The reason for the difference between the income tax (benefit) expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:

		Quarters ended
		June 30, 2013				June 30, 2012
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	35,135	39	%	$	(3,646)	30	%
Net benefit of net tax exempt interest income		(10,325)	(11)			(3,739)	31
Deferred tax asset valuation allowance		(8,312)	(9)			(48)	-
Non-deductible expenses		7,946	9			5,726	(47)
Difference in tax rates due to multiple jurisdictions		(3,201)	(4)			(1,149)	9
Adjustment in deferred tax due to change in tax rate		(215,600)	(239)			-	-
Effect of income subject to preferential tax rate^[1]		(47,322)	(53)			(73,298)	603
Others		4,299	5			(1,739)	14
Income tax (benefit) expense	$	(237,380)	(263)	%	$	(77,893)	640	%
[1] For 2012, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012.

		Six months ended
		June 30, 2013				June 30, 2012
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	(33,967)	39	%	$	15,734	30	%
Net benefit of net tax exempt interest income		(19,876)	23			(10,753)	(21)
Deferred tax asset valuation allowance		(11,737)	13			1,119	2
Non-deductible expenses		15,759	(18)			11,365	22
Difference in tax rates due to multiple jurisdictions		(6,950)	8			(4,356)	(8)
Adjustment in deferred tax due to change in tax rate		(197,467)	227			-	-
Effect of income subject to preferential tax rate^[1]		(45,313)	52			(74,269)	(142)
Others		5,294	(6)			(541)	(1)
Income tax (benefit) expense	$	(294,257)	338	%	$	(61,701)	(118)	%
[1] For 2012, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012.

The results for the second quarter of 2013 reflect a tax benefit of $215.6 million with a corresponding increase in the Corporation's net deferred tax asset as a result of the increase in the Puerto Rico marginal tax rate from 30% to 39%. On June 30, 2013, the Governor of Puerto Rico signed Act Number 40 which includes among the most significant changes to the Puerto Rico Internal Revenue Code an increase in the marginal tax rate from 30% to 39% effective for taxable years beginning after December 31, 2012.

During the second quarter of 2013 Popular, Inc. recognized a gain on the sale of a portion of Evertec's common stock as part of Evertec, Inc.'s initial public offering ('IPO”) which was taxable at a preferential tax rate according to Act Number 73 of May 28, 2008, known as “Economic Incentives Act for the Development of Puerto Rico”. This gain was offset by the loss generated on the bulk sale of non-performing mortgage loans. The results for the second quarter of 2012 reflect the tax benefit of $72.9 million related to the tax treatment of the loans acquired in the Westernbank FDIC-assisted transaction. In June 2012, the Puerto Rico Department of the Treasury and the Corporation entered into a Closing Agreement to clarify that those Acquired Loans are capital assets and any gain resulting from such loans would be taxed at the capital gain tax rate of 15% instead of the ordinary income tax rate.

The increase in income tax benefit for the six months ended June 30, 2013, compared to the same period of 2012 was mainly due to the recognition during the year 2013 of a tax benefit and a corresponding increase in the net deferred tax assets of the Puerto Rico operations as a result of the increase in the marginal tax rate from 30% to 39% as mention above. In addition, income tax benefit increase due to the loss generated on the Puerto Rico operations by the sale of non-performing assets that took place during the first and second quarter of 2013 net of the gain realized on the sale of Evertec's common stock.

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

(In thousands)			June 30, 2013		December 31, 2012
Deferred tax assets:
Tax credits available for carryforward		$	6,200	$	2,666
Net operating loss and other carryforward available			1,345,667		1,201,174
Postretirement and pension benefits			133,279		97,276
Deferred loan origination fees			7,740		6,579
Allowance for loan losses			721,114		592,664
Deferred gains			9,910		10,528
Accelerated depreciation			6,901		6,699
Intercompany deferred gains			3,326		3,891
Other temporary differences			39,576		31,864
	Total gross deferred tax assets		2,273,713		1,953,341
Deferred tax liabilities:
Differences between the assigned values and the tax basis of assets and liabilities
	recognized in purchase business combinations		38,737		37,281
Difference in outside basis between financial and tax reporting on sale of a business			2,795		6,400
FDIC-assisted transaction			72,537		53,351
Unrealized net gain on trading and available-for-sale securities			20,784		51,002
Deferred loan origination costs			-		3,459
Other temporary differences			10,402		10,142
	Total gross deferred tax liabilities		145,255		161,635
Valuation allowance			1,268,954		1,260,542
Net deferred tax asset		$	859,504	$	531,164

The net deferred tax asset shown in the table above at June 30, 2013 is reflected in the consolidated statements of financial condition as $864 million in net deferred tax assets in the “Other assets” caption (December 31, 2012 - $541 million) and $5 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2012 - $10 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.

At June 30, 2013, the Corporation's net deferred tax assets related to its Puerto Rico operations amounted to $888 million. The Corporation's Puerto Rico banking operation is in a cumulative loss position for the three-year period ended June 30, 2013 taking into account taxable income exclusive of reversing temporary differences (adjusted taxable income). This cumulative loss position was mainly due to the sale of assets, most of which were in non-performing status, comprised of commercial and construction loans and commercial and single family real estate owned generated during the first quarter of 2013 and mortgage loans generated during the second quarter of 2013. The Corporation weights all available positive and negative evidence to assess the realization of the deferred tax asset. Positive evidence assessed included (i) the Corporation's Puerto Rico banking operations very strong earnings history; (ii) consideration that the event causing the cumulative loss position is not a continuing condition of the operations; (iii) new legislation extending the period of carryover of net operating losses to twelve years for losses incurred during taxable years 2005 thru 2012 and ten years for losses incurred after 2012. Accordingly, there is enough positive evidence to outweigh the negative evidence of the cumulative loss. Based on this evidence, the Corporation has concluded that it is more-likely-than-not that such net deferred tax asset will be realized.

The Corporation's U.S. mainland operations are in a cumulative loss position for the three-year period ended June 30, 2013. 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, 2013, the Corporation recorded a valuation allowance of approximately $ 1.3 billion on the deferred tax assets of its U.S. operations (December 31, 2012 - $ 1.3 billion).

(In millions)		2013		2012
Balance at January 1	$	13.4	$	19.5
Additions for tax positions - January through March		0.2		0.7
Balance at March 31	$	13.6	$	20.2
Additions for tax positions - April through June		0.3		-
Reduction for tax positions - April through June		-		(0.2)
Reduction for tax positions taken in prior years - April through June		-		(0.7)
Balance at June 30	$	13.9	$	19.3

The accrued interest related to uncertain tax positions approximated $5.0 million at June 30, 2013 (December 31, 2012 - $4.3 million). Management determined that at June 30, 2013 and December 31, 2012, 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 $18.0 million at June 30, 2013 (December 31, 2012 - $16.9 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, 2013, the following years remain subject to examination in the U.S. Federal jurisdiction: 2009 and thereafter; and in the Puerto Rico jurisdiction, 2008 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $11 million.

		Quarters ended
		June 30, 2013				June 30, 2012
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	35,135	39	%	$	(3,646)	30	%
Net benefit of net tax exempt interest income		(10,325)	(11)			(3,739)	31
Deferred tax asset valuation allowance		(8,312)	(9)			(48)	-
Non-deductible expenses		7,946	9			5,726	(47)
Difference in tax rates due to multiple jurisdictions		(3,201)	(4)			(1,149)	9
Adjustment in deferred tax due to change in tax rate		(215,600)	(239)			-	-
Effect of income subject to preferential tax rate^[1]		(47,322)	(53)			(73,298)	603
Others		4,299	5			(1,739)	14
Income tax (benefit) expense	$	(237,380)	(263)	%	$	(77,893)	640	%
[1] For 2012, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012.

		Six months ended
		June 30, 2013				June 30, 2012
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	(33,967)	39	%	$	15,734	30	%
Net benefit of net tax exempt interest income		(19,876)	23			(10,753)	(21)
Deferred tax asset valuation allowance		(11,737)	13			1,119	2
Non-deductible expenses		15,759	(18)			11,365	22
Difference in tax rates due to multiple jurisdictions		(6,950)	8			(4,356)	(8)
Adjustment in deferred tax due to change in tax rate		(197,467)	227			-	-
Effect of income subject to preferential tax rate^[1]		(45,313)	52			(74,269)	(142)
Others		5,294	(6)			(541)	(1)
Income tax (benefit) expense	$	(294,257)	338	%	$	(61,701)	(118)	%
[1] For 2012, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2012.