:
Loans	$	5,058		$	16	$	—		$	864,666		$	(3,905	)	$	865,835
Money market investments		5			47		3			1,923			(105	)		1,873
Investment securities		8,161			22		161			104,196			(6,442	)		106,098
Trading account securities		—			—		—			18,544			—			18,544
Total interest income		13,224			85		164			989,329			(10,452	)		992,350
INTEREST EXPENSE:
Deposits		—			—		—			147,798			(247	)		147,551
Short-term borrowings		50			—		556			30,110			(2,982	)		27,734
Long-term debt		48,332			—		15,287			41,397			(5,852	)		99,164
Total interest expense		48,382			—		15,843			219,305			(9,081	)		274,449
Net interest (expense) income		(35,158	)		85		(15,679	)		770,024			(1,371	)		717,901
Provision for loan losses		—			—		—			219,636			—			219,636
Net interest (expense) income after provision for loan losses		(35,158	)		85		(15,679	)		550,388			(1,371	)		498,265
Service charges on deposit accounts		—			—		—			92,432			—			92,432
Other service fees		—			—		—			125,033			(8,074	)		116,959
Net loss on sale and valuation adjustments of investment securities		—			—		—			(90	)		—			(90	)
Trading account profit		—			—		—			375			—			375
Net loss on sale of loans, including valuation adjustments on loans held-for-sale		—			—		—			(5,538	)		—			(5,538	)
Adjustments (expense) to indemnity reserves on loans sold		—			—		—			(19,302	)		—			(19,302	)
FDIC loss share income		—			—		—			54,705			—			54,705
Fair value change in equity appreciation instrument		—			—		—			8,323			—			8,323
Other operating income		20,354			25,248		1,388			19,687			(26,013	)		40,664
Total non-interest income		20,354			25,248		1,388			275,625			(34,087	)		288,528
OPERATING EXPENSES:
Personnel costs		13,862			173		—			203,064			—			217,099
Net occupancy expenses		1,704			17		1			47,055			1,766			50,543
Equipment expenses		1,580			3		—			21,214			—			22,797
Other taxes		662			—		—			25,933			—			26,595
Professional fees		6,672			117		6			126,202			(36,830	)		96,167
Communications		234			5		9			14,150			—			14,398
Business promotion		808			—		—			20,384			—			21,192
FDIC deposit insurance		—			—		—			45,355			—			45,355
Loss on early extinguishment of debt		8,000			—		—			528			—			8,528
Other real estate owned (OREO) expenses		—			—		—			8,651			—			8,651
Other operating expenses		(25,517	)		8,568		221			58,839			(1,097	)		41,014
Amortization of intangibles		—			—		—			4,510			—			4,510
Total operating expenses		8,005			8,883		237			575,885			(36,161	)		556,849
(Loss) income before income tax and equity in earnings of subsidiaries		(22,809	)		16,450		(14,528	)		250,128			703			229,944

106

Income tax expense (benefit)		3,137			4,462		(264	)		101,491		301			109,127
(Loss) income before equity in earnings of subsidiaries		(25,946	)		11,988		(14,264	)		148,637		402			120,817
Equity in undistributed earnings of subsidiaries		146,763			7,719		20,444			—		(174,926	)		—
NET INCOME	$	120,817		$	19,707	$	6,180		$	148,637	$	(174,524	)	$	120,817

107

Condensed Statement of Operations

(Unaudited)

	Quarter ended June 30, 2010
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
INTEREST INCOME:
Loans	$	2,141		$	—		$	—		$	420,789		$	(1,920	)	$	421,010
Money market investments		50			10			1			1,893			(61	)		1,893
Investment securities		6,274			8			80			62,401			(5,848	)		62,915
Trading account securities		—			—			—			6,599			—			6,599
Total interest income		8,465			18			81			491,682			(7,829	)		492,417
INTEREST EXPENSE:
Deposits		—			—			—			90,625			(10	)		90,615
Short-term borrowings		10			—			91			17,423			(1,972	)		15,552
Long-term debt		29,511			—			7,650			40,504			(6,010	)		71,655
Total interest expense		29,521			—			7,741			148,552			(7,992	)		177,822
Net interest (expense) income		(21,056	)		18			(7,660	)		343,130			163			314,595
Provision for loan losses		—			—			—			202,258			—			202,258
Net interest (expense) income after provision for loan losses		(21,056	)		18			(7,660	)		140,872			163			112,337
Service charges on deposit accounts		—			—			—			50,679			—			50,679
Other service fees		—			—			—			105,770			(2,045	)		103,725
Net gain on sale and valuation adjustments of investment securities		—			—			—			397			—			397
Trading account profit		—			—			—			2,464			—			2,464
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			—			5,078			—			5,078
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			(14,389	)		—			(14,389	)
FDIC loss share expense		—			—			—			(15,037	)		—			(15,037	)
Fair value change in equity appreciation instrument		—			—			—			24,394			—			24,394
Other operating (loss) income		(693	)		4,997			(248	)		38,534			(1,074	)		41,516
Total non-interest (loss) income		(693	)		4,997			(248	)		197,890			(3,119	)		198,827
OPERATING EXPENSES:
Personnel costs		6,346			120			—			131,876			(310	)		138,032
Net occupancy expenses		757			11			—			28,290			—			29,058
Equipment expenses		740			—			—			24,606			—			25,346
Other taxes		457			—			—			12,002			—			12,459
Professional fees		3,583			3			3			31,259			(623	)		34,225
Communications		112			5			5			11,220			—			11,342
Business promotion		269			—			—			9,935			—			10,204
FDIC deposit insurance		—			—			—			17,393			—			17,393
Loss on early extinguishment of debt		—			—			—			430			—			430
Other real estate owned (OREO) expenses		19			—			—			14,603			—			14,622
Other operating expenses		(12,151	)		(99	)		108			45,420			(428	)		32,850
Amortization of intangibles		—			—			—			2,455			—			2,455
Total operating expenses		132			40			116			329,489			(1,361	)		328,416
(Loss) income before income tax and equity in losses of subsidiaries		(21,881	)		4,975			(8,024	)		9,273			(1,595	)		(17,252	)

108

Income tax (benefit) expense		(1,616	)		1,791			—			27,095			(33	)		27,237
(Loss) income before equity in losses of subsidiaries		(20,265	)		3,184			(8,024	)		(17,822	)		(1,562	)		(44,489	)
Equity in undistributed losses of subsidiaries		(24,224	)		(66,736	)		(59,613	)		—			150,573			—
NET LOSS	$	(44,489	)	$	(63,552	)	$	(67,637	)	$	(17,822	)	$	149,011		$	(44,489	)

109

Condensed Statement of Operations

(Unaudited)

	Six months ended June 30, 2010
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
INTEREST AND DIVIDEND INCOME:
Dividend income from subsidiaries	$	87,400		$	7,500		$	—		$	—		$	(94,900	)	$	—
Loans		3,084			—			—			775,297			(2,722	)		775,659
Money market investments		50			222			1			2,935			(273	)		2,935
Investment securities		13,440			17			161			126,913			(12,690	)		127,841
Trading account securities		—			—			—			13,177			—			13,177
Total interest and dividend income		103,974			7,739			162			918,322			(110,585	)		919,612
INTEREST EXPENSE:
Deposits		—			—			—			183,811			(222	)		183,589
Short-term borrowings		38			—			122			33,409			(2,758	)		30,811
Long-term debt		59,746			—			15,325			59,659			(13,030	)		121,700
Total interest expense		59,784			—			15,447			276,879			(16,010	)		336,100
Net interest income (expense)		44,190			7,739			(15,285	)		641,443			(94,575	)		583,512
Provision for loan losses		—			—			—			442,458			—			442,458
Net interest income (expense) after provision for loan losses		44,190			7,739			(15,285	)		198,985			(94,575	)		141,054
Service charges on deposit accounts		—			—			—			101,257			—			101,257
Other service fees		—			—			—			207,648			(2,603	)		205,045
Net gain on sale and valuation adjustments of investment securities		—			—			—			478			—			478
Trading account profit		—			—			—			2,241			—			2,241
Net gain on sale of loans, including valuation adjustments on loans held-for-sale		—			—			—			10,146			—			10,146
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			(31,679	)		—			(31,679	)
FDIC loss share expense		—			—			—			(15,037	)		—			(15,037	)
Fair value change in equity appreciation instrument		—			—			—			24,394			—			24,394
Other operating income (loss)		1,216			11,561			(1,474	)		49,767			(1,222	)		59,848
Total non-interest income (loss)		1,216			11,561			(1,474	)		349,215			(3,825	)		356,693
OPERATING EXPENSES:
Personnel costs		12,533			219			—			246,611			(399	)		258,964
Net occupancy expenses		1,407			18			1			56,508			—			57,934
Equipment expenses		1,440			—			—			47,359			—			48,799
Other taxes		824			—			—			23,939			—			24,763
Professional fees		6,952			7			6			55,549			(1,240	)		61,274
Communications		233			11			5			21,865			—			22,114
Business promotion		442			—			—			18,057			—			18,499
FDIC deposit insurance		—			—			—			32,711			—			32,711
Loss on early extinguishment of debt		—			—			—			978			—			978
Other real estate owned (OREO) expenses		19			—			—			19,306			—			19,325
Other operating expenses		(23,067	)		(199	)		216			83,464			(950	)		59,464
Amortization of intangibles		—			—			—			4,504			—			4,504
Total operating expenses		783			56			228			610,851			(2,589	)		609,329

110

Income (loss) before income tax and equity in losses of subsidiaries		44,623			19,244			(16,987	)		(62,651	)		(95,811	)		(111,582	)
Income tax (benefit) expense		(1,639	)		1,801			—			17,618			182			17,962
Income (loss) before equity in losses of subsidiaries		46,262			17,443			(16,987	)		(80,269	)		(95,993	)		(129,544	)
Equity in undistributed losses of subsidiaries		(175,806	)		(176,118	)		(152,994	)		—			504,918			—
NET LOSS	$	(129,544	)	$	(158,675	)	$	(169,981	)	$	(80,269	)	$	408,925		$	(129,544	)

111

Condensed Consolidating Statement of Cash Flows (Unaudited)

	For the six months ended June 30, 2011
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net income	$	120,817		$	19,707		$	6,180		$	148,637		$	(174,524	)	$	120,817
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(146,763	)		(7,719	)		(20,444	)		—			174,926			—
Depreciation and amortization of premises and equipment		395			—			2			23,053			—			23,450
Provision for loan losses		—			—			—			219,636			—			219,636
Amortization of intangibles		—			—			—			4,510			—			4,510
Impairment losses on net assets to be disposed of		—			8,743			—			—			—			8,743
Fair value adjustments of mortgage servicing rights		—			—			—			16,249			—			16,249
Net amortization of premiums and deferred fees
(accretion of discounts)		12,015			—			122			(76,310	)		(325	)		(64,498	)
Net loss on sale and valuation adjustment of investment securities		—			—			—			90			—			90
Fair value change in equity appreciation instrument		—			—			—			(8,323	)		—			(8,323	)
FDIC loss share income		—			—			—			(54,705	)		—			(54,705	)
FDIC deposit insurance expense		—			—			—			45,355			—			45,355
Net gain on disposition of premises and equipment		(1	)		—			—			(1,991	)		—			(1,992	)
Net loss on sale of loans, including valuation adjustments on loans held for sale		—			—			—			5,538			—			5,538
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			19,302			—			19,302
(Earnings) losses from investments under the equity method		(12,619	)		(11,788	)		(1,388	)		—			26,013			218
Gain on sale of equity method investment		(5,493	)		(11,414	)		—			—			—			(16,907	)
Net disbursements on loans held-for-sale		—			—			—			(417,220	)		—			(417,220	)
Acquisitions of loans held-for-sale		—			—			—			(173,549	)		—			(173,549	)
Proceeds from sale of loans held-for-sale		—			—			—			65,667			—			65,667
Net decrease in trading securities		—			—			—			319,024			—			319,024
Net decrease (increase) in accrued income receivable		252			(9	)		—			8,499			(66	)		8,676
Net (increase) decrease in other assets		(2,003	)		6,743			1,201			7,103			(30,009	)		(16,965	)
Net (decrease) increase in interest payable		(3,467	)		—			459			1,993			66			(949	)
Deferred income taxes		4,198			1,356			—			15,900			301			21,755
Net decrease in pension and other postretirement benefit obligations		—			—			—			(123,084	)		—			(123,084	)
Net decrease in other liabilities		(54,791	)		(3,416	)		(2,334	)		(7,871	)		3,029			(65,383	)
Total adjustments		(208,277	)		(17,504	)		(22,382	)		(111,134	)		173,935			(185,362	)
Net cash (used in) provided by operating activities		(87,460	)		2,203			(16,202	)		37,503			(589	)		(64,545	)
Cash flows from investing activities:
Net increase in money market investments		(62	)		(5,267	)		(1	)		(404,519	)		5,251			(404,598	)
Purchases of investment securities:
Available-for-sale		—			—			—			(856,543	)		—			(856,543	)
Held-to-maturity		(37,093	)		—			—			(27,265	)		—			(64,358	)
Other		—			—			—			(69,504	)		—			(69,504	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			—			707,567			—			707,567
Held-to-maturity		50,613			—			—			1,460			—			52,073
Other		—			—			—			56,162			—			56,162
Proceeds from sale of investment securities available for sale		—			—			—			19,143			—			19,143
Proceeds from sale of other investment securities		—			—			—			2,294			—			2,294
Net repayments on loans		184,638			193			—			775,188			(180,413	)		779,606
Proceeds from sale of loans		—			—			—			225,698			—			225,698
Acquisition of loan portfolios		—			—			—			(744,390	)		—			(744,390	)
Net proceeds from sale of equity method investments		(10,690	)		42,193			—			—			—			31,503
Capital contribution to subsidiary		—			(37,000	)		—			—			37,000			—
Mortgage servicing rights purchased		—			—			—			(860	)		—			(860	)
Acquisition of premises and equipment		(316	)		—			—			(25,232	)		—			(25,548	)
Proceeds from sale of premises and equipment		11			—			—			9,836			—			9,847
Proceeds from sale of foreclosed assets		—			—			—			94,759			—			94,759
Net cash provided by (used in) investing activities		187,101			119			(1	)		(236,206	)		(138,162	)		(187,149	)

112

Cash flows from financing activities:
Net increase in deposits		—			—			—			1,204,005			(5,753	)		1,198,252
Net increase in federal funds purchased and assets sold under agreements to repurchase		—			—			—			157,772			—			157,772
Net decrease in other short-term borrowings		—			—			(19,100	)		(371,820	)		178,000			(212,920	)
Payments of notes payable		(100,000	)		—			(3,000	)		(1,074,306	)		—			(1,177,306	)
Proceeds from issuance of notes payable		—			—			—			419,500			—			419,500
Dividends paid		(1,861	)		—			—			—			—			(1,861	)
Proceeds from issuance of common stock		3,917			—			—			—			—			3,917
Treasury stock acquired		(68	)		—			—			—			—			(68	)
Return of capital		1,514			(1,514	)		—			—			—			—
Capital contribution from parent		—			—			37,000			—			(37,000	)		—
Net cash (used in) provided by financing activities		(96,498	)		(1,514	)		14,900			335,151			135,247			387,286
Net increase (decrease) in cash and due from banks		3,143			808			(1,303	)		136,448			(3,504	)		135,592
Cash and due from banks at beginning of period		1,638			618			1,576			451,723			(3,182	)		452,373
Cash and due from banks at end of period	$	4,781		$	1,426		$	273		$	588,171		$	(6,686	)	$	587,965

113

Condensed Consolidating Statement of Cash Flows (Unaudited)

	For the six months ended June 30, 2010
(In thousands)	Popular, Inc. Holding Co.			PIBI Holding Co.			PNA Holding Co.			All other subsidiaries and eliminations			Elimination entries			Popular, Inc. Consolidated
Cash flows from operating activities:
Net loss	$	(129,544	)	$	(158,675	)	$	(169,981	)	$	(80,269	)	$	408,925		$	(129,544	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Equity in undistributed losses of subsidiaries		175,806			176,118			152,994			—			(504,918	)		—
Depreciation and amortization of premises and equipment		389			—			2			30,368			—			30,759
Provision for loan losses		—			—			—			442,458			—			442,458
Amortization of intangibles		—			—			—			4,504			—			4,504
Fair value adjustments of mortgage servicing rights		—			—			—			9,577			—			9,577
Net amortization of premiums and deferred fees (accretion of discounts)		10,216			—			138			(62,148	)		(325	)		(52,119	)
Net gain on sale and valuation adjustment of investment securities		—			—			—			(478	)		—			(478	)
Fair value change of equity appreciation instrument		—			—			—			(24,394	)		—			(24,394	)
FDIC loss share expense		—			—			—			15,037			—			15,037
FDIC deposit insurance expense		—			—			—			32,711			—			32,711
Net loss (gain) on disposition of premises and equipment		23			—			—			(2,094	)		—			(2,071	)
Net gain on sale of loans, including valuation adjustments on loans held for sale		—			—			—			(10,146	)		—			(10,146	)
Adjustments (expense) to indemnity reserves on loans sold		—			—			—			31,679			—			31,679
(Earnings) losses from investments under the equity method		(1,216	)		(11,561	)		1,474			(2,355	)		(855	)		(14,513	)
Net disbursements on loans held-for-sale		—			—			—			(312,489	)		—			(312,489	)
Acquisitions of loans held-for-sale		—			—			—			(133,798	)		—			(133,798	)
Proceeds from sale of loans held-for-sale		—			—			—			35,867			—			35,867
Net decrease in trading securities		—			—			—			396,940			—			396,940
Net (increase) decrease in accrued income receivable		(11	)		122			21			10,712			(115	)		10,729
Net (increase) decrease in other assets		(8,995	)		5,602			1,703			9,487			(9,143	)		(1,346	)
Net increase (decrease) in interest payable		522			—			(54	)		(18,149	)		115			(17,566	)
Deferred income taxes		(222	)		—			—			(8,462	)		181			(8,503	)
Net increase in pension and other postretirement benefit obligations		—			—			—			1,627			—			1,627
Net (decrease) increase in other liabilities		(7,234	)		1,798			(1,539	)		(14,729	)		9,676			(12,028	)
Total adjustments		169,278			172,079			154,739			431,725			(505,384	)		422,437
Net cash provided by (used in) operating activities		39,734			13,404			(15,242	)		351,456			(96,459	)		292,893
Cash flows from investing activities:
Net decrease (increase) in money market investments		—			50,241			(61	)		(1,344,605	)		(50,189	)		(1,344,614	)
Purchases of investment securities:
Available-for-sale		—			—			—			(542,506	)		—			(542,506	)
Held-to-maturity		(26,927	)		—			—			(10,204	)		—			(37,131	)
Other		—			—			—			(13,076	)		—			(13,076	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		—			—			—			818,380			—			818,380
Held-to-maturity		86,928			250			—			13,538			(60,000	)		40,716
Other		—			—			—			83,272			—			83,272
Proceeds from sale of investment securities available for sale		—			—			—			19,484			—			19,484
Net repayments on loans		(257,000	)		—			—			1,047,971			233,875			1,024,846
Proceeds from sale of loans		—			—			—			10,878			—			10,878
Acquisition of loan portfolios		—			—			—			(87,471	)		—			(87,471	)
Capital contribution to subsidiary		(845,000	)		(245,000	)		(245,000	)		—			1,335,000			—
Cash received from acquisitions		—			—			—			261,311			—			261,311
Mortgage servicing rights purchased		—			—			—			(364	)		—			(364	)
Acquisition of premises and equipment		(826	)		—			—			(26,335	)		—			(27,161	)
Proceeds from sale of premises and equipment		156			—			—			9,470			—			9,626
Proceeds from sale of foreclosed assets		74			—			—			68,984			—			69,058
Net cash (used in) provided by investing activities		(1,042,595	)		(194,509	)		(245,061	)		308,727			1,458,686			285,248

114

Cash flows from financing activities:
Net decrease in deposits		—			—			—			(1,252,761	)		50,542			(1,202,219	)
Net decrease in federal funds purchased and assets sold under agreements to repurchase		—			—			—			(325,596	)		—			(325,596	)
Net (decrease) increase in other short-term borrowings		(22,725	)		—			19,300			233,237			(235,875	)		(6,063	)
Payments of notes payable		(75,000	)		—			(4,000	)		(172,780	)		62,000			(189,780	)
Proceeds from issuance of notes payable		—			—			—			111,101			—			111,101
Dividends paid to parent company		—			(63,900	)		—			(31,000	)		94,900			—
Net proceeds from issuance of depository shares		1,100,740			—			—			—			1,618			1,102,358
Treasury stock acquired		(503	)		—			—			—			—			(503	)
Capital contribution from parent		—			245,000			245,000			845,000			(1,335,000	)		—
Net cash provided by (used in) by financing activities		1,002,512			181,100			260,300			(592,799	)		(1,361,815	)		(510,702	)
Net (decrease) increase in cash and due from banks		(349	)		(5	)		(3	)		67,384			412			67,439
Cash and due from banks at beginning of period		1,174			300			738			677,606			(2,488	)		677,330
Cash and due from banks at end of period	$	825		$	295		$	735		$	744,990		$	(2,076	)	$	744,769

115

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the continental United States, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments. The Corporation has a 49% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of Popular’s system infrastructures and transaction processing businesses.

OVERVIEW

The Corporation reported net income of $110.7 million for the quarter ended June 30, 2011, compared with a net loss of $44.5 million for the quarter ended June 30, 2010. Pre-tax income for the quarter ended June 30, 2011 amounted to $72.6 million, compared with a pre-tax loss of $17.3 million for the quarter ended June 30, 2010.

For the six months ended June 30, 2011, the Corporation’s net income and pre-tax income amounted to $120.8 million and $229.9 million, respectively, compared with a net loss and pre-tax loss of $129.5 million and $111.6 million, respectively, for the same period in 2010.

Main events for the quarter and six months ended June 30, 2011

Income taxes

• The results for the second quarter of 2011 reflect a tax benefit of $59.6 million related to the timing of loan charge-offs for tax purposes. In May 2011, the Puerto Rico Department of the Treasury (the “P.R. Treasury”) issued a private ruling to the Corporation (the “Ruling”) establishing the criteria to determine when a charge-off for accounting and financial reporting purposes should be reported as a deduction for tax purposes. On June 30, 2011, the P.R. Treasury and the Corporation signed a closing agreement in which both parties agreed that for tax purposes the deductions related to certain charge-offs recorded on the financial statements of the Corporation for the years 2009 and 2010 will be deferred until 2013 through 2016. As a result of the agreement, the Corporation made a payment of $89.4 million to the P.R. Treasury and recorded a tax benefit on its financial statements of $143 million, or $53.6 million net of the payment made to the P.R. Treasury, resulting from the recognition of certain tax benefits not previously recorded during years 2009 (the benefit of reduced tax rates for capital gains) and 2010 (the benefit of exempt income) that were previously unavailable to the Corporation as a result of being in a loss position for tax purposes in such years. Also, the Corporation recorded a tax benefit of $6.0 million related to the tax benefit of the exempt income for the first quarter of 2011. The effective tax rate for the Corporation’s Puerto Rico banking operations for 2011 is estimated at 22%.

• On January 31, 2011, the Governor of Puerto Rico signed into law a new Internal Revenue Code for Puerto Rico (the “2011 Tax Code”), which resulted in a reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense of $103.3 million due to a reduction in the marginal corporate income tax rate. Under the provisions of the 2011 Tax Code, the maximum marginal corporate income tax rate is 30% for years commenced after December 31, 2010. Prior to the 2011 Tax Code, the maximum marginal corporate income tax rate in Puerto Rico was 39%, which had increased to 40.95% due to a temporary 5% surtax approved in March 2009 for years

116

beginning on January 1, 2009 through December 31, 2011. The 2011 Tax Code, however, eliminated the special 5% surtax on corporations for tax year 2011. Under the 2011 Tax Code, the Corporation has an irrevocable one-time election to defer the application of the 2011 Tax Code for five years. This election must be made with the filing of the 2011 income tax return.

Westernbank loans

• The performance of the covered loan portfolio from the Westernbank transaction continues to exceed management’s expectations and has elevated the Corporation’s revenue-generating capacity at a time of limited loan demand. During the second quarter of 2011, the Corporation updated the cash flow estimates on the Westernbank acquired covered loan portfolio to reflect the current and expected credit performance of the portfolio. Management’s loan review during the quarter ended June 30, 2011 of the covered loan portfolio reflected that overall expected credit losses declined versus previous estimates. However, certain Westernbank loans in some of the loan pools did show increased expected losses, and the provision for loan losses was increased to reflect this increase in expected losses. During the quarter and six months ended June 30, 2011, the Corporation recognized $48.6 million and $64.2 million, respectively, in provision for loan losses on covered loans related to certain loan relationships. The negative effect of the provision to the Corporation’s results of operations before tax is approximately 20% of the covered loans related provision since the loss sharing agreement covers 80% of the losses and is included as part of FDIC loss share income in the statement of operations. Interest income derived from covered loans for the quarter and six months ended June 30, 2011 amounted to $115.9 million and $218.4 million, respectively, compared with $76.6 million for the quarter and six months ended June 30, 2010. The interest yield on covered loans was 9.91% for the quarter ended June 30, 2011, compared with 9.07% for the same quarter in the previous year. For the six months ended June 30, 2011, the yield on covered loans was 9.26% compared with 9.06% for the same period in 2010. Refer to Note 9 to the consolidated financial statements for a table presenting the changes in the carrying amount and the accretable yield of the covered loans accounted pursuant to ASC 310-30. The accretable yield will benefit prospectively from higher expected cash flows as credit losses are currently expected to be lower than initially estimated and loan defaults are expected to occur at a slower pace than originally projected, thus, producing higher interest cash inflows.

Assets subject to loss sharing agreements with the FDIC, including loans and other real estate owned, are identified as “covered” on the consolidated statements of condition and applicable notes to the consolidated financial statements. Loans acquired in the Westernbank FDIC-assisted transaction, except for credit cards, and other real estate owned are considered “covered” because the Corporation will be reimbursed for 80% of any future losses on these assets subject to the terms of the FDIC loss sharing agreements.

Loan sales and purchases

• In the first quarter of 2011, the Corporation completed the sale of $457 million (legal balance) in U.S. non-conventional residential mortgage loans by Banco Popular North America that were reclassified to loans held-for-sale during the fourth quarter of 2010. This sale had a positive impact of approximately $16.4 million to the results of operations for the six months ended June 30, 2011, which included a gain on sale of loans of $2.6 million and a reduction of $13.8 million to the original write-down booked as part of the allowance for loan losses as a result of higher than anticipated pricing.

The Corporation continues to hold the construction and commercial loans from the BPPR reportable segment that were reclassified to held-for-sale in December 2010. Management continues to pursue transactions to sell these portfolios, which amounted to $399 million at June 30, 2011.

• The Corporation continues to seek additional opportunities to acquire interest earning assets with appropriate risk profiles. During the second quarter of 2011, Popular completed its second bulk purchase of residential mortgage loans in the last six months, adding an additional $282 million in performing mortgages loans. The purchased loans, including the $236 million acquired in the first quarter, have an average FICO score of 718 and a loan-to-value (“LTV”) of 81%.

117

Other transactions for the six months ended June 30, 2011

• During 2011, the Corporation completed the sale of its equity investment in the processing business of Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) with a positive impact in earnings of $16.7 million, net of tax, for the six months ended June 30, 2011. The Corporation’s investment in CONTADO, accounted for under the equity method, amounted to $16 million at December 31, 2010.

• During the first quarter of 2011, the Corporation incurred prepayment penalties of $8.0 million on the early cancellation of $100 million in medium-term notes. Furthermore, in the second quarter of 2011, Popular North America, Inc. (“PNA”), the parent holding company of all of the Corporation’s U.S. mainland operations, exchanged $233.2 million in aggregate principal amount of the $275 million outstanding of 6.85% Senior Notes due 2012 for new notes, in order to extend their maturity and further improve the Corporation’s liquidity position.

• During the six months ended June 30, 2011, the Corporation recognized impairment losses of $8.7 million related to the Corporation’s full write-off of its investment in Tarjetas y Transacciones en Red Tranred, C.A. (“TRANRED”), the Corporation’s Venezuela processing subsidiary, as the Corporation has decided to wind down these operations.

The discussion that follows provides highlights of the Corporation’s results of operations for the quarter ended June 30, 2011 compared to the results of operations for the same quarter in 2010. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity. Table A provides selected financial data and performance indicators for the quarters ended June 30, 2011 and 2010.

Financial highlights:

• Net interest income for the second quarter of 2011 increased by $61.4 million, on a taxable equivalent basis, compared with the second quarter of 2010. The net interest margin on a taxable equivalent basis increased from 3.77% for the quarter ended June 30, 2010 to 4.72% for the quarter ended June 30, 2011. Covered loans, which on average approximated $4.7 billion for the quarter ended June 30, 2011 contributed with interest income of $115.9 million for the quarter, compared with $76.6 million for the second quarter of 2010. The improvement in the net interest margin was mainly influenced by the yield contribution of the covered loans accompanied with a reduction in the cost of deposits. The favorable variance from the acquired covered loans was partially offset by a decline in the average volume of non-covered loans, principally in the commercial and construction loan portfolios. The reduction in the average balance of the note issued to the FDIC, which carries a 2.50% rate, also contributed to a reduction in interest expense. Also, there was a decrease in investment securities. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs.

• The provision for loan losses for the quarter ended June 30, 2011 decreased by $57.9 million compared with the same quarter in the previous year. The lower provision for loan losses was mainly the result of lower provision required for the non-covered commercial, construction and mortgage loan portfolios, driven principally by: (i) the transfer during the fourth quarter of 2010 of $1.0 billion of commercial, construction and mortgage loans, primarily non-accruing loans, from the held-in-portfolio to held-for-sale category, and (ii) the downsizing of other portfolio segments of the Corporation, such as the legacy portfolio of the business lines exited at the BPNA reportable segment. This was offset by $48.6 million in provision for loan losses recorded during the quarter on the covered loans. Refer to the Credit Risk Management and Loan Quality section of this MD&A for information on the allowance for loan losses, non-performing assets, troubled debt restructurings, net charge-offs and credit quality metrics.

• Non-interest income for the quarter ended June 30, 2011 decreased by $74.7 million, compared with the quarter ended June 30, 2010, mainly due to lower impact of the fair value changes in the FDIC equity appreciation instrument that expired in May 2011 without further exercise, lower other service fees, and the impact of lower of cost or fair value adjustments on loans held-for-sale, among other factors. These unfavorable variances were partially offset by higher FDIC loss share income. The variance in other service fees was principally because of lower processing, debit and credit card fees due to the sale of the processing and merchant banking business on September 30, 2010. Refer to the Non-Interest Income section of this MD&A for detailed information.

118

• Operating expenses for the quarter ended June 30, 2011 decreased by $46.6 million compared with the same quarter of the previous year mainly due to lower personnel costs, equipment expenses, other real estate owned expenses and credit card processing, volume and interchange expenses, partially offset by higher professional fees, principally related to the sale of the processing and merchant banking business, and FDIC deposit insurance costs. The reduction in personnel costs was principally due to lower headcount due to the sale of the processing and merchant banking business in the third quarter of 2010. Refer to the Operating Expenses section of this MD&A for additional explanations.

• Income tax benefit amounted to $38.1 million for the quarter ended June 30, 2011, compared with an income tax expense of $27.2 million for the same quarter of 2010. The decrease in income tax expense was primarily due to a tax benefit of $59.6 million recorded in June 2011 which was previously explained in this MD&A and in Note 28 to the consolidated financial statements. The Corporation also benefited in the second quarter of 2011 from a lower marginal corporate income tax rate due to the change in the Puerto Rico tax code.

• Total assets amounted to $39.0 billion at June 30, 2011, compared with $38.7 billion at December 31, 2010. Total loans, including held-for-sale, declined $676 million, principally in commercial loans and mortgage loans held-for-sale, partially offset by higher volume of mortgage loans held-in-portfolio due to the loan purchases of performing mortgage loans previously described. The reduction in commercial loans was principally attributable to portfolio run-off and charge-offs, combined with soft loan origination volumes due to the weak Puerto Rico economy.

• The allowance for loan losses on the non-covered loan portfolio decreased by $104 million from December 31, 2010 to June 30, 2011. It represented 3.34% of non-covered loans held-in-portfolio at June 30, 2011, compared with 3.83% at December 31, 2010. Non-covered loans refer to loans not covered by the FDIC loss sharing agreements. This decrease includes a reduction in the Corporation’s general allowance component of approximately $110 million, offset by an increase in the specific allowance component of approximately $6 million. The reduction in the general component of the allowance for loan losses for the quarter ended June 30, 2011, was primarily attributable to lower portfolio balances, principally commercial and construction loans, and reduced level of net charge-offs. The Corporation’s non-performing loans held-in-portfolio (non-covered) increased by $81 million from December 31, 2010 to June 30, 2011, reaching $1.7 billion or 8.0% of total non-covered loans held-in-portfolio at June 30, 2011. The increase in non-performing loans held-in-portfolio was driven by the commercial and residential mortgage loan portfolios of the BPPR reportable segment. Weak economic conditions in Puerto Rico have continued to adversely impact the commercial and residential mortgage loan delinquency rates. Non-performing construction loans within the BPPR reportable segment decreased as most of the portfolio is now classified as held-for-sale and a lower level of problem loans remaining as held-in-portfolio. Consumer and lease financing loans in non-performing status in the BPPR reportable segment continue to reflect signs of a stable credit performance. Non-performing loans in the BPNA reportable segment decreased from December 31, 2010 to June 30, 2011. Most loan portfolios within the BPNA reportable segment continue to show signs of credit stabilization. The Corporation’s allowance for loan losses at June 30, 2011 includes $57 million related to the covered loans. Refer to the Provision for Loan Losses and Credit Risk Management and Loan Quality sections of this MD&A for quantitative and qualitative credit information on the loan portfolios.

• Refer to Table I in the Financial Condition section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. Deposits were $28.0 billion at June 30, 2011, compared with $26.8 billion at December 31, 2010. The increase in deposits was mostly associated with the deposits in trust, public funds and brokered certificates of deposit, partially offset by lower volume of retail certificates of deposit. The Corporation’s borrowings amounted to $6.1 billion at June 30, 2011, compared with $6.9 billion at December 31, 2010. The decrease in borrowings was mostly related to a reduction of $975 million in the note issued to the FDIC as part of the Westernbank FDIC-assisted transaction. The Corporation has prepaid a significant amount of the note with proceeds from maturities and pay downs of investment securities.

• Stockholders’ equity amounted to $4.0 billion at June 30, 2011, compared with $3.8 billion at December 31, 2010. The increase in stockholders’ equity was mostly due to earnings for the period.

• The Corporation continues to be well-capitalized. The Corporation’s regulatory capital ratios improved from December 31, 2010 to June 30, 2011. The Tier 1 capital and Tier 1 common equity to risk-weighted assets stood at 15.22% and 11.53%, respectively, at June 30, 2011, compared with 14.54% and 10.95%, respectively, at December 31, 2010. The

119

improvement in the Corporation’s regulatory capital ratios from December 31, 2010 to June 30, 2011 was principally due to: (i) balance sheet composition including the increase in lower risk-assets such as trading and investment securities and mortgage loans; and (ii) internal capital generation.

The Corporation will continue to manage credit costs and pursue transactions for its held-for-sale portfolios. The Corporation continues to seek opportunities to broaden its business through asset acquisitions that can be absorbed by its existing business platforms without undue added risk.

In August 2011, the Corporation announced it entered into a definitive asset purchase agreement with Citibank, N.A., to acquire the American Airlines co-branded credit card portfolio in Puerto Rico and the U.S. Virgin Islands, which represents approximately $130 million in balances and approximately 30,000 active accounts. Also, in July 2011, Popular announced that it entered into a definitive asset purchase agreement with Wells Fargo Advisors, LLC for the acquisition of certain assets and assumption of certain liabilities of Wells Fargo Advisors’ Puerto Rico branch. This transaction gives the opportunity to the Corporation to transition approximately 1,750 accounts with assets under management of approximately $500 million to Popular Securities. Both transactions closed during the third quarter of 2011.

Reflecting the diversity of BPNA’s business and to strengthen the commitment to serve all members of its community, the Corporation will continue rolling out a rebranding campaign. Pursuant to this campaign, which began in the Illinois region and will continue in the regions of California and Florida, BPNA will operate under the name “Popular Community Bank”.

As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation’s business contained in Item 1 of the Corporation’s 2010 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.

Certain Regulatory Matters

On July 25, 2011, the Corporation and BPPR entered into a Memorandum of Understanding (the “Corporation/BPPR MOU”) with the Federal Reserve Bank of New York (the “FRB-NY”) and the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (the “Office of the Commissioner”). On July 25, 2011, BPNA entered into a Memorandum of Understanding (the “BPNA MOU” and collectively with the Corporation/BPPR MOU, the “MOUs”) with the FRB-NY and the New York State Banking Department (the “Banking Department”). The MOUs provide, among other things, for the Corporation and BPPR to take steps to improve their credit risk management practices, for BPNA to take steps to improve its asset quality, and for the Corporation, BPPR, and BPNA to develop strategic plans to improve earnings and to develop capital plans. The Corporation does not expect the capital plans to require the Corporation to maintain capital ratios in excess of those it currently has achieved. The MOUs require BPPR to obtain approval from the Office of the Commissioner and the Federal Reserve System prior to declaring or paying dividends or incurring, increasing or guaranteeing debt; require BPNA to obtain approval from the Banking Department and the Federal Reserve System prior to declaring or paying dividends; and require the Corporation to obtain approval from the Federal Reserve System prior to declaring or paying dividends, incurring, increasing or guaranteeing debt, or making any distributions on its Trust Preferred Securities or subordinated debt.

120

In connection with the resumption of payment of monthly dividends on its Preferred Stock, in December 2010, the Corporation committed to the Federal Reserve System to fund the dividend payments out of newly-issued Common Stock issued to employees under the Corporation’s existing savings and investment plans or, if such issuances are insufficient, other common equity capital raised by the Corporation. It is currently anticipated that the Corporation will receive approval from the Federal Reserve System to make dividend payments on its Preferred Stock subject to the same commitments in the future, but there can be no assurance that such approvals will continue to be received. It is anticipated that sufficient Common Stock will be issued under those plans to cover the dividend payments.

Subsequent to entering into the MOU, the Corporation received approval from the Federal Reserve System to pay regularly scheduled dividends on its Preferred Stock and distributions on its Trust Preferred Securities through September 30, 2011. The Corporation has no current intention to seek approval to resume dividend payments on its Common Stock.

121

TABLE A

Financial Highlights

Financial Condition Highlights	At June 30,							Average for the six months
(In thousands)	2011		2010		Variance			2011		2010		Variance
Money market investments	$	1,383,892	$	2,444,209	$	(1,060,317	)	$	1,159,477	$	1,557,657	$	(398,180	)
Investment and trading securities		6,479,803		7,244,708		(764,905	)		6,383,995		7,186,905		(802,910	)
Loans		25,783,315		27,621,821		(1,838,506	)		25,887,785		24,713,009		1,174,776
Earning assets		33,647,010		37,310,738		(3,663,728	)		33,431,257		33,457,571		(26,314	)
Total assets		39,013,342		42,347,839		(3,334,497	)		38,682,630		36,853,238		1,829,392
Deposits*		27,960,429		27,113,573		846,856			27,462,905		26,165,729		1,297,176
Borrowings		6,144,910		10,546,734		(4,401,824	)		6,615,143		6,910,291		(295,148	)
Stockholders’ equity		3,964,068		3,614,787		349,281			3,655,074		2,822,710		832,364

* Average deposits exclude average derivatives.

Operating Highlights	Second Quarter									Six months ended June 30,
(In thousands, except per share information)	2011			2010			Variance			2011		2010			Variance
Net interest income	$	374,542		$	314,595		$	59,947		$	717,901	$	583,512		$	134,389
Provision for loan losses		144,317			202,258			(57,941	)		219,636		442,458			(222,822	)
Non-interest income		124,160			198,827			(74,667	)		288,528		356,693			(68,165	)
Operating expenses		281,800			328,416			(46,616	)		556,849		609,329			(52,480	)
Income (loss) before income tax		72,585			(17,252	)		89,837			229,944		(111,582	)		341,526
Income tax (benefit) expense		(38,100	)		27,237			(65,337	)		109,127		17,962			91,165
Net income (loss)	$	110,685		$	(44,489	)	$	155,174		$	120,817	$	(129,544	)	$	250,361
Net income (loss) applicable to common stock	$	109,754		$	(236,156	)	$	345,910		$	118,956	$	(321,211	)	$	440,167
Net income (loss) per common share - basic and diluted	$	0.11		$	(0.28	)	$	0.39		$	0.12	$	(0.43	)	$	0.55

	Second Quarter						Six months ended June 30,
Selected Statistical Information	2011			2010			2011			2010
Common Stock Data
Market price
High	$	3.24		$	4.02		$	3.53		$	4.02
Low		2.63			2.64			2.63			1.75
End		2.76			2.68			2.76			2.68
Book value per common share at period end		3.82			3.49			3.82			3.49
Profitability Ratios
Return on assets		1.15	%		(0.45	)%		0.63	%		(0.71	)%
Return on common equity		12.02			(6.17	)		6.66			(9.92	)
Net interest spread (taxable equivalent)		4.49			3.47			4.20			3.38
Net interest margin (taxable equivalent)		4.72			3.77			4.45			3.73
Capitalization Ratios
Average equity to average assets		9.60	%		8.10	%		9.45	%		7.66	%
Tier I capital to risk-weighted assets		15.22			12.72			15.22			12.72
Total capital to risk-weighted assets		16.50			14.01			16.50			14.01
Leverage ratio		10.19			8.90			10.19			8.90

122

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

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

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

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

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

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

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

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

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

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

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

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

123

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

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

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

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

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

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

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

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

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

124

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

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

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2010 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2010 Annual Report for a summary of the Corporation’s significant accounting policies.

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, is presented with its different components on Tables B and C for the quarter and six months ended June 30, 2011, as compared with the same periods in 2010, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include the investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies. Assets held by the Corporation’s international banking entities, which previously were tax exempt under Puerto Rico law, have a temporary 5% tax rate. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates at each quarter and period reported. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law.

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the quarter and six months ended June 30, 2011 included a favorable impact related to those items of $5.4 million and $10.5 million, respectively, compared to a favorable impact of $4.1 million and $8.0 million for the quarter and six months ended June 30, 2010, respectively. These figures exclude the discount accretion on covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30. The discount accretion on covered loans accounted for under ASC Subtopic 310-30 and 310-20 was $100.2 million and $9.1 million, respectively, for the quarter and $173.1 million and $33.6 million, respectively, for the six months ended June 30, 2011. The discount accretion on covered loans accounted for under ASC Subtopic 310-30 and 310-20 was $53.4 million and $19.5 million, respectively, for the quarter and six months ended June 30, 2010.

125

TABLE B

Analysis of Levels & Yields on a Taxable Equivalent Basis

Quarters ended June 30,

Average Volume									Average Yields / Costs										Interest							Variance Attributable to
2011			2010			Variance			2011			2010			Variance				2011		2010		Variance			Rate			Volume
($ in millions)																			(In thousands)
$	1,195		$	2,216		$	(1,021	)		0.31	%		0.34	%		(0.03	)%	Money market investments	$	926	$	1,894	$	(968	)	$	(264	)	$	(704	)
	5,659			6,688			(1,029	)		4.34			4.40			(0.06	)	Investment securities		61,418		73,500		(12,082	)		622			(12,704	)
	763			434			329			5.59			7.01			(1.42	)	Trading securities		10,641		7,584		3,057			(1,777	)		4,834
	7,617			9,338			(1,721	)		3.83			3.56			0.27		Total money market, investment and trading securities		72,985		82,978		(9,993	)		(1,419	)		(8,574	)
																		Loans:
	11,827			13,562			(1,735	)		4.93			4.94			(0.01	)	Commercial and construction		145,244		167,116		(21,872	)		(5,960	)		(15,912	)
	583			639			(56	)		8.85			8.68			0.17		Leasing		12,909		13,880		(971	)		266			(1,237	)
	5,124			4,588			536			6.79			6.01			0.78		Mortgage		86,962		68,964		17,998			9,446			8,552
	3,610			3,893			(283	)		10.26			10.39			(0.13	)	Consumer		92,343		100,858		(8,515	)		(2,028	)		(6,487	)
	21,144			22,682			(1,538	)		6.40			6.20			0.20		Sub-total loans		337,458		350,818		(13,360	)		1,724			(15,084	)
	4,686			3,385			1,301			9.91			9.07			0.84		Covered loans		115,897		76,613		39,284			7,666			31,618
	25,830			26,067			(237	)		7.03			6.57			0.46		Total loans		453,355		427,431		25,924			9,390			16,534
$	33,447		$	35,405		$	(1,958	)		6.31	%		5.78	%		0.53	%	Total earning assets	$	526,340	$	510,409	$	15,931		$	7,971		$	7,960
																		Interest bearing deposits:
$	5,353		$	5,194		$	159			0.63	%		0.80	%		(0.17	)%	NOW and money market*	$	8,371	$	10,338	$	(1,967	)	$	(2,177	)	$	210
	6,257			5,970			287			0.64			0.93			(0.29	)	Savings		10,012		13,850		(3,838	)		(4,567	)		729
	10,990			10,999			(9	)		1.91			2.42			(0.51	)	Time deposits		52,289		66,427		(14,138	)		(13,680	)		(458	)
	22,600			22,163			437			1.25			1.64			(0.39	)	Total deposits		70,672		90,615		(19,943	)		(20,424	)		481
	2,745			2,346			399			2.00			2.66			(0.66	)	Short-term borrowings		13,719		15,552		(1,833	)		(3,871	)		2,038
	3,741			6,379			(2,638	)		5.14			4.50			0.64		Medium and long-term debt		47,966		71,655		(23,689	)		1,283			(24,972	)
	29,086			30,888			(1,802	)		1.82			2.31			(0.49	)	Total interest bearing liabilities		132,357		177,822		(45,465	)		(23,012	)		(22,453	)
	5,044			4,620			424											Non-interest bearing demand deposits
	(683	)		(103	)		(580	)										Other sources of funds
$	33,447		$	35,405		$	(1,958	)		1.59	%		2.01	%		(0.42	)%	Total source of funds		132,357		177,822		(45,465	)		(23,012	)		(22,453	)
										4.72	%		3.77	%		0.95	%	Net interest margin
																		Net interest income on a taxable equivalent basis		393,983		332,587		61,396		$	30,983		$	30,413
										4.49	%		3.47	%		1.02	%	Net interest spread
																		Taxable equivalent adjustment		19,441		17,992		1,449
																		Net interest income	$	374,542	$	314,595	$	59,947

Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

* Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

126

Net interest income on a taxable equivalent basis for the quarter ended June 30, 2011 increased $61.4 million when compared with the same period in 2010. The increase in net interest margin, on a taxable equivalent basis, for the quarter ended June 30, 2011, compared with the same period in 2010, was driven mostly by:

• a decrease in deposit costs associated to both a low interest rate scenario and management actions to reduce deposit costs;

• improved yield on mortgage loans related to two large whole loan purchases by the BPPR reportable segment involving $518 million in performing mortgage loans during the first six months on 2011; and a

• higher yield on covered loans that resulted principally from higher accretion on loans accounted for under ASC Subtopic 310-30 by $46.8 million, partially offset by a reduction of $10.4 million on the discount accretion of covered loans accounted for under ASC Subtopic 310-20 due to their short-term nature. This impact is included in the line item “Covered loans” in Table B. The increase in the accretable yield for covered loans under ASC Subtopic 310-30 is due to one additional month in 2011 (acquisition was on April 30, 2010) and the impact of loan defaults coming in at a slower pace than originally projected, thus, producing higher interest income, and improved actual and expected cash flows on the majority of the loan pools to reflect improved expected credit performance of the portfolio.

All loan categories, except mortgage loans and covered loans, decreased in average volume for the quarter ended June 30, 2011 compared with the same quarter in 2010. The decline in the commercial and construction loan portfolios was principally due to loan repayments not being replaced with new loans at the same rate given the lower level of origination activity in the current economic environment, and the impact of loan charge-offs. The consumer loan portfolio shows a decrease due to the slowdown in the auto and consumer loan origination activity in Puerto Rico, and the run-off of E-LOAN’s home equity lines of credit (“HELOCs”) and closed-end second mortgages. On the positive side, covered loans acquired in the Westernbank FDIC-assisted transaction with an increase of $1.3 billion in average loan volume for the second quarter of 2011 as compared to the same period in 2010, mostly related to the timing of the acquisition, mitigated the decrease in the volume of earning assets. Covered loans contributed $115.9 million to the Corporation’s interest income during second quarter 2011, compared to $76.6 million in the same period of 2010. Also, the increase in mortgage loans positively impacted interest income with good quality assets. Investment securities decreased in average volume as a result of maturities and prepayments of mortgage-related investment securities, which funds were not reinvested due in part to deleveraging strategies, and to the sale of certain investment securities during the third quarter of 2010. The decrease was partially offset by the purchase of $753 million in investment securities by BPNA during the first quarter of 2011. The increase of $424 million in the average volume of demand deposits contributed to the improved net interest margin with no associated funding costs. Also, positively impacting net interest income is the prepayment of several high cost liabilities from July 2010 to June 2011 as part of the Corporation’s efforts to reduce funding costs, including $363 million in Federal Home Loan Bank advances and the early extinguishment of $100 million in medium-term notes. Also, there was a reduction of $2.0 billion in the average volume of the note issue to the FDIC which carries a 2.50% annual rate.

127

TABLE C

Analysis of Levels & Yields on a Taxable Equivalent Basis

Six months ended June 30,

Average Volume							Average Yields / Costs										Interest							Variance Attributable to
2011		2010		Variance			2011			2010			Variance				2011		2010		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	1,159	$	1,558	$	(399	)		0.33	%		0.38	%		(0.05	)%	Money market investments	$	1,873	$	2,936	$	(1,063	)	$	(319	)	$	(744	)
	5,661		6,744		(1,083	)		4.02			4.44			(0.42	)	Investment securities		113,874		149,674		(35,800	)		(11,610	)		(24,190	)
	723		443		280			5.63			6.96			(1.33	)	Trading securities		20,182		15,301		4,881			(3,353	)		8,234
	7,543		8,745		(1,202	)		3.61			3.84			(0.23	)	Total money market, investment and trading securities		135,929		167,911		(31,982	)		(15,282	)		(16,700	)
																Loans:
	11,973		13,854		(1,881	)		4.85			4.95			(0.10	)	Commercial and construction		287,733		340,158		(52,425	)		(17,486	)		(34,939	)
	587		648		(61	)		8.93			8.70			0.23		Leasing		26,228		28,199		(1,971	)		748			(2,719	)
	4,939		4,569		370			6.45			6.19			0.26		Mortgage		159,278		141,379		17,899			6,109			11,790
	3,639		3,940		(301	)		10.31			10.35			(0.04	)	Consumer		186,049		202,257		(16,208	)		(2,852	)		(13,356	)
	21,138		23,011		(1,873	)		6.28			6.23			0.05		Sub-total loans		659,288		711,993		(52,705	)		(13,481	)		(39,224	)
	4,750		1,702		3,048			9.26			9.06			0.20		Covered loans		218,445		76,613		141,832			838			140,994
	25,888		24,713		1,175			6.82			6.42			0.40		Total loans		877,733		788,606		89,127			(12,643	)		101,770
$	33,431	$	33,458	$	(27	)		6.10	%		5.75	%		0.35	%	Total earning assets	$	1,013,662	$	956,517	$	57,145		$	(27,925	)	$	85,070
																Interest bearing deposits:
$	5,166	$	5,003	$	163			0.67	%		0.83	%		(0.16	)%	NOW and money market*	$	17,286	$	20,581	$	(3,295	)	$	(3,759	)	$	464
	6,249		5,750		499			0.73			0.91			(0.18	)	Savings		22,570		25,976