Popular Inc Annual Report 2011

FY2011 Annual Report · Popular Inc
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A n n u a l   R e p o r t 2 01 1 I n f o r m e   A n u a l

contents/índice

1 

 Letter to Shareholders 

3 

Institutional Values 

5 

 Highlights, Key Facts 

& Figures 

6 

 A Legacy of Caring 

8 

 25-Year Historical Financial 

Summary

10   Corporate Information

21   Financial Review and 

Supplementary Information

11  Carta a los Accionistas 

13  Valores Institucionales 

15   Puntos Principales, 

Datos y Cifras Claves 

16   Un Legado de Solidaridad 

18   Resumen Financiero 

Histórico – 25 Años 

20  Información Corporativa

Popular, Inc. (NASDAQ:BPOP) is a full service ﬁ nancial provider based in Puerto Rico with operations in Puerto Rico and the United 
States. In Puerto Rico it is the leading banking institution by both assets and deposits, and ranks 36th in assets among U.S. banks. 
With 192 branches in Puerto Rico and the Virgin Islands, Popular offers retail and commercial banking services, as well as auto and 
equipment leasing and ﬁ nancing, mortgage loans, investment banking and broker-dealer services. In the United States, Popular has 
established a community-banking franchise providing a broad range of ﬁ nancial services and products with branches in New York, 
New Jersey, Illinois, Florida and California.

Popular, Inc. (NASDAQ: BPOP) es un proveedor ﬁ nanciero de servicio completo con sede en Puerto Rico y operaciones en Puerto 
Rico y los Estados Unidos. En Puerto Rico es la institución bancaria líder tanto en activos como en depósitos, y ocupa la posición 36 
entre los bancos en los Estados Unidos en términos de activos. Con 192 sucursales en Puerto Rico y las Islas Vírgenes, ofrece servicios 
bancarios a individuos y comercios, así como arrendamiento y ﬁ nanciamiento de autos y equipo, préstamos hipotecarios, banca de 
inversión y transacciones de corredores de valores. En los Estados Unidos, Popular ha establecido una franquicia bancaria de base 
comunitaria que provee una amplia gama de servicios y productos ﬁ nancieros, con sucursales en Nueva York, Nueva Jersey, Illinois, 
Florida y California.

P O P U L A R ,   I N C . 2 0 1 1   A N N U A L   R E P O R T

L E T T E R   TO

shareholders

D E A R   S H A R E H O L D E R S :

Popular, Inc. delivered a turnaround year 
in 2011. 

For the ﬁ rst time since 2006, we achieved 
operational proﬁ tability. Building on the 
steps taken in 2010, in 2011 we focused our 
e(cid:625) orts on reducing credit costs, identifying 
opportunities to acquire assets, increasing 
our e(cid:631)  ciency and further improving the 
performance of our operations in the United 
States. Fundamentally, we are a much tighter 
organization than just a few years ago, and 
one focused more than ever on the strong 
community banking roots at our core. 

Popular achieved net income of $151 million 
in 2011, compared to $137 million in the 
previous year. Gross revenues remained 
strong at $2.0 billion, while the provision 
for loan losses fell by $436 million. 

Net income at Banco Popular Puerto Rico 
(BPPR) totaled $231 million, compared to 
$47 million in 2010. Driving these improved 
results were a lower provision and higher 
net interest income from revenues related 
to the Westernbank portfolio and e(cid:625) orts to 
reduce deposit costs. Despite the deposit 
rate reductions throughout the year, attrition 
was minimal and concentrated in high-
cost products, mainly among customers 
who had a single relationship with the 
institution. That alone underscores the 
strength of our franchise in Puerto Rico.

Banco Popular North America (BPNA) 
reached $30 million in net income, compared 
to a net loss of $340 million in 2010, fueled 
in large part by a lower provision.

Our stock price has not been reﬂ ecting our 
progress in spite of the improvement in our 
ﬁ nancial results in 2011. Even though the entire 
banking segment is under pressure, we will 
continue to do everything possible – including 

building on our ﬁ nancial and operational 
momentum – to beneﬁ t our investors. 

C R E D I T   Q U A L I T Y

Credit quality remains the toughest challenge 
for most ﬁ nancial institutions, and Popular 
is no exception. While there is still much to 
be done, we made progress and were able to 
substantially reduce credit costs during 2011. 

Our 2011 net charge-o(cid:625) s reached $534 
million, less than half of the year-ago total. 
Driving this year-over-year reduction were 
improvements at both BPPR and BPNA. As 
a result of lower net charge-o(cid:625) s, our provision 
for non-covered loan losses totaled $430 
million in 2011, a considerable improvement 
over the $1.0 billion recorded in 2010. 

Notwithstanding the reduction in credit 
costs, non-performing loans held in portfolio 
excluding covered loans rose from $1.57 billion 
to $1.74 billion, driven by an increase at BPPR. 
In response, we intensiﬁ ed our e(cid:625) orts on 
the commercial and mortgage portfolios and 
began to see progress by the end of the year.

For the Puerto Rico commercial portfolio, 
we continued our aggressive collection 
and loss mitigation activities, segmenting 
the distressed portfolio and developing 
individual action plans for loans above a 
certain threshold. In the year’s last quarter, 
we saw a decline in non-performing inﬂ ows 
– suggesting that the level of commercial 
non-performing loans should begin to stabilize. 

As for mortgages in Puerto Rico, despite 
persistently high delinquency rates, losses 
have historically represented less than 1% 
of total loan balances. We have also seen 
signs of stabilization due to intensiﬁ ed loss 
mitigation e(cid:625) orts and a decrease in new 
delinquencies. Through a stronger in-house 
loss mitigation group, we increased the 

Richard L. Carrión
Chairman, President 
and Chief Executive Offi  cer

Gross revenues remained strong 

at $2.0 billion, while the provision 

for loan losses fell by $436 million. 

1

L E T T E R   TO

shareholders

In the United States, 

we expect our credit 

performance to keep 

advancing steadily, though at 

a slower pace than previous 

years due to the signiﬁ cant 

progress already made. In 

Puerto Rico, we believe 

that most of the economic 

contraction is over. 

2

alternatives o(cid:625) ered to clients by almost 30%. 
Even more signiﬁ cant, approximately 70% 
of all loans modiﬁ ed were performing after 
12 months, more than twice the U.S. average, 
reﬂ ecting our disciplined modiﬁ cation process 
where clients choose among alternatives 
that maximize their ability to meet their 
payments and remain in their homes.

In the United States, we continue to see 
positive results in credit quality due to our 
de-risking strategies launched in 2008. Net 
charge-o(cid:625) s, the provision for loan losses and 
non-performing loans declined substantially 
in 2011 by 57%, 78%, and 42%, respectively.

At both banks, we executed a series of asset 
sales in 2011 that improved our credit risk 
proﬁ le by lowering our exposure in certain 
sectors. In December of 2010, we reclassiﬁ ed 
approximately $1 billion in loans as held-
for-sale, $603 million of construction and 
commercial loans at BPPR and $396 million of 
non-conventional mortgage loans at BPNA. 
In both cases, the vast majority of these loans 
were non-accruing. In the ﬁ rst half of 2011, 
BPNA sold all reclassiﬁ ed non-conventional 
mortgage loans. In the third quarter, 
BPPR sold a portfolio of commercial and 
construction loans with an unpaid principal 
balance of $358 million and net book value 
of $128 million. As a result of these sales, as 
well as other smaller transactions completed 
during the year, loans held-for-sale declined 
from $894 million in 2010 to $363 million 
at 2011 year-end. We will pursue additional 
sales in 2012 to further reduce this balance. 

We are conﬁ dent that the credit situation will 
continue to improve. In the United States, 
we expect our credit performance to keep 
advancing steadily, though at a slower pace than 
previous years due to the signiﬁ cant progress 
already made. In Puerto Rico, we believe that 
most of the economic contraction is over, and 
recent trends point towards stabilization, if 
not improvement. Even with our optimism, 
we will stay focused on our e(cid:625) orts to manage 
credit quality to ensure continued progress.

A S S E T   VO L U M E

Economic conditions and the deleveraging 
strategies we have implemented in recent 
years have put pressure on our balance sheet 
in terms of asset generation. In Puerto Rico, 
the protracted recession and the consolidation 
process drove a signiﬁ cant decline in banking 
assets, from $101 billion at their peak in 
2005 to $72 billion in 2011. In the United 
States, despite a slight upturn in economic 
activity, loan demand remains limited while 
competition is ﬁ erce. To mitigate the impact 
of these factors on our balance sheet, we 
sought opportunities in 2011 similar to our 
Westernbank acquisition, though smaller in 
scale, in which we acquired low-risk assets 
that could be managed within our existing 
infrastructure at minimal marginal cost. 

In Puerto Rico, we purchased approximately 
$518 million in ﬁ xed-rate performing, ﬁ rst-lien 
mortgage loans with strong credits scores and 
low loan-to-values. We also acquired Citibank’s 
local AAdvantage credit card portfolio 
with a balance of $131 million, a transaction 
that has been accretive since inception. 

We believe there are other opportunities 
to add high-quality assets, both in Puerto 
Rico and the United States, and we will 
pursue them during the year to continue 
to enhance our earnings potential.

E F F I C I E N C Y 

Throughout 2011, we worked hard on 
improving organizational e(cid:631)  ciency and 
e(cid:625) ectiveness through a redesign of our critical 
processes and reduction of our expense base.

Early in the year, we launched a project 
to evaluate and redesign key processes to 
make them more e(cid:631)  cient. We began with 
the commercial and mortgage origination 
processes, and saw encouraging results 
in the pilot phase in terms of reduced 
processing times and higher levels of 
customer satisfaction. We are currently 
rolling out the revised processes to the entire 

commercial and mortgage origination groups 
and expect to see substantial improvements in 
these areas. We will follow a similar approach 
in other areas, prioritizing processes and 
assigning expert resources to evaluate them 
and redesign them, if necessary. In view of the 
long-range nature and upside impact of these 
e(cid:625) orts, we created the Business and Process 
Improvement O(cid:631)  ce at a corporate level, with 
the mandate of overseeing current and future 
process redesign and e(cid:631)  ciency initiatives.

Also, in 2011, we took several steps to reduce 
expenses. At the end of the year, we announced 
a voluntary retirement window. A total of 369 
employees, or 39% of the eligible population, 
elected to exercise this option. These were 
experienced colleagues who dedicated many 
years to our organization and made important 
contributions to our growth and success. We thank 
them for their commitment and wish them all the 
best. We have put in place robust plans to ensure 
a smooth transition. These voluntary retirements 
resulted in a one-time expense of $15.6 million, 
but are expected to generate annual savings of 
approximately $15 million. In addition, we launched 
a plan to reduce our network in Puerto Rico by 10 
branches. We completed two consolidations in 2011 
and will execute the remaining eight during 2012. 

We are well aware of the importance of managing 
the expense side of our operations at a time 
when generating revenue and credit costs pose a 
challenge, and we are committed to capture every 
opportunity to do so within our organization.

B A N C O   P O P U L A R 
N O R T H   A M E R I C A

BPNA returned to proﬁ tability in 2011. Three 
years earlier, BPNA embarked on a restructuring 
plan that included the exit of all national lending 
initiatives, closure or sale of underperforming 
branches, an asset deleveraging strategy and the 
refocusing of resources on its community banking 
activities. Having made signiﬁ cant progress every 
year after the plan was launched, BPNA registered 
a net gain in 2011 for the ﬁ rst time in ﬁ ve years.

P O P U L A R ,   I N C . 2 0 1 1   A N N U A L   R E P O R T

  I N S T I T U T I O N A L

values

S O C I A L   C O M M I T M E N T

We work hand-in-hand with our 
communities. We are committed to actively 
promote the social and economic well-being 
of our communities.

C U S TO M E R

We develop life-long relationships. 
Our relationship with the customer takes 
precedence over any particular transaction. 
We add value to each interaction by o(cid:625) ering 
high quality personalized service, and 
e(cid:631)  cient and innovative solutions.

I N T E G R I T Y

We live up to the trust placed in us. 
We adhere to the strictest ethical and moral 
standards through our daily decisions 
and actions.

E XC E L L E N C E

We strive to excel each day. We believe 
there is only one way to do things: doing 
them right from the ﬁ rst time while 
exceeding expectations.

I N N OVAT I O N

We are a driving force for progress. We foster 
a constant search for innovative ideas and 
solutions in everything we do, thus enhancing 
our competitive advantage.

O U R   P E O P L E

We have the best talent. We are leaders 
and work together as a team in a caring 
and disciplined environment.

P E R F O R M A N C E

We are fully committed to our shareholders. 
We aim to attain a high level of e(cid:631)  ciency, 
both individually and as a team, to achieve 
superior and consistent ﬁ nancial results based 
on a long-term vision.

3

L E T T E R   TO

shareholders

The main driver of BPNA’s improved results 
in 2011 was a lower provision, due to the 
continued improvement in credit quality 
resulting from our disciplined portfolio 
management strategy. As previously 
mentioned, BPNA had considerably lower 
losses and fewer non-performing loans 
when compared to the previous year. 
Our persistent attention to expenses also 
contributed to this positive outcome.

Building on this renewed focus on our 
community banking strategy, in 2010 
we rebranded the Banco Popular North 
America franchise in the Illinois region as 
Popular Community Bank to broaden its 
appeal to non-Hispanics while maintaining 
the recognition it has achieved among 
Hispanics. Based on the growth in account 
openings and balances in Illinois, we rolled 
out the rebranding e(cid:625) ort to the California 
and Florida regions in August of 2011. 

In 2012, BPNA will continue to execute on 
our repositioning as a relationship-based, 
community bank – growing our retail and 
commercial businesses without diverting 
attention from improving our asset quality 
and maintaining costs under control.

O U R   O R G A N I Z AT I O N

In 2011, we welcomed C. Kim Goodwin to 
our Board of Directors. With over 20 years 
of experience in investments and ﬁ nancial 
services, Kim brings great knowledge and 
valuable insight to Popular. Late last year, 
Michael Masin retired from the Board to 
devote more time to other professional 
endeavors. Mike served in our Board for ﬁ ve 
years and his experience, incisive analysis and 
support was critical in guiding management 

through these challenging times. We are 
pleased to announce the nomination of 
David E. Goel as a new member of our 
Board of Directors to ﬁ ll the vacancy 
resulting from Mike’s retirement. David 
is the co-founder and Managing General 
Partner of Matrix Capital Management 
Company, LLC. We believe that David will 
be a great addition to our Board and we 
are conﬁ dent that his expertise and insight 
in areas such as risk management and 
corporate governance will be of great value.

Last year also brought changes in our 
management team. With ample experience 
from top management positions in several 
ﬁ nancial institutions, Lidio Soriano joined 
Popular as the Chief Risk O(cid:631)  cer and 
has taken a number of signiﬁ cant steps 
to further enhance our risk management 
function. We extend our gratitude to Amílcar 
Jordán for his many contributions during his 
years in the Finance and Risk Management 
Groups. After leading our Corporate 
Banking Division and more recently the 
Commercial Banking Group, Ricardo Toro 
retired after more than 20 years of service 
at Popular. Ricardo’s upbeat attitude, 
inquisitive nature and mentoring abilities 
will be dearly missed by us all. Finally, in an 
e(cid:625) ort to strengthen our commercial credit 
administration practices without losing our 
focus on business generation and customer 
service, we created a new Commercial 
Credit Administration Group, which 
operates separately from the Commercial 
Credit Group. Ileana González, previously 
our Corporate Comptroller, will lead the 
new group. Jorge García, formerly the head 
of the U.S. Finance Group, will replace 
Ileana as the new Corporate Comptroller.

LO O K I N G   A H E A D

After the momentous events of 2010, 
mainly the capital raise, the acquisition of 
Westernbank and the sale of EVERTEC, 
2011 was our year to focus on what we 
believe will drive sustained growth and 
proﬁ tability in the coming years. We 
continue to face a static economy in Puerto 
Rico, still only moderate economic growth in 
the United States, and a credit environment 
that, while improving, has not yet reached 
normalized levels. In this context, we will 
continue to actively manage credit quality to 
reduce the level of non-performing loans, to 
add assets to improve our ability to generate 
revenues, to systematically look for ways 
to become increasingly e(cid:631)  cient and to 
continue to improve BPNA’s operations and 
ﬁ nancial results. We are undertaking these 
e(cid:625) orts with the conviction that these are the 
right steps to take to increase shareholder 
value and with an unwavering commitment 
to deliver the results that reﬂ ect the 
true potential of this great franchise.

Sincerely,

RICHARD L. CARRIÓN 
CHAIRMAN, PRESIDENT 
AND CHIEF EXECUTIVE OFFICER

4

P O P U L A R ,   I N C . 2 0 1 1   A N N U A L   R E P O R T

2 0 1 1   H I G H L I G H T S

Key Facts & Figures

Founded in 1893, Popular, Inc. is the leading banking institution by both assets and deposits in Puerto Rico 
and ranks 36th by assets among U.S. banks with $37.3 billion in assets. 

P O P U L A R ,   I N C .

•   The year 2011 marked a turnaround for Popular. The $151 million proﬁ t for 2011 marks the ﬁ rst year of operational 

earnings since 2006. 

•  U.S. operations earned $30 million in net income, compared with a $340 million loss the previous year. 

•   Puerto Rico operations, which earned $231 million in net income in 2011, increased its loan book by $350 million in 2011 as 
$649 million in high-quality loan purchases more than o(cid:625) set the decline in the covered loan portfolio that was acquired in 
the FDIC-assisted acquisition of Westernbank in 2010.

B A N C O   P O P U L A R   P U E R TO   R I C O
K E Y   FAC T S

• More than 1.5 million clients

•  192 branches and 57 o(cid:631)  ces throughout P.R. 

and Virgin Islands (V.I.)

• 6,524 FTEs in P.R. and V.I.

•  No. 1 market share in Total Deposits (40%) 

and Total Loans (34%)1

•  $28.4 billion in assets, $19.5 billion in loans, 

and $21.8 billion in deposits

B A N C O   P O P U L A R   N O R T H   A M E R I C A
K E Y   FAC T S

• Approximately 395,000 clients

•  94 branches throughout ﬁ ve states 

(Florida, California, New York, New Jersey 
and Illinois)

• 1,386 FTEs

•  Access to more than 35,000 surcharge-free ATMs 
in leading national and local merchant locations

•  E-LOAN held $464 million in deposits 

and approximately 25,000 clients

•  $8.6 billion in assets, $5.8 billion in loans, 

and $6.2 billion in total deposits

1 As of September 30, 2011

5

Social Commitment

A   L E G AC Y   O F   C A R I N G

Since its founding in 1893, Popular has 
endeavored to serve the community with 
a special focus on improving education 
and academic achievement. To further this 
mission, Fundación Banco Popular was 
established in 1979 and the Banco Popular 
Foundation in the United States in 2005. 
These foundations are philanthropic arms 
which advance community outreach alongside 
with the everyday e(cid:625) orts of our employees. 

The foundations are primarily dedicated to 
improve education and academic achievement, 
a reﬂ ection of our founders' belief that a 
community's progress is directly linked to 
education. In 2011, the foundations contributed 
$2.5 million to community programs and 
initiatives, including $1.9 million in donations 
to non-proﬁ t organizations in Puerto Rico, our 
ﬁ ve U.S. regions (California, Illinois, Florida, 
New York and New Jersey) and the Virgin 
Islands. More than 80% of donations were 
provided to education-related initiatives.

AC A D E M I C   E XC E L L E N C E 
&   I N N OVAT I O N 

We annually reward 100 high school graduates 
in Puerto Rico with a $1,000 Academic 
Excellence Award. We are the largest private 
investor of Instituto Nueva Escuela, a non-
proﬁ t that develops a Montessori model 
for 18 public schools in Puerto Rico. 

over ﬁ ve years. We contributed $83,000 in 
2011 for music-education programs at the 
three major art museums in Puerto Rico — 
the Contemporary Art Museum of Puerto 
Rico, the Puerto Rico Museum of Art and 
the Ponce Museum of Art — to help foster 
imagination, provide information and develop 
opinion and reﬂ ection among our youth. We 
donated a total of $236,000 in 2011 for music-
education initiatives, including $50,000 raised 
from our music ﬁ lm special commemorating 
legendary salsa composer Tito Curet. 

A F T E R   S C H O O L 

We support 25 non-proﬁ ts that provide 
after-school services to improve the academic 
achievement of more than 4,000 public 
school students of low-income families. 
At least 80% of the students served by 
these after-school programs recorded an 
improvement on their grades last year.

YO U T H 

Through our partnership with Junior 
Achievement USA (JA), we work with 
young students to help them realize their 
academic aspirations, understanding the 
importance of personal ﬁ nance and setting 
career goals. In 2011, our employees in 
the U.S. raised $119,000 and volunteered 
419 hours for Junior Achievement. 

A LT E R N AT I V E   E D U C AT I O N 

F I N A N C I A L   E D U C AT I O N

We support ﬁ ve innovative non-proﬁ t 
organizations that have developed alternative 
education schools in Puerto Rico for youth 
who have dropped out of public schools. 
These schools serve more than 2,000 students 
and had 90% student retention in 2011.

A R T S   &   M U S I C 

Our "Revive the Music" program has donated 
more than 900 musical instruments to 60 
public schools and non-proﬁ t organization 

We held 527 free ﬁ nancial-literacy workshops 
in Puerto Rico that were attended by 16,400 
participants, including individuals, small 
businesses, students, employees and non-
proﬁ ts. The workshops, which were held 
across the island, were rated as “excellent” by 
94.5 percent of the surveyed participants.

We are the largest private 

investor of Instituto Nueva 

Escuela, a non-proﬁ t that 

develops a Montessori model 

for 18 public schools 

in Puerto Rico. 

6

P O P U L A R ,   I N C . 2 0 1 1   A N N U A L   R E P O R T

DONATIONS BY POPULAR FOUNDATIONS TO 
NON-PROFITS IN U.S. AND P.R.
(2005–2011)

Dollars in thousands

GRANTS

ORGANIZATIONS

$2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

140

120

100

80

60

40

20

0

2005

2006

2007

2008

2009

2010

2011

Popular supported over 100 organizations in the U.S. and Puerto Rico

CONSERVATOORIO DE MÚSICAA DEE PUERTO RICO

PROGRAMA DE APOYO Y ENLLAACE COMUNIITTAARRIIOO

BOYS AND GIRLS CLUBS DE PUERTO RICCOO

NEIGHBORHOOD HOOUSING SSERVICES OF OORRANGE CCOUUNTYY, CCAA
HOPPE CCENTER,, FL

B

A

DONALDD HOUSE CHARITIES OF CEENTRRAL FLORIDA
RONALD MCDONALDD HOUUSE CHARITIES OF CEENTRRAL FLORIDA

OR

7

Popular, Inc. 25 year

Historical Financial Summary

(Dollars in millions, except per share data) 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

Selected Financial Information

  Net Income (Loss)   

  Assets   

  Gross Loans 

  Deposits 

Stockholders’ Equity 

  Market Capitalization 

  Return on Assets (ROA) 

  Return on Equity (ROE) 

Per Common Share1

  Net Income (Loss) – Basic 

  Net Income (Loss) – Diluted 

  Dividends (Declared) 

  Book Value 

  Market Price 

Assets by Geographical Area

  Puerto Rico 

  United States 

Caribbean and Latin America 

Total  

Traditional Delivery System

  Banking Branches

  Puerto Rico 

  Virgin Islands 

  United States 

Subtotal 

  Non-Banking Offices

  Popular Financial Holdings 

  Popular Cash Express 

  Popular Finance 

  Popular Auto 

  Popular Leasing, U.S.A. 

  Popular Mortgage 

  Popular Securities 

  Popular One 

  Popular Insurance 

  Popular Insurance Agency U.S.A. 

  Popular Insurance, V.I. 

E-LOAN 

EVERTEC 

Subtotal 

Total 

Electronic Delivery System

  ATMs

  Owned

  Puerto Rico 

  Virgin Islands 

  United States 

Total 

Transactions (in millions)

Electronic Transactions2 

Items Processed3 

 $ 

38.3  

 $ 

47.4  

 $ 

56.3  

 $ 

63.4  

 $ 

64.6  

 $ 

85.1  

 $ 

109.4  

 $ 

124.7  

 $ 

146.4  

 $ 

185.2  

 $  209.6  

5,389.6  

 2,768.5  

 4,491.6  

 308.2  

 5,706.5  

 3,096.3  

 4,715.8  

 341.9  

 5,972.7  

 3,320.6  

 4,926.3  

 383.0  

 8,983.6  

 5,373.3  

 7,422.7  

 588.9  

 8,780.3  

 10,002.3  

 5,195.6  

 7,207.1  

 631.8  

 5,252.1  

 8,038.7  

 752.1  

 11,513.4  

 6,346.9  

 8,522.7  

 834.2  

 12,778.4  

 15,675.5  

 7,781.3  

 9,012.4  

 1,002.4  

 8,677.5  

 9,876.7  

 1,141.7  

 16,764.1  

 9,779.0  

 10,763.3  

 1,262.5  

 19,300.5  

 11,376.6  

 11,749.6  

 1,503.1  

 $  260.0  

 $  355.0  

 $  430.1  

 $ 

479.1  

 $  579.0  

 $  987.8  

 $  1,014.7  

 $  923.7  

 $  1,276.8  

 $ 2,230.5  

 $ 3,350.3  

0.76% 

13.09% 

0.85% 

14.87% 

0.99% 

15.87% 

1.09% 

15.55% 

0.72% 

10.57% 

0.89% 

12.72% 

1.02% 

13.80% 

1.02% 

13.80% 

1.04% 

14.22% 

1.14% 

16.17% 

1.14% 

15.83% 

 $ 

0.24  

 $ 

0.30  

 $ 

0.35  

 $ 

0.40  

 $ 

0.27  

 $ 

0.35  

 $ 

0.42  

 $ 

0.46  

 $ 

0.53  

 $ 

0.67  

 $ 

0.75  

 0.35  

 0.10  

 2.35  

 2.69  

92% 

6% 

2% 

100% 

 0.40  

 0.10  

 2.46  

 2.00  

89% 

9% 

2% 

100% 

128 

3 

10 

141 

18 

4 

22 

163 

151 

3 

154 

173 

3 

24 

200 

26 

9 

35 

235 

211 

3 

214 

 0.24  

 0.09  

 1.89  

 1.67  

94% 

5% 

1% 

100% 

126 

3 

9 

138 

 0.30  

 0.09  

 2.10  

 2.22  

93% 

6% 

1% 

100% 

126 

3 

10 

139 

14 

17 

17 

156 

153 

3 

156 

14 

152 

136 

3 

139 

12.7 

139.1 

 0.27  

 0.10  

 2.63  

 2.41  

87% 

11% 

2% 

100% 

161 

3 

24 

188 

27 

26 

9 

 0.35  

 0.10  

 2.88  

 3.78  

87% 

10% 

3% 

100% 

162 

3 

30 

195 

41 

26 

9 

 0.42  

 0.12  

 3.19  

 3.88  

79% 

16% 

5% 

100% 

165 

8 

32 

205 

58 

26 

8 

 0.46  

 0.13  

 3.44  

 3.52  

76% 

20% 

4% 

100% 

166 

8 

34 

208 

73 

28 

10 

 0.53  

 0.15  

 3.96  

 4.85  

75% 

21% 

4% 

100% 

166 

8 

40 

214 

91 

31 

9 

3 

 0.67  

 0.18  

 4.40  

 8.44  

74% 

22% 

4% 

100% 

178 

8 

44 

230 

102 

39 

8 

3 

1 

 0.75  

 0.20  

 5.19  

 12.38  

74% 

23% 

3% 

100% 

201 

8 

63 

272 

117 

44 

10 

7 

3 

2 

62 

250 

76 

271 

92 

297 

111 

319 

134 

348 

153 

383 

183 

455 

206 

3 

209 

23.9 

166.1 

211 

3 

6 

220 

28.6 

170.4 

234 

8 

11 

253 

33.2 

171.8 

262 

8 

26 

296 

43.0 

174.5 

281 

8 

38 

327 

56.6 

175.0 

327 

9 

53 

389 

78.0 

173.7 

391 

17 

71 

479 

111.2 

171.9 

14.9 

159.8 

16.1 

161.9 

18.0 

164.0 

Employees (full-time equivalent) 

 4,699  

 5,131  

 5,213  

 7,023  

 7,006  

 7,024  

 7,533  

 7,606  

 7,815  

 7,996  

 8,854  

8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
P O P U L A R ,   I N C . 2 0 1 1   A N N U A L   R E P O R T

1  Per common share data adjusted for stock splits.
2  From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago Popular, Internet Banking and ATH Network transactions in Puerto Rico. From 2004 to 
2009, these numbers were adjusted to include ATH Network transactions in the Dominican Republic, Costa Rica, El Salvador and the United States, health care transactions, 
wire transfers, and other electronic payment transactions in addition to those previously stated. After 2010, electronic transactions only include transactions made by 
Popular, Inc.'s clients and exclude electronic transactions processed by EVERTEC for other clients.
3 After the sale in 2010 of a majority interest in EVERTEC, Popular’s information technology subsidiary, the Corporation does not process items.

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

2011

 $  232.3  

 $ 

257.6  

 $ 

276.1  

 $  304.5  

 $ 

351.9  

 $  470.9  

 $  489.9  

 $  540.7  

 $ 

357.7  

 $ 

(64.5) 

 $ (1,243.9) 

 $  (573.9) 

 $ 

137.4  

 $ 

151.3

 23,160.4  

 25,460.5  

 14,907.8  

 28,057.1  

 16,057.1  

 30,744.7  

 33,660.4  

 36,434.7  

 44,401.6  

 48,623.7  

 47,404.0  

 44,411.4  

 38,882.8  

 34,736.3  

 38,815.0  

 18,168.6  

 19,582.1  

 22,602.2  

 28,742.3  

 31,710.2  

 32,736.9  

 29,911.0  

 26,268.9  

 23,803.9  

 26,458.9  

 14,173.7  

 14,804.9  

 16,370.0  

 1,661.0  

 1,993.6  

 2,272.8  

 17,614.7  

 2,410.9  

 18,097.8  

 20,593.2  

 22,638.0  

 24,438.3  

 28,334.4  

 27,550.2  

 25,924.9  

 26,762.2  

 2,754.4  

 3,104.6  

 3,449.2  

 3,620.3  

 3,581.9  

 3,268.4  

 2,538.8  

 3,800.5  

 13,078.8  

 13,672.2  

 1,709.1  

 37,348.4 

 25,314.4 

 27,942.1 

 3,918.8 

 $  4,611.7  

 $ 3,790.2  

 $  3,578.1  

 $ 3,965.4  

 $ 4,476.4  

 $ 5,960.2  

 $ 7,685.6  

 $ 5,836.5  

 $ 5,003.4  

 $ 2,968.3  

 $  1,455.1  

 $ 1,445.4  

 $  3,211.4  

 $ 1,426.0 

1.14% 

15.41% 

1.08% 

15.45% 

1.04% 

15.00% 

1.09% 

14.84% 

1.11% 

16.29% 

1.36% 

19.30% 

1.23% 

17.60% 

1.17% 

17.12% 

0.74% 

9.73% 

-0.14% 

-2.08% 

-3.04% 

-44.47% 

-1.57% 

-32.95% 

0.36% 

4.37% 

0.40%

4.01%

 $ 

0.83  

 $ 

0.92  

 $ 

0.99  

 $ 

1.09  

 $ 

1.31  

 $ 

1.74  

 $ 

1.79  

 $ 

1.98  

 $ 

1.24  

 $ 

(0.27) 

 $ 

(4.55) 

 $ 

0.24  

 $ 

(0.06) 

 $ 

0.14 

 0.83  

 0.25  

 5.93  

 17.00  

71% 

25% 

4% 

100% 

 0.92  

 0.30  

 5.76  

 13.97  

71% 

25% 

4% 

100% 

 0.99  

 0.32  

 6.96  

 13.16  

72% 

26% 

2% 

100% 

 1.09  

 0.38  

 7.97  

 14.54  

68% 

30% 

2% 

100% 

 1.31  

 0.40  

 9.10  

 16.90  

66% 

32% 

2% 

100% 

 1.74  

 0.51  

 9.66  

 22.43  

62% 

36% 

2% 

100% 

 1.79  

 0.62  

 10.95  

 28.83  

55% 

43% 

2% 

100% 

 1.97  

 0.64  

 11.82  

 21.15  

53% 

45% 

2% 

100% 

 1.24  

 0.64  

 12.32  

 17.95  

52% 

45% 

3% 

100% 

199 

8 

95 

302 

136 

132 

61 

12 

11 

21 

3 

2 

4 

382 

684 

478 

37 

109 

624 

196 

8 

96 

300 

149 

154 

55 

20 

13 

25 

4 

2 

1 

4 

427 

727 

524 

39 

118 

681 

195 

8 

96 

299 

153 

195 

36 

18 

13 

29 

7 

2 

1 

1 

5 

460 

759 

539 

53 

131 

723 

193 

8 

97 

298 

181 

129 

43 

18 

11 

32 

8 

2 

1 

1 

5 

431 

729 

557 

57 

129 

743 

192 

8 

128 

328 

183 

114 

43 

18 

15 

30 

9 

2 

1 

1 

5 

421 

749 

568 

59 

163 

790 

 194  

 8  

 136  

 338  

 212  

 4  

 49  

 17  

 14  

 33  

 12  

 2  

 1  

 1  

 1  

 5  

 351  

 689  

 583  

 61  

 181  

825 

 191  

 8  

 142  

 341  

 158  

0  

 52  

 15  

 11  

 32  

 12  

 2  

 1  

 1  

 1  

 7  

 292  

 633  

 605  

 65  

 192  

862 

198 

8 

89 

295 

128 

51 

48 

10 

8 

11 

2 

258 

553 

421 

59 

94 

574 

130.5 

170.9 

199 

8 

91 

298 

137 

102 

47 

12 

10 

13 

2 

4 

327 

625 

442 

68 

99 

609 

159.4 

171.0 

 (0.27) 

 0.64  

 12.12  

 10.60  

59% 

38% 

3% 

100% 

196 

8 

147 

 351  

134 

0 

51 

12 

24 

32 

13 

2 

1 

1 

1 

9 

 (4.55) 

 0.48  

 6.33  

 5.16  

64% 

33% 

3% 

100% 

179 

8 

139 

 326  

2 

0 

9 

12 

22 

32 

7 

1 

1 

1 

1 

9 

 0.24  

 0.02  

 3.89  

 2.26  

65% 

32% 

3% 

100% 

173 

8 

101 

(0.06) 

– 

 3.67  

 3.14  

74% 

23% 

3% 

100% 

185 

8 

96 

 282  

 289  

0 

0 

0 

10 

0 

33 

6 

1 

1 

1 

0 

9 

0 

0 

0 

10 

0 

36 

6 

1 

1 

1 

0 

0 

 0.14 

–

 3.77 

 1.39 

74%

23%

3%

100%

183

9

94

 286 

0

0

0

10

0

37

4

4

1

1

1

0

0

 280  

 631  

 97  

 423  

 61  

 343  

 55  

 344  

 58 

 344 

615 

69 

187 

871 

605 

74 

571 

77 

624 

17 

613

20

135
176 
HOPE CENTER, FL
768
855 

784 

779 

136 

138 

199.5 

160.2 

206.0 

149.9 

236.6 

145.3 

255.7 

138.5 

 568.5  

133.9 

625.9 

140.3 

690.2 

150.0 

772.7 

175.2 

849.4 

202.2 

804.1 

191.7 

381.6 

0 

410.4

0

 10,549  

 11,501  

 10,651  

 11,334  

 11,037  

 11,474  

 12,139  

 13,210  

 12,508  

 12,303  

 10,587  

 9,407  

 8,277  

 8,329

9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our Creed

Banco Popular is a local institution dedicating 
its e(cid:625) orts exclusively to the enhancement of the 
social and economic conditions in Puerto Rico 
and inspired by the most sound principles and 
fundamental practices of good banking.

Popular pledges its e(cid:625) orts and resources to the 
development of a banking service for Puerto 
Rico within strict commercial practices and so 
e(cid:631)  cient that it could meet the requirements of 
the most progressive community in the world.

(cid:179) These words, written in 1928 by Rafael Carrión  
Pacheco, Executive Vice President and President  
(1927–1956), embody the philosophy of Popular, 
Inc. in all its markets.

Our People

The men and women who work for our 
institution, from the highest executive to the 
employees who handle the most routine tasks, 
feel a special pride in serving our customers 
with care and dedication.

All of them feel the personal satisfaction of 
belonging to the “Banco Popular Family,” which 
fosters a(cid:625) ection and understanding among its 
members, and which at the same time ﬁ rmly 
complies with the highest ethical and moral 
standards of behavior.

(cid:179) These words by Rafael Carrión, Jr., President
and Chairman of the Board (1956–1991), 
were written in 1988 to commemorate the 95th 
anniversary of Banco Popular, and reﬂ ect our 
commitment to human resources.

C O R P O R AT E   I N F O R M AT I O N
Independent Registered Public Accounting Firm: 
PricewaterhouseCoopers LLP

Annual Meeting: 
The 2012 Annual Stockholders’ Meeting of Popular, 
Inc. will be held on Friday, April 27, at 9:00 a.m. at 
Centro Europa Building in San Juan, Puerto Rico.

Additional Information: 
The Annual Report to the Securities and Exchange 
Commission on Form 10-K and any other ﬁ nancial 
information may also be viewed by visiting our 
website: www.popular.com

10

SENIOR MANAGEMENT TEAM

From left to right, Carlos J. Vázquez, Juan Guerrero, Néstor O. Rivera, Eli Sepúlveda, Richard L. Carrión, 
Ileana González, Ignacio Alvarez, Gilberto Monzón, Lidio Soriano, Eduardo J. Negrón and Jorge A. Junquera.

BOARD OF DIRECTORS

EXECUTIVE OFFICERS

RICHARD L. CARRIÓN
Chairman
President & Chief Executive Offi  cer
Popular, Inc.

RICHARD L. CARRIÓN
Chairman
President & Chief Executive Offi  cer
Popular, Inc. 

ALEJANDRO M. BALLESTER
President
Ballester Hermanos, Inc.

MARÍA LUISA FERRÉ
President and 
Chief Executive Offi  cer
Grupo Ferré Rangel

C. KIM GOODWIN
Private Investor

MANUEL MORALES JR.
President
Parkview Realty, Inc.

WILLIAM J. TEUBER JR.
Vice Chairman
EMC Corporation

CARLOS A. UNANUE
President
Goya de Puerto Rico

JOSÉ R. VIZCARRONDO
President and 
Chief Executive Offi  cer
Desarrollos Metropolitanos, S.E.

JORGE A. JUNQUERA
Senior Executive Vice President
Chief Financial Offi  cer 
Popular, Inc.

CARLOS J. VÁZQUEZ
Executive Vice President
Popular, Inc.
President of Banco Popular 
North America

IGNACIO ALVAREZ
Executive Vice President 
Chief Legal Offi  cer
General Counsel & Corporate 
Matters Group 
Popular, Inc.

ILEANA GONZÁLEZ*
Executive Vice President
Commercial Credit 
Administration Group
Banco Popular de Puerto Rico

JUAN GUERRERO
Executive Vice President
Financial & Insurance Services Group
Banco Popular de Puerto Rico

GILBERTO MONZÓN
Executive Vice President
Individual Credit Group
Banco Popular de Puerto Rico

EDUARDO J. NEGRÓN 
Executive Vice President
Administration Group 
Popular, Inc.

NÉSTOR O. RIVERA
Executive Vice President
Retail Banking and 
Operations Group
Banco Popular de Puerto Rico

ELI SEPÚLVEDA
Executive Vice President
Popular, Inc.
Commercial Credit Group
Banco Popular de Puerto Rico 

LIDIO SORIANO
Executive Vice President
Chief Risk Offi  cer
Corporate Risk Management Group 
Popular, Inc.

* Eff ective March 15, 2012

P O P U L A R ,   I N C . 2 0 1 1   I N F O R M E   A N U A L

C A R TA   A   LO S 

E S T I M A D O S   AC C I O N I S TA S :

Popular, Inc. tuvo un año de 
recuperación en 2011.

Por primera vez desde 2006, obtuvimos 
ganancias operacionales. Construyendo 
sobre las acciones tomadas el año anterior, 
en 2011 enfocamos nuestros esfuerzos en 
reducir los costos crediticios, identiﬁ car 
oportunidades para adquirir activos, aumentar 
nuestra eﬁ ciencia y seguir mejorando el 
desempeño de nuestras operaciones en 
los Estados Unidos continentales.

Fundamentalmente, somos una organización 
mucho más ﬁ rme que hace tan sólo unos 
años, enfocada ahora más que nunca en 
nuestras raíces en la banca comunitaria.

Popular logró un ingreso neto de $151 
millones en 2011, comparado con $137 
millones el año anterior. El ingreso bruto 
se mantuvo sólido con $2,000 millones, 
mientras que la provisión para pérdidas en 
préstamos disminuyó por $436 millones.

En Banco Popular Puerto Rico (BPPR) 
el ingreso neto totalizó $231 millones, 
comparado con $47 millones en 2010. Esta 
mejoría en resultados fue impulsada por una 
menor provisión y un mayor ingreso neto 
de intereses relacionado con las ganancias 
de la cartera de Westernbank y los esfuerzos 
para reducir el costo de los depósitos. 

A pesar de la baja en las tasas de depósitos 
durante el año, la reducción en el número 
de cuentas fue mínima y concentrada en los 
productos de alto costo y mayormente entre 
clientes que tenían una sola relación con la 
institución. Este dato por sí solo demuestra la 
fortaleza de nuestra franquicia en Puerto Rico. 

Banco Popular North America (BPNA) 
alcanzó $30 millones en ingreso neto, 
comparado con una pérdida neta de $340 
millones en 2010, impulsado en gran 
medida por una menor provisión. 

El precio de nuestra acción no ha estado 
reﬂ ejando nuestro progreso a pesar de la 
mejoría de  nuestros resultados ﬁ nancieros 
en 2011. Aunque todo el segmento bancario 
está bajo presión, continuaremos haciendo 
todo lo posible – incluso aumentando el 
impulso ﬁ nanciero y operacional que llevamos 
– para beneﬁ ciar a nuestros inversionistas.

C A L I DA D   D E L   C R É D I TO 

La calidad del crédito sigue siendo el 
reto principal para la mayoría de las 
instituciones ﬁ nancieras, y Popular 
no es la excepción. Aunque queda 
mucho por hacer, hemos progresado 
y pudimos reducir signiﬁ cativamente 
los costos crediticios durante 2011.

En 2011 las pérdidas netas en préstamos 
alcanzaron $534 millones, menos de la mitad 
del total del año anterior. Esta reducción 
de un año a otro se dio gracias a las mejoras 
tanto en BPPR como en BPNA. Como 
resultado de la baja en las pérdidas netas 
en préstamos, nuestra provisión para 
pérdidas en préstamos no cubiertos por el 
FDIC totalizó $430 millones en 2011, una 
mejora considerable en comparación con 
los $1,000 millones registrados en 2010.

A pesar de la reducción en los costos 
crediticios, los préstamos no-acumulativos 
en cartera (excluyendo los préstamos 
cubiertos por el FDIC) aumentaron de $1,570 
millones a $1,740 millones, impulsados por 
un aumento en BPPR. Como respuesta, 
intensiﬁ camos nuestros esfuerzos en 
las carteras comerciales e hipotecarias y 
comenzamos a ver progreso a ﬁ nales de año.

Para la cartera comercial de Puerto Rico 
continuamos reforzando nuestras gestiones de 
cobro y mitigación de pérdidas, segmentando 
los préstamos en problemas y desarrollando 
planes individuales de acción para aquellos 
préstamos que excedan ciertos parámetros. 
En el último trimestre del año vimos una baja 

Richard L. Carrión
Presidente de la Junta de Directores,
Presidente y Principal Oﬁ cial Ejecutivo

El ingreso bruto se mantuvo sólido 

con $2,000 millones, mientras 

que la provisión para pérdidas en 

préstamos disminuyó por $436 

millones.

11

C A R TA   A   LO S 

En los Estados Unidos, 

esperamos que nuestro 

rendimiento de crédito 

avance a paso ﬁ rme, aunque a 

un ritmo menor que en años 

anteriores debido al progreso 

signiﬁ cativo que ya hemos 

logrado. En Puerto Rico, 

creemos que gran parte de la 

contracción económica 

ha ﬁ nalizado.

12

en el volumen entrante de préstamos 
comerciales no-acumulativos, lo que sugiere 
que el nivel de estos préstamos no-acumulativos 
debe comenzar a estabilizarse.

En cuanto a las hipotecas en Puerto 
Rico, a pesar de las tasas de morosidad 
persistentemente altas, las pérdidas 
históricamente han representado menos del 
1% del balance total de préstamos. Hemos 
visto también señales de estabilización debido 
al aumento en los esfuerzos de mitigación 
de pérdidas y una baja en morosidad nueva. 
A través de un grupo interno de mitigación 
de pérdidas, incrementamos las alternativas 
ofrecidas a los clientes por casi 30%. 
Más importante aun, aproximadamente 
el 70% de los préstamos modiﬁ cados se 
mantuvo realizando sus pagos luego de 
12 meses, más del doble del promedio en 
los Estados Unidos. Esto reﬂ eja nuestro 
proceso disciplinado de modiﬁ cación en el 
que los clientes escogen entre alternativas 
que maximizan su habilidad para realizar 
sus pagos y permanecer en sus hogares. 

En los Estados Unidos, seguimos viendo 
resultados positivos en la calidad del 
crédito como resultado de las estrategias de 
reducción de riesgo lanzadas en 2008. Las 
pérdidas netas, la provisión y los préstamos 
no-acumulativos bajaron sustancialmente en 
2011 por 57%, 78% y 42%, respectivamente.

En ambos bancos ejecutamos una serie de 
ventas de activos en 2011 que mejoró nuestro 
perﬁ l crediticio al bajar nuestra exposición 
en ciertos sectores. En diciembre de 2010 
reclasiﬁ camos aproximadamente $1,000 
millones en préstamos retenidos para la 
venta, de los cuales $603 millones fueron 
préstamos de construcción y comerciales 
de BPPR y $396 millones fueron préstamos 
hipotecarios no-convencionales de BPNA. 
En ambos casos, la amplia mayoría de 
estos préstamos eran no-acumulativos.

En la primera mitad de 2011, BPNA completó 
la venta de todos sus préstamos hipotecarios 
no-convencionales. En el tercer trimestre, 
BPPR vendió una cartera de préstamos 
comerciales y de construcción con un balance 
de principal de $358 millones y un valor 
neto en los libros de $128 millones. Como 
resultado de estas ventas, combinado con otras 
transacciones menores completadas durante 
el año, los préstamos retenidos para la venta 
disminuyeron de $894 millones en 2010 a 

$363 millones al ﬁ nal de 2011. Continuaremos 
explorando oportunidades adicionales de venta 
en 2012 para reducir este balance aun más.

Conﬁ amos en que la situación crediticia 
continuará mejorando. En los Estados 
Unidos, esperamos que nuestro rendimiento 
de crédito avance a paso ﬁ rme, aunque a un 
ritmo menor que en años anteriores debido 
al progreso signiﬁ cativo que ya hemos 
logrado. En Puerto Rico, creemos que 
gran parte de la contracción económica ha 
ﬁ nalizado, y las tendencias recientes apuntan 
a la estabilización, o incluso a una mejoría. 
Aunque optimistas, seguiremos enfocados en 
nuestros esfuerzos para manejar la calidad de 
crédito y garantizar así el progreso continuo.

VO L U M E N   D E   AC T I VO S

Las condiciones económicas y las estrategias 
para reducir el apalancamiento que hemos 
implementado en años recientes le han puesto 
presión a nuestro estado de situación en 
términos de la generación de activos. En Puerto 
Rico, la recesión prolongada y el proceso de 
consolidación produjeron una baja signiﬁ cativa 
en los activos bancarios, de $101,000 millones 
en su mejor momento en 2005 a $72,000 
millones en 2011. En los Estados Unidos, 
a pesar de una leve mejoría en la actividad 
económica, la demanda por préstamos 
continúa limitada mientras que la competencia 
es intensa. Para mitigar el impacto de estos 
factores en nuestro estado de situación, 
buscamos en 2011 oportunidades similares a 
nuestra adquisición de Westernbank, aunque 
en menor escala, en las que adquirimos 
activos de bajo riesgo que pudieran ser 
manejados con nuestra infraestructura 
existente a un costo marginal mínimo.

En Puerto Rico compramos alrededor de 
$518 millones en préstamos hipotecarios 
de primer gravamen, acumulativos y con 
interés ﬁ jo, con puntuaciones de crédito 
excelentes y con una baja razón de préstamo 
a valor. También adquirimos la cartera 
local de tarjetas de crédito AAdvantage de 
Citibank con un balance de aproximadamente 
$131 millones, una transacción que 
ha sido rentable desde su inicio.

Creemos que existen otras oportunidades 
para añadir activos de alta calidad, tanto en 
Puerto Rico como en los Estados Unidos, y las 
perseguiremos durante el año para continuar 
realizando nuestro potencial de ganancias.

E F I C I E N C I A

A través de 2011 trabajamos arduamente para 
mejorar la eﬁ ciencia y la efectividad organizacional 
mediante un rediseño de nuestros procesos críticos 
y una reducción en nuestra base de gastos. 

A principios de año lanzamos un proyecto para 
evaluar y rediseñar procesos claves para hacerlos 
más eﬁ cientes. Comenzamos con el proceso 
de originación de préstamos comerciales e 
hipotecarios y vimos resultados alentadores 
en la fase piloto en términos de una baja en el 
tiempo de procesamiento y mayores niveles 
de satisfacción en los clientes. Actualmente 
estamos lanzando los procesos rediseñados a los 
grupos de originación comercial e hipotecaria y 
esperamos ver mejoras sustanciales en estas áreas.

Vamos a seguir un enfoque similar en otras 
áreas, estableciendo prioridad a los procesos y 
asignando expertos para evaluarlos y rediseñarlos, 
de ser necesario. En vista de la naturaleza a largo 
plazo y el impacto positivo de estos esfuerzos, 
hemos creado la Oﬁ cina de Mejoras de Procesos 
y Negocio a nivel corporativo, con el mandato 
de supervisar el rediseño actual y las iniciativas 
futuras para mejorar los procesos y la eﬁ ciencia. 

En 2011 también tomamos medidas para 
reducir gastos. Al ﬁ nal del año anunciamos una 
ventana de retiro voluntario. Un total de 369 
empleados, o el 39% de las personas elegibles, 
se acogieron a esta opción. Eran compañeros 
con experiencia que le dedicaron muchos años 
a nuestra organización e hicieron aportaciones 
importantes a nuestro crecimiento y éxito. Les 
agradecemos su compromiso y les deseamos lo 
mejor. Hemos puesto en marcha planes robustos 
para asegurar una transición ordenada. Estos 
retiros voluntarios resultaron en un gasto no 
recurrente de $15.6 millones, pero se espera que 
generen ahorros anuales de aproximadamente $15 
millones. Además, lanzamos un plan para reducir 
nuestra red en Puerto Rico por 10 sucursales. 
Completamos dos consolidaciones en 2011 y 
ejecutaremos las ocho restantes durante 2012.

Estamos muy conscientes de la importancia 
de manejar los gastos de nuestra operación 
en momentos cuando la generación de 
ganancias y los costos crediticios representan 
un reto, y estamos comprometidos con 
aprovechar todas las oportunidades para 
hacerlo dentro de nuestra organización.

P O P U L A R ,   I N C . 2 0 1 1   I N F O R M E   A N U A L

valores

  I N S T I T U C I O N A L E S

C O M P R O M I S O   S O C I A L

Trabajamos mano a mano con nuestras 
comunidades. Estamos comprometidos 
a trabajar activamente para promover el 
desarrollo social y económico de nuestras 
comunidades.

C L I E N T E

Desarrollamos relaciones para toda la vida. La 
relación con el cliente está por encima de una 
transacción particular. Añadimos valor a cada 
interacción ofreciendo servicio personalizado 
de alta calidad, y soluciones adecuadas, 
eﬁ cientes e innovadoras.

I N T E G R I DA D

Honramos la conﬁ anza depositada en 
nosotros. Nos desempeñamos bajo las normas 
más estrictas de ética y moral, manifestadas 
diariamente a través de todas nuestras 
decisiones y acciones.

E XC E L E N C I A

Aspiramos a ser mejores cada día. Creemos 
que sólo hay una forma de hacer las cosas: 
bien hechas desde el principio y excediendo 
expectativas.

I N N OVAC I Ó N

Somos propulsores de futuro. Fomentamos 
la búsqueda incesante de ideas y soluciones 
innovadoras en todo lo que hacemos para 
realzar nuestra ventaja competitiva.

N U E S T R A   G E N T E

Contamos con el mejor talento. Somos líderes 
y trabajamos en equipo para el éxito dentro 
de un ambiente de trabajo que se caracteriza 
por el cariño y la disciplina.

R E N D I M I E N TO

Tenemos un compromiso total con nuestros 
accionistas. Nos exigimos un alto nivel 
de eﬁ ciencia, individual y en equipo, para 
obtener resultados ﬁ nancieros altos y 
consistentes, fundamentados en una visión a 
largo plazo.

13

M I R A N D O   H AC I A   E L   F U T U R O

Después de los trascendentales 
acontecimientos de 2010, principalmente 
el ofrecimiento de capital, la adquisición 
de Westernbank y la venta de EVERTEC, 
2011 fue el año para concentrarnos en lo que 
creemos impulsará el crecimiento sostenido 
y la rentabilidad en los próximos años. 
Seguimos enfrentando una economía estática 
en Puerto Rico, y sólo un crecimiento 
económico moderado en los Estados 
Unidos, y un entorno de crédito que, al 
tiempo que mejora, aún no ha llegado a 
niveles normalizados. En este contexto, 
vamos a seguir manejando activamente la 
calidad del crédito para reducir el nivel de 
morosidad, añadiendo activos para mejorar 
nuestra capacidad de generar ingresos, 
estudiando sistemáticamente la forma de 
ser cada vez más eﬁ cientes y continuar 
mejorando las operaciones de BPNA y sus 
resultados ﬁ nancieros. Estamos llevando a 
cabo estos esfuerzos con la convicción de 
que estos son los pasos correctos a seguir 
para aumentar el valor para los accionistas 
y con un ﬁ rme compromiso de lograr 
los resultados que reﬂ ejen el verdadero 
potencial de esta gran franquicia.

Sinceramente,

RICHARD L. CARRIÓN 
PRESIDENTE DE LA JUNTA DE DIRECTORES,
PRESIDENTE Y PRINCIPAL OFICIAL EJECUTIVO

C A R TA   A   LO S 

B A N C O   P O P U L A R 
N O R T H   A M E R I C A

BPNA volvió a ser rentable en 2011. Tres 
años antes, BPNA comenzó un plan de 
restructuración que incluyó la salida de 
todas las iniciativas nacionales de crédito, 
el cierre o la venta de las sucursales de 
bajo rendimiento, una estrategia de 
desapalancamiento de activos y el reenfoque 
de los recursos en las actividades de banca 
comunitaria. Después de lograr un progreso 
signiﬁ cativo cada año luego del lanzamiento 
del plan, BPNA registró una ganancia neta 
en 2011 por primera vez en cinco años.

El principal impulsor de la mejora en 
los resultados de BPNA en 2011 fue una 
menor provisión, debido a la continua 
mejora en la calidad del crédito derivada 
de nuestra estrategia disciplinada de 
manejo de cartera. Según mencionado 
anteriormente, BPNA tuvo una baja 
considerable en pérdidas y menor 
balance de préstamos no-acumulativos en 
comparación con el año anterior. Nuestra 
continua atención a los gastos también 
contribuyó a este resultado positivo.

Partiendo de este enfoque renovado en 
nuestra estrategia de banca comunitaria, en 
2010 se cambió la marca de  la franquicia de 
Banco Popular North America en la región 
de Illinois a Popular Community Bank para 
ampliar su atractivo a personas no hispanas, 
mientras se mantuvo el reconocimiento 
que ha logrado entre los hispanos. Basado 
en el crecimiento de apertura de cuentas 
y balances en Illinois, pusimos en marcha 
el cambio de marca en las regiones de 
California y Florida en agosto de 2011.

En 2012, BPNA continuará con la 
ejecución de nuestro reposicionamiento 
como un banco comunitario enfocado 
en las relaciones personales - creciendo 
nuestros negocios para individuos y 
comercios, sin desviar la atención de 
mejorar nuestra calidad de activos y en 
mantener los costos bajo control.

N U E S T R A   O R G A N I Z AC I Ó N

En 2011, le dimos la bienvenida a C. Kim 
Goodwin a nuestra Junta de Directores. 
Kim, quien cuenta con más de 20 años 
de experiencia en inversiones y servicios 

14

ﬁ nancieros, trae a Popular un gran 
conocimiento y una perspectiva valiosa. 
A ﬁ nales del año pasado, Michael Masin 
se retiró de la Junta para dedicarle más 
tiempo a otras labores profesionales. 
Mike sirvió en nuestra Junta durante 
cinco años y su experiencia, análisis 
incisivo y apoyo fueron críticos para guiar 
a la gerencia durante estos tiempos de 
grandes retos. Nos complace anunciar la 
nominación de David E. Goel como un 
nuevo miembro a nuestra Junta para llenar 
la vacante creada tras la partida de Mike.

David es el cofundador y socio gerente 
general de Matrix Capital Management 
Company, LLC. Entendemos que 
será una gran adición a nuestra 
Junta y estamos seguros de que su 
experiencia y conocimientos en áreas 
tales como manejo de riesgo y regencia 
corporativa serán de gran valor.

El año pasado también trajo cambios en 
nuestro equipo gerencial. Con una amplia 
experiencia en altos puestos gerenciales en 
varias instituciones ﬁ nancieras, Lidio Soriano 
se unió a Popular como Principal Oﬁ cial de 
Riesgo y ha tomado una serie de medidas 
importantes para mejorar aun más nuestra 
función de manejo de riesgo. Extendemos un 
profundo agradecimiento a Amílcar Jordán 
por sus muchas contribuciones durante sus 
años en los Grupos de Finanzas y Manejo de 
Riesgo. Después de liderar nuestra División 
de Banca Corporativa y, más recientemente, 
el Grupo de Banca Comercial, Ricardo 
Toro se retiró después de más de 20 años 
de servicio en Popular. Todos nosotros 
extrañaremos profundamente la actitud 
positiva de Ricardo, su naturaleza inquisitiva 
y sus habilidades como mentor. Por último, 
en un esfuerzo por fortalecer nuestras 
prácticas de administración de crédito 
comercial, sin perder nuestro enfoque 
en la generación de negocios y servicio al 
cliente, hemos creado un nuevo Grupo de 
Administración de Crédito Comercial, que 
funciona por separado del Grupo de Crédito 
Comercial. Ileana González, anteriormente 
nuestra Contralor Corporativo, liderará el 
nuevo grupo. Jorge García, ex jefe del Grupo 
de  Finanzas de Estados Unidos, remplazará 
a Ileana como Contralor Corporativo.

P O P U L A R ,   I N C . 2 0 1 1   I N F O R M E   A N U A L

P U N TO S   P R I N C I PA L E S   D E   2 0 1 1

Datos y cifras claves

Popular, Inc., fundada en 1893, es la institución bancaria líder en Puerto Rico - tanto en activos como en depósitos - y 
ocupa la posición número 36 entre los bancos en los Estados Unidos en términos de activos con $37,348 millones en activos.

P O P U L A R ,   I N C .

•  El 2011 fue uno de recuperación para Popular. El resultado de $151 millones en el 2011 representa el primer año con 

ganancias operacionales desde 2006. 

•  Las operaciones en los Estados Unidos produjeron $30 millones en ingreso neto, comparado con una pérdida de $340 

millones el año anterior.

•  Las operaciones en Puerto Rico, que devengaron $231 millones en ingreso neto en 2011, aumentaron su cartera de préstamos 
por $350 millones durante el año, gracias a la compra de préstamos de alta calidad por el valor de $648 millones los cuales 
más que compensaron la baja en la cartera de préstamos cubiertos adquirida como parte de la transacción asistida por la 
FDIC de Westernbank en 2010.

B A N C O   P O P U L A R   P U E R TO   R I C O
DATO S   C L AV E S

• Más de 1.5 millones de clientes

•  192 sucursales y 57 oﬁ cinas alrededor de Puerto Rico y 

las Islas Vírgenes 

•  6,524 empleados a tiempo completo en Puerto Rico y 

las Islas Vírgenes 

•  Núm. 1 en cuota del mercado basado en Total de 
Depósitos (40%) y Total de Préstamos (34%) 

•  $28,400 millones en activos, $19,600 millones en 

préstamos y $21,800 millones en depósitos

B A N C O   P O P U L A R   N O R T H   A M E R I C A
DATO S   C L AV E S

• Aproximadamente 395,000 clientes

•  94 sucursales en cinco estados (Florida, California, 

Nueva York, Nueva Jersey e Illinois)

• 1,386 empleados a tiempo completo

•  Acceso a más de 35,000 cajeros automáticos sin cargos 

adicionales en toda la nación 

•  E-LOAN mantiene $464 millones en depósitos y 

aproximadamente 25,000 clientes

•  $8,600 millones en activos, $5,800 millones en 

préstamos y $6,200 millones en depósitos

1Cifras hasta el 30 de septiembre de 2011

15

Compromiso Social

L E G A D O   D E   S O L I DA R I DA D

Desde su fundación en 1893, Popular se ha 
esforzado por servir a la comunidad con un 
enfoque particular en mejorar la educación 
y el rendimiento académico. Para llevar a 
cabo esta misión, en 1979 se estableció la 
Fundación Banco Popular en Puerto Rico y 
en 2005 el Banco Popular Foundation en los 
Estados Unidos. Estas Fundaciones son los 
brazos ﬁ lantrópicos que encauzan nuestras 
iniciativas comunitarias en conjunto con los 
esfuerzos diarios de nuestros empleados.

Las Fundaciones se dedican primordialmente 
a mejorar la educación y el rendimiento 
académico, reﬂ ejando la creencia de nuestros 
fundadores de que el progreso de una 
comunidad está directamente relacionado 
con la educación. En 2011, nuestras 
Fundaciones contribuyeron $2.5 millones 
a programas e iniciativas comunitarias, 
incluyendo $1.9 millones en donaciones a 
organizaciones sin ﬁ nes de lucro en Puerto 
Rico, nuestras cinco regiones en los Estados 
Unidos (California, Illinois, Florida, Nueva 
York y Nueva Jersey) y las Islas Vírgenes. 
Se otorgó más de 80% de las donaciones a 
iniciativas relacionadas con la educación.

E XC E L E N C I A   AC A D É M I C A 
E   I N N OVAC I Ó N

Cada año reconocemos a 100 graduados de 
escuela superior en Puerto Rico con $1,000 
y el Premio de Excelencia Académica. Somos 
el principal inversionista privado del Instituto 
Nueva Escuela, una institución sin ﬁ nes de 
lucro que desarrolla un modelo Montessori 
para 18 escuelas públicas en Puerto Rico.

ﬁ nes de lucro durante los pasados cinco años. 
En 2011, contribuimos $83,000 a programas 
de educación musical en los tres principales 
museos de arte en Puerto Rico - el Museo 
de Arte Contemporáneo de Puerto Rico, el 
Museo de Arte de Puerto Rico y el Museo 
de Arte de Ponce - para ayudar a fomentar la 
imaginación, proveer información y desarrollar 
las opiniones y la reﬂ exión entre nuestra 
juventud. Donamos un total de $236,000 en 
2011 a iniciativas relacionadas con la música, 
incluyendo $50,000 recaudados como parte 
de nuestro especial musical conmemorando al 
legendario compositor de salsa Tite Curet. 

D E S P U É S   D E   L A   E S C U E L A 

Apoyamos a 25 organizaciones sin ﬁ nes de 
lucro que proveen servicios después de la 
escuela para mejorar el rendimiento académico 
de más de 4,000 estudiantes de escuela 
pública provenientes de familias de escasos 
recursos. Al menos el 80% de los estudiantes 
inscritos en estos programas registraron una 
mejoría en sus caliﬁ caciones el año pasado.

J U V E N T U D

A través de nuestra asociación con Junior 
Achievement USA (JA), trabajamos con 
estudiantes jóvenes para ayudarles a hacer 
realidad sus aspiraciones académicas, 
entendiendo la importancia de las 
ﬁ nanzas personales y estableciendo metas 
profesionales. En 2011, nuestros empleados 
en los Estados Unidos recaudaron 
$119,000 y rindieron 419 horas de servicio 
voluntario a Junior Achievement.

E D U C AC I Ó N   A LT E R N AT I VA

E D U C AC I Ó N   F I N A N C I E R A

Apoyamos cinco organizaciones innovadoras 
sin ﬁ nes de lucro que han desarrollado escuelas 
de educación alternativa en Puerto Rico 
para niños que han abandonado la escuela 
pública. Estas escuelas sirven a más de 2,000 
estudiantes y obtuvieron un promedio de 
retención estudiantil de 90% en 2011. 

A R T E   Y   M Ú S I C A

Nuestro programa “Revive la música” ha 
donado más de 900 instrumentos musicales 
a 60 escuelas públicas y organizaciones sin 

Organizamos en Puerto Rico 527 talleres 
libres de costo sobre educación ﬁ nanciera que 
contaron con 16,400 participantes, incluyendo 
individuos, pequeños negocios, estudiantes, 
empleados y organizaciones sin ﬁ nes de lucro. 
Los talleres, que se realizaron alrededor de la 
isla, fueron caliﬁ cados como “excelentes” por 
el 94.5% de los participantes encuestados.

Somos el principal 

inversionista privado del 

Instituto Nueva Escuela, una 

institución sin ﬁ nes de lucro 

que desarrolla un modelo 

Montessori para 18 escuelas 

públicas en Puerto Rico.

16

P O P U L A R ,   I N C . 2 0 1 1   I N F O R M E   A N U A L

DONACIONES DE FUNDACIONES DE POPULAR 
A ORGANIZACIONES SIN FINES DE LUCRO EN ESTADOS 
UNIDOS Y PUERTO RICO (2005-2011)

Dólares en miles

DONACIONES

ORGANIZACIONES

$2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

140

120

100

80

60

40

20

0

2005

2006

2007

2008

2009

2010

2011

Popular apoyó a más de 100 organizaciones en los Estados Unidos y Puerto Rico

CONSERVATOORIO DE MÚSICAA DEE PUERTO RICO

PROGRAMA DE APOYO Y ENLLAACE COMUNIITTAARRIIOO

BOYS AND GIRLS CLUBS DE PUERTO RICCOO

NEIGHBORHOOD HOOUSING SSERVICES OF OORRANGE CCOUUNTYY, CCAA
HOPPE CCENTER,, FL

B

A

DONALDD HOUSE CHARITIES OF CEENTRRAL FLORIDA
RONALD MCDONALDD HOUUSE CHARITIES OF CEENTRRAL FLORIDA

OR

17

Popular, Inc. 25 Años

Resumen Financiero Histórico

(Dólares en millones, excepto información por acción) 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

Información Financiera Seleccionada

Ingreso neto (Pérdida Neta)   

 $ 

38.3  

 $ 

47.4  

 $ 

56.3  

 $ 

63.4  

 $ 

64.6  

 $ 

85.1  

 $ 

109.4  

 $ 

124.7  

 $ 

146.4  

 $ 

185.2  

 $  209.6  

  Activos  

  Préstamos Brutos 

  Depósitos 

Capital de Accionistas 

  Valor agregado en el mercado 

  Rendimiento de Activos (ROA) 

  Rendimiento de Capital (ROE) 

Por Acción Común1

5,389.6  

 2,768.5  

 4,491.6  

 308.2  

 5,706.5  

 3,096.3  

 4,715.8  

 341.9  

 5,972.7  

 3,320.6  

 4,926.3  

 383.0  

 8,983.6  

 5,373.3  

 7,422.7  

 588.9  

 8,780.3  

 10,002.3  

 5,195.6  

 7,207.1  

 631.8  

 5,252.1  

 8,038.7  

 752.1  

 11,513.4  

 6,346.9  

 8,522.7  

 834.2  

 12,778.4  

 15,675.5  

 7,781.3  

 9,012.4  

 1,002.4  

 8,677.5  

 9,876.7  

 1,141.7  

 16,764.1  

 9,779.0  

 10,763.3  

 1,262.5  

 19,300.5  

 11,376.6  

 11,749.6  

 1,503.1  

 $  260.0  

 $  355.0  

 $  430.1  

 $ 

479.1  

 $  579.0  

 $  987.8  

 $  1,014.7  

 $  923.7  

 $  1,276.8  

 $ 2,230.5  

 $ 3,350.3  

0.76% 

13.09% 

0.85% 

14.87% 

0.99% 

15.87% 

1.09% 

15.55% 

0.72% 

10.57% 

0.89% 

12.72% 

1.02% 

13.80% 

1.02% 

13.80% 

1.04% 

14.22% 

1.14% 

16.17% 

1.14% 

15.83% 

Ingreso neto (Pérdida Neta) – Básico 

 $ 

0.24  

 $ 

0.30  

 $ 

0.35  

 $ 

0.40  

 $ 

0.27  

 $ 

0.35  

 $ 

0.42  

 $ 

0.46  

 $ 

0.53  

 $ 

0.67  

 $ 

0.75  

Ingreso neto (Pérdida Neta) – Diluido 

  Dividendos (Declarados) 

  Valor en los Libros  

  Precio en el Mercado 

Activos por Área Geográfica

  Puerto Rico 

Estados Unidos 

Caribe y Latinoamérica 

Total  

Sistema de Distribución Tradicional

Sucursales Bancarias

  Puerto Rico 

Islas Vírgenes 

Estados Unidos 

Subtotal 

  Oficinas No Bancarias

  Popular Financial Holdings 

  Popular Cash Express 

  Popular Finance 

  Popular Auto 

  Popular Leasing, U.S.A. 

  Popular Mortgage 

  Popular Securities 

  Popular One 

  Popular Insurance 

  Popular Insurance Agency U.S.A. 

  Popular Insurance, V.I. 

E-LOAN 

EVERTEC 

Subtotal 

Total 

Sistema Electrónico de Distribución

 Cajeros Automáticos

  Propios y Administrados

  Puerto Rico 

Islas Virgenes 

Estados Unidos 

Total 

Transacciones (en millones)

Transacciones Electrónicas2 

Efectos Procesados 3 

 0.35  

 0.10  

 2.35  

 2.69  

92% 

6% 

2% 

100% 

 0.40  

 0.10  

 2.46  

 2.00  

89% 

9% 

2% 

100% 

128 

3 

10 

141 

18 

4 

22 

163 

151 

3 

154 

173 

3 

24 

200 

26 

9 

35 

235 

211 

3 

214 

 0.24  

 0.09  

 1.89  

 1.67  

94% 

5% 

1% 

100% 

126 

3 

9 

138 

 0.30  

 0.09  

 2.10  

 2.22  

93% 

6% 

1% 

100% 

126 

3 

10 

139 

14 

17 

17 

156 

153 

3 

156 

14 

152 

136 

3 

139 

12.7 

139.1 

 0.27  

 0.10  

 2.63  

 2.41  

87% 

11% 

2% 

100% 

161 

3 

24 

188 

27 

26 

9 

 0.35  

 0.10  

 2.88  

 3.78  

87% 

10% 

3% 

100% 

162 

3 

30 

195 

41 

26 

9 

 0.42  

 0.12  

 3.19  

 3.88  

79% 

16% 

5% 

100% 

165 

8 

32 

205 

58 

26 

8 

 0.46  

 0.13  

 3.44  

 3.52  

76% 

20% 

4% 

100% 

166 

8 

34 

208 

73 

28 

10 

 0.53  

 0.15  

 3.96  

 4.85  

75% 

21% 

4% 

100% 

166 

8 

40 

214 

91 

31 

9 

3 

 0.67  

 0.18  

 4.40  

 8.44  

74% 

22% 

4% 

100% 

178 

8 

44 

230 

102 

39 

8 

3 

1 

 0.75  

 0.20  

 5.19  

 12.38  

74% 

23% 

3% 

100% 

201 

8 

63 

272 

117 

44 

10 

7 

3 

2 

62 

250 

76 

271 

92 

297 

111 

319 

134 

348 

153 

383 

183 

455 

206 

3 

209 

23.9 

166.1 

211 

3 

6 

220 

28.6 

170.4 

234 

8 

11 

253 

33.2 

171.8 

262 

8 

26 

296 

43.0 

174.5 

281 

8 

38 

327 

56.6 

175.0 

327 

9 

53 

389 

78.0 

173.7 

391 

17 

71 

479 

111.2 

171.9 

Empleados (equivalente a tiempo completo) 

 4,699  

 5,131  

 5,213  

 7,023  

 7,006  

 7,024  

 7,533  

 7,606  

 7,815  

 7,996  

 8,854  

18

14.9 

159.8 

16.1 

161.9 

18.0 

164.0 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
P O P U L A R ,   I N C . 2 0 1 1   I N F O R M E   A N U A L

1  Los datos de las acciones comunes han sido ajustados por las divisiones en acciones.
2  Desde el 1981 al 2003, las transacciones electrónicas incluyen transacciones ACH, Pago Directo, TelePago Popular, Banca por Internet y transacciones por la Red ATH en 
Puerto Rico. Desde el 2004 hasta el 2009, estos números incluyen el total de transacciones por la Red ATH en República Dominicana, Costa Rica, El Salvador y Estados 
Unidos, transacciones de facturación médica, transferencias cablegráficas y otros pagos electrónicos además de lo previamente señalado. A partir del 2010, esta cifra incluye 
solamente las transacciones realizadas por los clientes de Popular, Inc. y excluye las transacciones procesadas por EVERTEC para otros clientes.
3 Luego de la venta en 2010 de una participación mayoritaria en EVERTEC, la subsidiaria de tecnología de Popular, Inc., no se procesan efectos electrónicos.

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

2011

 $  232.3  

 $ 

257.6  

 $ 

276.1  

 $  304.5  

 $ 

351.9  

 $  470.9  

 $  489.9  

 $  540.7  

 $ 

357.7  

 $  (64.5) 

 $ (1,243.9) 

 $ (573.9) 

 $ 

137.4  

 $ 

151.3

 23,160.4  

 25,460.5  

 14,907.8  

 28,057.1  

 16,057.1  

 30,744.7  

 33,660.4  

 36,434.7  

 44,401.6  

 48,623.7  

 47,404.0  

 44,411.4  

 38,882.8  

 34,736.3  

 38,815.0  

 18,168.6  

 19,582.1  

 22,602.2  

 28,742.3  

 31,710.2  

 32,736.9  

 29,911.0  

 26,268.9  

 23,803.9  

 26,458.9  

 14,173.7  

 14,804.9  

 16,370.0  

 1,661.0  

 1,993.6  

 2,272.8  

 17,614.7  

 2,410.9  

 18,097.8  

 20,593.2  

 22,638.0  

 24,438.3  

 28,334.4  

 27,550.2  

 25,924.9  

 26,762.2  

 2,754.4  

 3,104.6  

 3,449.2  

 3,620.3  

 3,581.9  

 3,268.4  

 2,538.8  

 3,800.5  

 13,078.8  

 13,672.2  

 1,709.1  

 37,348.4 

 25,314.4 

 27,942.1 

 3,918.8 

 $  4,611.7  

 $ 3,790.2  

 $  3,578.1  

 $ 3,965.4  

 $ 4,476.4  

 $ 5,960.2  

 $ 7,685.6  

 $ 5,836.5  

 $ 5,003.4  

 $ 2,968.3  

 $  1,455.1  

 $ 1,445.4  

 $  3,211.4  

 $ 1,426.0 

1.14% 

15.41% 

1.08% 

15.45% 

1.04% 

15.00% 

1.09% 

14.84% 

1.11% 

16.29% 

1.36% 

19.30% 

1.23% 

17.60% 

1.17% 

17.12% 

0.74% 

9.73% 

-0.14% 

-2.08% 

-3.04% 

-44.47% 

-1.57% 

-32.95% 

0.36% 

4.37% 

0.40%

4.01%

 $ 

0.83  

 $ 

0.92  

 $ 

0.99  

 $ 

1.09  

 $ 

1.31  

 $ 

1.74  

 $ 

1.79  

 $ 

1.98  

 $ 

1.24  

 $ 

(0.27) 

 $ 

(4.55) 

 $ 

0.24  

 $ 

(0.06) 

 $ 

0.14 

 0.83  

 0.25  

 5.93  

 17.00  

71% 

25% 

4% 

100% 

 0.92  

 0.30  

 5.76  

 13.97  

71% 

25% 

4% 

100% 

 0.99  

 0.32  

 6.96  

 13.16  

72% 

26% 

2% 

100% 

 1.09  

 0.38  

 7.97  

 14.54  

68% 

30% 

2% 

100% 

 1.31  

 0.40  

 9.10  

 16.90  

66% 

32% 

2% 

100% 

 1.74  

 0.51  

 9.66  

 22.43  

62% 

36% 

2% 

100% 

 1.79  

 0.62  

 10.95  

 28.83  

55% 

43% 

2% 

100% 

 1.97  

 0.64  

 11.82  

 21.15  

53% 

45% 

2% 

100% 

 1.24  

 0.64  

 12.32  

 17.95  

52% 

45% 

3% 

100% 

199 

8 

95 

302 

136 

132 

61 

12 

11 

21 

3 

2 

4 

382 

684 

478 

37 

109 

624 

196 

8 

96 

300 

149 

154 

55 

20 

13 

25 

4 

2 

1 

4 

427 

727 

524 

39 

118 

681 

195 

8 

96 

299 

153 

195 

36 

18 

13 

29 

7 

2 

1 

1 

5 

460 

759 

539 

53 

131 

723 

193 

8 

97 

298 

181 

129 

43 

18 

11 

32 

8 

2 

1 

1 

5 

431 

729 

557 

57 

129 

743 

192 

8 

128 

328 

183 

114 

43 

18 

15 

30 

9 

2 

1 

1 

5 

421 

749 

568 

59 

163 

790 

 194  

 8  

 136  

 338  

 212  

 4  

 49  

 17  

 14  

 33  

 12  

 2  

 1  

 1  

 1  

 5  

 351  

 689  

 583  

 61  

 181  

825 

 191  

 8  

 142  

 341  

 158  

0 

 52  

 15  

 11  

 32  

 12  

 2  

 1  

 1  

 1  

 7  

 292  

 633  

 605  

 65  

 192  

862 

198 

8 

89 

295 

128 

51 

48 

10 

8 

11 

2 

258 

553 

421 

59 

94 

574 

130.5 

170.9 

199 

8 

91 

298 

137 

102 

47 

12 

10 

13 

2 

4 

327 

625 

442 

68 

99 

609 

159.4 

171.0 

 (0.27) 

 0.64  

 12.12  

 10.60  

59% 

38% 

3% 

100% 

196 

8 

147 

 351  

134 

0 

51 

12 

24 

32 

13 

2 

1 

1 

1 

9 

 (4.55) 

 0.48  

 6.33  

 5.16  

64% 

33% 

3% 

100% 

179 

8 

139 

 326  

2 

0 

9 

12 

22 

32 

7 

1 

1 

1 

1 

9 

 0.24  

 0.02  

 3.89  

 2.26  

65% 

32% 

3% 

100% 

173 

8 

101 

(0.06) 

– 

 3.67  

 3.14  

74% 

23% 

3% 

100% 

185 

8 

96 

 282  

 289  

0 

0 

0 

10 

0 

33 

6 

1 

1 

1 

0 

9 

0 

0 

0 

10 

0 

36 

6 

1 

1 

1 

0 

0 

 0.14 

–

 3.77 

 1.39 

74%

23%

3%

100%

183

9

94

 286 

0

0

0

10

0

37

4

4

1

1

1

0

0

 280  

 631  

 97  

 423  

 61  

 343  

 55  

 344  

 58 

 344 

615 

69 

187 

871 

605 

74 

176 

855 

571 

77 

136 

784 

804.1 

191.7 

624 

17 

138 

779 

381.6 

0 

613

20

135

768

410.4

0

199.5 

160.2 

206.0 

149.9 

236.6 

145.3 

255.7 

138.5 

 568.5  

133.9 

625.9 

140.3 

690.2 

150.0 

772.7 

175.2 

849.4 

202.2 

 10,549  

 11,501  

 10,651  

 11,334  

 11,037  

 11,474  

 12,139  

 13,210  

 12,508  

 12,303  

 10,587  

 9,407  

 8,277  

 8,329

19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nuestro Credo

El Banco Popular es una institución 
genuinamente nativa dedicada exclusivamente 
a trabajar por el bienestar social y económico 
de Puerto Rico e inspirada en los principios 
más sanos y fundamentales de una buena 
práctica bancaria.

El Popular tiene empeñados sus esfuerzos 
y voluntad al desarrollo de un servicio 
bancario para Puerto Rico dentro de normas 
estrictamente comerciales y tan eﬁ ciente como 
pueda requerir la comunidad más progresista 
del mundo.

(cid:179) Estas palabras, escritas en 1928 por don Rafael 
Carrión Pacheco, Vicepresidente Ejecutivo y 
Presidente (1927–1956), representan el pensamiento 
que rige a Popular, Inc. en todos sus mercados.

Nuestra Gente

Los hombres y mujeres que laboran para nuestra 
institución, desde los más altos ejecutivos hasta 
los empleados que llevan a cabo las tareas más 
rutinarias, sienten un orgullo especial al servir a 
nuestra clientela con esmero y dedicación.

Todos sienten la íntima satisfacción de 
pertenecer a la Gran Familia del Banco Popular, 
en la que se fomenta el cariño y la comprensión 
entre todos sus miembros, y en la que a la vez se 
cumple ﬁ rmemente con las más estrictas reglas 
de conducta y de moral.

(cid:179) Estas palabras fueron escritas en 1988 por don 
Rafael Carrión, Jr., Presidente y Presidente 
de la Junta de Directores (1956–1991), con 
motivo del 95to aniversario de Banco Popular 
de Puerto Rico y son muestra del compromiso con 
nuestros empleados.

I N F O R M AC I Ó N   C O R P O R AT I VA
Firma Registrada de Contabilidad Pública 
Independiente: PricewaterhouseCoopers LLP

Reunión Anual: 
La reunión anual del 2012 de accionistas de Popular, 
Inc. se celebrará el viernes, 27 de abril, a las 9:00 
a.m. en el Ediﬁ cio Centro Europa en San Juan, 
Puerto Rico. 

Información Adicional: 
El Informe Anual en el Formulario 10-K radicado con 
la Comisión de Valores e Intercambio e información 
ﬁ nanciera adicional están disponibles visitando 
nuestra página de Internet: www.popular.com

20

EQUIPO GERENCIAL EJECUTIVO

De izquierda a derecha, Carlos J. Vázquez, Juan Guerrero, Néstor O. Rivera, Eli Sepúlveda, Richard L. Carrión, 
Ileana González, Ignacio Alvarez, Gilberto Monzón, Lidio Soriano, Eduardo J. Negrón y Jorge A. Junquera.

JUNTA DE DIRECTORES

OFICIALES EJECUTIVOS

RICHARD L. CARRIÓN
Presidente de la Junta de Directores
Presidente y Principal Oﬁ cial Ejecutivo 
Popular, Inc.

RICHARD L. CARRIÓN
Presidente de la Junta de Directores
Presidente y Principal Oﬁ cial Ejecutivo 
Popular, Inc.

ALEJANDRO M. BALLESTER
Presidente
Ballester Hermanos, Inc.

MARÍA LUISA FERRÉ
Presidenta y Principal Oﬁ cial Ejecutiva
Grupo Ferré Rangel

C. KIM GOODWIN
Inversionista Privada

MANUEL MORALES JR.
Presidente 
Parkview Realty, Inc.

WILLIAM J. TEUBER JR.
Vicepresidente Ejecutivo
EMC Corporation

CARLOS A. UNANUE
Presidente 
Goya de Puerto Rico

JOSÉ R. VIZCARRONDO
Presidente y Principal Oﬁ cial Ejecutivo 
Desarrollos Metropolitanos S.E.

JORGE A. JUNQUERA
Primer Vicepresidente Ejecutivo 
Principal Oﬁ cial Financiero
Popular, Inc.

CARLOS J. VÁZQUEZ
Vicepresidente Ejecutivo
Popular, Inc.
Presidente 
Banco Popular North America

IGNACIO ALVAREZ
Vicepresidente Ejecutivo
Principal Oﬁ cial Legal 
Grupo de Consejería General y Asuntos 
Corporativos
Popular, Inc.

ILEANA GONZÁLEZ*
Vicepresidenta Ejecutiva 
Grupo de Administración de 
Crédito Comercial
Banco Popular de Puerto Rico

JUAN GUERRERO
Vicepresidente Ejecutivo 
Grupo de Servicios Financieros y 
Seguros 
Banco Popular de Puerto Rico

GILBERTO MONZÓN
Vicepresidente Ejecutivo 
Grupo de Crédito a Individuos 
Banco Popular de Puerto Rico

EDUARDO J. NEGRÓN 
Vicepresidente Ejecutivo 
Grupo de Administración
Popular, Inc.

NÉSTOR O. RIVERA
Vicepresidente Ejecutivo 
Grupo de Banca Individual y 
Operaciones
Banco Popular de Puerto Rico

ELI SEPÚLVEDA
Vicepresidente Ejecutivo 
Popular, Inc.
Grupo de Crédito Comercial 
Banco Popular de Puerto Rico 

LIDIO SORIANO
Vicepresidente Ejecutivo
Principal Oﬁ cial de Riesgo
Grupo Corporativo de Manejo de Riesgo 
Popular, Inc.

* Efectivo el 15 de marzo de 2012

Financial Review and
Supplementary Information

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Statistical Summaries

Financial Statements

Management’s Report to Stockholders

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of

December 31, 2011 and 2010

Consolidated Statements of Operations for the years ended

December 31, 2011, 2010 and 2009

Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the years ended

December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

2

89

94

95

97

98

99

101

102

103

Management’s Discussion and
Analysis of Financial Condition
and Results of Operations

2

3

3

10

23

23

27

27

30

33

33

34

37

37

42

43

43

46

46

48

51

52

59

65

85

86

89

90

91

93

Forward-Looking Statements

Overview

Critical Accounting Policies / Estimates

Statement of Operations Analysis

Net Interest Income

Provision for Loan Losses

Non-Interest Income

Operating Expenses

Income Taxes

Fourth Quarter Results

Reportable Segment Results

Statement of Financial Condition Analysis

Assets

Deposits and Borrowings

Stockholders’ Equity

Regulatory Capital

Off-Balance Sheet Arrangements and Other

Commitments

Contractual Obligations and Commercial Commitments

Guarantees Associated with Loans Sold / Serviced

Risk Management

Market / Interest Rate Risk

Liquidity

Credit Risk Management and Loan Quality

Enterprise Risk and Operational Risk Management

Adoption of New Accounting Standards and Issued But

Not Yet Effective Accounting Standards

Statistical Summaries

Statements of Condition

Statements of Operations

Average Balance Sheet and Summary of Net Interest

Income

Quarterly Financial Data

3

POPULAR, INC. 2011 ANNUAL REPORT

Inc. and its

following Management’s Discussion

The
and Analysis
(“MD&A”) provides information which management believes is
necessary for understanding the financial performance of
(the “Corporation” or
subsidiaries
Popular,
“Popular”). All accompanying tables, consolidated financial
statements and corresponding notes included in this “Financial
Review and Supplementary Information - 2011 Annual Report”
(“the report”) should be considered an integral part of this
MD&A.

FORWARD-LOOKING STATEMENTS
The information included in this report contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements may relate to the Corporation’s financial condition,
results of operations, plans, objectives, future performance and
business, including, but not limited to, statements with respect
to expected earnings levels, the adequacy of the allowance for
loan losses, delinquency trends, market risk and the impact of
conditions, capital
interest
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,”
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.

capital market

“estimate,”

“intend,”

“project”

changes,

rate

and

Forward-looking statements are not guarantees of future
performance, are based on management’s current expectations
involve certain risks, uncertainties,
and, by their nature,
estimates and assumptions by management that are difficult to
predict. Various factors, some of which are beyond the
Corporation’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 (Financial Reform
Act) on the Corporation’s businesses, business practices and
costs of operations; 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;
industry;
additional Federal Deposit Insurance Corporation (“FDIC”)

competition in the

financial

services

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 such
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 the
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
the
Corporation’s ability to grow its core businesses; decisions to
downsize, sell or close units or otherwise change the business
mix of the Corporation; and management’s ability to identify
and manage these and other risks. Moreover, the outcome of
legal proceedings is inherently uncertain and depends on
judicial interpretations of law and the findings of regulators,
judges and juries.

interpretations;

competition;

increased

and

All forward-looking statements included in this report are
based upon information available to the Corporation as of the
date of this report, and other than as required by law, including
the requirements of applicable securities laws, management
assumes 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.

The description of

the Corporation’s business and risk
factors contained in Item 1 and 1A of its Form 10-K for the year
ended December 31, 2011 discusses additional
information
about the business of the Corporation and the material risk
factors that, in addition to the other information in this report,
readers should consider.

OVERVIEW
The Corporation is a diversified, publicly-owned financial
holding company subject to the supervision and regulation of
the Board of Governors of the Federal Reserve System. The
Corporation has operations in Puerto Rico, the United States
(“U.S.”) mainland, 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 mortgage
loans, investment banking, broker-dealer, auto and equipment
through
leasing
specialized subsidiaries. In the U.S. mainland, the Corporation
operates Banco Popular North America (“BPNA”), including its
wholly-owned subsidiary E-LOAN. BPNA focuses efforts and
resources on the core community banking business. BPNA

and financing,

and insurance

services

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 39 to the consolidated
financial
the
Corporation’s business segments. The Corporation has a 49%
interest in EVERTEC, which provides transaction processing
the Caribbean and Latin America,
services
including
system
the Corporation’s
infrastructures and transaction processing businesses.

servicing many of

information

throughout

statements

presents

about

for

the

loss

year

income

The Corporation’s net

ended
December 31, 2011 amounted to $151.3 million, compared
with net income of $137.4 million for 2010 and a net loss of
$573.9 million for 2009. The results for 2010 included a $640.8
million gain on the sale of a majority interest in EVERTEC. The
results of 2009 included a net
from discontinued
operations, net of tax, amounting to $20.0 million. Table 1
provides selected financial data for the past five years. The
discussions that follow pertain to Popular, Inc.’s continuing
operations, unless otherwise indicated. Also, for purposes of the
discussions, assets subject to loss sharing agreements with the
FDIC, including loans and other real estate owned, are referred
to as “covered assets” or “covered loans” since the Corporation
expects to be reimbursed for 80% of any future losses on those
assets,
sharing
agreements.

to the terms of

the FDIC loss

subject

During 2011,

the Corporation maintained a strong net
interest margin, produced strong and stable top line income
throughout
the challenging credit cycle, and continued to
reduce credit costs. For 2011, top line income, defined as net
interest income plus non-interest income, remained strong at
$2.0 billion, while the provision for loan losses declined by
$436.2 million, compared with 2010. Substantial efforts to

4

bring down the cost of deposits and increased interest income
from the covered loan portfolio helped maintain a strong net
interest margin, on a taxable equivalent basis, of 4.47% for the
year 2011.

In Puerto Rico, the credit environment remains unstable
and credit costs remain high, but there has been improvement
in some of
the Corporation’s Puerto Rico loan portfolios
during 2011, which contributed to a decline in the provision
for loan losses in the BPPR reportable segment of $122.4
million compared with the year 2010. Continuing weak
economic conditions in Puerto Rico makes loan growth a
challenge. However, the Corporation has seen growth in the
consumer lending sectors with declining delinquencies and
losses and an increase in loan demand from its corporate
clients. Although the real estate sector
in Puerto Rico
continues to be a challenge, the Corporation experienced an
increase in residential mortgage loan originations during 2011,
when compared with 2010, and its market share has also
continued improving. Credit management has remained a
focus in the BPPR reportable segment,
primary area of
principally in the commercial, construction and mortgage
lending areas.

The Corporation’s U.S. mainland operations were profitable
during 2011 with steady net interest income benefited by lower
funding costs in the midst of improving credit conditions. The
improved credit performance of BPNA resulted in a reduction
in the provision for loan losses for 2011. The U.S. operations
have followed the general credit
trends on the mainland
top line
demonstrating progressive improvement. BPNA’s
income remained steady. Management remains focused on
increasing BPNA’s customer base, as it continues its strategy to
transition from a mainly Hispanic-focused bank to a more
broad-based community bank. The biggest challenge for the
BPNA reportable segment is achieving healthy loan growth in
the markets it serves at an adequate risk-adjusted return.

5

POPULAR, INC. 2011 ANNUAL REPORT

Table 1 - Selected Financial Data

(Dollars in thousands, except per share data)

2011

2010

2009

2008

2007

CONDENSED STATEMENTS OF OPERATIONS

Year ended December 31,

Interest income
Interest expense

Net interest income

Provision for loan losses:
Non-covered loans
Covered loans
Non-interest income
Operating expenses
Income tax expense (benefit)

Income (loss) from continuing operations
Loss from discontinued operations, net of tax

Net income (loss)

Net income (loss) applicable to common stock

PER COMMON SHARE DATA [1]
Net income (loss) - basic and diluted:

From continuing operations
From discontinued operations

Total

Dividends declared
Book value
Market price
Outstanding shares:
Average - basic
Average - assuming dilution
End of period
AVERAGE BALANCES

Net loans [2]
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity
PERIOD END BALANCES

Net loans [2]
Allowance for loan losses
Earning assets
Total assets
Deposits
Borrowings
Total stockholders’ equity

SELECTED RATIOS

$1,937,501
505,509

1,431,992

430,085
145,635
560,277
1,150,297
114,927

151,325
–

$151,325

$147,602

$0.14
–

$0.14

$–
3.77
1.39

$1,948,246
653,381

$1,854,997
753,744

$2,274,123
994,919

$2,552,235
1,246,577

1,294,865

1,101,253

1,279,204

1,305,658

1,011,880
–
1,288,193
1,325,547
108,230

137,401
–

1,405,807
–
896,501
1,154,196
(8,302)

(553,947)
(19,972)

991,384
–
829,974
1,336,728
461,534

(680,468)
(563,435)

$137,401

$(573,919)

$(1,243,903)

$(54,576)

$97,377

$(1,279,200)

$(0.06)
–

$(0.06)

$–
3.67
3.14

$0.29
(0.05)

$0.24

$0.02
3.89
2.26

$(2.55)
(2.00)

$(4.55)

$0.48
6.33
5.16

341,219
–
873,695
1,545,462
90,164

202,508
(267,001)

$(64,493)

$(76,406)

$0.68
(0.95)

$(0.27)

$0.64
12.12
10.60

1,021,793,932
1,022,894,962
1,025,904,567

885,154,040
885,154,040
1,022,727,802

408,229,498
408,229,498
639,540,105

281,079,201
281,079,201
282,004,713

279,494,150
279,494,150
280,029,215

$25,617,767
32,931,332
38,066,268
27,503,391
5,846,874
3,732,836

$25,314,392
815,308
32,441,983
37,348,432
27,942,127
4,293,669
3,918,753

$25,821,778
34,154,021
38,378,966
26,650,497
7,448,021
3,259,167

$26,458,855
793,225
33,507,582
38,814,998
26,762,200
6,946,955
3,800,531

$24,836,067
34,083,406
36,569,370
26,828,209
5,832,896
2,852,065

$23,803,909
1,261,204
32,340,967
34,736,325
25,924,894
5,288,748
2,538,817

$26,471,616
36,026,077
40,924,017
27,464,279
7,378,438
3,358,295

$26,268,931
882,807
36,146,389
38,882,769
27,550,205
6,943,305
3,268,364

$25,380,548
36,374,143
47,104,935
25,569,100
9,356,912
3,861,426

$29,911,002
548,832
40,901,854
44,411,437
28,334,478
11,560,596
3,581,882

Net interest margin (taxable equivalent basis)
Return on average total assets
Return on average common stockholders’ equity
Tier I Capital to risk-adjusted assets
Total Capital to risk-adjusted assets

4.47%
0.40
4.01
15.97
17.25

3.82%
0.36
4.37
14.52
15.79

3.47%
(1.57)
(32.95)
9.81
11.13

3.81%
(3.04)
(44.47)
10.81
12.08

3.83%
(0.14)
(2.08)
10.12
11.38

[1] Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the
end of the periods.
[2] Includes loans held-for-sale and covered loans.

During 2011, the Corporation executed various initiatives to
de-risk its balance sheet,
including loan sales and loss
mitigation activities. The Corporation executed two large loan
sales during 2011. In the first quarter of 2011, the Corporation
completed the sale of $457 million (unpaid principal balance)
in U.S. non-conventional residential mortgage loans by BPNA.
On September 29, 2011, BPPR completed the sale of
construction and commercial real estate loans with an unpaid
principal balance and net book value of approximately
$358 million and $128 million, respectively. The majority of
the loans sold during 2011 were in non-performing status at the
transaction date.

Furthermore, during 2011,

the Corporation strived to
mitigate the decline in earning assets amid weak economic
conditions in Puerto Rico,
its principal market. The BPPR
segment’s non-covered loans held-in-portfolio
reportable
increased by $834 million from December 31, 2010 to the same
date in 2011, principally from the purchase of performing
loans. During the first half of 2011, the Corporation completed
two bulk purchases of residential mortgage loans from a Puerto
Rico financial institution, adding $518 million in performing
mortgage loans to its portfolio. The purchased loans had an
average FICO score of 718 and a loan-to-value (“LTV”) of 81%.
In August 2011, the Corporation completed the purchase of
Citibank’s AAdvantage co-branded credit card portfolio in
Puerto Rico and the U.S. Virgin Islands, which represented

6

approximately $131 million in balances. Also, BPPR entered
into an agreement with American Airlines, Inc. to become the
exclusive issuer of AAdvantage co-branded credit cards in those
two regions.

in

EVERTEC,

substantially

strengthened

The year 2010 was one of several accomplishments for the
Corporation that contributed to the Corporation’s profitability and
de-risking in 2011. In an effort to position the Corporation for its
participation in an FDIC-assisted transaction in Puerto Rico,
during 2010 the Corporation enhanced its capital position with an
equity offering in which it raised $1.15 billion of new common
equity capital. This capital raise, along with the after-tax gain of
$531.0 million, net of transaction costs, on the sale of a 51%
interest
the
Corporation’s capital ratios, placing it in a position to participate
in the consolidation of the Puerto Rico banking market and to
pursue strategies to improve the credit quality of its loan portfolio.
Furthermore, the Westernbank FDIC-assisted transaction proved
to be an important strategic transaction that further solidified the
Corporation’s
leadership position in Puerto Rico amid a
contracting market and has contributed with a positive financial
impact. Apart from expanding its client base, the covered assets
have boosted the Corporation’s net interest margin and other
revenues. The yield on covered loans approximated 8.95% for the
year ended December 31, 2011. Table 2 provides a summary of
the gross revenues derived from the assets acquired in the FDIC-
assisted transaction during 2010 and 2011.

Table 2 - Financial Information - Westernbank FDIC-Assisted Transaction

(In thousands)
Interest income:
Interest income on covered loans, except for discount accretion on ASC 310-20 covered loans
Discount accretion on ASC 310-20 covered loans

Total interest income on covered loans

FDIC loss share income (expense):
(Amortization) accretion of indemnification asset
80% mirror accounting on discount accretion on loans and unfunded commitments accounted for

under ASC 310-20

80% mirror accounting on provision for loan losses for reductions in expected cash flows that are

reimbursable by the FDIC [1]

Other

Total FDIC loss share income (expense)

Fair value change in equity appreciation instrument
Amortization of contingent liability on unfunded commitments (included in other operating

income)
Total revenues
Provision for loan losses
Total revenues less provision for loan losses

Average balances
(In thousands)
Covered loans
FDIC loss share asset
Note issued to the FDIC

2011

2010

Variance

$375,595
37,083
412,678

$223,271
79,825
303,096

$152,324
(42,742)
109,582

(10,855)

73,487

(84,342)

(33,221)

(95,383)

62,162

110,457
410
66,791
8,323

4,487
492,279
145,635
$346,644

–
(3,855)
(25,751)
42,555

39,404
359,304
–
$359,304

110,457
4,265
92,542
(34,232)

(34,917)
132,975
145,635
$(12,660)

2011
$4,613,361
2,176,865
1,381,981

2010
$3,364,932
1,619,830
2,753,490

Variance
$1,248,429
557,035
(1,371,509)

[1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest
cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements
(approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

7

POPULAR, INC. 2011 ANNUAL REPORT

The discussion that

the
Corporation’s
ended
December 31, 2011 compared to the results of operations of
2010. It also provides some highlights with respect to the

follows provides highlights of
for

results of operations

the year

Corporation’s financial condition, credit quality, capital and
liquidity. Table 3 presents a five-year
the
components of net income (loss) as a percentage of average
total assets.

summary of

Table 3 - Components of Net Income (Loss) as a Percentage of Average Total Assets

2011

2010

2009

2008

2007

Net interest income
Provision for loan losses
Net gain on sale and valuation adjustments of investment securities
Net (loss) gain on sale of loans, including adjustments to indemnity reserves, and valuation

adjustments on loans held-for-sale

Trading account profit
FDIC loss share income (expense)
Fair value change in equity appreciation instrument
Gain on sale of processing and technology business
Other non-interest income

Total net interest income and non-interest income, net of provision for loan losses
Operating expenses

Income (loss) from continuing operations before income tax
Income tax (expense) benefit

Income (loss) from continuing operations
Loss from discontinued operations, net of tax

Net income (loss)

3.76% 3.38% 3.01% 3.13% 2.77%
(3.84)
(1.51)
0.60
0.03

(0.72)
0.21

(2.64)
0.01

(2.42)
0.17

(0.02)
0.01
0.18
0.02
–
1.25

3.72
(3.02)

0.70
(0.30)

0.40
–

(0.15)
0.04
(0.07)
0.11
1.67
1.74

4.09
(3.45)

0.64
(0.28)

0.36
–

(0.10)
0.11
–
–
–
1.84

1.62
(3.16)

(1.54)
0.02

(1.52)
(0.05)

0.01
0.11
–
–
–
1.74

2.74
(3.27)

(0.53)
(1.13)

(1.66)
(1.38)

0.13
0.08
–
–
–
1.43

3.90
(3.28)

0.62
(0.19)

0.43
(0.57)

0.40% 0.36% (1.57)% (3.04)% (0.14)%

Net interest income on a taxable equivalent basis for the
year ended December 31, 2011 amounted to $1.5 billion, an
increase of $170 million, compared with 2010. The net interest
margin on a taxable equivalent basis increased from 3.82% for
the year 2010 to 4.47% for the year 2011, mainly due to interest
income from the covered loans, greater volume of mortgage
loans and a reduction in the cost of deposits. 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 2011 decreased by $436.2
million, or 43%, compared with 2010, which was the net result
of a decrease in the provision for non-covered loans of $581.8
million, partially offset by an increase in the provision for loan
losses on covered loans of $145.6 million. The allowance for
loan losses was 3.35% of non-covered loans held-in-portfolio at
December 31, 2011, compared with 3.83% at December 31,
2010. Total net charge-offs for 2011 decreased $597.9 million,
compared with 2010. The reduction in the allowance for loan
losses for non-covered loans at December 31, 2011, compared
with 2010, was mostly attributable to a lower portfolio balance
and net charge-offs from the commercial and construction loan
portfolios, principally at the BPNA reportable segment, and an
the
improvement
Corporation’s consumer loan portfolios, partially offset by
higher specific reserve requirements on the mortgage loan
portfolio. Year-over-year, total non-performing assets decreased

credit quality performance of

in the

by $123 million, driven by sales of non-performing loans and a
reduction in non-performing construction loans, offset in part
by an increase in non-performing commercial and mortgage
loans. The Corporation’s non-covered, non-performing loans
held-in-portfolio increased by $166 million from December 31,
2010 to the same date in 2011, reaching $1.7 billion or 8.44%
of total non-covered loans held-in-portfolio at December 31,
2011. The increase in non-performing loans held-in-portfolio
was mainly driven by the commercial and residential mortgage
loan portfolios of the BPPR reportable segment as economic
conditions in Puerto Rico continue to impact those portfolios.

Two general observations summarize the credit performance
of the Corporation’s loan portfolios heading into 2012. First, in
the U.S. mainland, the Corporation continues to enjoy the
benefits of
the de-risking strategies initiated in 2008. Net
charge-offs and non-performing loans in the BPNA reportable
segment peaked in 2009 and have since decreased. The
Corporation’s U.S. mainland construction loan exposure at
December 31, 2011 was down to $151 million, or 55% lower
2010.
than the
Non-performing
loans
held-in-portfolio at the U.S. mainland operations has declined
despite a shrinking loan portfolio. Non-performing loans
continued to decline throughout 2011; though, as expected, the
change in the rate of improvement began to level-off at the end
of the year. Second, all of the Corporation’s loan portfolios in
Puerto Rico, except for the commercial and mortgage loan

a percentage of

outstanding

of
total

balance

loans

end

the

as

at

portfolio,
showed better credit quality, with both early
delinquency and non-performing loans decreasing. The increase
in mortgage non-performing loans was mainly driven by
repurchases from mortgage loans serviced with credit recourse,
mostly from legacy securitizations into FNMA pools. In early
2009, the Corporation stopped the practice of securitizing loans
with recourse. Once the loan is repurchased, the Corporation
programs.
its
may
Notwithstanding the increase in Puerto Rico non-performing
mortgage loans, charge-offs continue to be low, representing
less that 1% of mortgage loan balances.

loss-mitigation

through

put

it

Refer to the Provision for Loan Losses and 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 year ended December 31, 2011
amounted to $560 million, a decrease of $727.9 million,
compared with 2010. Excluding the $640.8 million gain on the
sale of the 51% interest in EVERTEC during 2010, non-interest
income for 2011 decreased by $87.1 million, mainly due to
lower other service fees by $137.8 million resulting from lower
processing, debit and credit card fees due in part to the sale of
on
the
September 30, 2010. Refer to the Non-Interest Income section
of this MD&A for a table that provides a breakdown of the
different categories of non-interest income.

and merchant

processing

business

banking

Total operating expenses for the year 2011 amounted to $1.2
billion, a decline of $175.3 million, when compared with the
previous year. The main driver for the decrease pertained to
EVERTEC’s operating expenses in 2010 prior to the sale.
Operating expenses for the BPPR reportable segment totaled
$890.6 million for 2011, an increase of $29.7 million when
compared with 2010. Operating expenses for
the BPNA
reportable segment amounted to $248.4 million, a decrease of
$49.9 million when compared with the previous year.
Operating expenses for the year ended December 31, 2011
included approximately $15.6 million in pension costs related
to employees that were eligible and elected to participate in the
voluntary retirement program announced in October 2011. A
total of 369 employees retired effective February 1, 2012.
Annual cost savings from this reduction in headcount are
estimated to be approximately $15 million. The voluntary
retirement program was part of management’s efforts to achieve
efficiencies through the reduction in salary costs. Refer to the
Operating Expenses section of
this MD&A for additional
explanations on the major variances in the different categories
of operating expenses.

Income tax expense amounted to $114.9 million for the year
2011, compared with $108.2 million for 2010, principally due
to the recognition of $103.3 million in income tax expense and
a decrease in the net deferred tax assets of the Puerto Rico
operations resulting from the reduction in the marginal tax

8

rate. This increase was offset by lower income before taxes from
the Puerto Rico operations mostly due to the gain on the sale of
the 51% interest in EVERTEC during 2010. In addition, income
tax expense decreased during 2011 as a result of the tax benefit
of $53.6 million recorded in June 2011 for 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 the tax-exempt income). Also, in 2011 there was a
higher benefit on net exempt interest income compared to
2010. Refer to the Income Taxes section in this MD&A and
Note 37 to the
for
information on the private ruling issued by the Puerto Rico
Department of the Treasury to the Corporation, as well as other
detailed information such as the changes in the tax rate.

consolidated financial

statements

Total assets amounted to $37.3 billion at December 31,
2011, compared with $38.8 billion at December 31, 2010, a
decrease of $1.5 billion. Total earning assets at December 31,
2011 amounted to $32.4 billion, a decrease of $1.1 billion, or
3%, compared with December 31, 2010. Total assets and total
earning assets amounted to $34.7 billion and $32.3 billion,
respectively, at December 31, 2009. The significant increase in
total assets from December 31, 2009 to the same date in 2010
was due to the assets acquired in the Westernbank FDIC-
assisted transaction.

offset

volume

by higher

of mortgage

Total loans, including loans held-for-sale and covered loans,
decreased $1.1 billion from December 31, 2010 to the same
date in 2011, principally in commercial and construction loans,
partially
loans
held-in-portfolio. The Corporation’s U.S. mainland operations
experienced a reduction in total loans of $1.1 billion, while the
Puerto Rico operations’ total loan portfolio remained stable.
The decline in total loans was mainly due to portfolio run-off,
loan sales, charge-offs and reclassifications to repossessed
properties as part of foreclosure proceedings, coupled with low
new loan demand in certain loan segments. Despite a large
reduction in the portfolio due to the sales executed during
2011, the Corporation mitigated the decline in earning assets,
in part, by successfully executing two bulk loan purchases of
performing mortgage loans and by acquiring the Citibank’s
AAdvantage co-branded credit card portfolio in Puerto Rico and
the U.S. Virgin Islands. Refer to the Statement of Financial
Condition Analysis section included in this MD&A for a
description of these transactions. The Corporation continues to
seek additional opportunities to acquire interest earning assets
with appropriate risk profiles that can be absorbed by its
existing business platforms without undue added risk.

Refer to Table 14 in the Statement of Financial Condition
Analysis section of this MD&A for the percentage allocation of
the composition of the Corporation’s financing to total assets.
Deposits amounted to $27.9 billion at December 31, 2011,
compared with $26.8 billion at December 31, 2010. Table 15
presents a breakdown of deposits by major categories. The
increase in deposits was mostly associated with higher volume

9

POPULAR, INC. 2011 ANNUAL REPORT

to

31,

2011,

amounted

equity
2011,

compared with $6.9

$3.9
compared with $3.8

of brokered deposits, deposits in trust and savings accounts,
partially offset by lower volume of retail sector time deposits.
The Corporation’s borrowings amounted to $4.3 billion at
billion at
December
December 31, 2010. The decrease in borrowings was mostly
related to a reduction of $2.5 billion in the note issued to the
FDIC as part of the Westernbank FDIC-assisted transaction.
The note issued to the FDIC was completely repaid at
December 31, 2011.
Stockholders’
31,

billion
at
December
billion at
December 31, 2010. The Corporation continues to be well-
capitalized at December 31, 2011. The Corporation’s regulatory
capital
31, 2010 to
improved from December
December 31, 2011. The Tier 1 risk-based capital and Tier 1
common equity to risk-weighted assets stood at 15.97% and
12.10%, respectively, at December 31, 2011, compared with
14.52% and 10.94%, respectively, at December 31, 2010. The
improvement in the Corporation’s regulatory capital ratios from
December 31, 2010 to December 31, 2011 was principally due
to a reduction in assets, changes in balance sheet composition
including the increase in lower risk-assets such as mortgage
loans, higher net deferred tax asset included without limitation
in regulatory capital and internal capital generation. Refer to
Table 16 of this report for information on capital adequacy
data, including regulatory capital ratios.

ratios

and reported operational profits. Some

In summary, 2011 was a turnaround year during which the
Corporation boosted its net interest margin, reduced its credit
important
costs
transactions during the past years, including the reorganization
of
the
acquisition of assets of Westernbank on the FDIC-assisted
transaction and the acquisition of Citibank’s retail business in

to exit high-risk businesses,

the U.S. operations

Puerto Rico, strengthened the Corporation’s financial position.
Also, as described previously, the capital raise and sale of
EVERTEC positioned the Corporation to participate in the
FDIC-assisted transaction. Operationally, the Corporation is a
smaller organization than it was a few years ago. The
Corporation is now focused on its core banking business both
in Puerto Rico and the U.S. mainland. Heading into 2012,
management expects the Puerto Rico economy to remain flat
and the U.S. mainland economy to grow moderately.

Moving forward,

the Corporation also
in Puerto Rico,
expects to continue pursuing sales of non-performing loans,
further enhance loss-mitigation areas, redesign processes and
consolidate branches
to achieve greater efficiencies and
continue to identify opportunities to add lower-risk assets that
can be managed within the existing business platforms. In the
U.S. mainland, the Corporation expects to solidify the trend of
improving credit quality by continuing the
run-off or
disposition of discontinued portfolios, actively manage the
existing classified portfolio, and identify new asset growth in
selected loan categories. Also, going forward, BPNA plans to
continue improving its client mix, maximizing the value of the
rebranding, achieving growth in targeted loan portfolios both
organically and through asset acquisitions and continue
enhancing its retail network and products offerings.

For

financial
further discussion of operating results,
condition and business risks refer to the narrative and tables
included herein.

The shares of the Corporation’s common stock are traded on
the NASDAQ Global Select Market under the symbol BPOP.
Table 4 shows the Corporation’s common stock performance on
a quarterly basis during the last five years, including market
prices and cash dividends declared.

Table 4 - Common Stock Performance

10

Market Price

High

Low

Cash Dividends
Declared
per Share

Book Value
Per Share

Dividend
Yield [1]

$3.77

N.M.

Price/
Earnings
Ratio

9.93x

Market/Book
Ratio

36.87%

$1.90
2.83
3.24
3.53

$3.14
2.95
4.02
2.91

$2.80
2.83
3.66
5.52

$8.61
11.17
13.06
14.07

$12.51
16.18
17.49
18.94

$1.12
1.37
2.63
2.87

$2.70
2.45
2.64
1.75

$2.12
1.04
2.19
1.47

$4.90
5.12
6.59
8.90

$8.65
11.38
15.82
15.82

$–
–
–
–

$–
–
–
–

$–
–
–
0.02

$0.08
0.08
0.16
0.16

$0.16
0.16
0.16
0.16

3.67

N.M.

(52.33)

85.56

3.89

2.55%

N.M.

58.10

6.33

6.17

N.M.

81.52

12.12

4.38

(39.26)

87.46

2011
4th quarter
3rd quarter
2nd quarter
1st quarter
2010
4th quarter
3rd quarter
2nd quarter
1st quarter
2009
4th quarter
3rd quarter
2nd quarter
1st quarter
2008
4th quarter
3rd quarter
2nd quarter
1st quarter
2007
4th quarter
3rd quarter
2nd quarter
1st quarter

[1] Based on the average high and low market price for the four quarters.
N.M. - Not meaningful.

CRITICAL ACCOUNTING POLICIES / ESTIMATES
followed by the
The accounting and reporting policies
Corporation and its
subsidiaries conform with generally
accepted accounting principles (“GAAP”) in the United States
of America and general practices within the financial services
industry. The Corporation’s significant accounting policies are
described in detail
in Note 2 to the consolidated financial
statements and should be read in conjunction with this section.
Critical accounting policies require management to make
estimates and assumptions, which involve significant judgment
about the effect of matters that are inherently uncertain and
that involve a high degree of subjectivity. 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. The following MD&A

section is a summary of what management considers the
Corporation’s critical accounting policies / estimates.

Fair Value Measurement of Financial Instruments
The Corporation measures fair value as required by ASC
Subtopic 820-10 “Fair Value Measurements and Disclosures”,
which defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. The Corporation currently measures at fair
value on a recurring basis its trading assets, available-for-sale
securities, derivatives, mortgage servicing rights and contingent
consideration (true-up payment obligation to the FDIC).
Occasionally, the Corporation may be required to record at fair

11

POPULAR, INC. 2011 ANNUAL REPORT

value other assets on a nonrecurring basis, such as loans
held-for-sale, impaired loans held-in-portfolio that are collateral
dependent and certain other assets. These nonrecurring fair
value adjustments typically result from the application of lower
of cost or fair value accounting or write-downs of individual
assets.

its

assets

The Corporation categorizes

and liabilities
measured at fair value under the three-level hierarchy. The level
within the hierarchy is based on whether the inputs to the
valuation methodology used for fair value measurement are
observable. 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. No significant
degree of judgment for these valuations is needed, as they
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, and
can be
other
corroborated by observable market data for substantially
the full term of the financial instrument.

are observable or

inputs

that

that

inputs

• Level 3 - Unobservable inputs that are supported by little
or no market activity and that are significant to the fair
the financial asset or liability.
value measurement of
Unobservable
the Corporation’s own
reflect
assumptions about what market participants would use to
price the asset or liability, including assumptions about
risk. The inputs are developed based on the best available
information, which might include the Corporation’s own
data such as internally-developed models and discounted
cash flow analyses.

The Corporation requires the use of observable inputs when
available, in order to minimize the use of unobservable inputs
to determine fair value. The inputs or methodologies used for
valuing securities are not necessarily an indication of the risk
associated with investing on those securities. The amount of
judgment involved in estimating the fair value of a financial
instrument depends upon the availability of quoted market
prices or observable market parameters. In addition, it may be
affected on other factors such as the type of instrument, the
liquidity of the market for the instrument, transparency around
the inputs
the contractual
characteristics of the instrument.

to the valuation, as well as

If listed prices or quotes are not available, the Corporation
employs valuation models that primarily use market-based
inputs including yield curves, interest rate curves, volatilities,

credit curves, and discount, prepayment and delinquency rates,
among other considerations. When market observable data is
not available, the valuation of financial instruments becomes
more subjective and involves substantial judgment. The need to
use unobservable inputs generally results from diminished
observability of both actual trades and assumptions resulting
from the lack of market liquidity for those types of loans or
securities. When fair values are estimated based on modeling
the
techniques
Corporation uses
rates,
interest
prepayment speeds, default
loss severity rates and
discount rates. 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.

such as discounted cash flow models,

assumptions

such as

rates,

The fair value measurements and disclosures guidance in
ASC Subtopic 820-10 also addresses measuring fair value in
situations where markets are inactive and transactions are not
orderly. Transactions or quoted prices for assets and liabilities
may not be determinative of fair value when transactions are
not orderly and thus may require adjustments to estimate fair
value. Price quotes based on transactions that are not orderly
should be given little, if any, weight in measuring fair value.
Price quotes based upon transactions that are orderly shall be
considered in determining fair value and the weight given is
based on facts and circumstances. If sufficient information is
not available to determine if price quotes are based upon
orderly transactions, less weight should be given to the price
quote relative to other transactions that are known to be
orderly.

The lack of liquidity is incorporated into the fair value
measurement based on the type of asset measured and the
valuation methodology used. An illiquid market is one in which
little or no observable activity has occurred or one that lacks
willing buyers or willing sellers. Discounted cash flow
techniques incorporate forecasting of expected cash flows
discounted at appropriate market discount rates which reflect
the lack of liquidity in the market which a market participant
would
value
measurements inherently reflect any lack of liquidity in the
market since they represent an exit price from the perspective
of the market participants.

consider.

Broker

quotes

used

fair

for

Management believes that fair values are reasonable and
consistent with the fair value measurement guidance based on
the Corporation’s internal validation procedure and consistency
of the processes followed, which include obtaining market
quotes when possible or using valuation techniques that
incorporate market-based inputs.

Refer to Note 30 to the consolidated financial statements for
information on the Corporation’s fair value measurement
disclosures required by the applicable accounting standard. At
December 31, 2011, approximately $5.5 billion, or 97%, of the
assets measured at fair value on a recurring basis used market-

securities

and political
(“MBS”)

based or market-derived valuation inputs in their valuation
methodology and, therefore, were classified as Level 1 or Level
2. The majority of instruments measured at fair value were
including U.S. Treasury securities,
classified as Level 2,
obligations of U.S. Government sponsored entities, obligations
subdivisions, most
of Puerto Rico, States
mortgage-backed
collateralized
and
mortgage obligations (“CMOs”), and derivative instruments.
U.S. Treasury securities were valued based on yields that were
interpolated from the constant maturity treasury curve.
Obligations of U.S. Government sponsored entities were priced
based on an active exchange market and on quoted prices for
similar securities. Obligations of Puerto Rico, States and
political subdivisions were valued based on trades, bid price or
spread, two sided markets, quotes, benchmark curves, market
data feeds, discount and capital rates and trustee reports. MBS
and CMOs were priced based on a bond’s theoretical value from
similar bonds defined by credit quality and market sector. Refer
to the Derivatives section below for a description of
the
valuation techniques used to value these derivative instruments.
The remaining 3% of assets measured at fair value on a
recurring basis at December 31, 2011 were classified as Level 3
since their valuation methodology considered significant
unobservable inputs. The financial assets measured as Level 3
included mostly Puerto Rico tax-exempt GNMA mortgage-
backed securities and mortgage servicing rights (“MSRs”).
GNMA tax exempt mortgage-backed securities are priced using
a local demand price matrix prepared from local dealer quotes,
and other local investments such as corporate securities and
local mutual funds which are priced by local dealers. MSRs, on
the other hand, are priced internally using a discounted cash
flow model which considers
portfolio
characteristics, prepayment assumptions, delinquency rates,
late charges, other ancillary revenues, cost to service and other
economic factors. Additionally, the Corporation reported $180
million of financial assets that were measured at fair value on a
nonrecurring basis at December 31, 2011, all of which were
classified as Level 3 in the hierarchy.

servicing

fees,

Broker quotes used for fair value measurements inherently
reflect any lack of liquidity in the market since they represent
an exit price from the perspective of the market participants.
Financial assets that were fair valued using broker quotes
amounted to $49 million at December 31, 2011, of which $36
million were Level 3 assets and $13 million were Level 2 assets.
tax-exempt GNMA
These assets consisted principally of
mortgage-backed securities. Fair value for these securities was
based on an internally-prepared matrix derived from an average
of two indicative local broker quotes. The main input used in
the matrix pricing was non-binding local broker quotes
obtained from limited trade activity. Therefore, these securities
were classified as Level 3.

During the year ended December 31, 2011, there were no
transfers in and/or out of Level 3 for financial instruments

12

measured at fair value on a recurring basis. Also, there were no
transfers in and/or out of Level 1 and Level 2 during the years
ended December 31, 2011 and 2010. Pursuant
to the
Corporation’s policy, transfers are recognized as of the end of
the reporting period.

Trading Account Securities and Investment Securities
Available-for-Sale
The majority of the values for trading account securities and
investment securities available-for-sale are obtained from third-
party pricing services and are validated with alternate pricing
sources when available. Securities not priced by a secondary
pricing source are documented and validated internally
according to their significance to the Corporation’s financial
statements. Management has established materiality thresholds
according to the investment class to monitor and investigate
material deviations in prices obtained from the primary pricing
service provider and the secondary pricing source used as
support
for the valuation results. During the year ended
December 31, 2011, the Corporation did not adjust any prices
obtained from pricing service providers or broker dealers.

including the relative liquidity of

Inputs are evaluated to ascertain that they consider current
market conditions,
the
market. When a market quote for a specific security is not
available, the pricing service provider generally uses observable
data to derive an exit price for the instrument, such as
benchmark yield curves and trade data for similar products. To
the extent trading data is not available, the pricing service
provider relies on specific information including dialogue with
brokers, buy side clients, credit ratings, spreads to established
benchmarks and transactions on similar securities, to draw
correlations based on the characteristics of
the evaluated
for any reason the pricing service provider
instrument. If
cannot observe data required to feed its model, it discontinues
pricing the instrument. During the year ended December 31,
2011, none of the Corporation’s investment securities were
to pricing discontinuance by the pricing service
subject
providers. The pricing methodology and approach of our
primary pricing service providers is concluded to be consistent
with the fair value measurement guidance.

its
Furthermore, management assesses the fair value of
portfolio of investment securities at least on a quarterly basis,
which includes analyzing changes in fair value that have
resulted in losses that may be considered other-than-temporary.
Factors considered include, for example, the nature of the
investment, severity and duration of possible impairments,
industry reports, sector credit ratings, economic environment,
creditworthiness of the issuers and any guarantees.

Securities are classified in the fair value hierarchy according
to product type, characteristics and market liquidity. At the end
of each period, management assesses the valuation hierarchy for
each asset or liability measured. The fair value measurement
analysis performed by the Corporation includes validation

13

POPULAR, INC. 2011 ANNUAL REPORT

and

procedures
pricing
review of market
methodology, assumption and level hierarchy changes, and
evaluation of distressed transactions.

changes,

At December 31, 2011, the Corporation’s portfolio of trading
and investment securities available-for-sale amounted to $5.4
billion and represented 96% of
the Corporation’s assets
measured at fair value on a recurring basis. At December 31,
2011, net unrealized gains on the trading and available-for-sale
investment securities portfolios approximated $23 million and
$231 million,
the
Corporation’s
securities
and
available-for-sale were classified as Level 2. Trading and
investment securities available-for-sale classified as Level 3,
which were the securities that involved the highest degree of
judgment, represent less than 1% of the Corporation’s total
portfolio of trading and investment securities available-for-sale.

respectively. Fair values

for most of

investment

trading

Loans held-for-sale
Loans held-for-sale are stated at the lower of cost or fair value,
cost being determined based on the outstanding loan balance
less unearned income, and fair value determined, generally in
the aggregate. Fair value is measured based on current market
prices for similar loans, outstanding investor commitments,
prices of recent sales or discounted cash flow analyses which
utilize inputs and assumptions which are believed to be
consistent with market participants’ views. The cost basis also
includes consideration of deferred origination fees and costs,
which are recognized in earnings at the time of sale.

Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”), which amounted to $151
million at December 31, 2011, do not trade in an active, open
market with readily observable prices. Fair value is estimated
based upon discounted net cash flows calculated from a
combination of loan level data and market assumptions. The
valuation model combines loans with common characteristics
that impact servicing cash flows (e.g. investor, remittance cycle,
interest rate, product type, etc.) in order to project net cash
flows. Market valuation assumptions
include prepayment
speeds, discount rate, cost to service, escrow account earnings,
and
other
considerations. Prepayment speeds are derived from market
data that is more relevant to the U.S. mainland loan portfolios
and, thus, are adjusted for the Corporation’s loan characteristics
and portfolio behavior since prepayment rates in Puerto Rico
have been historically lower. Other assumptions are, in the
most part, directly obtained from third-party providers.
Disclosure of two of the key economic assumptions used to
measure MSRs, which are prepayment speed and discount rate,
and a sensitivity analysis
to these
assumptions,
is included in Note 13 to the consolidated
financial statements.

to adverse changes

contractual

servicing

income,

among

fee

Derivatives
Derivatives, such as 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 held
by the Corporation were classified as Level 2. Valuations of
derivative assets and liabilities reflect the values associated with
counterparty risk and nonperformance risk, respectively. The
non-performance risk, which measures the Corporation’s own
credit risk, is determined using internally-developed models
that consider the net realizable value of the collateral posted,
remaining term, and the creditworthiness or credit standing of
the Corporation. The counterparty risk is also determined using
internally-developed models
the
creditworthiness of the entity that bears the risk, net realizable
value of the collateral received, and available public data or
internally-developed data to determine their probability of
default. To manage the level of credit risk, the Corporation
employs procedures for credit approvals and credit
limits,
monitors the counterparties’ credit condition, enters into
master netting agreements whenever possible and, when
appropriate, requests additional collateral. During the year
ended December 31, 2011, inclusion of credit risk in the fair
value of the derivatives resulted in a net loss of $0.6 million
recorded in the other operating income and interest expense
captions of the consolidated statement of operations, which
consisted of a gain of $1.1 million resulting from the
Corporation’s own credit standing adjustment and a loss of $1.7
million from the assessment of the counterparties’ credit risk.

incorporate

which

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, size and supply and demand.
the housing markets and the
Continued deterioration of
economy in general have adversely impacted and continue to
affect the market activity related to real estate properties. These
collateral dependent impaired loans are classified as Level 3 and
are reported as a nonrecurring fair value measurement.

Other real estate owned
For other real estate owned received in satisfaction of debt, the
the
collateral dependent valuation method is used for
impairment determination since the expected realizable value is
based upon the proceeds received from the liquidation of the
property. The other real estate owned is classified as Level 3
and is reported as a nonrecurring fair value measurement.

True-up payment obligation to the FDIC
The fair value of the true-up payment obligation, considered
contingent consideration, to the FDIC as it relates to the
Westernbank FDIC-assisted transaction amounted to $98
million at December 31, 2011. The fair value was estimated
using projected cash outflows related to the loss sharing
agreements at
taking into
consideration the intrinsic loss estimate, asset premium/
discount, cumulative shared loss payments, and the cumulative
servicing amount related to the loan portfolio. Refer to Note 4
to the consolidated financial statements for a description of the
share cash outflows
true-up payment
expected to be paid to the FDIC were discounted using a term
equivalent rate taking into consideration BPPR’s credit rating.

the true-up measurement date,

formula. The loss

Loans and Allowance for Loan Losses
Interest on loans is accrued and recorded as interest income
based upon the principal amount outstanding.

Non-accrual loans are those loans on which the accrual of
interest is discontinued. When a loan is placed on non-accrual
status, all previously accrued and unpaid interest is charged
against income and the loan is accounted for either on a cash-
basis method or on the cost-recovery method. Loans designated
as non-accruing are returned to accrual status when the
Corporation expects repayment of the remaining contractual
principal and interest. The determination as to the ultimate
collectability of the loan’s balance may involve management’s
judgment in the evaluation of the borrower’s financial condition
and prospects for repayment.

Refer to the MD&A section titled Credit Risk Management
and Loan Quality, particularly the Non-performing assets
sub-section,
for a detailed description of the Corporation’s
non-accruing and charge-off policies by major loan categories.

One of the most critical and complex accounting estimates is
associated with the determination of the allowance for loan
losses. The provision for loan losses charged to current
operations is based on this determination. The Corporation’s
assessment of the allowance for loan losses is determined in
accordance with accounting guidance, specifically guidance of
loss
in ASC Subtopic 450-20 and loan
impairment guidance in ASC Section 310-10-35.

contingencies

allowance

The accounting guidance provides for the recognition of a
loss
loans. The
for groups of homogeneous
Corporation’s determination of the general allowance for loan
losses under ASC Subtopic 450-20 includes the following
principal factors:

• Historical net loss rates (including losses from impaired
loans) by loan type and by legal entity adjusted for recent
net charge-off trends and environmental factors. The base
net loss rates are based on the moving average of annualized
net charge-offs computed over a 3-year historical loss period
for commercial and construction loan portfolios, and an
18-month period for consumer loan portfolios.

14

• Net charge-off trend factors are applied to adjust the base
loss rates based on recent loss trends. The Corporation
applies a trend factor when base losses are below more
loss trends (last 6 months). The trend factor
recent
accounts
imprecision and the “lagging
perspective” in base loss rates. In addition, caps and floors
for the trend factor mitigate excessive volatility in the
adjustment.

inherent

for

• Environmental

credit

factors, which include

losses to differ from historical

and
macroeconomic indicators such as employment, price
index and construction permits, were adopted to account
for current market conditions that are likely to cause
estimated credit
loss
experience. The Corporation reflects the effect of these
environmental
an
adjustment that, as appropriate, increases or decreases the
historical loss rate applied to each group. Environmental
factors provide updated perspective on credit
and
economic conditions. Correlation and regression analyses
are used to select and weight these indicators.

factors on each loan group as

According to the accounting guidance criteria for specific
impairment of a loan, the Corporation defines as impaired loans
those commercial and construction borrowers with outstanding
debt of $1 million or more and with interest and/or principal 90
days or more past due. Also, specific commercial borrowers
with outstanding debt of $1 million or over are deemed
impaired when, based on current
information and events,
management considers that it is probable that the debtor would
be unable to pay all amounts due according to the contractual
terms of the loan agreement. Commercial and construction
loans that originally met
the Corporation’s threshold for
impairment identification in a prior period, but due to charge-
offs or payments are currently below the $1 million threshold
and are still 90 days past due, except for TDRs, are accounted
for under the Corporation’s general reserve methodology.
Although the accounting codification guidance for specific
impairment of a loan excludes large groups of smaller balance
homogeneous
evaluated for
are
impairment (e.g. mortgage and consumer loans), it specifically
loan modifications considered troubled debt
requires that
restructurings (“TDRs”) be analyzed under its provisions. An
allowance for loan impairment is recognized to the extent that
the carrying value of an impaired loan exceeds the present
value of the expected future cash flows discounted at the loan’s
effective rate,
if
the observable market price of
the loan,
available, or the fair value of the collateral
if the loan is
collateral dependent.

collectively

loans

that

The fair value of

the collateral on commercial and
construction loans is generally obtained from appraisals or
evaluations. The Corporation periodically requires updated
appraisal reports for loans that are considered impaired. The
periodicity of updated appraisals depends on total debt

15

POPULAR, INC. 2011 ANNUAL REPORT

outstanding and type of collateral. Currently, for commercial
and construction loans secured by real estate, if the borrower’s
total debt is equal to or greater than $1 million, the appraisal is
updated annually. If the borrower’s total debt is less than $1
million, the appraisal is updated at least every two years.

credits

considered impaired following

As a general procedure, the Corporation internally reviews
appraisals as part of the underwriting and approval process and
certain
also for
materiality benchmarks. Appraisals may be adjusted due to
their age, property conditions, geographical area or general
market conditions. The adjustments applied are based upon
internal information, like other appraisals and/or loss severity
information that can provide historical trends in the real estate
market. Discount rates used may change from time-to-time
based on management’s estimates. Refer to the Credit Risk
Management and Loan Quality section of this MD&A for more
detailed information on the Corporation’s collateral value
estimation for other real estate.

risks

or markets. Other

in the loan portfolio.

The Corporation’s management evaluates the adequacy of
the allowance for loan losses on a quarterly basis following a
systematic methodology in order to provide for known and
inherent
In developing its
assessment of the adequacy of the allowance for loan losses, the
Corporation must rely on estimates and exercise judgment
regarding matters where the ultimate outcome is unknown
such as economic developments affecting specific customers,
industries
can affect
management’s estimates are the years of historical data to
include when estimating losses, the level of volatility of losses
in a specific portfolio, changes in underwriting standards,
financial
impairment
measurement, among others. Changes in the financial condition
of individual borrowers, in economic conditions, in historical
loss experience and in the condition of the various markets in
which collateral may be sold may all affect the required level of
the allowance for loan losses. Consequently,
the business,
financial condition, liquidity, capital and results of operations
could also be affected.

accounting

standards

factors

loan

that

and

The collateral dependent method is generally used for the
impairment determination on commercial and construction
loans since the expected realizable value of the loan is based
upon the proceeds received from the liquidation of
the
collateral property. For commercial properties, the “as is” value
or the “income approach” value is used depending on the
financial condition of the subject borrower and/or the nature of
the subject collateral. In most cases, impaired commercial loans
do not have reliable or sustainable cash flow to use the
discounted cash flow valuation method. On construction loans,
“as developed” collateral values are used when the loan is
originated since the assumption is that the cash flow of the
property once leased or sold will provide sufficient funds to
repay the loan. In the case of many impaired construction
loans, the “as developed” collateral value is also used since

completing the project reflects the best exit strategy in terms of
potential loss reduction. In these cases, the costs to complete
are considered as part of the impairment determination. As a
general rule, the appraisal valuation used by the Corporation
for impaired construction loans is based on discounted value to
a single purchaser, discounted sell out or “as is” depending on
the condition and status of the project and the performance of
the same.

involves a degree of

including interest accrued at

A restructuring constitutes a TDR when the Corporation
separately concludes that both of the following conditions exist:
(i) the restructuring constitutes a concession and (ii) the debtor
is experiencing financial difficulties. The concessions stem from
an agreement between the creditor and the debtor or are
imposed by law or a court. These concessions could include a
reduction in the interest rate on the loan, payment extensions,
forgiveness of principal, forbearance or other actions intended
to maximize collection. A concession has been granted when, as
a result of the restructuring, the Corporation does not expect to
collect all amounts due,
the
original contract rate. If the payment of principal is dependent
on the value of collateral, the current value of the collateral is
taken into consideration in determining the amount of
principal to be collected; therefore, all factors that changed are
considered to determine if a concession was granted, including
the change in the fair value of the underlying collateral that
may be used to repay the loan. Classification of
loan
modifications as TDRs
judgment.
Indicators that the debtor is experiencing financial difficulties
which are considered include: (i) the borrower is currently in
default on any of its debt or it is probable that the borrower
would be in payment default on any of
in the
foreseeable future without the modification; (ii) the borrower
has declared or is in the process of declaring bankruptcy;
(iii) there is significant doubt as to whether the borrower will
continue to be a going concern; (iv) the borrower has securities
that have been delisted, are in the process of being delisted, or
are under threat of being delisted from an exchange; (v) based
on estimates
the
borrower’s current business capabilities, it is forecasted that the
entity-specific cash flows will be insufficient to service the debt
(both interest and principal) in accordance with the contractual
through maturity; and
terms of
(vi) absent
the borrower cannot
obtain funds from sources other than the existing creditors at
an effective interest rate equal to the current market interest
rate
a non-troubled debtor. The
identification of TDRs is critical in the determination of the
adequacy of the allowance for loan losses. Loans classified as
TDRs are excluded from TDR status if performance under the
restructured terms exists for a reasonable period (at least twelve
months of sustained performance) and the loan yields a market
rate.

the current modification,

the existing agreement

that only encompass

and projections

similar debt

its debt

for

for

For mortgage loans that are modified with regard to
payment terms and which constitute TDRs, the discounted cash
flow value method is used as the impairment valuation is more
appropriately calculated based on the ongoing cash flow from
the individuals rather than the liquidation of the asset. The
computations give consideration to probability of default and
loss-given-foreclosure on the related estimated cash flows. For
consumer loans deemed TDRs, the Corporation also uses a
discounted cash flow value methodology, but currently does
not
rate assumption pre- or post-
modification.

incorporate a default

Upon adoption of the amendments in ASU 2011-02 on the
third quarter of 2011,
the Corporation reassessed all
restructurings that occurred on or after January 1, 2011 to
determine if they are considered a TDR. Upon identifying those
the Corporation classified them as
receivables as TDRs,
impaired under the guidance in ASC section 310-10-35. The
amendments in ASU 2011-02 require prospective application of
the
ASC
Section 310-10-35 for those receivables newly identified as
impaired. Refer to Note 11 to the consolidated financial
statements for disclosures on the impact of adopting ASU
2011-02 and to Note 3 for a general description of the ASU
2011-02 guidance.

measurement

impairment

guidance

in

Acquisition Accounting for Covered Loans and Related
Indemnification Asset
The Corporation accounted for the Westernbank FDIC-assisted
transaction under the accounting guidance of ASC Topic
No. 805, Business Combinations, which requires the use of the
purchase method of accounting. All
identifiable assets and
liabilities acquired were initially recorded at fair value. No
allowance for loan losses related to the acquired loans was
recorded on the acquisition date as the fair value of the loans
acquired incorporated assumptions regarding credit risk. Loans
acquired were recorded at fair value in accordance with the fair
value methodology prescribed in ASC Topic 820, exclusive of
the shared-loss agreements with the FDIC. These fair value
estimates associated with the loans included estimates related to
expected prepayments and the amount and timing of expected
principal, interest and other cash flows.

fair

value

subject

Because the FDIC has agreed to reimburse the Corporation
for losses related to the acquired loans in the Westernbank
FDIC-assisted transaction,
to certain provisions
specified in the agreements, an indemnification asset was
recorded at
acquisition date. The
indemnification asset was recognized at the same time as the
indemnified loans, and is measured on the same basis, subject
limitations. The loss share
to collectability or contractual
indemnification asset on the acquisition date reflected the
reimbursements expected to be received from the FDIC, using
an appropriate discount rate, which reflected counterparty
credit risk and other uncertainties.

the

at

16

Refer to Note 4 for a description of the FDIC-assisted

The

these

loans

initial

valuation

transaction and the terms of the loss share agreements.
and

related
of
indemnification asset required management to make subjective
judgments concerning estimates about how the acquired loans
would perform in the future using valuation methods,
including discounted cash flow analyses and independent third-
party appraisals. Factors that may significantly affect the initial
valuation included, among others, market-based and industry
data related to expected changes in interest rates, assumptions
related to probability and severity of credit losses, estimated
timing of credit losses including the timing of foreclosure and
liquidation of collateral, expected prepayment rates, required or
anticipated loan modifications, unfunded loan commitments,
the specific terms and provisions of any loss share agreements,
and specific industry and market conditions that may impact
discount rates and independent third-party appraisals.

The Corporation applied the guidance of ASC 310-30 to all
loans acquired in the Westernbank FDIC-assisted transaction
(including loans that do not meet the scope of ASC 310-30),
except for credit cards and revolving lines of credit. ASC 310-30
provides two specific criteria that have to be met in order for a
loan to be within its scope: (1) credit deterioration on the loan
from its inception until the acquisition date and (2) that it is
probable that not all of the contractual cash flows will be
collected on the loan. Once in the scope of ASC 310-30, the
credit portion of the fair value discount on an acquired loan
cannot be accreted into income until the acquirer has assessed
that it expects to receive more cash flows on the loan than
initially anticipated.

Acquired loans that meet the definition of nonaccrual status
fall within the Corporation’s definition of impaired loans under
ASC 310-30. It is possible that performing loans would not
meet criteria number 1 above related to evidence of credit
deterioration since the date of loan origination, and therefore
not fall within the scope of ASC 310-30. Based on the fair value
determined for the acquired portfolio, acquired loans that did
not meet the Corporation’s definition of non-accrual status also
resulted in the recognition of a significant discount attributable
to credit quality.

the Westernbank acquired portfolio,

Given the significant discount related to credit

in the
valuation of
the
Corporation considered two possible options for the performing
loans (1) accrete the entire fair value discount (including the
credit portion) using the interest method over the life of the
loan in accordance with ASC 310-20; or (2) analogize to ASC
310-30 and only accrete the portion of the fair value discount
unrelated to credit.

Pursuant to an AICPA letter dated December 18, 2009, the
AICPA summarized the SEC Staff’s view regarding the
accounting in subsequent periods
for discount accretion
associated with loan receivables acquired in a business
combination or asset purchase. Regarding the accounting for

17

POPULAR, INC. 2011 ANNUAL REPORT

such loan receivables, in the absence of further standard setting,
the AICPA understands that the SEC Staff would not object to
an accounting policy based on contractual cash flows (Option 1
- ASC 310-20 approach) or an accounting policy based on
expected cash flows (Option 2 - ASC 310-30 approach). As
such, the Corporation considered the two allowable options as
follows:

• Option 1 - Since the credit portion of the fair value
discount is associated with an expectation of cash flows
that an acquirer does not expect to receive over the life of
the loan, it does not appear appropriate to accrete that
the loan as doing so could
portion over the life of
eventually overstate the acquirer’s expected value of the
loan and ultimately result in recognizing income (i.e.
through the accretion of the yield) on a portion of the
the
loan it does not expect
Corporation does not believe this is an appropriate
method to apply.

to receive. Therefore,

• Option 2 - The Corporation believes analogizing to ASC
310-30 is the more appropriate option to follow in
accounting for
the fair value
the credit portion of
discount. By doing so, the loan is only being accreted up
to the value that the acquirer expected to receive at
acquisition of the loan.

Based on the above, the Corporation elected Option 2 - the
ASC 310-30 approach to the outstanding balance for all the
acquired loans in the Westernbank FDIC-assisted transaction
with the exception of revolving lines of credit with active
privileges as of the acquisition date, which are explicitly scoped
out by the ASC 310-30 accounting guidance. New advances /
draws after the acquisition date under existing credit lines that
did not have revolving privileges as of the acquisition date,
particularly for construction loans, will effectively be treated as
a “new” loan for accounting purposes and accounted for under
the provisions of ASC 310-20, resulting in a hybrid accounting
for the overall construction loan balance.

Management used judgment in evaluating factors impacting
expected cash flows and probable loss assumptions, including
the quality of
the loan portfolio, portfolio concentrations,
distressed economic conditions in Puerto Rico, quality of
underwriting standards of the acquired institution, reductions
in collateral
real estate values, and material weaknesses
disclosed by the acquired institution, including matters related
to credit quality review and appraisal report review.

undiscounted

At April 30, 2010, the acquired loans accounted for pursuant
to ASC 310-30 by the Corporation totaled $4.9 billion which
represented
contractually-required
principal and interest balances of $9.9 billion reduced by a
discount of $5.0 billion resulting from acquisition date fair
value adjustments. The non-accretable discount on loans
accounted for under ASC 310-30 amounted to $3.4 billion or

unpaid

approximately 68% of the total discount, thus indicating a
significant amount of expected credit losses on the acquired
portfolios.

Pursuant to ASC 310-20-15-5, the Corporation aggregated
loans acquired in the FDIC-assisted transaction into pools with
common risk characteristics for purposes of applying the
recognition, measurement and disclosure provisions of this
subtopic. Each loan pool is accounted for as a single asset with
a single composite interest rate and an aggregate expectation of
cash flows. Characteristics considered in pooling loans in the
Westernbank FDIC-assisted transaction included loan type,
interest rate type, accruing status, amortization type, rate index
and source type. Once the pools are defined, the Corporation
maintains the integrity of the pool of multiple loans accounted
for as a single asset.

the pool

reasonably

Under ASC Subtopic 310-30, the difference between the
undiscounted cash flows expected at acquisition and the fair
value of the loans, or the “accretable yield,” is recognized as
interest
income using the effective yield method over the
estimated life of the loan if the timing and amount of the future
cash flows of
estimable. The
is
non-accretable difference represents the difference between
contractually required principal and interest and the cash flows
expected to be collected. Subsequent to the acquisition date,
increases in cash flows over those expected at the acquisition
date are recognized as interest income prospectively as an
adjustment
the loan’s or pool’s
remaining life. Decreases in expected cash flows after the
acquisition date are recognized by recording an allowance for
loan losses.

to accretable yield over

The fair value discount of lines of credit with revolving
privileges that are accounted for pursuant to the guidance of
ASC Subtopic 310-20, represented the difference between the
contractually required loan payment receivable in excess of the
initial
investment in the loan. Any cash flows collected in
excess of the carrying amount of the loan are recognized in
earnings at the time of collection. The carrying amount of lines
of credit with revolving privileges, which are accounted
pursuant to the guidance of ASC Subtopic 310-20, are subject
to periodic review to determine the need for recognizing an
allowance for loan losses.

The FDIC loss share indemnification asset for loss share
agreements is measured separately from the related covered
assets as it is not contractually embedded in the assets and is
not transferable with the assets should the assets be sold.

The FDIC loss share indemnification asset is recognized on
the same basis as the assets subject to loss share protection,
except that the amortization / accretion terms differ for each
to ASC
asset. For covered loans accounted for pursuant
Subtopic 310-30, decreases in expected reimbursements from
the FDIC due to improvements in expected cash flows to be
received from borrowers are recognized in non-interest income

prospectively over the life of the FDIC loss sharing agreements.
For covered loans accounted for under ASC Subtopic 310-20, as
the loan discount recorded as of the acquisition date was
accreted into income, a reduction of the related indemnification
asset was recorded as a reduction in non-interest income.
Increases in expected reimbursements from the FDIC are
recognized in non-interest income in the same period that the
allowance for credit losses for the related loans is recognized.

Over the life of the acquired loans that are accounted under
ASC Subtopic 310-30, the Corporation continues to estimate
cash flows expected to be collected on individual loans or on
loans sharing common risk characteristics. The
pools of
Corporation evaluates at each balance sheet date whether the
present value of its loans determined using the effective interest
rates has decreased based on revised estimated cash flows and if
so, recognizes a provision for loan loss in its consolidated
statement of operations and an allowance for loan losses in its
consolidated statement of financial condition. For any increases
in cash flows expected to be collected from borrowers, the
Corporation adjusts the amount of accretable yield recognized
on the loans on a prospective basis over the loan’s or pool’s
remaining life.

The evaluation of estimated cash flows expected to be
to acquisition on loans accounted
collected subsequent
pursuant to ASC Subtopic 310-30 and inherent losses on loans
accounted pursuant
to ASC Subtopic 310-20 require the
continued usage of key assumptions and estimates. Given the
current economic environment, the Corporation must apply
judgment to develop its estimates of cash flows considering the
impact of home price and property value changes, changing
loss
in the
expected cash flows for ASC Subtopic 310-30 loans and
decreases in the net realizable value of ASC Subtopic 310-20
loans will generally result in a charge to the provision for credit
losses resulting in an increase to the allowance for loan losses.
These estimates are particularly sensitive to changes in loan
credit quality.

severities and prepayment

speeds. Decreases

The amount that the Corporation realizes on the covered
loans and related indemnification assets could differ materially
from the carrying value reflected in these financial statements,
based upon the timing and amount of collections on the
acquired loans in future periods. The Corporation’s losses on
these assets may be mitigated to the extent covered under the
specific terms and provisions of the loss share agreements.

Refer to Notes 4 and 12 to the consolidated financial
statements for further discussions on the Westernbank FDIC-
assisted transaction and loans acquired.

Income Taxes
Income taxes are accounted for using the asset and liability
method. Under this method, deferred tax assets and liabilities
are
tax consequences
attributable to temporary differences between the financial

recognized based on the

future

18

statement carrying amounts of existing assets and liabilities and
their respective tax basis, and attributable to operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years
in which the temporary differences are expected to be recovered
or paid. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period when
the changes are enacted.

The calculation of periodic income taxes is complex and
requires the use of estimates and judgments. The Corporation
has recorded two accruals for income taxes: (i) the net
estimated amount currently due or to be received from taxing
jurisdictions, including any reserve for potential examination
issues, and (ii) a deferred income tax that represents the
estimated impact of temporary differences between how the
Corporation recognizes assets and liabilities under accounting
principles generally accepted in the United States (GAAP), and
how such assets and liabilities are recognized under the tax
code. Differences in the actual outcome of these future tax
consequences could impact the Corporation’s financial position
or its results of operations. In estimating taxes, management
assesses the relative merits and risks of the appropriate tax
treatment of transactions taking into consideration statutory,
judicial and regulatory guidance.

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 realization of deferred tax assets
requires the consideration of all sources of taxable income
available to realize the deferred tax asset, including the future
reversal of existing temporary differences,
future taxable
reversing temporary differences and
income exclusive of
carryforwards,
and
taxable
tax-planning strategies.

in carryback years

income

taking into account

The Corporation’s U.S. mainland operations are in a
cumulative loss position for the three-year period ended
December 31, 2011,
taxable income
adjusted by temporary differences. For purposes of assessing
the realization of the deferred tax assets in the U.S. mainland
operations, this cumulative taxable loss position is considered
significant negative evidence, which evaluated along with all
sources of taxable income available to realize the deferred tax
asset, has caused management to conclude that it is more-
likely-than-not that the Corporation will not be able to fully

19

POPULAR, INC. 2011 ANNUAL REPORT

realize the deferred tax assets in the future, considering solely
the criteria of ASC Topic 740. Management will reassess the
realization of the deferred tax assets based on the criteria of the
applicable accounting pronouncement each reporting period.
At December 31, 2011,
the Corporation recorded a full
valuation allowance of approximately $1.3 billion on the
deferred tax assets of the Corporation’s U.S. operations. To the
extent that the financial results of the U.S. operations improve
and the deferred tax asset becomes realizable, the Corporation
will be able to reduce the valuation allowance through earnings.
At December 31, 2011, the Corporation had deferred tax
assets related to its Puerto Rico operations amounting to $429
million. The Corporation’s Puerto Rico banking operation is in
a cumulative loss position for the three-year period ended
December 31, 2011 taking into account
taxable income
adjusted by temporary differences. As indicated above, the
Corporation weights all available positive and negative
evidence to assess the realization of the deferred tax asset. The
cumulative loss position in the Corporation’s Puerto Rico
banking operation was mainly due to the performance of the
construction and commercial
real estate loan portfolios,
including the losses related to the reclassification and sale of
certain loans pertaining to those portfolios. 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 expected
to be a continuing condition of the operations; (iii) new
legislation extending the period of carryover of net operating
losses to ten years; (iii) unrealized gain on appreciated assets
that could be realized to increase taxable income; and (iv) the
financial results of the operations showed an improvement in
the profitability of the business during 2011. 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. Management will
reassess the realization of the deferred tax assets based on the
criteria of
the applicable accounting pronouncement each
reporting period.

Changes in the Corporation’s estimates can occur due to
changes in tax rates, new business strategies, newly enacted
guidance, and resolution of
issues with taxing authorities
regarding previously taken tax positions. Such changes could
affect the amount of accrued taxes. The current income tax
payable for 2011 has been paid during the year in accordance
with estimated tax payments rules. Any remaining payment will
not have any significant
impact on liquidity and capital
resources.

The valuation of deferred tax assets requires judgment in
assessing the likely future tax consequences of events that have
been recognized in the financial statements or tax returns and
future
tax
consequences represents management’s best estimate of those

profitability. The

accounting

deferred

for

future events. Changes in management’s current estimates, due
to unanticipated events, could have a material impact on the
Corporation’s financial condition and results of operations.

tax law,

In evaluating a tax position,

the position. The Corporation’s estimate of

The Corporation establishes tax liabilities or reduces tax
assets for uncertain tax positions when, despite its assessment
that its tax return positions are appropriate and supportable
under local
the Corporation believes it may not
succeed in realizing the tax benefit of certain positions if
challenged.
the Corporation
determines whether it is more-likely-than-not that the position
will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical
merits of
the
ultimate tax liability contains assumptions based on past
experiences, and judgments about potential actions by taxing
jurisdictions as well as judgments about the likely outcome of
issues that have been raised by taxing jurisdictions. The tax
position is measured as the largest amount of benefit that is
greater
than 50% likely of being realized upon ultimate
settlement. The Corporation evaluates these uncertain tax
positions each quarter and adjusts the related tax liabilities or
assets in light of changing facts and circumstances, such as the
progress of a tax audit or the expiration of a statute of
the estimates and
limitations. The Corporation believes
assumptions used to support its evaluation of uncertain tax
positions are reasonable.

The amount of unrecognized tax benefits, including accrued
interest, at December 31, 2011 amounted to $24.2 million.
Refer to Note 37 to the consolidated financial statements for
further information on this subject matter. 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.

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. Although the
outcome of tax audits is uncertain, the Corporation believes
that adequate amounts of tax, interest and penalties have been
provided for any adjustments that are expected to result from
open years. From time to time, the Corporation is audited by
various federal, state and local authorities regarding income tax
matters. Although management believes
its approach in
determining the appropriate tax treatment is supportable and in
accordance with the accounting standards, it is possible that the
final tax authority will take a tax position that is different than
the tax position reflected in the Corporation’s income tax
provision and other tax reserves. As each audit is conducted,
adjustments,
appropriately recorded in the
consolidated financial statement in the period determined. Such

any,

are

if

differences could have an adverse effect on the Corporation’s
income tax provision or benefit, or other tax reserves, in the
reporting period in which such determination is made and,
consequently, on the Corporation’s results of operations,
financial position and / or cash flows for such period.

impairment charge is recorded for the excess. An impairment
loss recognized cannot exceed the amount of goodwill assigned
to a reporting unit, and the loss establishes a new basis in the
goodwill. Subsequent reversal of goodwill impairment losses is
not permitted under applicable accounting standards.

20

Under

applicable

standards,

the reporting unit

for each reporting unit

Goodwill
The Corporation’s goodwill and other identifiable intangible
assets having an indefinite useful life are tested for impairment.
Intangibles with indefinite lives are evaluated for impairment at
least annually, and on a more frequent basis,
if events or
circumstances indicate impairment could have taken place.
Such events could include, among others, a significant adverse
change in the business climate, an adverse action by a regulator,
an unanticipated change in the competitive environment and a
decision to change the operations or dispose of a reporting unit.
goodwill
accounting
impairment analysis is a two-step test. The first step of the
goodwill impairment test involves comparing the fair value of
the reporting unit with its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds its carrying
amount, goodwill of
is considered not
impaired; however, if the carrying amount of the reporting unit
exceeds its fair value, the second step must be performed. The
second step involves calculating an implied fair value of
goodwill
for which the first step
indicated possible impairment. The implied fair value of
goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination, which is the
excess of the fair value of the reporting unit, as determined in
the first step, over the aggregate fair values of the individual
assets,
liabilities and identifiable intangibles (including any
unrecognized intangible assets, such as unrecognized core
deposits and trademark) as if the reporting unit was being
acquired in a business combination and the fair value of the
reporting unit was the price paid to acquire the reporting unit.
The Corporation estimates the fair values of the assets and
liabilities of a reporting unit, consistent with the requirements
of the fair value measurements accounting standard, which
defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair
value of the assets and liabilities reflects market conditions,
thus volatility in prices could have a material impact on the
determination of the implied fair value of the reporting unit
goodwill at
test date. The adjustments to
measure the assets, liabilities and intangibles at fair value are
for the purpose of measuring the implied fair value of goodwill
and such adjustments are not reflected in the consolidated
statement of financial condition. If the implied fair value of
goodwill exceeds the goodwill assigned to the reporting unit,
there is no impairment. If the goodwill assigned to a reporting
the goodwill, an
unit exceeds the implied fair value of

the impairment

At December 31, 2011, goodwill amounted to $648 million.
Note 16 to the consolidated financial statements provides the
assignment of goodwill by reportable segment and the
Corporate group.

The Corporation performed the annual goodwill impairment
evaluation for the entire organization during the third quarter
of 2011 using July 31, 2011 as the annual evaluation date. The
reporting units utilized for this evaluation were those that are
one level below the business segments, which are the legal
entities within the reportable segment. The Corporation follows
push-down accounting, as such all goodwill is assigned to the
reporting units when carrying out a business combination.
In determining the fair value of a reporting unit,

the
Corporation generally uses
combination of methods,
a
including market price multiples of comparable companies and
transactions,
as discounted cash flow analysis.
Management evaluates the particular circumstances of each
reporting unit in order to determine the most appropriate
valuation methodology. The Corporation evaluates the results
obtained under each valuation methodology to identify and
understand the key value drivers in order to ascertain that the
results obtained are reasonable and appropriate under the
circumstances. Elements considered include current market
and economic conditions, developments in specific lines of
business, and any particular features in the individual reporting
units.

as well

The computations require management to make estimates
and assumptions. Critical assumptions that are used as part of
these evaluations include:

• a selection of comparable publicly traded companies,

based on nature of business, location and size;

• a selection of comparable acquisition and capital raising

transactions;

• the discount rate applied to future earnings, based on an

estimate of the cost of equity;

• the potential future earnings of the reporting unit; and
• the market growth and new business assumptions.

For purposes of the market comparable approach, valuations
were determined by calculating average price multiples of
relevant value drivers from a group of companies that are
comparable to the reporting unit being analyzed and applying
those price multiples to the value drivers of the reporting unit.
Multiples used are minority based multiples and thus, no
control premium adjustment
is made to the comparable
companies market multiples. While the market price multiple is
not an assumption, a presumption that it provides an indicator

21

POPULAR, INC. 2011 ANNUAL REPORT

of the value of the reporting unit is inherent in the valuation.
The determination of the market comparables also involves a
degree of judgment.

For purposes of

the discounted cash flows

financial projections presented to

(“DCF”)
approach, the valuation is based on estimated future cash flows.
The financial projections used in the DCF valuation analysis for
each reporting unit are based on the most recent (as of the
the
valuation date)
/ Liability Management Committee
Corporation’s Asset
(“ALCO”). The growth assumptions
included in these
projections are based on management’s expectations for each
reporting unit’s financial prospects considering economic and
industry conditions as well as particular plans of each entity
(i.e. restructuring plans, de-leveraging, etc.). The cost of equity
used to discount the cash flows was calculated using the
Ibbotson Build-Up Method and ranged from 13.51% to 19.40%
for the 2011 analysis. The Ibbotson Build-Up Method builds up
a cost of equity starting with the rate of return of a “risk-free”
asset (20-year U.S. Treasury note) and adds to it additional risk
elements such as equity risk premium, size premium and
industry risk premium. The resulting discount rates were
analyzed in terms of reasonability given the current market
conditions and adjustments were made when necessary.

For BPNA, the only reporting unit that failed Step 1, the
Corporation determined the fair value of Step 1 utilizing a DCF
approach and a market value approach. The market value
approach is based on a combination of price multiples from
comparable companies and multiples from capital
raising
transactions of comparable companies. The market multiples
used included “price to book” and “price to tangible book”. The
Step 1 fair value for BPNA under both valuation approaches
(market and DCF) was below the carrying amount of its equity
book value as of the valuation date (July 31, 2011), requiring the
completion of Step 2. In accordance with accounting standards,
the Corporation performed a valuation of all assets and liabilities
of BPNA, including any recognized and unrecognized intangible
assets, to determine the fair value of BPNA’s net assets. To
complete Step 2, the Corporation subtracted from BPNA’s Step 1
fair value, the determined fair value of the net assets to arrive at
the implied fair value of goodwill. The results of the Step 2
indicated that the implied fair value of goodwill is $1.1 billion,
which exceeded the goodwill carrying value of $402 million at
July 31, 2011 by $701 million, resulting in no goodwill
impairment. The reduction in BPNA’s Step 1 fair value was offset
by a reduction in the fair value of its net assets, resulting in an
implied fair value of goodwill that exceeds the recorded book
value of goodwill.

The analysis of the results for Step 2 indicates that the
reduction in the fair value of the reporting unit was mainly
attributed to the deteriorated fair value of the loan portfolios
and not to the fair value of the reporting unit as a going
concern. The current negative performance of the reporting
unit is principally related to deteriorated credit quality in its

loan portfolio, which is consistent with the results of the Step 2
analysis. The fair value determined for BPNA’s loan portfolio in
the July 31, 2011 annual test represented a discount of 28.0%,
compared with 23.6% at July 31, 2010. The discount is mainly
attributed to market participant’s expected rate of returns,
which affected the market discount on the commercial and
construction loan portfolios of BPNA.

If the Step 1 fair value of BPNA declines further in the future
without a corresponding decrease in the fair value of its net
assets or if loan discounts improve without a corresponding
increase in the Step 1 fair value, the Corporation may be
impairment charge. The
required to record a goodwill
Corporation
assist
engaged
management
in the annual evaluation of BPNA’s goodwill
(including Step 1 and Step 2) as well as BPNA’s loan portfolios
as of the July 31, 2011 valuation date. Management discussed
the methodologies, assumptions and results supporting the
relevant values for conclusions and determined they were
reasonable.

third-party

valuator

to

a

For the BPPR reporting unit, had the average reporting unit
estimated fair value calculated in Step 1 using all valuation
methodologies been approximately 20% lower, there would still
be no requirement to perform a Step 2 analysis. Thus, there
would be no indication of impairment on the goodwill recorded
in BPPR at July 31, 2011. For the BPNA reporting unit, had the
estimated implied fair value of goodwill calculated in Step 2
been approximately 64% lower,
there would still be no
impairment of the goodwill recorded in BPNA at July 31, 2011.
The goodwill balance of BPPR and BPNA, as legal entities,
represented approximately 97% of
the Corporation’s total
goodwill balance as of the July 31, 2011 valuation date.

the

as part of

Furthermore,

analyses, management
the aggregate fair values
performed a reconciliation of
determined for the reporting units to the market capitalization
of Popular,
the fair value results
determined for the reporting units in the July 31, 2011 annual
assessment were reasonable.

Inc. concluding that

The goodwill impairment evaluation process requires the
Corporation to make estimates and assumptions with regard to
the fair value of the reporting units. Actual values may differ
significantly from these estimates. Such differences could result
in future impairment of goodwill that would, in turn, negatively
impact the Corporation’s results of operations and the reporting
units where the goodwill
in the
is
Corporation’s market capitalization could increase the risk of
goodwill impairment in the future.

recorded. Declines

Management monitors events or changes in circumstances
between annual tests to determine if these events or changes in
circumstances would more likely than not reduce the fair value
of a reporting unit below its carrying amount.

Management continued monitoring the fair value of the
reporting units, particularly BPPR and BPNA that represent,
between these two reporting entities, approximately 97% of the

there is no goodwill

impairment. For BPNA,

Corporation goodwill balance at December 31, 2011. As part of
the monitoring process, management performed an assessment
for BPPR and BPNA at December 31, 2011. The Corporation
determined BPPR’s and BPNA’s fair values utilizing the same
valuation approaches (market and DCF) used in the annual
goodwill impairment test. The determined fair value for BPPR
at December 31, 2011 exceeded its carrying amount concluding
the
that
determined fair value at December 31, 2011 continued to be
below its carrying amount under all valuation approaches. The
fair value determination of BPNA’s assets and liabilities was
valuation
updated
methodologies consistent with the July 31, 2011 test. The
results of the BPNA assessment at December 31, 2011 indicated
that the implied fair value of goodwill exceeded the goodwill
carrying amount, resulting in no goodwill impairment. The
results obtained in the December 31, 2011 assessment of BPNA
were consistent with the results of the annual impairment test
in that the reduction in the fair value of BPNA was mainly
attributable to a significant reduction in the fair value of BPNA’s
loan portfolio.

at December

utilizing

2011

31,

Pension and Postretirement Benefit Obligations
The Corporation provides pension and restoration benefit plans
for certain employees of various subsidiaries. The Corporation
also provides certain health care benefits for retired employees
of BPPR. The non-contributory defined pension and benefit
restoration plans (“the Plans”) are frozen with regards to all
future benefit accruals.

The estimated benefit costs and obligations of the pension
and postretirement benefit plans are impacted by the use of
subjective assumptions, which can materially affect recorded
amounts, including expected returns on plan assets, discount
rates, termination rates, retirement rates and health care trend
rates. Management applies judgment in the determination of
these factors, which normally undergo evaluation against
current industry practice and the actual experience of the
Corporation. The Corporation uses an independent actuarial
firm for assistance in the determination of the pension and
postretirement
obligations. Detailed
information on the Plans and related valuation assumptions are
included in Note 34 to the consolidated financial statements.

benefit

costs

and

The Corporation periodically reviews its assumption for the
long-term expected return on pension plan assets. The Plans’
assets fair value at December 31, 2011 was $579.5 million. The
expected return on plan assets is determined by considering
various factors, including a total fund return estimate based on
a weighted-average of estimated returns for each asset class in
the plan. Asset class returns are estimated using current and
projected economic and market factors such as real rates of
return,
inflation, credit spreads, equity risk premiums and
excess return expectations.

22

As part of

the review,

the Corporation’s independent
consulting actuaries performed an analysis of expected returns
based on the plan’s asset allocation at January 1, 2012. This
analysis is reviewed by the Corporation and used as a tool to
develop expected rates of return, together with other data. This
forecast reflects the actuarial firm’s view of expected long-term
rates of return for each significant asset class or economic
indicator; for example, 8.7% for large / mid-cap stocks, 3.1% for
fixed-income securities, 9.4% for small cap stocks and 2.3%
inflation at January 1, 2012. A range of expected investment
returns is developed, and this range relies both on forecasts and
on broad-market historical benchmarks for expected returns,
correlations, and volatilities for each asset class.

reviews,

As a consequence of

the Corporation
recent
reduced its expected return on plan assets for year 2012 from
8.0% to 7.60%. The 8% had been used as the expected rate of
return in 2011 and 2010. Since the expected return assumption
is on a long-term basis, it is not materially impacted by the
yearly fluctuations (either positive or negative) in the actual
the actual return on assets
if
return on assets. However,
performs below management’s expectations for a continued
period of time, this could eventually result in the reduction of
the expected return on assets percentage assumption.

retirement under

During the fourth quarter of 2011, the Corporation offered a
Voluntary Retirement Program (“VRP”) to all participants
eligible for
the Plans, excluding senior
management. The VRP provided for an additional benefit of
one-year of base pay, payable either as a lump-sum payment
from the Plans on February 1, 2012, or as an increase in
monthly pension payments on their elected pension benefit
commencement date.

Pension expense for the Plans amounted to $15.0 million in
2011, which includes $15.6 million related to the VRP. The
total pension expense included a credit of $45.2 million for the
expected return on assets.

Pension expense is sensitive to changes in the expected
return on assets. For example, decreasing the expected rate of
return for 2012 from 7.60% to 7.10% would increase the
projected 2012 expense for the Banco Popular de Puerto Rico
Retirement
by
the Corporation’s
approximately $2.6 million.

largest

Plan,

plan,

The Corporation accounts for the underfunded status of its
pension and postretirement benefit plans as a liability, with an
offset, net of tax, in accumulated other comprehensive income
or loss. The determination of the fair value of pension plan
obligations involves judgment, and any changes in those
estimates
consolidated
statement of financial condition. The valuation of pension plan
obligations is discussed above. Management believes that the
fair value estimates of the pension plan assets are reasonable
given that the plan assets are managed, in the most part, by the
fiduciary division of BPPR, which is subject to periodic audit

the Corporation’s

impact

could

23

POPULAR, INC. 2011 ANNUAL REPORT

verifications. Also,
the plan assets, as
the composition of
disclosed in Note 34 of the consolidated financial statements, is
primarily in equity and debt securities, which have readily
determinable quoted market prices.

The Corporation uses

the Towers Watson RATE:
Link(10/90) Model to discount the expected program cash
flows of the plans as a guide in the selection of the discount
rate. The Corporation used a discount rate of 4.40% to
determine the benefit obligation at December 31, 2011,
compared with 5.30% at December 31, 2010.

A 50 basis point decrease in the assumed discount rate of
4.40% as of the beginning of 2012 would increase the projected
2012 expense for the Banco Popular de Puerto Rico Retirement
Plan by approximately $3.0 million. The change would not
affect the minimum required contribution to the Plan.

The Corporation also provides a postretirement health care
benefit plan for certain employees of BPPR. This plan was
unfunded (no assets were held by the plan) at December 31,
2011. The Corporation had an accrual
for postretirement
benefit costs of $181 million at December 31, 2011. Assumed
health care trend rates may have significant effects on the
amounts reported for the health care plan. Note 34 to the
consolidated financial statements provides information on the
assumed rates considered by the Corporation and on the
sensitivity that a one-percentage point change in the assumed
rate may have on specified cost components and the
postretirement benefit obligation of the Corporation.

STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income
Net interest income on a taxable equivalent basis for the year
ended December 31, 2011 increased by $169.6 million when
compared with 2010. The Corporation’s main source of income
is subject to volatility derived from several risk factors, which
include market driven events, as well as strategic decisions
made by the Corporation’s management.

The average key index rates for the years 2009 through 2011

were as follows:

Table 5 - Average Key Index Rates

Prime rate
Fed funds rate
3-month LIBOR
3-month Treasury Bill
10-year Treasury
FNMA 30-year

2011

2010

2009

3.25% 3.25% 3.25%
0.18
0.11
0.34
0.34
0.13
0.05
3.19
2.76
3.95
4.11

0.17
0.69
0.14
3.24
4.68

of

its

Rico,

Puerto

agencies

Interest earning assets include 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
and
instrumentalities. Assets held by the Corporation’s international
banking entities, which previously were tax-exempt under
Puerto Rico law, were subject to a temporary 5% tax rate up to
December 31, 2011. 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, in the subsidiaries that have
the benefit. The taxable equivalent computation considers the
interest expense disallowance required by the Puerto Rico tax
law. Under this law, exempt interest can be deducted up to the
amount of taxable income. The increase in taxable equivalent
income for 2011 was mainly the result of a change BPPR’s tax
position when compared to 2010. During 2011, BPPR was able
to deduct tax exempt interest income, net of the related interest
expense. BPPR’s net interest income for 2010 did not include a
tax benefit related to exempt income due to its tax position at
that time.

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.
income for the period ended December 31, 2011
Interest
included a favorable impact, excluding the discount accretion
on covered loans accounted for under ASC 310-20 and ASC
310-30, of $21.4 million, related to those items, compared with
a favorable impact of $19.1 million for the same period in 2010
and of $21.7 million in 2009. The discount accretion on
covered loans accounted for under ASC 310-20 (revolving lines
of credit) was $37.1 million for the year ended December 31,
2011, compared with $79.8 million in 2010.

Table 6.A presents

the different components of

the
Corporation’s net interest income, on a taxable equivalent basis,
for the year ended December 31, 2011, as compared with the
same period in 2010, segregated by major categories of interest
earning assets and interest bearing liabilities.

The increase in net interest margin, on a taxable equivalent
basis, for the year ended December 31, 2011 compared with the
same period in 2010 was driven mostly by:

• a higher proportion of covered loans when compared to
2010, which was mainly due to the covered loan portfolio
being outstanding for the full year in 2011 compared to
eight months during 2010. This portfolio, due to its
nature, carries a higher yield than the other
loan
portfolios. This impact
is included in the line item
“Covered loans” in Table 6.A;

• a decrease of 40 basis points in the cost of interest bearing
deposits, driven by management actions to reduce deposit
costs, as well as renewing brokered certificates of deposits
at a lower cost due to the low rate environment; and

• a higher yield in the investments category by 26 basis
points, which resulted from the combination of maturities
of lower yielding investments, as well as the increase in
the taxable equivalent benefit for 2011.

The above variances were partially offset by the following
factors, which negatively affected the Corporation’s net interest
margin:

• excess liquidity invested in money market investments
with the Federal Reserve (“Fed”) earning a low interest
rate, which reduced the yield on earning assets;

• a lower yield in both the commercial and construction
loan portfolios mostly attributable to the high level of
non-performing loans within those portfolios;

• the FDIC loss share asset of $1.9 billion at December 31,
2011, which is a non-interest earning asset, being funded
the year with interest bearing liabilities,
throughout
mainly a combination of the note issued to the FDIC at a
contractual 2.50% annual fixed interest rate and brokered
certificates of deposits. The FDIC note was fully repaid by
December 31, 2011. The accretion of the FDIC loss share
indemnification asset is recorded in non-interest income;
and

• a higher cost of medium- and long-term debt, which
effect generated by the
resulted mainly from the
repayment during 2011 of debt that carried a lower cost
than the remaining long-term debt. The longer-term debt
included the junior subordinated debentures issued to the
U.S. Treasury in 2009 in an exchange of preferred stock
(“TARP”). The TARP subordinated debentures have an
effective
to the
amortization of the discount generated by recording this
debt at fair value upon origination.

approximately 16% due

cost of

24

Most loan categories experienced a reduction in volume
during 2011. The reduced origination activity and charge-offs
impacted the different categories. In addition, during the year,
the Corporation sold certain commercial, construction and
mortgage loan portfolios in an effort to reduce the level of
non-performing loans within those portfolios. Consumer loans
decreased mainly as a result of
the continued run-off of
discontinued businesses within the U.S. mainland operations.
In contrast, the mortgage loan category reflects an increase of
$527 million in average balance during the year. This increase
resulted in part from acquisitions made during the year within
the Puerto Rico portfolio. The increase in the average balance of
the covered loan portfolio was mainly the result of the portfolio
being outstanding for the full year in 2011 instead of eight
months when compared to 2010, as
the FDIC-assisted
transaction occurred in April 30, 2010. Investment securities
decreased in average volume as a result of normal cash flow
activity as well as prepayments of mortgage-related investment
securities and sales of agency securities. During 2011, the
Corporation continued executing its deleveraging strategy.

The decrease in the average volume of medium- and long-
term debt is the combination of the repayment of the note
issued to the FDIC, the early cancellation of approximately
$100 million in medium-term notes in the first quarter of 2011,
and the repayment of certain Federal Home Loan Bank
borrowings during the latter part of 2010.

the Corporation benefited from the interest

The covered loan portfolio accounted for under ASC
Subtopic 310-30 is subject to a quarterly loss reassessment
procedure. Reductions in expected losses will increase the yield
of the particular pool based on its expected average life. As part
of those procedures, and actual cash flows received during the
year,
income
impact derived from pools that either paid-in-full and had a
related loss expectation, or from loans within a pool for which
the Corporation received cash flows that were not contemplated
in its original estimates and the pool had a relatively short
expected average life. This impact contributed to offset the
reduction in the discount accretion related to the portion of the
covered loan portfolio that
is accounted for under ASC
Subtopic 310-20, and contributed to the stability in the covered
loan portfolio yield from 2010 to 2011. The discount accretion
related to covered loans accounted for under ASC Subtopic
310-20 presented a reduction of $42.7 million during 2011
since the related discount was fully accreted close to mid-2011.
the
Corporation’s net
ended
December 31, 2010, as compared with the same period in 2009.

the different components of
for

Table 6.B presents

interest

income

year

the

25

POPULAR, INC. 2011 ANNUAL REPORT

Table 6.A - Net Interest Income - Taxable Equivalent Basis

2011

Average volume
2010
($ in millions)

Variance

Year ended December 31,

Average yields / costs

2011

2010

Variance

$1,152
5,494
667

$1,539
6,300
493

$(387)
(806)
174

0.31% 0.35% (0.04)% Money market investments
4.05
5.82

Investment securities
Trading securities

0.26
(0.73)

3.79
6.55

2011

Interest
2010

Variance
attributable to

Variance

Rate

Volume

(In thousands)

$3,597
222,465
38,850

$5,384
238,654
32,333

$(1,787)
(16,189)
6,517

$(610)
19,324
(3,896)

$(1,177)
(35,513)
10,413

7,313

8,332

(1,019)

3.62

3.32

0.30

trading securities

264,912

276,371

(11,459)

14,818

(26,277)

Total money market, investment and

10,889
731
577
5,154
3,654

21,005
4,613

11,889
1,458
629
4,627
3,854

22,457
3,365

(1,000)
(727)
(52)
527
(200)

(1,452)
1,248

25,618

25,822

(204)

5.06
1.48
8.81
6.06
10.30

6.20
8.95

6.69

5.17
2.03
8.77
6.02
10.40

6.14
9.01

6.51

Loans:

Commercial
Construction
Leasing
Mortgage
Consumer

Sub-total loans
Covered loans

(0.11)
(0.55)
0.04
0.04
(0.10)

0.06
(0.06)

551,252
10,801
50,867
312,348
376,158

614,187
29,539
55,144
278,339
400,662

(62,935)
(18,738)
(4,277)
34,009
(24,504)

(12,085)
(6,605)
283
2,138
(8,947)

(50,850)
(12,133)
(4,560)
31,871
(15,557)

1,301,426
412,678

1,377,871
303,096

(76,445)
109,582

(25,216)
(51,229)
(1,702) 111,284

0.18

Total loans

1,714,104

1,680,967

33,137

(26,918)

60,055

$32,931 $34,154 $(1,223)

6.01% 5.73% 0.28% Total earning assets

$1,979,016 $1,957,338

$21,678

$(12,100) $33,778

Interest bearing deposits:

$5,204
6,321
10,920

$4,981
5,970
10,967

22,445

21,918

2,630
3,217

28,292
5,058
(419)

2,401
5,047

29,366
4,732
56

$223
351
(47)

527

229
(1,830)

(1,074)
326
(475)

0.60% 0.80% (0.20)% NOW and money market [1]
0.59
1.84

Savings
Time deposits

(0.31)
(0.50)

0.90
2.34

$30,994
37,537
200,956

$39,776
54,021
257,084

$(8,782)
(16,484)
(56,128)

$(10,113)
(19,907)
(53,031)

$1,331
3,423
(3,097)

1.20

2.10
5.62

1.79

1.60

2.51
4.80

2.22

(0.40)

(0.41)
0.82

(0.43)

Total deposits

269,487

350,881

(81,394)

(83,051)

1,657

Short-term borrowings
Medium and long-term debt

Total interest bearing liabilities
Non-interest bearing demand deposits
Other sources of funds

55,258
180,764

60,278
242,222

(5,020)
(61,458)

(8,658)
14,434

3,638
(75,892)

505,509

653,381 (147,872)

(77,275)

(70,597)

$32,931 $34,154 $(1,223)

1.54% 1.91% (0.37)% Total source of funds

505,509

653,381 (147,872)

(77,275)

(70,597)

4.47% 3.82% 0.65% Net interest margin

Net interest income on a taxable

equivalent basis

1,473,507

1,303,957

169,550

$65,175 $104,375

4.22% 3.51% 0.71% Net interest spread

Taxable equivalent adjustment

41,515

9,092

32,423

Net interest income

$1,431,992 $1,294,865 $137,127

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.

[1] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

The increase in net interest margin, on a taxable equivalent
basis, for the year ended December 31, 2010, compared with
the same period in 2009, was driven mostly by following items:

• $79.8 million of discount accretion on covered loans
accounted for under ASC Subtopic 310-20 due to their
revolving characteristics;

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

• a higher yield in consumer loans mainly reflected in the
credit cards portfolio, in part due to revisions made to the

spread charged over the prime rate for different risk
categories and the impact of credit cards acquired in the
Westernbank FDIC-assisted transaction not
covered
under the loss sharing agreements.

The above variances were partially offset by the following

factors:

• excess liquidity from the capital issuance in 2010 was
temporarily invested in money market investments with
the Fed earning a very low interest rate, which reduced
the yield on earning assets;

26

• FDIC loss share asset of $2.4 billion at December 31,

2010, being funded with interest bearing liabilities;

• the exchange with the U.S. Treasury of $935 million of
Series C preferred stock for trust preferred securities in
August 2009, which resulted in an increase of $45.2
million in the interest expense for
the year ended
December 31, 2010, when compared with 2009 (these
payments were characterized as dividends prior to the
exchange); and

• a higher balance of non-performing loans across the

different loan categories.

The decrease in the taxable equivalent adjustment for the
year 2010, compared with the previous year, related to the fact
that due to its tax position in 2010, BPPR did not benefit from
the exempt income generated during the year.

Average tax-exempt earning assets approximated $3.5 billion
in 2011, of which 47% represented tax-exempt investment
securities, compared with $429 million and 6% in 2010, and
$5.0 billion and 68% in 2009. The lower balance of earning
assets in 2010 relates to the fact that BPPR’s tax position
changed during 2010 and the benefit obtained from exempt
assets was not applicable in that year. As indicated previously,
BPPR’s tax position also changed in 2011, returning the benefit
to net interest income of exempt assets upon signing a tax ruling
with the Puerto Rico Treasury Department, which is explained
in the Income Taxes section of this MD&A. Non-taxable interest
income on investment securities amounted to $59.8 million for
the year ended December 31, 2011, compared with $1.4 million
in 2010 and $121.7 million in 2009.

Table 6.B - Analysis of Levels & Yields on a Taxable Equivalent Basis

Year ended December 31,

Average volume

2010

2009 Variance

Average yields / costs
2009 Variance
2010

($ in millions)
$1,183
7,449
615

$1,539
6,300
493

$356
(1,149)
(122)

0.35% 0.72% (0.37)% Money market investments
3.79
6.55

(0.83)
(0.08)

4.62
6.63

Investment securities
Trading securities
Total money market, investment and

Interest
2009

Variance

(In thousands)
$8,573
$(3,189)
344,465 (105,811)
(8,438)
40,771

2010

$5,384
238,654
32,333

Variance
attributable to
Rate

Volume

$(2,789)
(54,047)
(494)

$(400)
(51,764)
(7,944)

8,332

9,247

(915)

3.32

4.26

(0.94)

trading securities

276,371

393,809 (117,438)

(57,330)

(60,108)

Loans:

13,204
11,889
2,026
1,458
768
629
4,494
4,627
4,344
3,854
24,836
22,457
–
3,365
25,822
24,836
$34,154 $34,083

$4,981
5,970
10,967
21,918
2,401
5,047
29,366
4,732
56

$4,804
5,538
12,193
22,535
2,888
2,945
28,368
4,293
1,422
$34,154 $34,083

(1,315)
(568)
(139)
133
(490)
(2,379)
3,365
986
$71

$177
432
(1,226)
(617)
(487)
2,102
998
439
(1,366)
$71

5.29
2.68
8.42
6.49
9.94
6.20
–
6.20

5.17
2.03
8.77
6.02
10.40
6.14
9.01
6.51
5.73% 5.68% 0.05% Total earning assets

Commercial
Construction
Leasing
Mortgage
Consumer
Sub-total loans
Covered loans

(0.12)
(0.65)
0.35
(0.47)
0.46
(0.06)
9.01
0.31

Total loans

Interest bearing deposits:

0.80% 1.12% (0.32)% NOW and money market [1]
0.90
2.34
1.60
2.51
4.80
2.22

Savings
Time deposits
Total deposits

(0.07)
(0.89)
(0.62)
0.11
(1.42)
(0.44)

0.97
3.23
2.22
2.40
6.22
2.66

Short-term borrowings
Medium and long-term debt
Total interest bearing liabilities
Non-interest bearing demand deposits
Other sources of funds

698,377
54,340
64,697
291,792
431,712

614,187
29,539
55,144
278,339
400,662
1,377,871
–
303,096
1,680,967
1,540,918
$1,957,338 $1,934,727

(84,190)
(24,801)
(9,553)
(13,453)
(31,050)
1,540,918 (163,047)
303,096
140,049
$22,611

(15,942)
(11,557)
2,568
(21,953)
10,133
(36,751)
–

(68,248)
(13,244)
(12,121)
8,500
(41,183)
(126,296)
303,096
(36,751) 176,800
$(94,081) $116,692

$39,776
54,021
257,084
350,881
60,278
242,222
653,381

$53,695 $(13,919)
53,660
361
393,907 (136,823)
501,262 (150,381)
(9,079)
69,357
59,097
183,125
753,744 (100,363)

$(15,266)
(3,724)
(96,845)
(115,835)
3,134
46,138
(66,563)

$1,347
4,085
(39,978)
(34,546)
(12,213)
12,959
(33,800)

1.91% 2.21% (0.30)% Total source of funds

653,381

753,744 (100,363)

(66,563)

(33,800)

3.82% 3.47% 0.35% Net interest margin

Net interest income on a taxable

equivalent basis

1,303,957

1,180,983

122,974

$(27,518) $150,492

3.51% 3.02% 0.49% Net interest spread

Taxable equivalent adjustment
Net interest income

9,092

(70,638)
$1,294,865 $1,101,253 $193,612

79,730

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.

[1] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

27

POPULAR, INC. 2011 ANNUAL REPORT

Provision for Loan Losses
The provision for loan losses amounted to $575.7 million, or
104% of net charge-offs, for the year ended December 31, 2011,
compared with $1.0 billion, or 88%, respectively, for 2010, and
$1.4 billion, or 137%, respectively, for 2009. Excluding the
impact related to the covered loans during 2011, the provision
for loan losses amounted to $430.1 million, or 81% of net
charge-offs.

for

the year

The provision for

ended
loan losses
December 31, 2010 included the effect of a $176.0 million
charge to provide for the difference between the book value and
the BPPR commercial and
the estimated fair value of
construction loans and the BPNA non-conventional mortgage
loans transferred to loans held-for-sale in December 2010.

As indicated in the Overview section of this MD&A, the
decrease in the provision for loan losses for 2011, compared
with 2010, was the net result of a decrease in the provision for
non-covered loans of $581.8 million, partially offset by an
increase in the provision for loan losses on the covered loans by
$145.6 million. Total net charge-offs for 2011 decreased by
$597.9 million compared with 2010. Reductions were reflected
in all loan categories and segments, except in mortgage loans at
the BPPR reportable segment, which had an increase of $5.9
million. The declines were principally influenced by the
following factors: (i) charge-offs taken in 2010 on loans
reclassified to held-for-sale, (ii) a lower level of problem loans
in the commercial and construction loan portfolio balances
classified as held-for-investment, (iii) the running-off of the
BPNA non-conventional mortgage loan portfolio and (iv) the
continued improvement in the credit quality performance of the
Corporation’s
residential
mortgage loan portfolio of
the BPPR reportable segment
continues to reflect the impact of weak economic conditions in
Puerto Rico, which have adversely impacted the real estate
market.

loan portfolios. The

consumer

increase was impacted by two particular credit relationships
accounted for pursuant to ASC 310-20 which required specific
reserves of $28.2 million, of which $10.9 million were
charged-off during the fourth quarter of 2011. The covered loan
portfolio did not require an allowance for loan losses at
December 31, 2010.

in

the

commercial

residential mortgage

provisioning, mainly

Excluding the $176.0 million increase in provision related to
the loan reclassifications to held-for-sale described above, the
provision for loan losses declined by $570 million during the
year ended December 31, 2010, compared with the year ended
December 31, 2009. Both reportable segments, BPPR and
BPNA, contributed to the reduction as the year 2009 demanded
higher
and
construction loan portfolios of BPPR and in the commercial,
construction, non-conventional
and
HELOCs loan portfolios of the BPNA reportable segment. The
provision for loan losses for the year ended December 31, 2010,
when compared with the previous year, reflects higher net
charge-offs by $125.2 million, mainly in commercial loans by
$175.0 million and construction loans by $85.1 million.
Partially offsetting this negative variance were lower net charge-
offs in consumer loans by $102.0 million, mortgage loans by
$25.8 million, and lease financing by $7.1 million. The
increases in the commercial and construction loan net charge-
offs were primarily attributable to the Corporation’s decision to
promptly charge-off previously reserved impaired amounts of
collateral dependent loans both in Puerto Rico and the U.S.
mainland. The decreases in the consumer and mortgage loan
net charge-offs were mostly related to the favorable credit
trends
experienced by the Corporation’s U.S. mainland
operations.

Refer to the Credit Risk Management and Loan Quality
charge-offs,
analysis
the allowance for loan losses and

for
section
non-performing assets,
selected loan losses statistics.

detailed

net

of

a

During 2011, the Corporation recorded a provision for loan
losses of $145.6 million on the covered loan portfolio,
principally to account for reductions in expected cash flows on
certain pools accounted for pursuant to ASC 310-30. Also, the

Non-Interest Income
Refer to Table 7.A for a breakdown of non-interest income by
major categories for the past five years.

Table 7.A - Non-Interest Income

(In thousands)

Service charges on deposit accounts

Other service fees:
Debit card fees
Credit card fees and discounts
Insurance fees
Processing fees
Sale and administration of investment products
Mortgage servicing fees, net of fair value adjustments
Trust fees
Check cashing fees
Other fees

Total other services fees

Net gain on sale and valuation adjustments of investment securities
Trading account profit
Net gain on sale of loans, including valuation adjustments on loans

held-for-sale

Adjustments (expense) to indemnity reserves on loans sold
FDIC loss share income (expense)
Fair value change in equity appreciation instrument
Gain on sale of processing and technology business
Other operating income

28

Year ended December 31,

2011

2010

2009

2008

2007

$184,940

$195,803

$213,493

$206,957

$196,072

49,459
49,049
54,390
6,839
34,388
12,098
15,333
339
17,825

239,720

10,844
5,897

30,891
(33,068)
66,791
8,323
–
45,939

100,639
84,786
49,768
45,055
37,783
24,801
14,217
408
20,047

377,504

3,992
16,404

15,874
(72,013)
(25,751)
42,555
640,802
93,023

110,040
94,636
50,132
55,005
34,134
15,086
12,455
588
22,111

394,187

219,546
39,740

5,151
(40,211)
–
–
–
64,595

108,274
107,713
50,417
51,731
34,373
25,987
12,099
512
25,057

416,163

69,716
43,645

26,256
(20,238)
–
–
–
87,475

76,573
102,176
53,097
47,476
30,453
17,981
11,157
387
26,311

365,611

100,869
37,197

68,491
(8,445)
–
–
–
113,900

Total non-interest income

$560,277

$1,288,193

$896,501

$829,974

$873,695

Non-interest income for the year ended December 31, 2011,
when compared with the previous year, was negatively
impacted by the following factors:

fees

analysis

account

• lower service charges on deposit accounts by $10.9 million
mostly related to lower nonsufficient funds and overdraft
lower
fees as a result of the impact of Regulation E,
(non-balance
commercial
compensation accounts) and reduced fees from money
services clients in BPNA. These unfavorable variances were
partially offset by increased service charges on consumer
checking accounts in BPNA due to a new ATM fee
structure and increased service charges in BPPR, driven in
part by a higher volume of accounts and a new service
charge of $0.50 for non-BPPR ATM terminal transactions;
• lower other service fees by $137.8 million principally due
to lower credit and debit card fees, mostly as a result of
transferring the merchant banking business to EVERTEC
as part of
effective
September 30, 2010. There were also lower volume of
fees and lower
credit cards subject
average rate charged per transaction as a result of the
Credit Card Accountability, Responsibility and Disclosure
Act of 2009. In addition, there were higher unfavorable
fair value adjustments on mortgage servicing rights by
$14.2 million mainly due to changes
in the cost
assumptions impacted by the increase in the delinquency,

those operations

to late payment

sale of

the

foreclosure and base cost. These unfavorable variances
were partially offset by higher interchange income on
point-of-sale terminals and VISA interchange income due
to the increase in transaction volume;

• lower trading account profit by $10.5 million mainly due
to higher realized losses on derivatives by $29.2 million in
banking
the Corporation’s Puerto Rico mortgage
subsidiary, partially offset by $17.2 million in unrealized
gains on outstanding mortgage-backed securities due to
higher market prices on a higher volume of outstanding
pools in that subsidiary;

• unfavorable impact

in the fair value of

the equity
appreciation instrument issued to the FDIC as part of the
Westernbank FDIC-assisted transaction by $34.2 million
since the instrument expired on May 7, 2011;

• unfavorable variance resulting from the gain on sale of the
51% ownership interest in the Corporation’s processing
and technology business, EVERTEC, during 2010 of
$640.8 million; and

• lower other operating income by $47.1 million mainly
due to higher losses by $23.4 million (including the
impact of intra-entity eliminations) for the year ended
December 31, 2011 from the retained ownership interest
in EVERTEC. The
the
following
composition of such amounts.

provides

table

29

POPULAR, INC. 2011 ANNUAL REPORT

Table 7.B - Income (Loss) from Retained Ownership Interest
in EVERTEC

(In thousands)

2011

2010

Share of income from the equity investment

in EVERTEC

$13,936

$574

Intra-company eliminations considered in

other operating income

(52,218)

(15,425)

Share of income (loss) from the equity
investment in EVERTEC, net of
eliminations

$(38,282) $(14,851)

The unfavorable impact in non-interest income was offset
principally by the elimination of 49% of the professional fees
(expense) paid by the Corporation to EVERTEC. Refer to Note
25 to the consolidated financial statements for a list of intra-
transactions and service payments
entity eliminations for
between the Corporation and EVERTEC as an affiliate.

The reduction in other operating income was also related to
lower income by $34.9 million for the year ended December 31,
2011, compared with 2010, related to the accretion of the
contingency for unfunded lending commitments that was
recorded at fair value as part of the FDIC-assisted transaction
(with an offset of 80% recorded as a reduction to income in the
category of FDIC loss share expense). These unfunded lending
commitments relate to revolving lines that generally had
maturities of one year or less. Refer to Table 2 for a comparison
items related to the accounting for covered loans and
of
impact non-interest
associated unfunded commitments that
income. For
the
the year
unfavorable variance in other operating income was partially
offset by the gain of $20.6 million (before tax) on the sale of the
equity interest in CONTADO during the first quarter of 2011.
The remainder of the unfavorable variances was related to
revenues that were derived by EVERTEC for services to
unrelated third-parties in the period prior to sale of
the
ownership interest.

ended December 31, 2011,

These

unfavorable

ended
variances
December 31, 2011, when compared with the previous year,
were partially offset by the following positive factors:

year

the

for

• higher net gain on sale and valuation adjustments of
investment securities principally due to the $8.5 million
gain on the sale of $234 million in FHLB notes during the
third quarter of 2011, and to the $2.8 million gain on the
sale of a limited partnership interest in real estate limited
partnerships owning property qualifying for low-income
housing tax credits by BPNA during the fourth quarter of
2011, compared to $3.8 million in gains mostly related to
the sale of available-for-sale securities during 2010;

• higher net gain on sale of

including valuation
adjustments on loans held-for-sale, by $15.0 million
principally due to the gain of $17.4 million recorded by
BPPR on the sale of construction and commercial real

loans,

loan losses

estate loans to a joint venture (which was offset by the
$12.7 million provision for
on the
reclassification of certain loans to held-for-sale) during
the gain of $3.8 million
the third quarter of 2011,
recorded by BPPR on the sale of a certain construction
project during the third quarter of 2011, higher gains on
securitization transactions
in the BPPR reportable
segment by $9.1 million, and higher net gains by $7.4
million in the BPNA reportable segment, partially offset
by valuation adjustments on loans held-for-sale by
approximately $23.9 million, principally in the BPPR
reportable segment related to advances on the commercial
and construction loans classified as held-for-sale, and on
loan transfers from held-for-sale to other real estate
owned;

• lower unfavorable adjustments

related to indemnity
reserves on loans sold by $38.9 million, which was mainly
due to lower unfavorable representation and warranty
adjustments in the BPNA reportable segment by $22.1
million mostly as a result of settlements with two of the
largest counterparties which released the Corporation
from any further financial obligations regarding loans sold
to those counterparties and due to reduced activity from
its remaining counterparties. Also, there were lower credit
recourse adjustments in the BPPR reportable segment by
$10.1 million due in part to reductions in the probability
of default assumption and to higher expected prepayment
rates on the serviced portfolio, partially offset by charge-
offs taken due to a greater volume of loans repurchased
under credit recourse arrangements in the Puerto Rico
operations,
representation and warranty
adjustments in BPPR by $5.8 million due to refinement in
estimates based on historical claims and loss expectations;
and

and lower

• favorable variance in FDIC loss share income (expense)
during the year ended December 31, 2011 by $92.5
million. Refer to Table 2 for a description and amounts of
the items that compose the FDIC loss share income
(expense) caption. The positive variance was mostly
influenced by (i) increase in the indemnification asset
associated to 80% of the provision for loan losses recorded
on the covered loans on the portion of the losses that are
reimbursable under the loss sharing agreements; and
(ii) 80% impact of the lower discount accretion on the
loans and contingent liability for unfunded commitments
accounted for under ASC 310-20, which as indicated
previously, had an estimated accretion period of one year.
The impact of those two items was partially offset by
higher amortization (lower accretion) of the loss share
indemnification asset
from the quarterly
resulting
evaluation of expected cash flows of the loan portfolio
that resulted in reduced losses expected to be collected

from the FDIC due to the improved performance of
certain loan pools. This reduction in losses also results in
an improvement in interest income due to an increase in
the accretable yield on the covered loans. The impact in
interest income is taken throughout the life of the loans
whereas the life of the indemnification asset is tied to the
FDIC loss sharing agreements and is shorter.

For the year ended December 31, 2010, non-interest income
increased by $391.7 million, or 44%, when compared to 2009,
principally due to the gain of $640.8 million, before tax and
transaction costs, recognized on the sale of the 51% ownership
interest
in the Corporation’s processing and technology
business, EVERTEC. In addition, there were $42.6 million in
favorable changes in the fair value of the equity appreciation
instrument
issued to the FDIC during the year ended
December 31, 2010 due to a reduction in the assumption of
volatility related to the Corporation’s stock price and a shorter
period remaining for the expiration of the instrument. Also,
other operating income increased by $28.4 million, mainly due
to the $39.4 million accretion of the fair value of unfunded loan
commitments that were recorded as part of the FDIC-assisted
transaction and lower net derivative losses, including lower
unfavorable credit adjustments by $8.2 million; partially offset
by losses of $14.8 million from the retained ownership interest
in EVERTEC, which represented $574 thousand of the share of
EVERTEC’s net income for the period from October 1, 2010
through December 31, 2010, offset by the 49% of intercompany
income eliminations of $15.4 million. Those favorable variances
were partially offset by (i) lower net gains on sales of
investment
valuation adjustments of
investment securities, by $215.6 million; (ii) $25.8 million in
FDIC loss share expense during 2010; (iii) a decrease in trading

securities, net of

30

account profit by $23.3 million; (iv) higher losses on sales of
loans, net of lower of cost or fair value adjustments on loans
held-for-sale, by $21.1 million; and (v) a decrease in service
charges on deposit accounts by $17.7 million.

valuation adjustments of

During the year ended December 31, 2010, there were $3.8
million in gains mainly on sales of available-for-sale securities,
compared with $236.6 million in gains on the sale of
investment securities during 2009, mostly related to the sale of
$3.4 billion in U.S. Treasury notes and U.S. agency obligations
by BPPR and the sale of equity securities, partially offset by
lower unfavorable
investment
securities by $16.8 million during 2010. The decrease in trading
account profit was mostly in the Puerto Rico mortgage banking
subsidiary and was mainly related to $51.1 million in lower
realized gains as a result of a lower volume of mortgage-backed
securities sold, partially offset by $23.2 million in higher
unrealized gains of outstanding mortgage-backed securities.
The higher losses on sales of loans, net of lower of cost or fair
value adjustments on loans held-for-sale, were mostly related to
higher adjustments to the indemnity reserve of $31.8 million,
mainly in the BPPR reportable segment related to loans serviced
with
certain
representation and warranty arrangements by E-LOAN. Service
charges on deposit accounts decreased mostly in the BPNA
reportable segment related to lower non-sufficient funds fees
and reduced fees from money services clients, the impact of
Regulation E, and due to fewer customer accounts resulting
from the reduction in BPNA’s branches.

settlements

recourse

credit

and

on

to

Operating Expenses
Table 8 provides a breakdown of operating expenses by major
categories.

31

POPULAR, INC. 2011 ANNUAL REPORT

Table 8 - Operating Expenses

(In thousands)

Personnel costs:

Salaries
Commissions, incentives and other bonuses
Pension, postretirement and medical insurance
Other personnel costs, including payroll taxes

Total personnel costs

Net occupancy expenses
Equipment expenses
Other taxes
Professional fees:

Collections, appraisals and other credit related fees
Programming, processing and other technology services
Other professional fees

Total professional fees

Communications
Business promotion
Impairment losses on long-lived assets
FDIC deposit insurance
Loss (gain) on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses:

Credit and debit card processing, volume, interchange and other

expenses

Transportation and travel
Printing and supplies
All other

Total other operating expenses

Goodwill and trademark impairment losses
Amortization of intangibles

Total operating expenses

Personnel costs to average assets
Operating expenses to average assets
Employees (full-time equivalent)
Average assets per employee (in millions)

Operating expenses for the year ended December 31, 2011
decreased by $175.3 million, or 13%, compared with the year
ended December 31, 2010. The decrease in operating expenses
for the year ended December 31, 2011, when compared with
the previous year, was impacted by the following factors:

the 51% ownership interest

• a decrease in personnel costs of $60.8 million that was
mainly related to the reduction in headcount due to the
sale of
in EVERTEC
completed on September 30, 2010. EVERTEC had 1,879
employees at September 30, 2010. Personnel costs for the
EVERTEC operations, including the merchant acquiring
business, approximated $71.7 million for the year ended
December 31, 2010. Pension and postretirement plan

Year ended December 31,

2011

2010

2009

2008

2007

$305,018
44,421
62,219
41,712

453,370

102,319
43,840
51,885

28,127
96,699
70,116

$352,139
53,837
61,294
46,928

514,198

116,203
85,851
50,608

27,081
45,685
93,339

$364,529
43,840
81,372
43,522

533,263

111,035
101,530
52,605

21,675
31,286
58,326

$421,134
61,745
56,481
69,105

608,465

120,456
111,478
52,799

21,413
35,830
63,902

194,942

166,105

111,287

121,145

27,115
55,067
–
93,728
8,693
21,778

17,539
7,012
5,273
58,082

87,906

–
9,654

38,905
46,671
–
67,644
38,787
46,789

42,613
7,769
9,302
84,929

46,264
38,872
1,545
76,796
(78,300)
25,800

43,806
8,796
11,093
60,322

51,386
62,731
13,491
15,037
–
12,158

45,326
12,751
14,450
71,066

144,613

124,017

143,593

–
9,173

–
9,482

12,480
11,509

$417,418
69,805
62,662
70,875

620,760

109,344
117,082
48,489

23,567
31,569
64,387

119,523

58,092
109,909
10,478
2,858
–
2,905

41,791
14,239
15,603
52,194

123,827

211,750
10,445

$1,150,297

$1,325,547

$1,154,196

$1,336,728

$1,545,462

1.19%
3.02
8,329
$4.57

1.34%
3.45
8,277
$4.64

1.46%
3.16
9,407
$3.89

1.54%
3.39
10,387
$3.80

1.57%
3.92
11,374
$3.47

losses

expense for 2011 amounted to $26.1 million, compared
with $20.6 million for 2010. The pension cost for the year
ended December 31, 2011 included $15.6 million in
termination benefit
related to the voluntary
retirement program described in the Overview section of
this MD&A. Excluding the impact of
the voluntary
retirement program, the reduction in pension costs during
2011 was principally due to higher return on plan assets
in 2011 and the fact that the pension cost for 2010
included a settlement loss on the termination of the BPNA
pension plan of $4.2 million. Refer to Note 34 to the
consolidated financial statements for a breakdown of the
pension and postretirement costs for 2011 and 2010;

32

• a decrease in net occupancy expenses of $13.9 million,
which was primarily the result of a reduction in rental
expense related to the EVERTEC facilities prior to the sale
including the
of
merchant business, incurred net occupancy expenses of
$10.6 million in 2010;

the ownership interest. EVERTEC,

• a decrease in equipment expenses of $42.0 million that
was mainly due to lower amortization of software licenses
and depreciation of electronic equipment as a result of the
transfer of software and equipment to EVERTEC as part
of
the sale. Equipment expenses pertaining to the
EVERTEC operations approximated $35.8 million in
2010;

• a reduction in communication expenses of $11.8 million
primarily due to the transferring of communication lines
to EVERTEC, including those related to the merchant
banking business. The former EVERTEC reportable
segment,
recorded
including the merchant business,
communication costs of $9.3 million in 2010;

• lower loss on early extinguishment of debt in 2011 since
the results for 2010 included losses of $38.8 million,
mostly from prepayment penalties on the cancellation of
FHLB advances and certain public fund certificates of
deposit as part of BPNA’s redeployment of excess liquidity
and as part of
strategy to increase margins
prospectively. The variance was partially offset mainly by
$8.0 million in prepayment penalties on the repayment of
$100 million in medium-term notes in the first quarter of
2011;

the

• OREO expenses decreased by $25.0 million during 2011
as compared to 2010 mainly due to lower write-downs in
commercial properties since there were large reappraisal
adjustments on certain high-value properties made during
2010;

• a decline in credit and debit card processing, volume and
interchange expenses of $25.1 million, mainly due to the
sale of the processing and merchant banking businesses;
and

• the reduction in the “other” category within the caption of
other operating expenses in Table 8 was in part related to
transactions costs recognized in 2010 on the EVERTEC
sale.

These favorable variances for the year ended December 31,
2011, when compared with the previous year, were partially
offset by the following factors:

• an increase in professional fees of $28.8 million, which
was principally in the categories of system application
processing
services
provided by EVERTEC to the Corporation’s subsidiaries.
Prior to the sale of EVERTEC, these costs were fully

and hosting, which represent

eliminated in consolidation, but now 51% of such costs
are not eliminated when consolidating the Corporation’s
financial results of operations, resulting in an increase in
the costs for the year ended December 31, 2011. The
increase related to those services provided by EVERTEC
in 2011 was partially offset by a reduction in other
professional costs, such as transaction costs for legal and
consulting services that were incurred as part of the
the ownership interest
negotiations and sale of
in
EVERTEC,
fees related to litigations and
lower audit fees;

lower legal

• an increase in business promotion of $8.4 million, mainly
in advertising expenses due to new campaigns, including
marketing costs for the new AAdvantage credit card
products, and costs from the credit card reward point
there were higher marketing
programs. Additionally,
expenses associated with the BPNA rebranding initiative;
and

• higher FDIC deposit insurance assessments during 2011
by $26.1 million mainly due to the change in the
assessment computation for BPPR effective in the second
quarter of 2011.

Operating expenses for the year ended December 31, 2010
increased by $171.4 million, or 15%, compared with
December 31, 2009. This increase in operating expenses was
principally due to prepayment penalties on the early
extinguishment of debt of $38.8 million in 2010, compared
to $78.3 million in gains on the early extinguishment of debt
in 2009. The latter resulted principally from the junior
subordinated debentures that were extinguished as a result of
the exchange of trust preferred securities for common stock
in August 2009. Also contributing to the increase in
operating expenses for the year ended December 31, 2010,
compared with the previous year, were higher professional
fees, principally in the categories of consulting fees related to
the EVERTEC sale and the Westernbank FDIC-assisted
transactions and legal fees related in part to credit collection
services and litigation support. Furthermore,
there were
higher maintenance
costs on repossessed
and selling
properties as well as higher write-downs on the value of these
properties. These unfavorable variances were partially offset
by lower personnel costs, principally a reduction of $12.4
million in pension and restoration plan expenses, and lower
equipment expenses. A decrease in salaries from a reduction
in headcount at
the BPNA reportable segment, due to
restructuring and staff reductions during 2009 and to the sale
of EVERTEC in the fourth quarter of 2010, was partially
offset by the salaries related to the employees hired from the
Westernbank former operations. The decrease in equipment
expenses was mainly due to lower depreciation expense of
software licenses and electronic equipment as a result of the
EVERTEC sale, and to lower depreciation and maintenance

33

POPULAR, INC. 2011 ANNUAL REPORT

and repair expenses in the BPNA reportable segment due to
fewer licensing needs and fewer branches as a result of the
restructuring of its operations.

Income Taxes
Income tax expense amounted to $114.9 million for the year
December 31, 2011, compared with an income tax expense of
$108.2 million for the previous year. The increase in income tax
expense was mainly due to the recognition of $103.3 million in
income tax expense and a reduction in the net deferred tax
assets of the Puerto Rico operations mainly due to the reduction
in the marginal tax rate from 39% to 30% during the first quarter
of 2011. In January 2011, the Governor of Puerto Rico signed
into law a new Internal Revenue Code for Puerto Rico, which
among
to the
Corporation, was the reduction in the marginal tax as indicated
above. This increase was offset by lower income before taxes on
the Puerto Rico operations mostly because of the gain on the
sale of 51% interest in EVERTEC that took place during 2010.
This gain was calculated at the preferential tax rate of 25%.

the most

significant

applicable

changes

In addition, the increase in income tax expense was partly
offset by the tax benefit of $53.6 million recorded in June 2011
for 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 the tax-exempt income).

Table 9 - Components of Income Tax Expense (Benefit)

The Corporation and the Puerto Rico Treasury Department
agreed that for tax purposes the deductions related to certain
loan charge-offs
consolidated financial
statements for those two years could be deferred until 2013
through 2016. Also, in 2011, there was a higher benefit on net
exempt interest income compared to 2010.

recorded on the

Income tax expense for the year ended December 31, 2010
was $108.2 million, compared with an income tax benefit of
$8.3 million for 2009. The increase in income tax expense for
2010 was due to higher pre-tax earnings in 2010 related to the
Puerto Rico operations, mostly related to income subject to
capital gain tax rate and by lower benefit on net exempt interest
income.

The Corporation’s net deferred tax assets at December 31,
2011 amounted to $405 million (net of the valuation allowance
of $1.3 billion) compared to $377 million at December 31,
2010. Note 37 to the consolidated financial statements provides
the composition of the net deferred tax assets as of such dates.
All of the net deferred tax assets at December 31, 2011 pertain
to the Puerto Rico operations. Of the amount related to the U.S.
operations, without considering the valuation allowance, $1.1
billion is attributable to net operating losses of such operations.
The components of the income tax expense (benefit) for the
years ended December 31, 2011, 2010 and 2009 are included in
Table 9.

(Dollar in thousands)

2011

Amount

% of pre-tax
income

Computed income tax at statutory rates
Benefit of net tax exempt interest income
Effect of income subject to preferential tax rate
Deferred tax asset valuation allowance
Non-deductible expenses
Difference in tax rates due to multiple jurisdictions
Initial adjustment in deferred tax due to change in tax rate
Recognition of tax benefits from previous years [1]
States taxes and others

Income tax expense (benefit)

$79,876
(31,379)
(1,802)
7,192
21,756
(8,555)
103,287
(53,615)
(1,833)

$114,927

The full valuation allowance in the Corporation’s U.S.
operations was recorded in the year 2008 in consideration of
the requirements of ASC 740. Refer to the Critical Accounting
Policies / Estimates section of this MD&A for information on
the requirements of ASC 740 and management’s position with
respect to the realization of the net deferred tax assets of the
Corporation’s U.S. operations and the Puerto Rico banking
operation.

Refer to Note 37 to the consolidated financial statements for

additional information on income taxes.

2010

% of pre-tax
income

41%
(3)
(59)
59
11
6
–
–
(11)

44%

Amount

$100,586
(7,799)
(143,844)
143,754
28,130
13,908
–
–
(26,505)

$108,230

2009

Amount

$(230,241)
(50,261)
(1,842)
282,933
–
40,625
(12,351)
–
(37,165)

$(8,302)

% of pre-tax
income

41%
9
–
(50)
–
(7)
2
–
6

1%

30%
(12)
(1)
3
8
(3)
39
(20)
(1)

43%

Fourth Quarter Results
The Corporation recognized net income of $3.0 million for the
quarter ended December 31, 2011, compared with a net loss of
$227.1 million for the same quarter of 2010. The variance in
the quarterly results was principally from a reduction in the
provision for loan losses by $174.6 million.

Net interest income for the fourth quarter of 2011 amounted
to $344.8 million, compared with $354.6 million for the fourth
quarter of 2010. The decrease in net interest income was
primarily due to lower volumes of investment securities and of

commercial, construction and covered loans offset in part by
greater volume of mortgage loans and reduced levels of long-
term debt. Average total
loans declined $1.6 billion, while
investment securities decreased $1.0 billion. Also, the decrease
in net interest income was influenced by a reduction in loan
yields by 31 basis points, partially offset by the reduction in the
cost of deposits which went down 46 basis points.

The provision for loan losses amounted to $179.8 million or
131% of net charge-offs for the quarter ended December 31,
2011, compared to $354.4 million or 74% of net charge-offs for
the fourth quarter of 2010. There was a decrease of $230.5
million in the provision for loan losses on non-covered loans,
partially offset by an increase of $55.9 million in the provision
for loan losses on covered loans. The provision for loan losses
for the quarter ended December 31, 2010 included the effect of
a $176 million charge to provide for the difference between the
book value and the estimated fair value of the commercial,
construction and non-conventional mortgage loan portfolios
transferred to loans held-for-sale in the fourth quarter of 2010.
The 2011 fourth quarter results reflect higher provisioning for
consumer and mortgage loans modified under loss mitigation
programs that are categorized as troubled debt restructurings
and are evaluated for impairment on an individual basis. At
December 31, 2011, the specific allowance for loan losses for
consumer and mortgage loans that were considered troubled
debt restructurings amounted to $46 million, compared with $5
million at December 31, 2010. The increase in the provision for
loan losses on the covered loan portfolio was impacted mainly
by two particular credit relationships accounted for pursuant to
ASC 310-20, which required specific reserves of $28.2 million
during the fourth quarter of 2011.

the same quarter

Non-interest income amounted to $149.4 million for the
quarter ended December 31, 2011, compared with $105.6
million for
in 2010. The increase in
non-interest income was mainly due to a favorable variance in
gain on sale of loans, net of valuation adjustments on loans
held-for-sale, of $14.7 million mostly due to higher gains on
mortgage loans sold and to lower net adjustments to indemnity
reserves on loans sold by $31.0 million. Additionally,
the
variance in non-interest income was due to an increase in FDIC
loss share income of $20.5 million. These favorable variances
were partially offset by lower debit card fees as a result of lower
POS interchange income driven by the effect of the Durbin
Amendment
to the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 implemented in October
2011, higher unfavorable valuation adjustments on mortgage
servicing rights,
trading account profits, and the
unfavorable impact in the fair value of the equity appreciation
instrument issued to the FDIC.

lower

Operating expenses totaled $311.1 million for the quarter
ended December 31, 2011, compared with $344.7 million for
the same quarter in the previous year. The decrease in
operating expenses was impacted by the prepayment penalties

34

of $12.1 million on the cancellation of $183 million in FHLB
advances and the $7.5 million payment to cover the uninsured
portion of the settlement of certain securities class action
lawsuits during the fourth quarter of 2010. In general, for the
fourth quarter of 2011, there were lower net occupancy and
equipment expenses due to the sale of the ownership interest in
EVERTEC in September 2010,
lower unfavorable fair value
adjustments on repossessed property, lower charges to increase
the reserve for unfunded lending commitments, and lower legal
fees, among other factors influencing the variance in operating
expenses. These favorable variances were partially offset by the
previously mentioned charge to pension costs related to the
voluntary retirement program and higher amortization of FDIC
deposit insurance.

Income tax expense amounted to $0.3 million for the
quarter ended December 31, 2011, compared with an income
tax benefit of $11.8 million for the same quarter of 2010. The
variance was primarily due to the loss before tax in the Puerto
Rico operations for the fourth quarter of 2010 as compared to
the earnings in the fourth quarter of 2011.

REPORTABLE SEGMENT RESULTS
The Corporation’s reportable segments for managerial reporting
purposes consist of Banco Popular de Puerto Rico and Banco
Popular North America. A Corporate group has been defined to
support
the reportable segments. For managerial reporting
purposes, the costs incurred by the Corporate group are not
allocated to the reportable segments.

financial

the BPPR reportable segment but

As a result of the sale of a 51% interest in EVERTEC, the
Corporation no longer presents EVERTEC as a reportable
segment and therefore, historical
information for
EVERTEC, including the merchant acquiring business that was
transferred to
part of
EVERTEC in connection with the sale, was reclassified in 2010
under Corporate for all periods discussed. Revenues from the
Corporation’s equity interest in EVERTEC are being reported as
non-interest income in the Corporate group. The Corporation
sold its equity investments in CONTADO and Serfinsa during
2011.

For a description of the Corporation’s reportable segments,
including additional financial information and the underlying
management accounting process, refer to Note 39 to the
consolidated financial statements.

The Corporate group reported a net loss of $110.8 million
for the year ended December 31, 2011, compared with net
income of $432.9 million for the year ended December 31,
2010. The variance in the results was principally due to the gain
on sale of the 51% interest in EVERTEC in 2010 of $640.8
million, reduced by the related tax expense at a preferential tax
rate of 25%. Also, there were lower operating expenses in 2011
by approximately $209.8 million, principally due to the
expenses incurred in 2010 by the processing, technology and
merchant acquiring business operations. Also, there were lower

35

POPULAR, INC. 2011 ANNUAL REPORT

consulting services related to the sale of EVERTEC, litigation
support expenses and accruals for legal reserves related to the
class actions.

Highlights on the earnings

results

for

the reportable

segments are discussed below.

Banco Popular de Puerto Rico
The Banco Popular de Puerto Rico reportable segment’s net
income amounted to $231.5 million for
the year ended
December 31, 2011, compared with $46.6 million for the year
ended December 31, 2010. The principal
that
contributed to the variance in the financial results included the
following:

factors

• higher net interest income by $144.8 million, or 13%,
mostly due to interest income from covered loans which
increased by $109.6 million. Other favorable variances
included reduced deposit and borrowing cost, and greater
volume of mortgage loans. The net interest margin was
5.02% for the year ended December 31, 2011, compared
with 4.43% for the year 2010;

• lower provision for loan losses by $122.4 million, or 20%,
mostly due to the decrease in the provision for loan losses
on the non-covered loan portfolio of $268.0 million,
partially offset by an increase of $145.6 million related to
the covered loan portfolio. The decline on the provision
for loan losses for non-covered loans was mainly driven
by lower levels of commercial, construction and consumer
net charge-offs, coupled with an improved outlook in net
charge-offs for the consumer loan portfolio due to better
macro-economic indicators. These improvements were
partially offset by provisioning requirements for consumer
and mortgage loans restructured under loss mitigation
programs that are considered troubled debt restructurings
and require to be analyzed for specific reserves under ASC
Section 310-10-35. The decrease in net charge-offs was in
part because of the charge-offs taken in December 2010
on the commercial and construction loans reclassified to
held-for-sale. Also, the decrease in net charge-offs of the
BPPR construction loan portfolio was principally because
a substantial portion of the portfolio was classified as
held-for-sale. The decline in consumer loan net charge-
offs reflects some signs of more stable credit performance
in the personal and auto loan portfolios. These favorable
variances were partially offset by the recording of a
provision for loan losses on the covered loans during the
year 2011, principally due to reductions in expected cash
flows of certain loans accounted for pursuant to ASC
310-30 and two particular credit relationships accounted
for pursuant to ASC 310-20. Refer to the Credit Risk
Management and Loan Quality section of this MD&A for
certain quality indicators and further explanations;

• higher non-interest

the contingent

income by $40.2 million, or 9%,
which included an increase in FDIC loss share income of
$92.5 million, higher gains on sale of
loans, net of
valuation adjustments on loans held-for-sale, of $8.9
million, and lower adjustments to indemnity reserves on
loans serviced by $16.0 million. These favorable variances
were partially offset by lower fair value adjustment on the
equity appreciation instrument by $34.2 million, lower
amortization of
liability on unfunded
commitments of Westernbank by $34.9 million, lower
trading account profits by $10.5 million, lower service
charges on deposit accounts by $2.3 million and other
service fees by $2.9 million. The latter was principally due
to a reduction in credit and debit card fees and
unfavorable adjustments in the fair value of servicing
rights, offset in part by higher insurance agency fees and
revenues for the sale and administration of investment
products. Refer to Table 2 for detailed amounts on the
Westernbank-related items.

• higher operating expenses by $29.7 million, or 3%, mainly
due to increase in personnel costs by $4.5 million, mostly
pension and postretirement benefit costs by $9.8 million,
fees by $13.5 million primarily for
and professional
legal and credit related services, such as
consulting,
appraisals. Also, there was higher business promotion
expense by $6.3 million related to credit card programs
and advertising, other operating taxes by $4.2 million
related mostly to personal property taxes, and higher
FDIC deposit
insurance by $31.9 million. These
unfavorable variances were partially offset by lower
equipment, net occupancy, and communication expenses,
as well as a reduction in provision for unfunded lending
commitments and the write-downs in other real estate
properties; and

• higher income tax expense by $92.7 million, mainly due
to an increase in income before tax. Also, during the first
quarter of 2011, an adjustment to income tax expense was
made to reduce the net deferred tax asset of the Puerto
Rico operations as a result of
the reduction in the
marginal rate from 39% to 30%. These variances were
partially offset by a tax benefit of $53.6 million for the
recognition of certain tax benefits not previously recorded
during years 2009 and 2010 and by higher benefit on net
exempt interest income.

The main factors that contributed to the variance in the
financial results for the year ended December 31, 2010, when
compared with 2009, included the following:

• higher net interest income by $229.3 million, or 26%,
mainly as a result of the $79.8 million discount accretion
on covered loans acquired from the Westernbank FDIC-
assisted transaction that are accounted for under ASC

Subtopic 310-20 due to their revolving characteristics and
the $207.0 million discount accretion on covered loans
accounted for under ASC Subtopic 310-30, as well as
lower cost of deposits, partially offset by the cost of
funding the note issued to the FDIC as part of the
Westernbank FDIC-assisted transaction. The BPPR
reportable segment’s net
interest yield was adversely
impacted by funding the FDIC loss share asset, a
non-interest earning asset, with interest bearing liabilities,
including the note issued to the FDIC;

the

related to

• lower provision for loan losses by $13.9 million, or 2%,
mainly as a result of higher increases in reserves during
2009, primarily
construction and
commercial loan portfolios. The BPPR reportable segment
experienced an increase of $168.3 million in net charge-
offs for the year ended December 31, 2010, compared
with 2009, principally associated with increases in the
commercial and construction loan net charge-offs by
$106.6 million and $93.4 million,
respectively. At
December 31, 2010, there were $498 million of loans
individually evaluated for
in the BPPR
reportable segment with a related allowance for loan
losses of $14 million, compared with $1.0 billion and
at December 31, 2009.
$190 million,
Non-performing loans held-in-portfolio in this reportable
segment
totaled $1.1 billion at December 31, 2010,
compared with $1.5 billion at December 31, 2009. The
decreases in the commercial and construction loans in
non-performing status were principally prompted by the
reclassification in 2010 of approximately $603 million
worth of loans held-in-portfolio to loans held-for-sale.
This reclassification had an impact in the provision for
loan losses
segment of
approximately $56.0 million;

the BPPR reportable

respectively,

impairment

for

agencies

• lower non-interest income by $218.5 million, or 33%,
lower gains on the sale and
primarily as a result of
valuation adjustment of investment securities of $223.7
million, reflecting the absence of the $227.6 million gain
in 2009 derived principally from the sale of U.S. Treasury
and equity securities. Lower
notes, U.S.
non-interest income also reflects lower trading account
profit by $23.3 million mainly in the mortgage banking
business, and a reduction in the net gain on sale of loans
and adjustments to indemnity reserves of $50.0 million,
mainly due to increases in indemnity reserves for loans
sold with credit recourse. Also, non-interest income for
2010 included a $25.6 million negative impact from the
the FDIC loss sharing asset. These
net reduction of
unfavorable variances were partially offset by an increase
in other operating income of $58.8 million resulting
mostly from the accretion of the fair value adjustment on
the Westernbank unfunded lending commitments due to

36

the passage of
changes in the fair value of
instrument issued to the FDIC;

time; and, $42.6 million in favorable
the equity appreciation

• higher operating expenses by $108.1 million, or 14%,
mainly due to higher personnel costs, professional fees
and other operating expenses. The increase in personnel
costs was mainly due to the new hires from Westernbank
while the increase in other operating expenses was mostly
due to losses associated with write-downs in other real
estate property; and

• income tax expense of $27.1 million in 2010, compared
with an income tax benefit of $1.3 million in 2009,
primarily due to lower benefit on net tax exempt interest
income. In addition, there was an increase in the Puerto
Rico statutory tax rate from 39% to 40.95% that resulted
in an income tax benefit during the year 2009 as
compared to 2010.

Banco Popular North America
For the year ended December 31, 2011, the reportable segment
of Banco Popular North America reported net income of $29.9
million, compared with a net loss of $340.3 million for the year
ended December 31, 2010. The principal
that
contributed to the variance in the financial results included the
following:

factors

• lower net

interest

income by $14.4 million, or 5%,
principally as a result of lower earning assets primarily
due to loan pay downs, sales, and charge-offs. This
negative variance was partially offset by deleveraging of
the balance sheet and lower deposit cost. The BPNA
reportable segment’s net interest margin was 3.64% for
2011, compared with 3.32% for 2010;

• lower provision for loan losses by $313.8 million, or 78%
of net charge-offs, principally driven by improvements in
credit performance, lower loan balances, primarily in the
commercial loan portfolio, and decreases in net charge-
offs in all
loan categories. Refer to the Credit Risk
Management and Loan Quality section of this MD&A for
certain quality indicators
explanations
corresponding to the BPNA reportable segment;

and further

• higher non-interest

income by $20.3 million, or 37%,
principally due to lower adjustments to representation and
warranty reserves of $22.1 million as E-LOAN has
negotiated settlements with certain major counterparties
who have agreed to release the Corporation from any future
claims, and higher gains on the sale of loans, net of valuation
adjustments, by $5.9 million, partially offset by lower service
charges on deposit accounts by $8.5 million; and

• lower operating expenses by $49.9 million, or 17%,
mainly due to lower prepayment penalties on early
lower FDIC
extinguishment of debt by $21.9 million,

37

POPULAR, INC. 2011 ANNUAL REPORT

deposit insurance amortization by $5.9 million and lower
professional fees by $7.0 million,
including legal fees,
armored car expenses, appraisal fees and computer service
fees, among others. In addition, there were lower other
real
and also lower net
occupancy and equipment expenses mainly due to fewer
branches. In addition, the results for 2010 included a
settlement loss on the termination of the BPNA pension
plan of $4.2 million.

estate property expenses

The main factors that contributed to the variance in results
for the year ended December 31, 2010, when compared with
2009, included:

• lower net interest income by $5.5 million, or 2%, mainly
due to a reduction in the volume of average earning
assets, principally loans. The decrease in loans is related
to lower originations coupled with deleveraging activity
and the exiting of certain lending channels such as
non-conventional residential mortgages and the E-LOAN
origination platform. Partially offsetting the decrease in
the volume of earning assets was a lower cost of interest
bearing deposits, mainly time deposits and money market
deposits, which contributed to an increase in the net
interest margin;

a

as

for

2009

during

segment

reportable

recorded for

result of higher

general
commercial

• lower provision for loan losses by $380.0 million, or 49%,
reserve
principally
loans,
requirements
residential
construction loans, U.S. non-conventional
mortgages and home equity lines of credit, combined with
specific reserves
individually evaluated
impaired loans. Non-performing loans held-in-portfolio in
this
totaled $460 million at
December 31, 2010, compared with $798 million at
December 31, 2009. The decrease in non-performing
loans held-in-portfolio was mostly reflected in the
commercial and construction loan portfolios, which
decreased by $81 million and $76 million, respectively,
coupled with a decrease in non-performing mortgage
loans of $174 million. The latter was mainly driven by the
reclassification of approximately $396 million (book
value) of U.S. non-conventional residential mortgage
loans to loans held-for-sale;

• higher non-interest income by $24.3 million, mainly due
to lower provisioning in 2010 for representation and
warranty reserves on loans sold in previous periods,
compared with 2009 charges, and lower losses on the sale
of Popular Equipment Finance loans. These favorable
variances were partially offset by lower service charges on
deposit accounts;

• lower operating expenses by $15.9 million, or 5%,
principally as a result of lower personnel costs due to the
staff reductions from the restructuring efforts, lower net

occupancy expenses due to fewer branch locations, and
lower equipment expenses also resulting from BPNA’s
previous year’s restructuring efforts. Also contributing to
the reduction in operating expenses were lower FDIC
assessments since 2009, which included a larger deposit
base and the one-time special assessment. These variances
were partially offset by prepayment penalties of $21.9
million on the cancellation of FHLB advances and early
termination of certain public fund certificates of deposit
as part of BPNA’s deployment of excess liquidity and as
part of a strategy to increase margin in future periods; and
• income tax expense increase of $29.2 million in 2010, due
to an adjustment of the deferred tax valuation allowance
expense, in the year 2009, as a result of the tax sharing
agreement between the entities to reflect actual 2009
federal taxable income as reported on the tax returns. In
addition, in the year 2009 there was a reversal in the
deferred tax valuation allowance due to a refund received
from the IRS as a result of the use of the net operating loss
carryback available.

for

STATEMENT OF FINANCIAL CONDITION ANALYSIS
Assets
Refer to the consolidated financial statements included in this
2011 Annual Report
the Corporation’s consolidated
statements of financial condition at December 31, 2011 and
December 31, 2010. Also, refer to the Statistical Summary
2007-2011 in this MD&A for condensed statements of financial
condition for the past five years. At December 31, 2011, the
Corporation’s total assets were $37.3 billion, compared with
$38.8 billion at December 31, 2010 and $34.7 billion at
December 31, 2009.

Money market, trading and investment securities
Money market
investments amounted to $1.4 billion at
December 31, 2011, compared with $979 million at the same
date in 2010 and $1.0 billion at December 31, 2009. The
increase from the end of 2010 to 2011 was mainly due to an
increase of $146 million in federal
funds sold and resell
agreements and $251 million in time deposits with other banks.
The latter was principally on funds deposited with the Federal
Reserve Bank of New York that earn interest. The excess
liquidity was derived in part from an increase in deposits in
trust received late December 2011 on a government bond
issuance, which were of a short-term nature.

Trading account securities amounted to $436 million at
December 31, 2011,
compared with $547 million at
December 31, 2010 and $462 million at December 31, 2009.
The decrease in trading account securities was principally due
to a reduction in the volume of mortgage-backed securities,
mostly from a bulk sale in the third quarter of 2011 to take
advantage of favorable market conditions. Proceeds were used
to repay short-term debt. Refer to the Market / Interest Rate

Risk section of this MD&A included in the Risk Management
section for a table that provides a breakdown of the trading
portfolio by security type.

Table 10 provides a breakdown of

the Corporation’s
portfolio of investment securities available-for-sale (“AFS”) and
held-to-maturity
at
on
December 31, 2011, 2010 and 2009. Notes 8 and 9 to the
additional
provide
statements
consolidated
information with respect
to the Corporation’s investment
securities AFS and HTM.

combined

(“HTM”)

financial

basis

a

Table 10 - Table - AFS and HTM Securities

(In millions)

2011

2010

2009

U.S. Treasury securities
Obligations of U.S. government

sponsored entities

Obligations of Puerto Rico,

States and political
subdivisions

Collateralized mortgage

obligations

Mortgage-backed securities
Equity securities
Other

Total AFS and HTM investment

$38.7

$64.0

$56.2

985.5

1,211.3

1,647.9

157.7

144.7

262.8

1,755.6
2,139.6
6.9
51.2

1,323.4
2,576.1
9.5
30.2

1,718.0
3,210.2
7.8
4.8

securities

$5,135.2

$5,359.2

$6,907.7

The investment securities portfolio consists primarily of
liquid and high quality securities. The decrease in investment
securities from December 31, 2010 to December 31, 2011 was
related to maturities and prepayments, which proceeds were
used mostly to prepay the note payable issued to the FDIC as
part of the FDIC-assisted transaction. Also, the decrease was
due to the sale of $234 million in FHLB notes during the third
quarter of 2011. With this sale, the Corporation monetized part
of the unrealized gain in its investment portfolio and used those
proceeds also for partial prepayment of the note issued to the

38

FDIC. These decreases were offset by purchases of investment
securities by the BPNA reportable segment during the first
quarter of 2011 of approximately $751 million, in order to
deploy excess liquidity, mainly in the form of U.S. Government
agency-issued collateralized mortgage obligations and U.S.
agency securities. The reduction in investment securities from
December 31, 2009 to December 31, 2010 was mostly impacted
the
by maturities, prepayments and sales. During 2009,
Corporation sold $3.4 billion of
securities
available-for-sale, principally U.S. agency securities (FHLB
notes) and U.S Treasury securities. The proceeds received from
this sale were approximately $2.9 billion, and were later
partially reinvested, primarily in GNMA mortgage-backed
securities to strengthen common equity by realizing a gain and
improving the Corporation’s regulatory capital ratios.

investment

At December 31, 2011, there were investment securities
available-for-sale and held-to-maturity with a fair value of $210
million in an unrealized loss position of $9 million, compared
with securities of $290 million with unrealized losses of $9
million at December 31, 2010. Management performed its
quarterly analysis of all debt securities in an unrealized loss
position at December 31, 2011 and concluded that no
individual debt security was other-than-temporarily impaired as
of such date. At December 31, 2011, the Corporation does 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 those investment securities prior to recovery of
their amortized cost basis.

Loans
Refer to Table 11 for a breakdown of the Corporation’s loan
portfolio,
the principal category of earning assets. Loans
covered under the FDIC loss sharing agreements are presented
in a separate line item in Table 11. The risks on covered loans
are significantly different as a result of the loss protection
provided by the FDIC.

39

POPULAR, INC. 2011 ANNUAL REPORT

Table 11 - Loans - Ending Balances

(in thousands)

2011

2010

2009

2008 [2]

2007

Loans not covered under FDIC loss sharing agreements:

At December 31,

Commercial
Construction
Lease financing
Mortgage
Consumer

Total non-covered loans held-in-portfolio
Loans covered under FDIC loss sharing agreements [1]

$10,534,886
311,628
563,867
5,518,460
3,673,755

20,602,596
4,348,703

$11,393,485
500,851
602,993
4,524,722
3,705,984

20,728,035
4,836,882

$12,664,058
1,724,373
675,629
4,603,246
4,045,807

$13,648,939
2,212,813
753,203
4,469,134
4,648,784

23,713,113
–

25,732,873
–

$13,661,643
1,941,372
1,097,803
6,071,374
5,249,264

28,021,456
–

Total loans held-in-portfolio

24,951,299

25,564,917

23,713,113

25,732,873

28,021,456

Loans held-for-sale:
Commercial
Construction
Lease financing
Mortgage
Consumer

Total loans held-for-sale

Total loans

26,198
236,045
–
100,850
–

363,093

60,528
412,744
–
420,666
–

893,938

2,897
–
–
87,899
–

90,796

38,121
–
327,607
170,330
–

536,058

24,148
–
66,636
1,363,426
435,336

1,889,546

$25,314,392

$26,458,855

$23,803,909

$26,268,931

$29,911,002

[1] Refer to Note 10 to the consolidated financial statements for the composition of the loans covered under FDIC loss sharing agreements.
[2]

Loans disclosed exclude the discontinued operations of PFH.

loan demand,

the impact of

In general, the changes in most loan categories generally
loan charge-offs,
reflect soft
portfolio runoff of the exited loan origination channels at the
BPNA reportable segment and loan sales. The decreases were
partially offset by mortgage loan growth in the Puerto Rico
operations due to loan acquisitions and loan origination volume
generated, in part, by government incentives.

There were various transactions executed during 2011
which impacted the comparative results with 2010. The
those main
following highlights provide a summary of
transactions.

• In the first quarter of 2011, the Corporation completed
the sale of $457 million (unpaid principal balance) in U.S.
non-conventional residential mortgage loans by BPNA
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 year ended December 31, 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.

• On September 29, 2011, BPPR,

the Corporation’s
principal banking subsidiary, completed the sale of
construction and commercial real estate loans with an
and net book value of
unpaid principal balance
approximately
$128 million,
the loans sold were in
respectively. The majority of
the transaction date. The
non-performing status at

$358 million

and

purchaser was a newly created joint venture (the “Joint
Venture”), which is majority owned by a limited liability
company created by an unrelated financial group. The
Joint Venture was created for the limited purpose of
acquiring and servicing those loans.

The purchase price for the transaction was equal to 45.3%
of the unpaid principal balance of the loans at March 31,
2011, adjusted for certain collections and advances made
after such date. During the third quarter of 2011, the
Corporation recognized a positive impact to revenues of
approximately $4.7 million before tax as a result of the
sale. This included approximately $17.4 million classified
as gain on sale of loans, partially offset by $12.7 million of
provision for loan losses related to write-downs taken on
certain loans included in the sale that were reclassified
from held-in-portfolio to held-for-sale during the third
quarter of 2011.

a note

As consideration for the sale of the loans, BPPR received
approximately
for
$48 million in cash,
approximately $86 million as seller financing and a 24.9%
equity interest in the Joint Venture. BPPR extended a
$68.5 million advance facility to the Joint Venture to
cover unfunded commitments and other costs to complete
the construction projects and a $20 million working
capital line of credit to fund certain expenses of the Joint
Venture. The parties agreed that no distributions may be
made by the Joint Venture to its equity members until all
the credit facilities have been paid in full and all lending
commitments terminated. In addition, any distributions

by the Joint Venture to its equity members, including
BPPR, will be made on a pro rata basis according to their
proportionate interest in the entity. Refer to Note 28 to
for additional
the consolidated financial
information on the sale structure and the Joint Venture.
• During the first two quarters of 2011, the Corporation
completed two bulk purchases of residential mortgage
institution, adding
loans from a Puerto Rico financial
$518 million in performing mortgages
to its
loans
portfolio.

statements

• In August 2011,

the Corporation purchased from
Citibank, N.A., the AAdvantage co-branded credit card
portfolio in Puerto Rico and the U.S. Virgin Islands,
which had approximately $131 million in balances and
approximately 30,000 active accounts at
the time of
acquisition.

The explanations for loan portfolio variances discussed

below exclude the impact of the covered loans.

loan charge-offs. However,

The decrease in commercial

loans held-in-portfolio from
December 31, 2010 to December 31, 2011 was reflected in the
BPPR and BPNA reportable segments by $241 million and $612
million, respectively. The decrease in the BPPR reportable
segment was principally the result of overall portfolio runoff
and the impact of
the BPPR
reportable segment experienced an increase in the commercial
loan portfolio of $59 million from September 30, 2011 to
December 31, 2011. Although loan demand is soft,
the
Corporation is seeing a greater loan demand from corporate
clients. The reduction in the BPNA reportable segment was
principally due to portfolio runoff of the discontinued lending
business, loan amortization, net charge-offs and reclassification
to other real estate exceeding new and renewal originations.

The decrease in construction loans from December 31, 2010
to the same date in 2011 was principally in the BPNA
reportable segment by $182 million, mainly due to loan
repayments and net charge-offs.

The decrease

in commercial

and construction loans
held-for-sale from December 31, 2010 to December 31, 2011
was primarily due to the loan sale executed in September 2011
by BPPR as described above.

Commercial and construction loan portfolios,

including
held-in-portfolio and held-for-sale loans, decreased $2.0 billion
from December 31, 2009 to the end of 2010. The decrease in
these portfolios was both reflected in the BPPR and BPNA
reportable segments and was impacted by lower new loan
origination activity, portfolio run-off associated with exited
origination channels in the U.S. operations, and loan net charge-
offs during the year ended December 31, 2010 that totaled $833
million. During the quarter ended December 31, 2010, the
Corporation decided to promptly charge-off previously reserved
impaired amounts of collateral dependent loans, both in Puerto
Rico and U.S. operations, which totaled $210 million.

40

in the

The decline

financing portfolio from
lease
December 31, 2010 to the same date in 2011 was experienced
in the BPPR and in the BPNA reportable segments by
approximately $24 million and $15 million, respectively. The
decrease at the BPPR reportable segment was mainly due to a
slowdown in originations due to economic conditions in Puerto
Rico. BPNA reportable
is no longer
the outstanding
originating lease financing and as such,
portfolio in those operations is running off. Similar factors
influenced the reduction in the lease financing portfolio from
December 31, 2009 to the end of 2010.

segment decrease

The

loans.

increase

segment

in mortgage

institution that

The increase in mortgage loans held-in-portfolio of the BPPR
reportable
from December 31, 2010 to 2011
approximated $1.0 billion. Mortgage loans held-in-portfolio
declined $46 million at the BPNA reportable segment, mainly
due to the run-off of the legacy portfolio of non-conventional
mortgage
loans
held-in-portfolio from December 31, 2010 to the same date in
2011 was principally related to two large whole loan purchases
involved
from a Puerto Rico financial
approximately $518 million in unpaid principal balance of
performing residential mortgage loans. Also, the increase in the
mortgage loan portfolio was due to higher volume of
non-conforming residential mortgage loans originated from
residential projects financed by BPPR and to loans repurchased
in the Puerto Rico
under credit
operations. The
thorough the
Corporation’s loss mitigation programs once repurchased.
loans held-for-sale

from
December 31, 2010 to December 31, 2011 was principally at the
BPNA reportable segment by $198 million due to the sale of the
non-conventional mortgage loans during 2011 and at the BPPR
reportable segment by $122 million due to loans securitized
into mortgage-backed securities.

recourse arrangements

are generally put

The decrease

in mortgage

latter

The mortgage loan portfolio at December 31, 2010,
including held-in-portfolio and held-for-sale loans, increased
$254 million from December 31, 2009. The BPPR reportable
segment showed an increase of $646 million, while the BPNA
reportable segment experienced a reduction of $392 million.
The Corporation’s mortgage loan origination subsidiary in
to
Puerto Rico, Popular Mortgage, continued its efforts
originate loans despite the weak economic conditions in the
Island. The increased origination volumes were prompted by
the Puerto Rico government housing-incentive law that put into
effect temporary measures that seek to stimulate demand for
housing. The reduction at BPNA resulted principally from the
discontinuance
loan
origination business and a higher volume of net charge-offs in
the non-conventional mortgage loan portfolio.

the non-conventional mortgage

of

The decrease in consumer loans held-in-portfolio from
December 31, 2010 to December 31, 2011 of $32 million was
mostly related to the BPNA reportable segment which
experienced a decline of $105 million, mainly due to runoff of

41

POPULAR, INC. 2011 ANNUAL REPORT

the portfolio at exited lines of business, including E-LOAN.
There was an increase in the BPPR reportable segment of $73
million mostly in credit cards due to the portfolio acquired,
partially offset by lower volume of personal loans.

The decrease in the total consumer loan portfolio from
December 31, 2009 to December 31, 2010 of approximately
$340 million was mostly reflected in personal and auto loans in
Puerto Rico and home equity lines of credit and closed-end
second mortgages in E-LOAN. Net charge-offs in the consumer
loan portfolio amounted to $214 million for the twelve months
ended December 31, 2010.

Covered loans were initially recorded at fair value. Their
carrying value approximated $4.3 billion at December 31, 2011,
of which approximately 58% pertained to commercial loans,
12% to construction loans, 27% to mortgage loans and 3% to
loans. Note 10 to the consolidated financial
consumer
statements presents the carrying amount of the covered loans
broken down by major loan type categories and the activity in
the carrying amounts of loans accounted for pursuant to ASC
the covered loans, or
310-30. A substantial amount of
approximately $4.0 billion of
at
December 31, 2011, was accounted for under ASC Subtopic

carrying

value

their

310-30. The reduction was principally the result of
loan
collections, offset by the accretion on the loans which increases
their carrying value.

FDIC loss share asset
As indicated in the Critical Accounting Policies / Estimates
section of this MD&A, the Corporation recorded the FDIC loss
share asset, measured separately from the covered loans, as part
of the Westernbank FDIC-assisted transaction. Based on the
accounting guidance in ASC Topic 805, at each reporting date
subsequent to the initial recording of the indemnification asset,
the Corporation measures the indemnification asset on the
same basis as the covered loans and assesses its collectability.

to

be

for

The

amount

collected

ultimately

the
indemnification asset is dependent upon the performance of the
claims
underlying covered assets,
submitted to the FDIC and the Corporation’s compliance with
the terms of the loss sharing agreements. Refer to Note 12 to
the consolidated financial statements for additional information
on the FDIC loss share agreements.

the passage of

time,

Table 12 sets forth the activity in the FDIC loss share asset

for the years ended December 31, 2011 and 2010.

Table 12 - Activity of Loss Share Asset

(In thousands)

Balance at beginning of year
FDIC loss share indemnification asset recorded at business combination
(Amortization) accretion of loss share indemnification asset, net
Credit impairment losses to be covered under loss sharing agreements
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments

accounted for under ASC Subtopic 310-20

Payments received from FDIC under loss sharing agreements
Other adjustments attributable to FDIC loss sharing agreements

Balance at December 31

2011

2010

$2,410,219
–
(10,855)
110,457

$–
2,425,929
73,487
–

(33,221)
(561,111)
(361)

(95,383)
–
6,186

$1,915,128

$2,410,219

Other assets
Table 13 provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated
statements of financial condition at December 31, 2011 and 2010.

Table 13 - Other Assets

(In thousands)

Net deferred tax assets (net of valuation allowance)
Investments under the equity method
Bank-owned life insurance program
Prepaid FDIC insurance assessment
Other prepaid expenses
Derivative assets
Securities sold not yet delivered
Others

Total other assets

2011

2010

Change

$429,691
313,152
238,077
58,082
77,335
61,886
69,535
214,635

$388,466
299,185
237,997
147,513
75,149
72,510
23,055
206,012

$41,225
13,967
80
(89,431)
2,186
(10,624)
46,480
8,623

$1,462,393

$1,449,887

$12,506

42

49% ownership interest in EVERTEC, which was accounted for
as an investment under the equity method at December 31,
2010 and amounted to $197 million as of such date. This
increase was partially offset by reductions in the prepaid FDIC
insurance assessment by $59 million due to amortization and in
other prepaid expenses by $56 million, principally in software
packages due to the sale of the processing and technology
business.

Deposits and Borrowings
The composition of the Corporation’s financing to total assets at
December 31, 2011 and December 31, 2010 is included in
Table 14.

The increase in other assets from December 31, 2010 to
December 31, 2011 was principally due to securities sold not
yet delivered. This included mortgage-backed securities sold in
December 2011 (trade date), but that settled in January 2012.
Also, there were higher deferred tax assets when compared with
December 31, 2010. Refer to Note 37 to the consolidated
financial statements for a table presenting the composition of
the Corporation’s net deferred tax assets. The increase in the
investments accounted for under the equity method was related
to the 24.9% investment in the joint venture described earlier
that was created as part of the commercial and construction
loan sale. These increases were partially offset by a reduction in
the prepaid FDIC insurance assessment due to amortization.

The increase in other assets from December 31, 2009 to
December 31, 2010 of $125 million was primarily due to the

Table 14 - Financing to Total Assets

(In millions)

Non-interest bearing deposits
Interest-bearing core deposits
Other interest-bearing deposits
Repurchase agreements
Other short-term borrowings
Notes payable
Others
Stockholders’ equity

December 31,
2011

December 31,
2010

% increase
(decrease)

December 31,
2011

December 31,
2010

% of total assets

$5,655
15,689
6,597
2,141
296
1,856
1,195
3,919

$4,939
15,637
6,186
2,413
364
4,170
1,305
3,801

14.5%
0.3
6.6
(11.3)
(18.7)
(55.5)
(8.4)
3.1

15.1%
42.0
17.7
5.7
0.8
5.0
3.2
10.5

12.7%
40.3
15.9
6.2
0.9
10.8
3.4
9.8

Deposits
A breakdown of the Corporation’s deposits at period-end is included in Table 15.

Table 15 - Deposits Ending Balances

(In thousands)

2011

2010

2009

2008

2007

Demand deposits [1]
Savings, NOW and money market deposits (non-brokered)
Savings, NOW and money market deposits (brokered)
Time deposits (non-brokered)
Time deposits (brokered CDs)

Total deposits

$6,256,530
10,762,869
212,688
7,552,434
3,157,606

$5,501,430
10,371,580
–
8,594,759
2,294,431

$5,066,282
9,635,347
–
8,513,854
2,709,411

$4,849,387
9,554,866
64,711
10,123,845
2,957,396

$5,115,875
9,804,605
–
10,297,724
3,116,274

$27,942,127

$26,762,200

$25,924,894

$27,550,205

$28,334,478

[1] Includes interest and non-interest bearing demand deposits.

The increase in demand deposits from December 31, 2010 to
December 31, 2011 was principally related to higher balance of
deposits in trust by $618 million. These deposits were of a
short-term nature and were mostly associated with certain
Puerto Rico government bond issuances. The increase in
savings, NOW and money market deposits was related to the
BPPR reportable segment and included higher balances on
retail, commercial, and wealth management accounts. Brokered

deposits increased at BPPR during 2011. Approximately $300
million of such increase was directed towards funding the full
repayment of the outstanding balance of the note issued to the
FDIC in December 2011. Following the repayment of the FDIC
note,
the use of brokered deposits is anticipated to fall.
Brokered deposits provide an alternate funding source at lower
interest rates than other time deposits.

43

POPULAR, INC. 2011 ANNUAL REPORT

When comparing total deposits at December 31, 2010 and
2009, demand, savings and time deposits increased mostly as a
result of the deposits assumed in the Westernbank FDIC-
assisted transaction. The increase in time deposits was partially
offset by a reduction in the BPNA reportable segment, mainly
due to reduced levels of individual certificates of deposit and
lower deposits gathered through E-LOAN’s internet platform,
the effect of the reduction in the pricing of these deposits and
strategic actions
reduced BPNA’s asset base
considerably due to portfolio runoffs.

taken that

31,

2011,

compared with $6.9

Borrowings
The Corporation’s borrowings amounted to $4.3 billion at
December
billion at
December 31, 2010 and $5.3 billion at December 31, 2009. The
decrease in borrowings from December 31, 2010 to the same
date in 2011 was mostly due to the full repayment of the note
issued to the FDIC which at December 31, 2010 amounted to
$2.5 billion. There were no prepayment penalties on the
prepayment of the note. Refer to Notes 18, 19 and 20 to the
consolidated financial statements for detailed information on
the Corporation’s borrowings at December 31, 2011 and
December 31, 2010. Also, refer to the Liquidity section in this
MD&A for additional information on the Corporation’s funding
sources.

The increase in borrowings from the end of 2009 to
December 31, 2010 was related to the note issued to the FDIC
as a result of the FDIC-assisted transaction, partially offset by a
decrease in FHLB advances, repurchase agreements, and term
notes. During 2010, the Corporation prepaid certain FHLB
advances and repurchased certain term notes in order to
extinguish certain high-cost debt and benefit the Corporation’s
cost of funds in the future.

Refer to the Off-Balance Sheet Arrangements and Other
Commitments section in this MD&A for additional information
on the Corporation’s contractual obligations at December 31,
2011.

Stockholders’ Equity
Stockholders’ equity totaled $3.9 billion at December 31, 2011,
compared with $3.8 billion and $2.5 billion at December 31,
2010 and 2009, respectively. The increase from December 31,
2010 to the end of 2011 was principally due to earnings
retention. The accumulated deficit was reduced by $135
million. Also, there was an increase in unrealized gains on
tax, of $43
investment securities available-for-sale, net of
million. These favorable variances were partially offset by an
increase in the underfunding of the pension and postretirement
health care benefit plans, net of tax, of $86 million due to
actuarial losses due to the reduction in the assumed discount
rate as explained in the Critical Accounting Policies / Estimates
section. The change in the underfunding of the pension and
postretirement health care benefit plans does not impact the
regulatory capital ratios. Refer to the consolidated statements of
financial condition and of stockholders’ equity for information
on the
the
disclosures of accumulated other comprehensive income (loss),
an integral component of stockholders’ equity, are included in
the consolidated statements of comprehensive income (loss).

composition of

equity. Also,

stockholders’

The increase in stockholder’s equity from December 31, 2009
to December 31, 2010 was principally derived from a common
stock issuance during the second quarter of 2010. In the context
of positioning the Corporation to participate in an FDIC-assisted
transaction in Puerto Rico, during the second quarter of 2010, the
Corporation enhanced its capital position with an offering of
equity whereby it raised $1.15 billion of new common equity
capital.

capital

16 presents

the Corporation’s

REGULATORY CAPITAL
Table
adequacy
information for the years 2007 through 2011. Note 24 to the
consolidated financial statements presents further information
on the Corporation’s regulatory capital requirements, including
the regulatory capital ratios of its depository institutions, BPPR
and BPNA. The Corporation continues to exceed the well-
capitalized guidelines under the federal banking regulations.

Table 16 - Capital Adequacy Data

(Dollars in thousands)

Risk-based capital:
Tier I capital
Supplementary (Tier II) capital

Total capital

Risk-weighted assets:
Balance sheet items
Off-balance sheet items

44

2011

2010

At December 31,
2009

2008

2007

$3,899,593
312,477

$3,733,776
328,522

$2,563,915
346,527

$3,272,375
384,975

$3,361,132
417,132

$4,212,070

$4,062,298

$2,910,442

$3,657,350

$3,778,264

$21,775,369
2,638,954

$22,621,779
3,099,186

$23,182,230
2,964,649

$26,838,542
3,431,217

$30,294,418
2,915,345

Total risk-weighted assets

$24,414,323

$25,720,965

$26,146,879

$30,269,759

$33,209,763

Ratios:

Tier I capital (minimum required - 4.00%)
Total capital (minimum required - 8.00%)
Leverage ratio [1]
Equity to assets
Tangible equity to assets
Equity to loans
Internal capital generation rate [2]

15.97%
17.25
10.90
9.81
8.10
14.57
3.95

14.52%
15.79
9.70
8.49
6.77
12.62
4.21

9.81%
11.13
7.50
7.80
6.12
11.48
(21.88)

10.81%
12.08
8.46
8.21
6.64
12.14
(42.11)

10.12%
11.38
7.33
8.20
6.64
11.79
(6.61)

[1] All banks are required to have minimum Tier 1 Leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification.
[2] Internal capital generation rate is defined as the rate at which a bank generates equity capital, computed by dividing net income (loss) less dividends by the average balance of
stockholders’ equity for a given accounting period.

To meet minimum adequately-capitalized

regulatory
requirements, an institution must maintain a Tier 1 Capital
ratio of 4% and a Total Capital ratio of 8%. A “well-capitalized”
institution must generally maintain capital ratios 200 basis
points higher than the minimum guidelines. The risk-based
capital rules have been further supplemented by a Tier 1
Leverage ratio, defined as Tier 1 Capital divided by adjusted
quarterly average total assets, after certain adjustments. “Well
capitalized” bank holding companies must have a minimum
Tier 1 Leverage ratio of 5%. The Corporation’s ratios presented
in Table 16 show that the Corporation was “well capitalized”
for regulatory purposes, the highest classification, for all years
presented. BPPR and BPNA were also well-capitalized for all
years presented.

During 2010, the Corporation made capital contributions
amounting to $745 million to its banking subsidiary BPNA to
maintain BPNA’s capital ratios at well-capitalized levels. No
contributions were made during 2011.

The improvement in the Corporation’s regulatory capital
ratios from December 31, 2010 to December 31, 2011 was
principally due to a reduction on assets, changes in balance
sheet composition including the increase in lower risk-assets
such as mortgage loans, higher net deferred tax asset included
without limitation and internal capital generation.

In accordance with the Federal Reserve Board guidance, the
restricted core capital
represent
trust preferred securities
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 December 31, 2011 and
December 31, 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
less any
restricted core capital elements), net of goodwill
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 December 31, 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 December 31,
2011, the remaining $935 million in trust preferred securities
corresponded to capital securities issued to the U.S. Treasury
pursuant to the Emergency Economic Stabilization Act of 2008.
The Dodd-Frank Act includes an exemption from the phase-out
provision that applies to these capital securities.

The Tier 1 common equity to risk-weighted assets ratio is
another non-GAAP measure. Ratios calculated based upon Tier
1 common equity have become a focus of regulators and
investors, and management believes ratios based on Tier 1
common equity assist investors in analyzing the Corporation’s
capital position. In connection with the Supervisory Capital
Assessment Program (“SCAP”),
the Federal Reserve Board
began supplementing its assessment of the capital adequacy of a
bank holding company based on a variation of Tier 1 capital,
known as Tier 1 common equity.

Because Tier 1 common equity is not formally defined by
GAAP or, unlike Tier 1 capital, codified in the federal banking
regulations,
this measure is considered to be a non-GAAP
financial measure. Non-GAAP financial measures have inherent
limitations, are not required to be uniformly applied and are not
the Corporation has
audited. To mitigate these limitations,
procedures in place to calculate these measures using the
appropriate GAAP or regulatory components. Although these
non-GAAP financial measures are frequently used by stakeholders
in the evaluation of a company, they have limitations as analytical
tools, and should not be considered in isolation, or as a substitute
for analyses of results as reported under GAAP.
the Corporation’s

total common
stockholders’ equity (GAAP) to Tier 1 common equity as
defined by the Federal Reserve Board, FDIC and other bank
regulatory agencies (non-GAAP).

Table 18 reconciles

45

POPULAR, INC. 2011 ANNUAL REPORT

The Corporation’s tangible common equity to tangible assets
ratio was 8.62% at December 31, 2011 and 7.99% at
December 31, 2010. The Corporation’s Tier 1 common equity
to risk-weighted assets ratio was 12.10% at December 31, 2011,
compared with 10.94% at December 31, 2010.

The tangible common equity ratio and tangible book value
per common share, which are presented in the table that
follows, are non-GAAP measures. Management and many stock
analysts use the tangible common equity ratio and tangible
book value per common share in conjunction with more
traditional bank capital ratios to compare the capital adequacy
of banking organizations with significant amounts of goodwill
or other intangible assets, typically stemming from the use of
the purchase accounting method of accounting for mergers and
acquisitions. Neither tangible common equity nor tangible
assets or related measures should be considered in isolation or
as a substitute for stockholders' equity, total assets or any other
measure calculated in accordance with GAAP. Moreover, the
manner
in which the Corporation calculates its tangible
common equity, tangible assets and any other related measures
may differ from that of other companies reporting measures
with similar names.

Table 17 provides a reconciliation of total stockholders’
equity to tangible common equity and total assets to tangible
assets at December 31, 2011 and December 31, 2010.

Table 17 - Reconciliation Tangible Common Equity and
Assets

(In thousands, except share or
per share information)
Total stockholders’ equity
Less: Preferred stock
Less: Goodwill
Less: Other intangibles

Total tangible common equity

Total assets
Less: Goodwill
Less: Other intangibles

Total tangible assets

Tangible common equity to

tangible assets

Common shares outstanding at

end of period

Tangible book value per

common share

2011

$3,918,753
(50,160)
(648,350)
(63,954)

$3,156,289

$37,348,432
(648,350)
(63,954)

2010

$3,800,531
(50,160)
(647,387)
(58,696)

$3,044,288

$38,814,998
(647,387)
(58,696)

$36,636,128

$38,108,915

8.62%

7.99%

1,025,904,567

1,022,727,802

$3.08

$2.98

Table 18 - Reconciliation Tier 1 Common Equity

(In thousands)
Common stockholders’ equity
Less: Unrealized gains on available-for-sale securities, net of tax [1]
Less: Disallowed deferred tax assets [2]
Less: Intangible assets:

Goodwill
Other disallowed intangibles

Less: Aggregate adjusted carrying value of all non-financial equity investments
Add: Pension liability adjustment, net of tax and accumulated net gains (losses) on cash flow hedges [3]

46

At December 31,

2011

$3,868,593
(203,078)
(249,325)

(648,350)
(29,655)
(1,189)
216,798

2010

$3,750,371
(159,700)
(231,475)

(647,387)
(26,749)
(1,538)
129,511

Total Tier 1 common equity

$2,953,794

$2,813,033

[1] In accordance with regulatory risk-based capital guidelines, Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on
available-for-sale equity securities with readily determinable fair values. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity
securities with readily determinable fair values, net of tax.
[2] Approximately $150 million of the Corporation’s $430 million of net deferred tax assets at December 31, 2011 ($144 million and $388 million, respectively, at December 31, 2010),
were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $249 million of such assets at December 31, 2011 ($231 million
at December 31, 2010) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets”, were deducted in arriving at Tier 1 capital. The remaining $31
million of the Corporation’s other net deferred tax assets at December 31, 2011 ($13 million at December 31, 2010) represented primarily the following items (a) the deferred tax
effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to
limitation under the guidelines; (b) the deferred tax asset corresponding to the pension liability adjustment recorded as part of accumulated other comprehensive income; and (c) the
deferred tax liability associated with goodwill and other intangibles.
[3] The Federal Reserve Board has granted interim capital relief for the impact of pension liability adjustment.

the

financial needs of

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER
COMMITMENTS
In the ordinary course of business, the Corporation engages in
financial transactions that are not recorded on the balance
sheet, or may be recorded on the balance sheet in amounts that
are different than the full contract or notional amount of the
transaction. As a provider of financial services, the Corporation
routinely enters into commitments with off-balance sheet risk
to meet
customers. These
commitments may include loan commitments and standby
letters of credit. These commitments are subject to the same
credit policies and approval process used for on-balance sheet
instruments. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. Other types of
off-balance sheet arrangements that the Corporation enters in
the ordinary course of business include derivatives, operating
leases and provision of guarantees,
indemnifications, and
representation and warranties.

its

Contractual Obligations and Commercial Commitments
The Corporation has various financial obligations, including
contractual obligations and commercial commitments, which
require future cash payments on debt and lease agreements.
Also, in the normal course of business, the Corporation enters
into contractual arrangements whereby it commits to future
from third parties.
purchases of products or
Obligations that are legally binding agreements, whereby the

services

Corporation agrees to purchase products or services with a
specific minimum quantity defined at a fixed, minimum or
variable price over a specified period of time, are defined as
purchase obligations.

Purchase obligations

legal and binding
include major
contractual obligations outstanding at
the end of 2011,
primarily for services, equipment and real estate construction
projects. Services include software licensing and maintenance,
facilities maintenance, supplies purchasing, and other goods or
services used in the operation of the business. Generally, these
least annually,
contracts are renewable or cancelable at
although in some cases the Corporation has committed to
contracts that may extend for several years to secure favorable
pricing concessions.

As previously indicated, the Corporation also enters into
derivative contracts under which it is required either to receive
or pay cash, depending on changes in interest rates. These
fair value on the consolidated
contracts are carried at
value
condition with the
financial
statements of
representing the net present value of the expected future cash
receipts and payments based on market rates of interest as of
the statement of condition date. The fair value of the contract
changes daily as interest rates change. The Corporation may
also be required to post additional collateral on margin calls on
the derivatives and repurchase transactions.

fair

At December 31, 2011,

the aggregate contractual cash
obligations, including purchase obligations and borrowings, by
maturities, are presented in Table 19.

47

POPULAR, INC. 2011 ANNUAL REPORT

Table 19 - Contractual Obligations

(In millions)

Certificates of deposits
Repurchase agreements
Other short-term borrowings
Long-term debt
Purchase obligations
Annual rental commitments under operating leases
Capital leases

Total contractual cash obligations

Less than
1 year

Payments Due by Period
3 to 5
1 to 3
years
years

After 5
years

Total

$6,874
1,049
296
214
54
41
1

$8,529

$2,433
350
–
286
32
76
2

$1,333
627
–
346
9
67
2

$70
115
–
985 [1]
1
193
20

$10,710
2,141
296
1,831
96
377
25

$3,179

$2,384

$1,384

$15,476

[1] Includes junior subordinated debentures with an aggregate liquidation amount of $936 million, net of $466 million discount. These junior subordinated debentures are perpetual
(no stated maturity).

Under the Corporation’s repurchase agreements, Popular is
required to deposit cash or qualifying securities to meet margin
requirements. To the extent
the value of securities
previously pledged as collateral declines because of changes in
the Corporation will be required to deposit
interest rates,
additional cash or securities to meet its margin requirements,
thereby adversely affecting its liquidity.

that

At December 31, 2011, the Corporation’s liability on its
pension, restoration and postretirement benefit plans amounted
to $344 million, compared with $333 million at December 31,
2010. During 2012, the Corporation’s expected contributions to
the pension and benefit restoration plans are minimal, while the
expected contributions to the postretirement benefit plan to
fund current benefit payment requirements are estimated at
$7.5 million. Obligations to these plans are based on current
and projected obligations of the plans, performance of the plan
assets, if applicable, and any participant contributions. Refer to
Note 34 to the consolidated financial statements for further
information on these plans. Management believes that the effect
of the pension and postretirement plans on liquidity is not
significant to the Corporation’s overall financial condition. The
benefit
BPPR’s
restoration plans are frozen with regards to all future benefit
accruals.

non-contributory

pension

defined

and

At December 31, 2011,

the liability for uncertain tax
positions was $19.5 million, compared with $26.3 million as of

the end of 2010. This liability represents an estimate of tax
positions that the Corporation has taken in its tax returns
which may ultimately not be sustained upon examination by
the tax authorities. The ultimate amount and timing of any
future cash settlements cannot be predicted with reasonable
certainty. Under the statute of
limitations, the liability for
uncertain tax positions expires as follows: 2012 - $7.7 million,
2013 - $5.6 million, 2014 - $2.6 million, 2015 - $2.1 million,
and 2016 - $1.5 million. As a result of examinations, 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.

The Corporation also utilizes

lending-related financial
instruments in the normal course of business to accommodate
the financial needs of
its customers. The Corporation’s
exposure to credit losses in the event of nonperformance by the
other party to the financial instrument for commitments to
extend credit, standby letters of credit and commercial letters of
credit is represented by the contractual notional amount of
these instruments. The Corporation uses credit procedures and
policies
and conditional
obligations as it does in extending loans to customers. Since
many of the commitments may expire without being drawn
upon, the total contractual amounts are not representative of
the Corporation’s actual future credit exposure or liquidity
requirements for these commitments.

in making those

commitments

The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities

at December 31, 2011:

Table 20 - Off-Balance Sheet Lending and Other Activities

48

(In millions)

Commitments to extend credit
Commercial letters of credit
Standby letters of credit
Commitments to originate mortgage loans
Unfunded investment obligations

Total

Guarantees Associated with Loans Sold / Serviced
At December 31, 2011, the Corporation serviced $3.5 billion in
residential mortgage loans subject to lifetime credit recourse
provisions, principally loans associated with FNMA and
FHLMC residential mortgage loan securitization programs,
compared with $4.0 billion at December 31, 2010. The
Corporation has not sold any mortgage loans subject to credit
recourse during 2010 and 2011.

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
if
serviced with recourse
applicable. 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.

and interest,

loans

In the case of Puerto Rico, most claims are settled by
repurchases of delinquent loans, the majority of which are
greater than 90 days past due. The average time period to
prepare an initial response to a repurchase request is from 30 to
120 days from the initial written notice depending on the
type of the repurchase request. Failure by the Corporation to
respond to a request for repurchase on a timely basis could
result in a deterioration of the seller/servicer relationship and
In certain instances,
the seller/servicer’s overall standing.
investors
to ensure
collateral
additional
could require
compliance with the servicer’s repurchase obligation or cancel
the seller/servicer license and exercise their rights to transfer
the servicing to an eligible seller/servicer.

Amount of Commitment - Expiration Period

2012

$5,426
12
120
44
1

$5,603

2013 -
2014

$223
–
2
9
9

$243

2015 -
2016

$436
–
–
–
–

$436

2017 -
thereafter

$146
–
3
–
–

$149

Total

$6,231
12
125
53
10

$6,431

The following table presents the delinquency status of the
residential mortgage loans serviced by the Corporation that are
subject to lifetime credit recourse provisions at December 31,
2011 and December 31, 2010.

Table 21 - Delinquency of Residential Mortgage Loans
Subject to Lifetime Credit Recourse

(In thousands)

Total portfolio
Days past due:

30 days and over
90 days and over

As a percentage of total portfolio:

30 days past due or more
90 days past due or more

2011

2010

$3,456,933

$3,981,915

$500,524
$215,597

$651,204
$314,031

14.48 %
6.24 %

16.35 %
7.89 %

During the year ended December 31, 2011, the Corporation
repurchased approximately $241 million of unpaid principal
balance in mortgage loans subject
to the credit recourse
provisions (December 31, 2010 - $121 million). There are no
particular loan characteristics, such as loan vintages, loan type,
loan-to-value ratio, or other criteria, that denote any specific
trend or a concentration of repurchases in any particular
segment. Based on historical repurchase experience, the loan
delinquency status is the main factor which causes the
repurchase request. The current economic situation has forced
the investors to take a closer review at loan performance and
recourse triggers, thus causing an increase in loan repurchases.
there were 19 outstanding
unresolved claims related to the recourse portfolio with a
principal balance outstanding of $2.1 million, compared with
27 and $2 million, respectively, at December 31, 2010. All the
outstanding unresolved claims pertained to FNMA and
FHLMC.

At December 31, 2011,

31,

2011,

At December

liability
established to cover the estimated credit loss exposure related
to loans sold or serviced with credit recourse amounted to $59
million, compared with $54 million at December 31, 2010.

the Corporation’s

49

POPULAR, INC. 2011 ANNUAL REPORT

The

table

presents

following

in the
Corporation’s liability of estimated losses from these credit
recourses agreements, included in the consolidated statements
of financial condition for the years ended December 31, 2011
and 2010.

changes

the

Table 22 - Changes in Liability of Estimated Losses from
Credit Recourse Agreements

(In thousands)

Balance as of beginning of period
Additions for new sales
Provision for recourse liability
Net charge-offs / terminations

Balance as of end of period

2011

2010

$53,729
–
43,828
(38,898)

$15,584
–
53,979
(15,834)

$58,659

$53,729

The decrease of $10.2 million in the provision for credit
recourse liability experienced for the year ended December 31,
2011, when compared to 2010, was mainly driven by the
following factors: (1) the improvement of the probability of
default (PD) component which decreased by 90 basis points,
prompted by an improvement in the credit quality of mortgage
recourse provisions, and (2) the
to credit
loans subject
improvement
(CPR),
in the constant prepayments
resulting from the current behavior of the market interest rate
scenario.

rates

sold”

relevant

The estimated 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
to
(expense)
(categorized in the line item “adjustments
indemnity reserves on loans
consolidated
in the
statements of operations) throughout the life of the loan, as
necessary, when additional
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
the
probability that a loan in good standing would become 90 days
delinquent within the
twelve-month period.
following
Regression analysis quantifies the relationship between the
default event and loan-specific characteristics, including credit
scores, loan-to-value ratios and loan aging, among others.

severity. The probability of default

represents

When the Corporation sells or securitizes mortgage loans, it
generally makes customary representations and warranties
the
regarding
sold. The
of
Corporation’s mortgage operations
in Puerto Rico group
conforming mortgage loans into pools which are exchanged for
FNMA and GNMA mortgage-backed securities, which are

characteristics

loans

the

generally sold to private investors, or are sold 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
loss related to the loans. Repurchases under
subsequent
representation and warranty arrangements
in which the
Corporation’s Puerto Rico banking subsidiaries were obligated
to repurchase the loans amounted to $22 million in unpaid
principal balance with losses amounting to $2.5 million for the
year ended December 31, 2011. A substantial amount of these
loans
to performing status or have mortgage
insurance, and thus the ultimate losses on the loans are not
deemed significant.

reinstate

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 $3.5 billion at
December 31, 2011. The Corporation recorded a representation
and warranty reserve for the amount of the proceeds received
from the third-party financial
institution. At December 31,
2011, this reserve amounted to $8.5 million. The reduction was
principally the result of refinement in reserve estimates based
on historical claims and loss expectations.

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
December 31, 2011, the Corporation serviced $17.3 billion in
mortgage loans for third-parties, including the loans serviced
with credit
compared with $18.4 billion at
December 31, 2010. 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.

recourse,

to that

loan. At December 31, 2011,

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
the
outstanding balance of funds advanced by the Corporation
agreements was
under
approximately $32 million, compared with $24 million at
December 31, 2010. 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.

such mortgage

loan servicing

certain

representations

At December 31, 2011, the Corporation has reserves for
customary representations and warranties related to loans sold
by its U.S. subsidiary E-LOAN prior to 2009. Loans had been
sold to investors on a servicing released basis subject to certain
representations and warranties. Although the risk of loss or
default was generally assumed by the investors, the Corporation
made
borrower
creditworthiness, loan documentation and collateral, which if
in requiring the Corporation to
not correct, may result
repurchase the loans or indemnify investors for any related
losses associated to these loans. At December 31, 2011 and
December 31, 2010, the Corporation’s reserve for estimated
losses from such representation and warranty arrangements
respectively.
amounted to $11 million and $31 million,
E-LOAN is no longer originating and selling loans since the
subsidiary ceased these activities in 2008.

relating

to

expected losses

associated to E-LOAN’s

On a quarterly basis, the Corporation reassesses its estimate
customary
for
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 of time between the
loan’s funding date and the loan repurchase date, as observed in
the historical loan data. The liability is estimated as follows:
(1) three year average of disbursement amounts (two year
historical and one year projected) are used to calculate an
average quarterly amount;
the quarterly average is
(2)
annualized and multiplied by the repurchase distance, which
currently averages approximately three years, to determine a
liability amount; and (3) the calculated reserve is compared to
current claims and disbursements to evaluate adequacy. The
Corporation’s success rate in clearing the claims in full or
negotiating lesser payouts has been fairly consistent. On
average, the Corporation avoided paying on 51% of claimed
amounts during the 24-month period ended December 31,
2011 (52% during the 24-month period ended December 31,
2010). On the remaining 49% of claimed amounts,
the
Corporation either repurchased the balance in full or negotiated

50

settlements. For the accounts where the Corporation settled, it
averaged paying 59% of claimed amounts during the 24-month
period ended December 31, 2011 (62% during the 24-month
In total, during the
period ended December 31, 2010).
24-month period ended December 31, 2011, the Corporation
paid an average of 33% of claimed amounts (24-month period
ended December 31, 2010 - 34%).

E-LOAN’s

related to
outstanding unresolved claims
representation and warranty obligations from mortgage loan
sales prior to 2009 at December 31, 2011 and December 31,
2010 are presented in the table below.

Table 23 - E-LOAN's Outstanding Unresolved Claims from
Mortgage Loan Sales

(In thousands)

By Counterparty

GSEs
Whole loan and private-label securitization

investors

Total outstanding claims by counterparty

By Product Type

1st lien (Prime loans)
2nd lien (Prime loans)

Total outstanding claims by product type

2011

2010

$432

$805

360

4,652

$792

$5,457

$792
–

$792

$5,403
54

$5,457

The outstanding claims balance from private-label investors
is comprised of one counterparty at December 31, 2011 and
three different counterparties at December 31, 2010.

In the case of E-LOAN, the Corporation indemnifies the
lender, repurchases the loan, or settles the claim, generally for
less than the full amount. Each repurchase case is different and
each lender / servicer has different requirements. The large
majority of the loans repurchased have been greater than 90
days past due at the time of repurchase and are included in the
Corporation’s non-performing loans. During the year ended
December 31, 2011, charge-offs recorded by E-LOAN against
this representation and warranty reserve associated with loan
repurchases,
and
indemnification or make-whole
settlement / closure of certain agreements with counterparties
to reduce the exposure to future claims were minimal. 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. Historically, claims have been predominantly for first
mortgage agency loans and principally consist of underwriting
errors related to undisclosed debt or missing documentation.
The table that follows presents the changes in the Corporation’s
associated with customary
estimated losses
liability for
representations and warranties
sold by
related to loans
E-LOAN, included in the consolidated statement of financial
condition for the years ended December 31, 2011 and 2010.

events

51

POPULAR, INC. 2011 ANNUAL REPORT

Table 24 - Changes in Liability for Estimated Losses Related
to Loans Sold by E-LOAN

(In thousands)

Balance as of beginning of period
Additions for new sales
(Credit) provision for representation and

warranties

Net charge-offs / terminations
Other - settlements paid

Balance as of end of period

2011

2010

$30,659
–

$33,294
–

(4,936)
(2,198)
(12,900)

18,594
(12,229)
(9,000)

$10,625

$30,659

certain representations or warranties

During 2008, the Corporation provided indemnification for
the breach of
in
connection with certain sales of assets by the discontinued
operations of Popular Financial Holding’s (“PFH”). The sales
were on a non-credit recourse basis. At December 31, 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 indemnification obligations are
subject to a cap or maximum aggregate liability defined as a
percentage of
indemnification
the purchase price. The
agreements outstanding at December 31, 2011 are related
principally to make-whole arrangements. At December 31,
2011, the Corporation’s reserve related to PFH’s indemnity
arrangements amounted to $1 million, compared with $8
million at December 31, 2010, and is included as other
liabilities in the consolidated statement of financial condition.
The reserve balance at December 31, 2011 contemplates
historical indemnity payments. Popular, Inc. and Popular North
America 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
financial condition for the years ended December 31, 2011 and
2010.

Table 25 - Changes in Liability for Estimated Losses Related
to Loans Sold by Discontinued Operations

(In thousands)

Balance as of beginning of period
Additions for new sales
Provision for representation and warranties
Net charge-offs / terminations
Other - settlements paid

Balance as of end of period

2011

2010

$8,058
–
–
(292)
(6,682)

$9,405
–
911
(1,678)
(580)

$1,084

$8,058

and

PIHC fully

certain
unconditionally
borrowing obligations issued by certain of its wholly-owned
to $0.7 billion at
consolidated subsidiaries

amounting

guarantees

December 31, 2011 (December 31, 2010 - $0.6 billion). In
addition, at December 31, 2011 and December 31, 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 21 to
the consolidated financial statements for further information on
the trust preferred securities.

The Corporation is a defendant

legal
proceedings arising in the ordinary course of business as
described in Note 27 to the consolidated financial statements.

in a number of

RISK MANAGEMENT
Managing risk is an essential component of the Corporation’s
business. Risk identification and monitoring are key elements
in overall risk management. The following principal risks,
which have been incorporated into the Corporation’s risk
management program, include:

• Credit Risk - Potential for default or loss resulting from an
obligor’s failure to meet the terms of any contract with the
Corporation or any of its subsidiaries, or failure otherwise
to perform as agreed. Credit risk arises from all activities
where success depends on counterparty,
issuer, or
borrower performance.

• Interest Rate Risk (“IRR”) - Interest rate risk is the risk to
earnings or capital arising from changes in interest rates.
Interest rate risk arises from differences between the
timing of rate changes and the timing of cash flows
(repricing risk); from changing rate relationships among
different
and
yield curves
borrowing activities (basis risk);
from changing rate
relationships across the spectrum of maturities (yield
curve risk); and from interest related options embedded
in bank products (options risk).

affecting bank lending

the

• Market Risk - Potential for loss resulting from changes in
in the
liabilities
market prices of
Corporation’s or in any of
its subsidiaries’ portfolios.
Market prices may change as a result of changes in rates,
credit and liquidity for the product or general economic
conditions.

assets or

• Liquidity Risk - Potential

for loss resulting from the
Corporation or its subsidiaries not being able to meet
their financial obligations when they come due. This
could be a result of market conditions, the ability of the
Corporation to liquidate assets or manage or diversify
various funding sources. This risk also encompasses the
possibility that an instrument cannot be closed out or sold
at its economic value, which might be a result of stress in
the market or in a specific security type given its credit,
volume and maturity.

• Operational Risk - This risk is the possibility that
inadequate or failed systems and internal controls or
procedures, human error, fraud or external
influences
such as disasters, can cause losses.

• Compliance Risk and Legal Risk - Potential

for loss
resulting from violations of or non-conformance with
laws, rules, regulations, prescribed practices, existing
contracts or ethical standards.

• Strategic Risk - Potential for loss arising from adverse
business decisions or
implementation of
business decisions. Also, it incorporates how management
analyzes
strategic
external
direction of the Corporation.

improper

impact

factors

that

the

• Reputational Risk - Potential for loss arising from negative

public opinion.

The Corporation’s Board of Directors (the “Board”) has
established a Risk Management Committee (“RMC”)
to
undertake the responsibilities of overseeing and approving the
Corporation’s Risk Management Program, as well as the
Corporation’s Capital Plan. The Capital Plan is a plan to
maintain sufficient regulatory capital at the Corporation, BPPR
and BPNA, which considers current and future regulatory
capital requirements, expected future profitability and credit
trends and, at least, two macroeconomic scenarios, including a
base and stress scenario.

The RMC, as an oversight body, monitors and approves the
overall business strategies, and corporate policies to identify,
measure, monitor and control risks while maintaining the
effectiveness and efficiency of the business and operational
processes. As an approval body for the Corporation, the RMC
reviews and approves relevant risk management policies and
critical processes. Also,
it periodically reports to the Board
about its activities.

the implementation of

The Board and RMC have delegated to the Corporation’s
the risk management
management
processes. This implementation is split into two separate but
coordinated efforts that include (i) business and / or operational
units who identify, manage and control the risks resulting from
their activities, and (ii) a Risk Management Group (“RMG”). In
general, the RMG is mandated with responsibilities such as
assessing and reporting to the Corporation’s management and
RMC the risk positions of the Corporation; developing and
implementing mechanisms, policies and procedures to identify,
implementing measurement
measure
mechanisms
risk
monitoring; developing and implementing the necessary
information and reporting mechanisms; and
management
monitoring and testing the adequacy of
the Corporation’s
policies, strategies and guidelines.

and infrastructure

and monitor

to achieve

effective

risks;

The RMG is responsible for the overall coordination of risk
the Corporation and is

throughout

efforts

management

52

three reporting divisions:

composed of
(i) Credit Risk
Management, (ii) Compliance Management, and (iii) Financial
and Operational Risk Management. The latter includes an
Enterprise Risk Management function that facilitates, among
other aspects, the identification and management of multiple
and cross-enterprise risks.

Additionally, the Internal Auditing Division provides an
independent assessment of the Corporation’s internal control
structure and related systems and processes.

Moreover, management oversight of the Corporation’s risk-
taking and risk management activities is conducted through
management committees:

• CRESCO (Credit Strategy Committee) - Manages the
Corporation’s overall credit exposure and approves credit
policies, standards and guidelines that define, quantify,
committee,
risk. Through this
and monitor
management reviews asset quality ratios,
trends and
forecasts, problem loans, establishes the provision for loan
losses and assesses the methodology and adequacy of the
allowance for loan losses on a quarterly basis.

credit

• ALCO (Asset

the policies

and approves

/ Liability Management Committee)

-
Oversees
and processes
designed to ensure sound market risk and balance sheet
strategies, including the interest rate, liquidity, investment
and trading policies. The ALCO monitors the capital
position and plan for the Corporation and approves all
capital management strategies, including capital market
transactions and capital distributions. The ALCO also
monitors forecasted results and their impact on capital,
liquidity, and net interest margin of the Corporation.

• ORCO (Operational Risk Committee)

- Monitors
operational risk management activities to ensure the
development and consistent application of operational
risk policies, processes and procedures that measure, limit
and manage the Corporation’s operational risks while
the
maintaining the effectiveness and efficiency of
operating and businesses’ processes.

Market / Interest Rate Risk
The financial results and capital levels of the Corporation are
constantly exposed to market, interest rate and liquidity risks.
The ALCO and the Corporate Finance Group are responsible
for planning and executing the Corporation’s market, interest
rate risk, funding activities and strategy, and for implementing
the policies and procedures approved by the RMC. In addition,
the Financial and Operational Risk Management Division is
responsible for the independent monitoring and reporting of
adherence with established policies, and enhancing and
strengthening controls
liquidity and
market risk. The ALCO generally meets on a weekly basis and
reviews the Corporation’s current and forecasted asset and
liability levels as well as desired pricing strategies and other

surrounding interest,

53

POPULAR, INC. 2011 ANNUAL REPORT

relevant topics. Also, on a monthly basis the ALCO reviews
various interest rate risk sensitivity metrics, ratios and portfolio
information, including but not limited to, the Corporation’s
liquidity positions, projected sources and uses of funds, interest
rate risk positions and economic conditions.

In general, 2011 was a year of modest growth for the U.S.
economy. While Gross Domestic Product rose at a faster pace
during the fourth quarter, in the previous three quarters it grew
at a weak 1.2% rate. Higher oil prices and the supply-chain
disruptions following the Japanese earthquake and tsunami
were the primary reasons behind slower growth for the year. At
the latter part of the year, an improvement in housing data
occurred with housing starts and home sales showing some
signs of stabilization as a consequence of lower mortgage rates.
Recent government administration housing proposals, as well
as renewed mortgage-backed securities purchases as part of the
Federal Reserve monetary tools may be supportive of home
price stability in 2012. Credit spreads,
in general, widened
during 2011 even for high-grade and government sponsored
issuers as investors became risk averse amid various sovereign
debt downgrades. U.S. Agency spreads also widened to
historically wide levels versus Treasuries despite a large drop in
net issuance and this trend may continue in 2012. Fiscal crisis
in various European countries dominated the news headlines
for a major part of the year. Most economists agree that
European Sovereign debt issues continue to be the biggest
economic risk globally even though it has not yet had much
impact on U.S. growth.
In Puerto Rico,

the
economic contraction moderated during 2011 according to
government data. A flat economy is expected in 2012 according
to most economists, which is a significant improvement over
the past years. Refer to the Geographic and Government Risk
section in the MD&A for some economic indicators. Economic
growth remains a challenge due to lack of job growth and a
housing sector that remains under pressure, in spite of progress
made by the government in addressing the budget deficit.

the Corporation’s main market,

In 2011,

the Federal Open Market Committee, which
influences interest rates, maintained the interbank rates at the
same levels of 2010 and continued its quantitative easing
measures. These measures consisted, primarily, of buying
and reinvesting principal
longer-term treasury securities
payments of
in mortgage-backed
its
securities in order to reduce long-term rates as well as support
the mortgage markets.

securities holdings

Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. The
Corporation has exposures to many different industries and
executes
counterparties,
transactions with counterparties
services
industry, including brokers and dealers, commercial banks, and
other institutional clients. Many of these transactions expose
the Corporation to credit risk in the event of default of the

and management

in the financial

routinely

or

client.

counterparty

In addition,

the
Corporation’s
Corporation’s credit
risk may be exacerbated when the
collateral held by it cannot be realized or is liquidated at prices
the loan or
to recover the full amount of
not sufficient
derivative exposures. There is no assurance that any such losses
would not materially and adversely affect the Corporation’s
results of operations.

the

loan origination volume,

Interest Rate Risk
The Corporation is subject to various categories of interest rate
risk, including repricing, basis, yield curve and option risks. In
addition, interest rates may have an indirect impact on loan
demand,
the
Corporation’s investment securities holdings and other assets
subject
to market valuation, gains and losses on sales of
securities and loans, the value of its mortgage servicing rights,
the funded status of the retirement plans, and other sources of
earnings. In limiting interest rate risk to an acceptable level,
management may alter the mix of floating and fixed rate assets
and liabilities, change pricing schedules, adjust maturities
through sales and purchases of investment securities, and enter
into derivative contracts, among other alternatives.

value

of

Interest rate risk management is an active process that
encompasses monitoring loan and deposit flows complemented
by investment and funding activities. Effective management of
interest rate risk begins with understanding the dynamic
characteristics of assets and liabilities and determining the
appropriate rate risk position given line of business forecasts,
and policy
management objectives, market
constraints.

expectations

and Economic Value

The Corporation’s ALCO utilizes various tools for the
management of IRR, including simulation modeling, static gap
three
analysis,
methodologies complement each other and are used jointly to
assist in the evaluation of the Corporation’s IRR. In order to
strengthen the Corporation’s long term view of
the
simulation modeling was applied to a longer period of five years
versus the previous two year period.

of Equity. The

IRR,

Net interest income simulation analysis performed by legal
entity and on a consolidated basis is a tool used by the
Corporation in estimating the potential change in net interest
income resulting from hypothetical changes in interest rates.
Sensitivity analysis is calculated using a simulation model
which incorporates actual balance sheet figures detailed by
It also incorporates
maturity and interest yields or costs.
assumptions on balance sheet growth and expected changes in
its composition, estimated prepayments in accordance with
projected interest rates, pricing and maturity expectations on
is a
new volumes and other non-interest related data.
dynamic process, emphasizing future performance under
diverse economic conditions.

It

Management assesses interest rate risk by comparing its
most likely earnings path with various net interest income

simulations using many interest rate scenarios that differ in
direction of interest rate changes, the degree of change over
time, the speed of change and the projected shape of the yield
the types of rate scenarios processed
curve. For example,
during the year included economic most likely scenarios, flat
rates, yield curve twists, +/- 200 and +/- 400 basis points
parallel
ramps and +/- 200 basis points parallel shocks.
Management also performs analyses to isolate and measure
basis and yield curve risk exposures, and prepayment risk. The
asset and liability management group also performs validation
procedures on various assumptions used as part of
the
sensitivity analysis as well as validations of results on a monthly
basis. Due to the importance of critical assumptions in
measuring market risk, the risk models incorporate third-party
developed data for critical assumptions such as prepayment
speeds on mortgage loans and mortgage-backed securities,
estimates on the duration of the Corporation’s deposits and
interest rate scenarios. These interest rate simulations exclude
the impact on loans accounted pursuant to ASC Subtopic
310-30, whose yields are based on management’s current
expectation of future cash flows.

the

rate

points

during

scenarios

twelve-month period

considered in these market

The Corporation processes net interest income simulations
under interest rate scenarios in which the yield curve is
assumed to rise and decline gradually by the same amount. The
rising
risk
simulations reflect gradual parallel changes of 200 and 400
basis
ending
December 31, 2012. Under a 200 basis points rising rate
scenario, 2012 projected net interest income increases by $61.4
million, while under a 400 basis points rising rate scenario,
2012 projected net interest income increases by $105.7 million.
These scenarios were compared against the Corporation’s flat or
unchanged interest rates forecast scenario. Given the fact that at
December 31, 2011, some market interest rates were close to
zero, management has focused on measuring the risk on net
interest income in rising rate scenarios. As disclosed in the
2010 Annual Report, the 2011 projected net interest income
assuming gradual parallel changes during the twelve-month
period ending December 31, 2011 under the 200 basis points
simulation reflected net interest income increasing by $29.0
million, while the 400 basis points simulation resulted in an
increase of $45.3 million.

54

loan prepayments and deposit decay. Thus,

Simulation analyses are based on many assumptions,
including relative levels of market interest rates, interest rate
spreads,
they
should not be relied upon as indicative of actual results.
Further,
that
management could take to respond to changes in interest rates.
By their nature, these forward-looking computations are only
estimates and may be different from what may actually occur in
the future.

the estimates do not contemplate actions

repricing volumes

Static gap analysis measures the volume of assets and
liabilities maturing or repricing at a future point in time. Static
gap reports stratify all of the Corporation’s assets, liabilities and
off-balance sheet positions according to the instrument’s
maturity, repricing characteristics and optionality, assuming no
new business. The
typically include
adjustments for anticipated future asset prepayments and for
differences in sensitivity to market rates. The volume of assets
and liabilities repricing during future periods, particularly
within one year, is used as one short-term indicator of IRR.
Depending on the duration and repricing characteristics,
changes in interest rates could either increase or decrease the
level of net interest income. For any given period, the pricing
structure of the assets and liabilities is generally matched when
an equal amount of such assets and liabilities mature or reprice
in that period. Any mismatch of interest earning assets and
interest bearing liabilities is known as a gap position. A positive
gap denotes asset sensitivity, which means that an increase in
interest rates could have a positive effect on net
interest
income, while a decrease in interest rates could have a negative
effect on net
income. As shown in Table 26, at
December 31, 2011, the Corporation’s one-year cumulative
positive gap was $3.3 billion, or 10.26% of total earning assets.
This compares with $2.0 billion or 5.93%, respectively, at
December 31, 2010. The significant change in the one-year
cumulative gap position is in part due to the repayment of the
note
static
issued to the FDIC during 2011. These
the results of any projected
measurements do not reflect
activity and are best used as early indicators of potential interest
rate exposures. They do not incorporate possible actions that
could be taken to manage the Corporation’s IRR, nor do they
capture the basis risks that might be included within that
cumulative gap, given possible changes in the spreads between
asset rates and the rates used to fund them.

interest

55

POPULAR, INC. 2011 ANNUAL REPORT

Table 26 - Interest Rate Sensitivity

At December 31, 2011

By repricing dates

(Dollars in thousands)

0-30 days

After three
months but
within six
months

After six
months but
within nine
months

After nine
months but
within one
year

After one
year but
within two
years

Within
31 - 90 days

After two
years

Non-interest
bearing
funds

Assets:
Money market investments
Investment and trading securities
Loans
Other assets

$1,321,608
401,635
8,533,019

$54,266
434,394
909,172

$391,946
909,916

$200
313,858
865,415

$100
290,202
695,648

$1,020,663
2,248,829

$2,898,719
11,152,393

$4,906,449

Total

$1,376,174
5,751,417
25,314,392
4,906,449

Total

10,256,262

1,397,832

1,301,862

1,179,473

985,950

3,269,492

14,051,112

4,906,449

37,348,432

Liabilities and stockholders’ equity:
Savings, NOW and money market

and other interest bearing
demand deposits
Certificates of deposit
Federal funds purchased and assets

sold under agreements to
repurchase

Other short-term borrowings
Notes payable
Non-interest bearing deposits
Other non-interest bearing liabilities
Stockholders’ equity

3,057,006
1,468,902

14
1,892,571

1,808,067

1,255,914

183
725,850

108
1,787,138

8,519,302
1,771,598

904,314
296,200
120

143,827

25,000

15,759

1,052,197

22,242

367

50,373

142,138

569,301

1,071,831

11,576,613
10,710,040

2,141,097
296,200
1,856,372
5,655,474
1,193,883
3,918,753

5,655,474
1,193,883
3,918,753

Total

$5,726,542

$2,058,654

$1,808,434

$1,331,287

$868,171

$2,372,306 $12,414,928 $10,768,110 $37,348,432

Interest rate sensitive gap
Cumulative interest rate sensitive

4,529,720

(660,822)

(506,572)

(151,814)

117,779

897,186

1,636,184

(5,861,661)

gap

4,529,720

3,868,898

3,362,326

3,210,512

3,328,291

4,225,477

5,861,661

Cumulative interest rate sensitive

gap to earning assets

13.96%

11.93%

10.36%

9.90%

10.26%

13.02%

18.07%

The Corporation estimates the sensitivity of economic value
of equity (“EVE”) to changes in interest rates. EVE is equal to
the estimated present value of the Corporation’s assets minus the
estimated present value of the liabilities. This sensitivity analysis
is a useful tool to measure long-term IRR because it captures the
impact of up or down rate changes in expected cash flows,
including principal and interest, from all future periods.

EVE sensitivity calculated using interest rate shock scenarios
is estimated on a quarterly basis. The shock scenarios consist of
+/- 200 basis points parallel shocks. Management has defined

limits for the increases / decreases in EVE sensitivity

resulting from the shock scenarios.

The Corporation maintains an overall

interest rate risk
management strategy that incorporates the use of derivative
instruments to minimize significant unplanned fluctuations in

net interest income or market value that are caused by interest
rate volatility. The market value of these derivatives is subject
to interest
risk
adjustments which could have a positive or negative effect in
the Corporation’s earnings.

rate fluctuations and counterparty credit

The Corporation’s loan and investment portfolios are subject
to prepayment risk, which results from the ability of a third-
party to repay debt obligations prior to maturity. Prepayment
risk also could have a significant impact on the duration of
collateralized mortgage
mortgage-backed
obligations,
lower
prepayments could extend) the weighted average life of these
portfolios. Table 27, which presents the maturity distribution of
earning
prepayment
assumptions.

securities
since prepayments

could shorten (or

consideration

assets,

takes

into

and

Table 27 - Maturity Distribution of Earning Assets

(In thousands)

Money market securities
Investment and trading securities
Loans:

Commercial
Construction
Lease financing
Consumer
Mortgage

Total non-covered loans
Covered loans under FDIC loss sharing agreements

At December 31, 2011
Maturities

After one year
through five years
Fixed
interest
rates

Variable
interest
rates

After five years

Fixed
interest
rates

Variable
interest
rates

$2,000,615

$197,087

$1,793,067

$114,799

1,680,913
8,473
337,597
1,110,050
1,781,960

4,918,993
449,308

2,680,344
61,232
–
368,199
134,785

3,244,560
700,250

643,240
3,177
5
103,565
2,016,670

2,766,657
451,329

1,425,675
2,260
–
200,246
242,388

1,870,569
835,747

One year
or less

$1,376,174
1,459,053

4,130,912
472,531
226,265
1,891,695
1,443,507

8,164,910
1,912,069

56

Total

$1,376,174
5,564,621

10,561,084
547,673
563,867
3,673,755
5,619,310

20,965,689
4,348,703

Note: Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the

Corporation, are not included in this table. Loans held-for-sale have been allocated according to the expected sale date.

$12,912,206

$7,368,916

$4,141,897

$5,011,053

$2,821,115

$32,255,187

of

life

the

effects

includes

remaining

acquired loans

Covered loans
The Corporation’s total assets increased significantly from
December 31, 2009 to December 31, 2010 primarily because of
the
in the Westernbank FDIC-assisted
transaction. The loans were initially recorded at estimated fair
values. As expressed in the Critical Accounting Policies /
Estimates section of this MD&A, most of the covered loans
have an accretable yield. The accretable yield includes the
future interest expected to be collected over the remaining life
of the acquired loans and the purchase premium or discount.
The
estimated
prepayments, expected credit losses and adjustments to market
liquidity and prevailing interest rates at acquisition date. For
covered loans accounted for under ASC Subtopic 310-30, the
Corporation is required to periodically evaluate its estimate of
cash flows expected to be collected. These evaluations,
performed quarterly,
require the continued usage of key
assumptions and estimates. Management must apply judgment
to develop its estimates of cash flows for those covered loans
given the impact of home price and property value changes,
changes in interest rates and loss severities and prepayment
speeds. Decreases in the expected cash flows by pool will
generally result in a charge to the provision for credit losses
resulting in an increase to the allowance for loan losses, while
increases in the expected cash flows of a pool will generally
result in an increase in interest income over the remaining life
of the loan, or pool of loans.

Trading
The Corporation engages in trading activities in the ordinary
course of business at its subsidiaries, Popular Securities and

to meet

Popular Mortgage. Popular Securities’ trading activities consist
expected
primarily of market-making activities
customers’ needs related to its retail brokerage business and
purchases and sales of U.S. Government and government
sponsored securities with the objective of realizing gains from
expected short-term price movements. Popular Mortgage’s
trading activities consist primarily of holding U.S. Government
sponsored mortgage-backed securities classified as “trading”
and
“TBA”
related market
transactions. The objective is to
(to-be-announced) market
derive spread income from the portfolio and not to benefit from
short-term market movements. In addition, Popular Mortgage
uses forward contracts or TBAs to hedge its securitization
pipeline. Risks related to variations in interest rates and market
volatility are hedged with TBAs that have characteristics similar
to that of the forecasted security and its conversion timeline.

risk with

hedging

the

At December 31, 2011, the Corporation held for trading,
securities with a fair value of $436 million,
representing
approximately 1% of the Corporation’s total assets, compared with
$547 million and 1% a year earlier. Mortgage-backed securities
represented 75% of the trading portfolio at December 31, 2011,
compared with 90% at the end of 2010. The mortgage-backed
securities are investment grade securities. Trading instruments are
recognized at fair value, with changes resulting from fluctuations
in market prices, interest rates or exchange rates reported in
current period earnings. The Corporation recognized net trading
account profit of $5.9 million for the year ended December 31,
2011. Table 28 provides the composition of the trading portfolio
at December 31, 2011 and 2010.

57

POPULAR, INC. 2011 ANNUAL REPORT

Table 28 - Trading Portfolio

(Dollars in thousands)

Mortgage-backed securities
Collateralized mortgage obligations
Commercial paper
Puerto Rico and U.S. Government obligations
Interest-only strips
Other

Total

[1] Not on a taxable equivalent basis.

The Corporation’s trading activities are limited by internal
policies. For each of the two subsidiaries, the market risk
assumed under trading activities is measured by the 5-day net
value-at-risk (“VAR”), with a confidence level of 99%. The VAR
measures the maximum estimated loss that may occur over a
5-day holding period, given a 99% probability. Under the
Corporation’s current policies, trading exposures cannot exceed
2% of the trading portfolio market value of each subsidiary,
subject to a cap.

The Corporation’s trading portfolio had a 5-day VAR of
approximately $2.0 million, assuming a confidence level of
99%, for the last week in December 2011. There are numerous
assumptions and estimates associated with VAR modeling, and
actual
from these assumptions and
estimates. Backtesting is performed to compare actual results
against maximum estimated losses, in order to evaluate model
and assumptions accuracy.

results could differ

In the opinion of management, the size and composition of
the trading portfolio does not represent a significant source of
market risk for the Corporation.

Derivatives
Derivatives are used by the Corporation as part of its overall
interest rate risk management strategy to minimize significant
unexpected fluctuations in earnings and cash flows that are
caused by fluctuations in interest rates. Derivative instruments
that the Corporation may use include, among others, interest
rate swaps, caps, floors, indexed options, and forward contracts.
The Corporation does not use highly leveraged derivative
instruments in its interest rate risk management strategy. The
Corporation enters into interest rate swaps, interest rate caps
and foreign exchange contracts for the benefit of commercial
customers. Credit risk embedded in these transactions is
reduced by requiring appropriate collateral from counterparties
and entering into netting agreements whenever possible. All
outstanding derivatives are recognized in the Corporation’s
consolidated statement of financial condition at their fair value.
Refer to Note 29 to the consolidated financial statements for
further
in
information on the Corporation’s
derivative instruments and hedging activities.

involvement

December 31, 2011
Weighted

Average Yield [1] Amount

December 31, 2010
Weighted
Average Yield [1]

Amount

$325,205
3,545
–
90,648
1,378
15,555

$436,331

4.56%
4.69
–
4.87
12.80
4.32

4.64%

$493,044
3,515
12,408
17,275
1,180
19,291

$546,713

4.87%
4.75
1.00
5.90
18.75
5.06

4.85%

The Corporation’s derivative activities are entered primarily
to offset the impact of market volatility on the economic value
of assets or liabilities. The net effect on the market value of
potential changes in interest rates of derivatives and other
financial instruments is analyzed. The effectiveness of these
hedges is monitored to ascertain that
the Corporation is
reducing market risk as expected. Derivative transactions are
generally executed with instruments with a high correlation to
liability. The underlying index or
the hedged asset or
instrument of
the derivatives used by the Corporation is
selected based on its similarity to the asset or liability being
hedged. As a result of interest rate fluctuations, fixed and
variable interest rate hedged assets and liabilities will appreciate
or depreciate in fair value. The effect of
this unrealized
appreciation or depreciation is expected to be substantially
offset by the Corporation’s gains or losses on the derivative
instruments
that are linked to these hedged assets and
liabilities. Management will assess if circumstances warrant
replacing the derivatives position in the
liquidating or
hypothetical event that high correlation is reduced. Based on
the Corporation’s derivative
at
December 31, 2011, it is not anticipated that such a scenario
would have a material impact on the Corporation’s financial
condition or results of operations.

instruments outstanding

Certain derivative contracts also present credit risk and
liquidity risk because the counterparties may not comply with
the terms of the contract, or the collateral obtained might be
illiquid or become so. The Corporation controls credit risk
through approvals,
limits and monitoring procedures, and
through master netting and collateral agreements whenever
possible. Further, as applicable under the terms of the master
the Corporation may obtain collateral, where
agreements,
appropriate, to reduce credit risk. The credit risk attributed to
the counterparty’s nonperformance risk is incorporated in the
fair value of the derivatives. Additionally, as required by the fair
the
value measurements
Corporation’s own credit standing is considered in the fair
value of
the derivative liabilities. During the year ended
December 31, 2011, inclusion of the credit risk in the fair value

guidance,

value

fair

the

of

of the derivatives resulted in a net loss of $0.6 million (2010 -
net loss of $0.2 million; 2009 - net loss of $4.8 million), which
consisted of a gain of $1.1 million (2010 - loss of $0.5 million;
2009 - loss of $6.8 million) resulting from the Corporation’s
credit standing adjustment and a loss of $1.7 million (2010 -
gain of $0.3 million; 2009 - gain of $2.0 million) from the
assessment of the counterparties’ credit risk. At December 31,
2011, the Corporation had $72 million (2010 - $86 million)
recognized for the right to reclaim cash collateral posted. On
the other hand, the Corporation had $2 million recognized for
the obligation to return cash collateral received at December 31,
2011 (2010 - $3 million).

the

financial

The Corporation performs appropriate due diligence and
monitors
that
condition of
represent a significant volume of credit exposure. Additionally,
the Corporation has exposure limits to prevent any undue
funding exposure.

counterparties

58

financial statements for additional quantitative and qualitative
information on these derivative instruments.

At December 31, 2011, the Corporation had outstanding
$1.4 billion (2010 - $1.6 billion) in notional amount of interest
rate swap agreements with a net negative fair value of $6
million (2010 - net negative fair value of $5 million), which
were not designated as accounting hedges. These swaps were
entered in the Corporation’s capacity as an intermediary on
behalf of its customers and their offsetting swap position.

interest

a net decrease

For the year ended December 31, 2011, the impact of the
rate swaps not designated as
mark-to-market of
in earnings of
accounting hedges was
approximately $1.4 million, recorded in the other operating
income category of the consolidated statement of operations,
compared with an earnings reduction of approximately $0.9
million in 2010 and an earnings reduction of $6.5 million in
2009.

Cash Flow Hedges
The Corporation manages the variability of cash payments due
to interest rate fluctuations by the effective use of derivatives
designated as cash flow hedges and that are linked to specified
hedged assets and liabilities. The notional amount of derivatives
designated as cash flow hedges at December 31, 2011 amounted
to $137 million (2010 - $256 million). The cash flow hedges
outstanding relate to forward contracts or “to be announced”
(“TBA”) mortgage-backed securities that are sold and bought
for future settlement to hedge mortgage-backed securities and
loans prior to securitization. The seller agrees to deliver on a
specified future date a specified instrument at a specified price
or yield. These securities are hedging a forecasted transaction
and thus qualify for cash flow hedge accounting.

At December 31, 2011,

the Corporation had forward
contracts with a notional amount of $115 million (2010 - $278
million) and a net negative fair value of $0.2 million (2010 - net
negative fair value of $1 million) not designated as accounting
hedges. These forward contracts are considered derivatives and
are recorded at fair value. Subsequent changes in the value of
these forward contracts are recorded in the consolidated
statement of operations. For the year ended December 31, 2011,
the impact of the mark-to-market of the forward contracts not
designated as accounting hedges was a reduction to non-interest
income of $41.8 million (2010 - loss of $15.8 million; 2009 -
loss of $12.5 million), which was included in the category of
trading account profit
in the consolidated statement of
operations. The higher loss in 2011 was attributable to a higher
volume of closed positions at a higher loss.

Refer to Note 29 to the consolidated financial statements for
information on these derivative

quantitative

additional
contracts.

Fair Value Hedges
The Corporation did not have any derivatives designated as fair
value hedges during the years ended December 31, 2011 and
2010.

Trading and Non-Hedging Derivative Activities
The Corporation enters into derivative positions based on
from price differentials
market expectations or to benefit
to
between financial
economically hedge a related asset or liability. The Corporation
also enters into various derivatives to provide these types of
derivative
free-standing
derivatives are carried at fair value with changes in fair value
recorded as part of the results of operations for the period.

and markets mostly

customers. These

instruments

products

to

Following is a description of the most significant of the
Corporation’s derivative activities that are not designated for
to Note 29 to the consolidated
hedge accounting. Refer

to its

linked to these indexes

Furthermore, the Corporation has over-the-counter option
contracts which are utilized in order to limit the Corporation’s
exposure on customer deposits whose returns are tied to the
S&P 500 or to certain other equity securities or commodity
indexes. The Corporation offers certificates of deposit with
returns
retail customers,
principally in connection with individual retirement accounts
(IRAs), and certificates of deposit. At December 31, 2011, these
deposits amounted to $82 million (2010 - $73 million), or less
than 1% (2010 - less than 1%) of the Corporation’s total
deposits.
is
guaranteed by the Corporation and insured by the FDIC to the
maximum extent permitted by law. The instruments pay a
return based on the increase of these indexes, as applicable,
during the term of the instrument. Accordingly, this product
gives customers the opportunity to invest in a product that
protects the principal invested but allows the customer the
potential to earn a return based on the performance of the
indexes.

the customer’s principal

In these certificates,

The risk of issuing certificates of deposit with returns tied to
the applicable indexes is hedged by the Corporation. BPPR and

59

POPULAR, INC. 2011 ANNUAL REPORT

BPNA purchase indexed options from financial
institutions
with strong credit standings, whose return is designed to match
the return payable on the certificates of deposit issued by these
banking subsidiaries. By hedging the risk in this manner, the
effective cost of these deposits is fixed. The contracts have a
maturity and an index equal to the terms of the pool of retail
deposits that they are economically hedging.

The purchased option contracts are initially accounted for at
cost (i.e., amount of premium paid) and recorded as a
derivative asset. The derivative asset is marked-to-market on a
quarterly basis with changes in fair value charged to earnings.
The deposits are hybrid instruments containing embedded
options that must be bifurcated in accordance with the
derivatives and hedging activities guidance. The initial value of
the embedded option (component of the deposit contract that
pays a return based on changes in the applicable indexes) is
bifurcated from the related certificate of deposit and is initially
recorded as a derivative liability and a corresponding discount
on the certificate of deposit is recorded. Subsequently, the
discount on the deposit is accreted and included as part of
interest
is
marked-to-market with changes in fair value charged to
earnings.

bifurcated

expense

option

while

the

The purchased indexed options are used to economically
hedge the bifurcated embedded option. These option contracts
do not qualify for hedge accounting, and therefore, cannot be
designated as accounting hedges. At December 31, 2011, the
notional
indexed options on deposits
approximated $73 million (2010 - $77 million) with a fair value
of $11 million (asset) (2010 - $8 million) while the embedded
options had a notional value of $82 million (2010 - $73 million)
with a fair value of $8 million (liability) (2010 - $7 million).

amount of

the

Refer to Note 29 to the consolidated financial statements for
a description of other non-hedging derivative activities utilized
by the Corporation during 2011 and 2010.

The

(“BHD”)

Foreign Exchange
The Corporation holds an interest in Centro Financiero BHD,
in the Dominican Republic, which is an
S.A.
investment accounted for under
the equity method. The
Corporation’s carrying value of the equity interest in BHD
approximated $65 million at December 31, 2011. Although not
significant, this business is conducted in the country’s foreign
currency.
translation
adjustment, from operations for which the functional currency
is other than the U.S. dollar, is reported in accumulated other
comprehensive income (loss) in the consolidated statements of
financial condition, except for highly-inflationary environments
in which the effects would be included in the consolidated
statements of operations. At December 31, 2011,
the
Corporation had approximately $29 million in an unfavorable
foreign currency translation adjustment as part of accumulated
compared with an
other

comprehensive

resulting

currency

income

foreign

(loss),

unfavorable adjustment of $36 million at December 31, 2010
and $41 million at December 31, 2009.

for December 2009 was

Popular, Inc. also operates in Venezuela through its wholly-
owned subsidiary Tarjetas y Transacciones en Red Tranred,
C.A., formerly EVERTEC VENEZUELA, C.A. (“Red Tranred”).
On January 7, 2010, Venezuela’s National Consumer Price
Index (“NCPI”)
released. The
cumulative three-year inflation rates for both of Venezuela’s
inflation indices were over 100 percent. The Corporation began
considering Venezuela’s economy as highly inflationary as of
January 1, 2010, and the financial statements of Red Tranred
were remeasured as if the functional currency was the reporting
currency as of such date. Under ASC Topic 830, if a country’s
economy is classified as highly inflationary, the functional
currency of the foreign entity operating in that country must be
remeasured to the functional currency of the reporting entity.
The unfavorable impact of remeasuring the financial statements
of Red Tranred at December 31, 2010, was approximately
$1.9 million. Total assets
for Red Tranred remeasured
amounted to approximately $8.9 million at the end of 2010. At
December 31, 2011, the Corporation had completely written-off
its investment in Red Tranred.

Liquidity
The objective of effective liquidity management is to ensure
that the Corporation has sufficient liquidity to meet all of its
financial obligations,
finance expected future growth and
maintain a reasonable safety margin for cash commitments
under both normal and stressed market conditions. The Board
is responsible for establishing the Corporation’s tolerance for
liquidity risk,
including approving relevant risk limits and
policies. The Board has delegated the monitoring of these risks
to the RMC and the ALCO. The management of liquidity risk,
on a long-term and day-to-day basis, is the responsibility of the
Corporate Treasury Division. The Corporation’s Corporate
Treasurer is responsible for implementing the policies and
procedures approved by the Board and for monitoring the
Corporation’s liquidity position on an ongoing basis. Also, the
Corporate Treasury Division coordinates
corporate wide
liquidity management
and activities with the
reportable segments, oversees policy breaches and manages the
and Operational Risk
escalation process. The Financial
Management Division is
the independent
monitoring and reporting of adherence with established
policies.

responsible for

strategies

An institution’s liquidity may be pressured if, for example,
its credit rating is downgraded, it experiences a sudden and
unexpected substantial cash outflow, or some other event
causes counterparties to avoid exposure to the institution.
Factors that the Corporation does not control, such as the
economic outlook of
its principal markets and regulatory
changes, could affect its ability to obtain funding.

Liquidity is managed by the Corporation at the level of the
holding companies that own the banking and non-banking
subsidiaries. It is also managed at the level of the banking and
non-banking subsidiaries. The Corporation has adopted policies
and limits to monitor more effectively the Corporation’s
liquidity position and that of
the banking subsidiaries.
Additionally, contingency funding plans are used to model
various stress events of different magnitudes and affecting
different time horizons that assist management in evaluating
the size of the liquidity buffers needed if those stress events
occur. However, such models may not predict accurately how
the market and customers might react to every event, and are
dependent on many assumptions.

funds for the Corporation,

Deposits, including customer deposits, brokered deposits,
and public funds deposits, continue to be the most significant
funding 75% of the
source of
Corporation’s total assets at December 31, 2011, compared with
69% at December 31, 2010 and 75% at December 31, 2009. The
decrease in the ratio of deposits to total assets from the end of
2009 to December 31, 2010 was directly related to the note
issued to the FDIC in the assisted transaction, which as
indicated previously, was fully repaid as of the end of 2011. The
ratio of total ending loans to deposits was 91% at December 31,
2011, compared with 99% at the same date in 2010 and 92% in
2009.
the Corporation
maintains borrowing arrangements. At December 31, 2011,
these borrowings consisted primarily of assets sold under
agreement to repurchase of $2.1 billion, advances with the
FHLB of $938 million, junior subordinated deferrable interest
debentures of $910 million (net of discount of $466 million)
and term notes of $279 million. A detailed description of the
Corporation’s borrowings, including their terms, is included in
Notes 18 to 20 to the consolidated financial statements. Also,
the consolidated statements of cash flows in the accompanying
consolidated financial statements provide information on the
Corporation’s cash inflows and outflows.

In addition to traditional deposits,

net

2011,

interest margin. During

During 2011, the Corporation’s liquidity position remained
strong. The Corporation executed several strategies to deploy
excess liquidity at its banking subsidiaries and improve the
Corporation’s
the
Corporation fully repaid the note issued to the FDIC, which
had a carrying amount of $2.5 billion at December 31, 2010.
The payments made were from proceeds received from the
FDIC on claims filed under the loss sharing agreements
amounting to $561 million, from optional prepayments made
by the Corporation from proceeds of maturities of securities
and brokered certificates of deposits of approximately $1.1
billion, and the remaining repayment balance came principally
from collections on the covered loans. Also, the Corporation
deployed excess liquidity at the BPNA reportable segment,
including proceeds received from the sale of non-conventional
mortgage loans to purchase $753 million in securities during
the first quarter of 2011, primarily U.S. Agencies securities and

60

agency-issued

U.S. Government
collateralized mortgage
obligations. Funds were invested in longer-term securities to
improve the net
interest margin. These securities can be
pledged to other counterparties in the repo market and
continue to serve as a source to manage the Corporation’s
liquidity needs. Furthermore, in the first quarter of 2011, the
Corporation repaid $100 million of medium-term notes, which
was accounted for as an early extinguishment of debt.

In addition, during 2011, the Corporation exchanged $233.2
million in aggregate principal amount of the $275 million
6.85% Senior Notes due 2012, in order to issue new debt with
later maturities. The modified notes are as follows: (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.

Disrupted market conditions prior to 2010 increased the
Corporation’s liquidity risk exposure due primarily to increased
risk aversion on the part of traditional credit providers. The
Corporation’s credit downgrades, as well as the economic
conditions in the Corporation’s main market hindered the
Corporation’s ability to issue debt in the capital markets. In
response, the Corporation reduced its liquidity exposure by
reducing the use of short-term and long-term unsecured
borrowings and exited certain lines of business, primarily in the
U.S. mainland operations. Although the Corporation has not
completed any recent debt issuance in the capital markets, it
did successfully complete a $1.15 billion capital raise through
the issuance of common stock in 2010.

Also, during 2010, the Corporation took steps to deleverage
its balance sheet and prepay certain high cost debt to benefit its
cost of funds going forward. These actions were possible in part
due to the excess liquidity derived from the Corporation’s 2010
capital raise, paydowns from the loan portfolio coupled with
weak loan demand, from maturities of investment securities
and funds received from the sale of the majority interest in
EVERTEC.

The following sections provide further information on the
Corporation’s major funding activities and needs, as well as the
risks involved in these activities. A detailed description of the
credit,
Corporation’s borrowings
is included in Notes 18 to 20 to the
including its terms,
consolidated financial
consolidated
statements of cash flows in the accompanying consolidated
financial statements provide information on the Corporation’s
cash inflows and outflows.

statements. Also,

and available

lines of

the

Banking Subsidiaries
funding for the Corporation’s banking
Primary sources of
subsidiaries (BPPR and BPNA), or “the banking subsidiaries,”
include retail and commercial deposits, brokered deposits,
collateralized borrowings, unpledged investment securities,
and, to a lesser extent, loan sales. In addition, the Corporation

61

POPULAR, INC. 2011 ANNUAL REPORT

maintains borrowing facilities with the FHLB and at
the
discount window of the Fed, and has a considerable amount of
collateral pledged that can be used to quickly raise funds under
these facilities.

and

repayment

repurchases,

The principal uses of funds for the banking subsidiaries
include loan originations, investment portfolio purchases, loan
purchases
outstanding
obligations (including deposits), and operational expenses.
Also, the banking subsidiaries assume liquidity risk related to
collateral posting requirements for certain activities mainly in
connection with contractual commitments, recourse provisions,
servicing advances, derivatives, credit card licensing agreements
and support to several mutual funds administered by BPPR.

of

Note 42 to the consolidated financial statements provides a
consolidating statement of cash flows which includes the
Corporation’s banking subsidiaries as part of the “All other
subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient

funding
capacity to address large increases in funding requirements
such as deposit outflows. This capacity is comprised mainly of
available liquidity derived from secured funding sources, as
well as on-balance sheet liquidity in the form of cash balances
maintained at the Fed and unused secured lines held at the Fed
in addition to liquid unpledged securities. The
and FHLB,
Corporation has established liquidity guidelines that require the
banking subsidiaries to have sufficient liquidity to cover all
short-term borrowings and a portion of deposits.

recognized credit

The Corporation’s ability to compete successfully in the
marketplace for deposits, excluding brokered deposits, depends
on various factors, including pricing, service, convenience and
financial stability as reflected by operating results, credit ratings
(by nationally
and
importantly, FDIC deposit insurance. Although a downgrade in
the credit ratings of the Corporation’s banking subsidiaries may
impact their ability to raise retail and commercial deposits or
the rate that it is required to pay on such deposits, management
does not believe that the impact should be material. Deposits at
all of
the Corporation’s banking subsidiaries are federally
insured (subject to FDIC limits) and this is expected to mitigate
the potential effect of a downgrade in the credit ratings.

agencies),

rating

$100,000,

Deposits are a key source of funding as they tend to be less
volatile than institutional borrowings and their cost is less
sensitive to changes in market rates. Refer to Table 15 for a
breakdown of deposits by major types. Core deposits are
generated from a large base of consumer, corporate and
institutional customers. Core deposits include all non-interest
bearing deposits, savings deposits and certificates of deposit
deposits with
under
denominations under $100,000. Core deposits have historically
provided the Corporation with a sizable source of relatively
stable and low-cost funds. Core deposits totaled $21.3 billion,
or 76% of total deposits, at December 31, 2011, compared with
$20.6 billion, or 77% of total deposits, at December 31, 2010.
Core deposits financed 66% of the Corporation’s earning assets
at December 31, 2011, compared with 61% at December 31,
2010.

excluding

brokered

Certificates of deposit with denominations of $100,000 and
over at December 31, 2011 totaled $4.2 billion, or 15% of total
deposits, compared with $4.7 billion, or 17%, at December 31,
2010. Their distribution by maturity at December 31, 2011 is
presented in the table that follows.

Table 29 - Distribution by Maturity of Certificate of Deposits
of $100,000 and Over

(In thousands)

3 months or less
3 to 6 months
6 to 12 months
Over 12 months

$2,013,689
625,129
649,312
948,815

$4,236,945

Average deposits, including brokered deposits, for the year
ended December 31, 2011 represented 84% of average earning
assets, compared with 78% and 79% for the years ended
December 31, 2010 and 2009,
respectively. Table 30
summarizes average deposits for the past five years.

62

Table 30 - Average Total Deposits

(In thousands)
Non-interest bearing demand deposits
Savings accounts
NOW, money market and other interest bearing demand accounts
Certificates of deposit:
Under $100,000
$100,000 and over
Certificates of deposit

Other time deposits

Total interest bearing deposits
Total average deposits

2011
$5,058,424
6,320,825
5,204,235

For the year ended December 31,
2008
2009
2010
$4,120,280
$4,293,285
$4,732,132
5,600,377
5,538,077
5,970,000
4,948,186
4,804,023
4,981,332

2007
$4,043,427
5,697,509
4,429,448

5,966,089
4,026,042
9,992,131
927,776
22,444,967
$27,503,391

6,099,741
4,073,047
10,172,788
794,245
21,918,365
$26,650,497

7,166,756
4,214,125
11,380,881
811,943
22,534,924
$26,828,209

6,955,843
4,598,146
11,553,989
1,241,447
23,343,999
$27,464,279

3,949,262
5,928,983
9,878,245
1,520,471
21,525,673
$25,569,100

approximately 9% of

At December 31, 2011,

the
Corporation’s assets were financed by brokered deposits,
compared with 6% at December 31, 2010. The Corporation had
$3.4 billion in brokered deposits at December 31, 2011,
compared with $2.3 billion at December 31, 2010. The
Corporation increased its use of brokered deposits during 2011
as part of a liability-management strategy to reduce higher-cost
borrowings, including the borrowing owed to the FDIC. In the
the Corporation’s banking subsidiaries’
event
regulatory capital ratios fall below those required by a well-
capitalized institution or are subject to capital restrictions by
the regulators, that banking subsidiary faces the risk of not
being able to raise or maintain brokered deposits and faces
limitations on the rate paid on deposits, which may hinder the
Corporation’s ability to effectively compete in its retail markets
and could affect its deposit raising efforts.

that any of

To the extent that the banking subsidiaries are unable to obtain
sufficient liquidity through core deposits, the Corporation may
meet
its liquidity needs through short-term borrowings by
pledging securities for borrowings under repurchase agreements,
by pledging additional loans and securities through the available
secured lending facilities, or by selling liquid assets. These
measures are subject to availability of collateral.

The Corporation’s banking subsidiaries have the ability to
borrow funds from the FHLB. At December 31, 2011 and 2010,
the banking subsidiaries had credit facilities authorized with
the FHLB aggregating $2.0 billion and $1.6 billion, respectively,
based on assets pledged with the FHLB at
those dates.
Outstanding borrowings under these credit facilities totaled
$0.9 billion and $0.7 billion at December 31, 2011 and 2010,
respectively.
collateralized by loans
held-in-portfolio, do not have restrictive covenants and do not
have any callable features. At December 31, 2011, the credit
facilities authorized with the FHLB were collateralized by $4.9
billion in loans held-in-portfolio, compared with $3.8 billion at
December 31, 2010. Refer
to Notes 19 and 20 to the
consolidated financial statements for additional information on
the terms of FHLB advances outstanding.

Such advances

are

At December 31, 2011, the Corporation’s borrowing capacity
at the Fed’s Discount Window amounted to approximately $2.6
billion, compared with $2.7 billion at December 31, 2010, which
remained unused as of both dates. This facility is a collateralized
source of credit that is highly reliable even under difficult
market conditions. The amount available under this borrowing
facility is dependent upon the balance of performing loans and
securities pledged as collateral and the haircuts assigned to such
collateral. At December 31, 2011, this credit facility with the Fed
was collateralized by $4.0 billion in loans held-in-portfolio,
compared with $4.2 billion at December 31, 2010.
31,

the
Corporation’s bank holding companies (Popular, Inc., Popular
International Bank,
North America,
Inc.)(“BHCs”) did not make any capital contributions to BPNA
and BPPR. During 2010, the BHCs made capital contributions
to BPNA amounting to $745 million in order to maintain the
banking subsidiary at well-capitalized levels.

ended December

and Popular

During

2011,

year

Inc.

the

The Corporation’s banking subsidiaries are required to
obtain approval from the Federal Reserve System and their
respective applicable state banking regulator prior to declaring
or paying dividends to the BHCs.

their

sources

to meet

liquidity resources

At December 31, 2011, management believes that
the
banking subsidiaries had sufficient current and projected
liquidity
anticipated cash flow
obligations, as well as special needs and off-balance sheet
commitments, in the ordinary course of business and have
sufficient
to address a stress event.
Although the banking subsidiaries have historically been able
to replace maturing deposits and advances if desired, no
assurance can be given that they would be able to replace those
funds in the future if the Corporation’s financial condition or
general market conditions were to change. The Corporation’s
financial flexibility will be severely constrained if its banking
subsidiaries are unable to maintain access to funding or if
adequate financing is not available to accommodate future
growth at acceptable interest rates. The banking subsidiaries
also are required to deposit cash or qualifying securities to

63

POPULAR, INC. 2011 ANNUAL REPORT

meet margin requirements. To the extent that the value of
securities previously pledged as collateral declines because of
changes in interest rates, a liquidity crisis or any other factors,
the Corporation will be required to deposit additional cash or
securities to meet its margin requirements, thereby adversely
affecting its liquidity. Finally, if management is required to
rely more heavily on more expensive funding sources to
increase
support
proportionately to cover costs. In this case, profitability would
be adversely affected.

revenues may

growth,

future

not

Westernbank FDIC-assisted Transaction and Impact on
Liquidity
BPPR’s liquidity may also be impacted by the loan payment
performance and timing of claims made and receipt of
reimbursements under the FDIC loss sharing agreements.

In the short-term, there may be a significant amount of the
covered loans acquired in the FDIC-assisted transaction that
will experience deterioration in payment performance, or will
be determined to have inadequate collateral values to repay the
loans. In such instances, the Corporation will likely no longer
receive payments from the borrowers, which will impact cash
flows. The loss sharing agreements will not fully offset the
if a loan is
financial effects of such a situation. However,
subsequently charged-off or written down after the Corporation
exhausts
sharing
agreements will cover 80% of the loss associated with the
covered loans, offsetting most of any deterioration in the
performance of the covered loans.

its best efforts at collection,

the loss

The effects of the loss sharing agreements on cash flows and
operating results in the long-term will be similar to the short-
term effects described above, except for the liquidity to be
provided by the pledging of the loans to the FHLB, following
their release of collateral upon full repayment of the FDIC note
in December 2011. The long-term effects
that we may
experience will depend primarily on the ability of the borrowers
whose loans are covered by the loss sharing agreements to
make payments over time. As the loss sharing agreements are in
effect for a period of ten years for one-to-four family loans and
five years for commercial, construction and consumer loans
(with periods commencing on April 30, 2010), changing
economic conditions will likely impact the timing of future
charge-offs and the resulting reimbursements from the FDIC.
Management believes that any recapture of interest income and
recognition of cash flows from the borrowers or received from
the FDIC on the claims filed may be recognized unevenly over
this period, as management exhausts its collection efforts under
the Corporation’s normal practices.

Bank Holding Companies
The principal sources of funding for the holding companies
include cash on hand, investment securities, dividends received
to
from banking and non-banking subsidiaries

(subject

regulatory limits and authorizations), asset sales, credit facilities
available from affiliate banking subsidiaries and proceeds from
potential securities offerings. The principal source of cash flows
for the parent holding company during 2011 has been the
repayment of loans made to subsidiaries and affiliates. Proceeds
from the repayment of these loans, net of new advances,
amounted to $226 million for the year ended December 31,
2011. The principal source of cash flows for the parent holding
company during 2010 was the capital issuance of $1.15 billion
and the proceeds amounting to $528.6 million, net of
transaction costs and taxes, from the sale of a majority interest
in EVERTEC.

The principal use of these funds include capitalizing its
banking subsidiaries,
the repayment of debt, and interest
payments to holders of senior debt and junior subordinated
(related to trust preferred
deferrable interest debentures
securities). During 2011, the main cash outflows of the holding
companies have been for the repurchase of $100 million in
medium-term notes and payments of interest on debt, mainly
associated with trust preferred securities.

Another use of liquidity at the parent holding company is
the payment of dividends on preferred stock. At the end of
2010, the Corporation resumed paying dividends on its Series A
and B preferred stock. The preferred stock dividends amounted
to $3.7 million for the year ended December 31, 2011. The
preferred stock dividends paid were financed by issuing new
shares of common stock to the participants of the Corporation’s
qualified employee savings plans. The Corporation is required
to obtain approval from the Fed prior to declaring or paying
dividends, incurring, increasing or guaranteeing debt or making
any distributions
trust preferred securities or
subordinated debt. The Corporation anticipates that any future
preferred stock dividend payments would continue to be
financed with the issuance of new common stock in connection
with its qualified employee savings plans. The Corporation is
not paying dividends to holders of its common stock.

on its

A principal use of liquidity at the BHCs is to ensure its
subsidiaries are adequately capitalized. Past operating losses at
the BPNA banking subsidiary required the BHCs to contribute
equity capital during 2009 and 2010 to ensure that it continued
“well-capitalized”
to meet
institutions. There were no capital contributions made to BPNA
during the year ended December 31, 2011. Management does
not expect either of
the banking subsidiaries to require
additional capitalizations for the foreseeable future.

regulatory guidelines

the

for

The BHCs have in the past borrowed in the money markets
and in the corporate debt market primarily to finance their
non-banking subsidiaries. These sources of
funding have
become more costly due to the reductions in the Corporation’s
credit ratings together with higher credit spreads in general.
The Corporation’s
below
“investment grade” which affects the Corporation’s ability to
raise funds in the capital markets. However, the cash needs of

principal

ratings

credit

are

the Corporation’s non-banking subsidiaries other than to repay
indebtedness and interest are now minimal. The Corporation
has an open-ended, automatic shelf registration statement filed
and effective with the SEC, which permits the Corporation to
issue an unspecified amount of debt or equity securities.

Note 42 to the consolidated financial statements provides a
statement of condition, of operations and of cash flows for the
three BHCs.

The loans held-in-portfolio in such financial statements are

principally associated with intercompany transactions.

The outstanding balance of notes payable at the BHCs
amounted to $1.2 billion at December 31, 2011, compared with
$1.3 billion at December 31, 2010. These borrowings are
principally junior subordinated debentures (related to trust
preferred securities),
including those issued to the U.S.
Treasury as part of the TARP, and unsecured senior debt (term
notes). The repayment of the BHCs obligations represents a
potential cash need which is expected to be met with a
combination of internal liquidity resources stemming mainly
from future dividend receipts and new borrowings.

The BHCs liquidity position continues to be adequate with
sufficient cash on hand,
investments and other sources of
liquidity which are expected to be enough to meet all BHCs
obligations during the foreseeable future.

sources of

funding for

Non-banking subsidiaries
The principal
the non-banking
subsidiaries include internally generated cash flows from
operations, loan sales, repurchase agreements, and borrowed
funds from their direct parent companies or the holding
companies. The principal uses of funds for the non-banking
subsidiaries include repayment of maturing debt, operational
expenses and payment of dividends to the BHCs. The liquidity
needs of the non-banking subsidiaries are minimal since most
of them are funded internally from operating cash flows or from
intercompany borrowings from their holding companies, BPPR
or BPNA.

securities,

repurchase

sponsored U.S.

sponsored mortgage-backed

agreements. The Corporation’s

Other Funding Sources and Capital
The investment securities portfolio provides an additional source
of liquidity, which may be realized through either securities sales
or
investment
securities portfolio consists primarily of liquid U.S. government
securities,
investment
and
government
collateralized mortgage obligations that can be used to raise funds
in the repo markets. At December 31, 2011, the investment and
trading securities portfolios, as shown in Table 27, totaled $5.6
billion, of which $1.5 billion, or 26%, had maturities of one year
or less. Mortgage-related investments in Table 27 are presented
based on expected maturities, which may differ from contractual
maturities, since they could be subject to prepayments. The
availability of the repurchase agreement would be subject to

securities,

agency

64

having sufficient unpledged collateral available at the time the
transactions are to be consummated,
in addition to overall
liquidity and risk appetite of the various counterparties. The
Corporation’s unpledged investment and trading securities,
excluding other investment securities, amounted to $1.5 billion at
December 31, 2011 and 2010. A substantial portion of these
securities could be used to raise financing quickly in the U.S.
money markets or from secured lending sources.

Additional

liquidity may be provided through loan
maturities, prepayments and sales. The loan portfolio can also
be used to obtain funding in the capital markets. In particular,
mortgage loans and some types of consumer loans, have
secondary markets which the Corporation may use. The
maturity distribution of the total loan portfolio at December 31,
2011 is presented in Table 27. As of that date, $10.1 billion, or
40% of the loan portfolio was expected to mature within one
year, compared with $10.5 billion or 40% of the loan portfolio
in the previous year. The contractual maturities of loans have
been adjusted to include prepayments based on historical data
and prepayment trends.

leverage

Risks to Liquidity
Total lines of credit outstanding are not necessarily a measure
of the total credit available on a continuing basis. Some of these
lines could be subject to collateral requirements, standards of
creditworthiness,
regulatory
requirements, among other factors. Derivatives, such as those
embedded in long-term repurchase transactions or interest rate
swaps, and off-balance sheet exposures, such as recourse,
performance bonds or credit card arrangements, are subject to
collateral
the
collateral requirements may increase,
thereby reducing the
balance of unpledged securities.

requirements. As their fair value increases,

ratios

other

and

for

The importance of

the Puerto Rico market

the
Corporation is an additional risk factor that could affect its
financing activities. In the case of a further weakening of the
economic condition in Puerto Rico, the credit quality of the
Corporation could be further affected and result in higher
credit costs. The Puerto Rico economy continues to face various
challenges, including significant pressures in some sectors of
the residential real estate market. Refer to the Geographical and
Government Risk section of this MD&A for some highlights on
the current status of the Puerto Rico economy.

Factors that the Corporation does not control, such as the
its principal markets and regulatory
economic outlook of
changes, could also affect its ability to obtain funding. In order
to prepare for the possibility of such scenario, management has
adopted contingency plans for raising financing under stress
scenarios when important sources of funds that are usually fully
available are temporarily unavailable. These plans call for using
alternate funding mechanisms, such as the pledging of certain
asset classes and accessing secured credit
lines and loan
facilities put in place with the FHLB and the Fed.

65

POPULAR, INC. 2011 ANNUAL REPORT

Credit ratings of Popular’s debt obligations are an important
factor for liquidity because they impact the Corporation’s ability
to borrow in the capital markets, its cost and access to funding
sources. Credit ratings are based on the financial strength,
credit quality and concentrations in the loan portfolio, the level
and volatility of earnings, capital adequacy, the quality of
management, the liquidity of the balance sheet, the availability
of a significant base of core retail and commercial deposits, and
the Corporation’s ability to access a broad array of wholesale
funding sources, among other factors.

The Corporation’s banking subsidiaries have historically not
used unsecured capital market borrowings to finance its
operations, and therefore are less sensitive to the level and
changes in the Corporation’s overall credit ratings. At the
BHCs, the volume of capital market borrowings has declined
substantially, as the non-banking lending businesses that it had
historically funded have been shut down and outstanding
unsecured senior debt has been reduced.

The Corporation’s banking subsidiaries currently do not use
borrowings that are rated by the major rating agencies, as these
banking subsidiaries are funded primarily with deposits and
secured borrowings. The banking subsidiaries had $20 million
in deposits at December 31, 2011 that are subject to rating
triggers.

Some of the Corporation’s derivative instruments include
financial covenants tied to the bank’s well-capitalized status and
certain formal regulatory actions. These agreements could
require exposure collateralization, early termination or both.
The fair value of derivative instruments in a liability position
subject to financial covenants approximated $57 million at
December 31, 2011, with the Corporation providing collateral
totaling $72 million to cover the net liability position with
counterparties on these derivative instruments.

to credit

In addition, certain mortgage servicing and custodial
agreements that BPPR has with third parties include rating
covenants. Based on BPPR’s failure to maintain the required
credit ratings, the third parties have the right to require the
institution to engage a substitute cash custodian for escrow
deposits and/or increase collateral levels securing the recourse
obligations. Also, as discussed in the Guarantees section of this
MD&A, the Corporation services residential mortgage loans
subject
recourse provisions. Certain contractual
agreements require the Corporation to post collateral to secure
such recourse obligations if the institution’s required credit
are not maintained. Collateral pledged by the
ratings
Corporation to secure recourse obligations approximated $140
million at December 31, 2011. The Corporation could be
required to post additional collateral under the agreements.
Management expects that it would be able to meet additional
collateral requirements if and when needed. The requirements
to post collateral under certain agreements or the loss of escrow
deposits could reduce the Corporation’s liquidity resources and
impact its operating results.

Credit Risk Management and Loan Quality
Credit risk occurs any time funds are advanced, committed,
invested or otherwise exposed. Credit risk arises primarily from
the Corporation’s lending activities, as well as from other
instruments.
on-balance sheet and off-balance sheet credit
Credit
the
is
creditworthiness of the borrower or counterparty, the adequacy
of underlying collateral given current events and conditions,
and the existence and strength of any guarantor support.

risk management

on analyzing

based

Business activities that expose the Corporation to credit risk
are managed within the Board’s established limits that consider
factors, such as maintaining a prudent balance of risk-taking
across diversified risk types and business units (compliance
such as
with regulatory
concentrations
controlling the
exposure to lower credit quality assets, and limiting growth in,
and overall exposure to, any product or risk segment where the
Corporation does not have sufficient experience and a proven
ability to predict credit losses.

and loan-to-value

considering

guidance,

ratios),

factors

The Corporation manages credit risk by maintaining sound
underwriting standards, monitoring and evaluating loan
portfolio quality,
its trends and collectability, and assessing
reserves and loan concentrations. Also, credit risk is mitigated
by implementing and monitoring lending policies and collateral
requirements, and instituting credit
review procedures to
ensure appropriate actions to comply with laws and regulations.
The Corporation’s credit policies require prompt identification
and quantification of asset quality deterioration or potential loss
in order to ensure the adequacy of the allowance for loan losses.
Included in these policies, primarily determined by the amount,
type of loan and risk characteristics of the credit facility, are
various approval levels and lending limit constraints, ranging
from the branch or department level to those that are more
the Corporation
centralized. When considered necessary,
requires
and
extensions
credit
support
commitments, which is generally in the form of real estate and
personal property, cash on deposit and other highly liquid
instruments.

collateral

to

that

in the detail

The Corporation’s Credit Strategy Committee (“CRESCO”)
is management’s top policy-making body with respect to credit-
related matters and credit strategies. CRESCO reviews the
activities of each subsidiary,
it deems
appropriate, to ensure a proactive and coordinated management
of credit granting, credit exposures and credit procedures.
CRESCO’s principal functions include reviewing the adequacy
of the allowance for loan losses and periodically approving
appropriate provisions, monitoring compliance with charge-off
policy, establishing portfolio diversification, yield and quality
standards, establishing credit exposure reporting standards,
monitoring asset quality, and approving credit policies and
amendments thereto for the subsidiaries and/or business lines,
lending approval authorities when and if
including special
the allowance adequacy is
appropriate. The analysis of

presented to the Risk Management Committee of the Board of
Directors
review, consideration and ratification on a
quarterly basis.

for

independent of

The Corporation also has

a Corporate Credit Risk
Management Division (“CCRMD”). CCRMD is a centralized
unit,
the lending function. The CCRMD’s
functions include identifying, measuring and controlling credit
risk independently from the business units, evaluating the
credit risk rating system and reviewing the adequacy of the
allowance for loan losses in accordance with GAAP and
regulatory standards. CCRMD also ensures that the subsidiaries
comply with the credit policies and applicable regulations, and
the CCRMD
monitors credit underwriting standards. Also,
performs ongoing monitoring of
including
potential areas of concern for
specific borrowers and/or
geographic regions.

the portfolio,

The Corporation has a Loan Review Department within the
CCRMD, which performs annual credit process reviews of
several small and middle markets, construction, asset-based and
in BPPR. This group
corporate banking lending groups
evaluates the credit risk profile of each originating unit along
with each unit’s credit administration effectiveness, including
the assessment of the risk rating representative of the current
credit quality of the loans, and the evaluation of collateral
documentation. The monitoring performed by this group
contributes to assess compliance with credit policies and
underwriting standards, determine the current level of credit
risk, evaluate the effectiveness of
the credit management
process and identify control deficiencies that may arise in the
credit-granting process. Based on its findings, the Corporate
Loan Review Department recommends corrective actions,
if
necessary, that help in maintaining a sound credit process. In
the case of the portfolios of commercial and construction loans
in the U.S. mainland operations, credit process reviews are
performed by an outside contractor. The CCRMD participates
in defining the review plan with the outside loan review firm
and actively participates in the discussions of the results of the
loan reviews with the business units. The CCRMD may
periodically review the work performed by the outside loan
review firm. CCRMD reports the results of the credit process
the
reviews
Corporation’s Board of Directors.

the Risk Management Committee

to

of

The Corporation has specialized workout officers that
handle substantially all commercial loans which are past due 90
days and over, borrowers which have filed bankruptcy, or those
that are considered problem loans based on their risk profile.

At December 31, 2011, the Corporation’s credit exposure
was centered in its $25.3 billion total loan portfolio, which
assets. The portfolio
represented 78% of
composition for the last five years is presented in Table 11.

earning

its

The Corporation issues certain credit-related off-balance
sheet financial instruments including commitments to extend
credit, standby letters of credit and commercial letters of credit

66

to meet the financing needs of its customers. For these financial
instruments, the contract amount represents the credit risk
associated with failure of
the counterparty to perform in
accordance with the terms and conditions of the contract and
the decline in value of the underlying collateral. The credit risk
associated with these financial instruments varies depending on
the counterparty’s creditworthiness and the value of any
collateral held. Refer to Note 27 to the consolidated financial
statements and to the Contractual Obligations and Commercial
Commitments section of this MD&A for the Corporation’s
involvement in these credit-related activities.

At December 31, 2011,

the Corporation maintained a
losses
reserve of approximately $15 million for potential
associated with unfunded loan commitments
related to
commercial and consumer lines of credit (2010 - $21 million),
the
including $5 million of
contingent liability on unfunded loan commitments recorded
with the Westernbank FDIC-assisted transaction (2010 - $6
million).

the unamortized balance of

The Corporation is also exposed to credit risk by using
derivative instruments but manages the level of risk by only
dealing with counterparties of good credit standing, entering
into master netting agreements whenever possible and, when
appropriate, obtaining collateral. Refer to Note 29 to the
consolidated financial statements for further information on the
Corporation’s
in derivative instruments and
hedging activities and the Derivatives sub-section included
under the Risk Management section of this MD&A.

involvement

and

the investment

the composition of

held-to-maturity. The

The Corporation may also encounter risk of default in
relation to its investment securities portfolio. Refer to Notes 8
securities
and 9 for
available-for-sale
investment
securities portfolio held by the Corporation at December 31,
2011 are mostly Obligations of U.S. Government sponsored
entities, collateralized mortgage obligations, mortgage-backed
securities and Obligations of Puerto Rico, States and political
subdivisions. The vast majority of these securities are rated the
equivalent of AAA by the major rating agencies. A substantial
portion of these instruments are guaranteed by mortgages, a
U.S. government sponsored entity or the full faith and credit of
the U.S. Government.

The Corporation’s credit risk exposure is spread among
individual consumers, small and medium businesses, as well as
corporate borrowers engaged in a wide variety of industries.
Only 191 of these commercial lending relationships have an
aggregate exposure of $10 million or more. At December 31,
2011, highly leveraged transactions and credit
facilities to
finance real estate ventures or business acquisitions amounted
to $50 million, and there are no loans to less developed
countries.
to
concentrations of credit risk by the nature of its lending limits.

The Corporation

exposure

limits

its

The Corporation has a significant portfolio of construction
loans, mostly secured by commercial and

and commercial

67

POPULAR, INC. 2011 ANNUAL REPORT

residential real estate properties. Due to their nature, these
loans entail a higher credit risk than consumer and residential
mortgage loans, since they are larger in size, may have less
collateral coverage, higher concentrated risk in a single
borrower and are generally more sensitive to economic
downturns. Rapidly
general
economic conditions and numerous other factors continue to
create volatility in the housing markets and have increased the
possibility that additional losses may have to be recognized
with respect to the Corporation’s current nonperforming assets.
Furthermore, given the current slowdown in the real estate
market, the properties securing these loans may be difficult to
dispose of, if foreclosed.

collateral

changing

values,

The housing market in the U.S. appears to be in a gradual
but uneven path to recovery. After a period of several years of
booming housing markets, fueled by liberal credit conditions
and rapidly rising property values, since early 2007 the sector
has been in the midst of a substantial dislocation in the
property values. This event has had a negative impact on some
of the Corporation’s U.S.-based business segments and in the
financial results and condition. The general level of property
values in the U.S., as measured by several
indexes widely
followed by the market, has declined significantly. These
declines are the result of ongoing market adjustments that are
aligning property values with income levels and home
inventories. The supply of homes in the market increased
substantially, and property value decreases were required to
clear the overhang of excess inventory in the U.S. market.
Recent indicators suggest that after a material price correction,
the U.S. real estate market may be entering into a period of
relative stability. Nonetheless,
further declines in property
values could impact the credit quality of the Corporation’s U.S.
the homes
mortgage loan portfolio because the value of
underlying the loans is a primary source of repayment in the
event of foreclosure. In the event of foreclosure in a loan from
this portfolio,
the current market value of the underlying
collateral could be insufficient to cover the loan amount owed.

the

current

homes. Nevertheless,

The level of real estate prices in Puerto Rico has been more
stable than in other U.S. markets, in part motivated by the
Puerto Rico Government housing stimulus program enacted in
2010 which has positively impacted the sales of new and
existing
economic
environment has accelerated the devaluation of properties when
compared with previous periods. Also, additional economic
weakness in Puerto Rico and the U.S. mainland could further
pressure residential property values. Lower real estate values
could increase the provision for loan losses, loan delinquencies,
foreclosures and the cost of repossessing and disposing of real
estate collateral. The higher end of the housing market in
Puerto Rico appears to have suffered a substantial slowdown in
sales activity in recent quarters, as reflected in the low
absorption rates of projects financed in the Corporation’s
construction loan portfolio.

production

significantly

the
ceased

During 2009, the Corporation executed a plan to close,
consolidate or sell underperforming branches and exit lending
businesses that do not generate deposits or fee income. The
of
Corporation
curtailed
it
as
non-traditional mortgages
originating
non-conventional mortgage
in its U.S. mainland
loans
operations. This initiative was part of the BPNA restructuring
plan implemented in 2008. During 2011, BPNA sold a
substantial portion of
its non-conventional mortgage loan
portfolio. The non-conventional mortgage unit is currently
focused on servicing the run-off portfolio and restructuring
In
loans that have or show signs of credit deterioration.
addition, as part of the actions taken to reduce credit risk,
during 2011,
the Corporation executed the previously
mentioned sale of construction and commercial real estate loans
from its Puerto Rico operations, which had been reclassified to
held-for-sale in December 2010. The majority of these loans
were in non-accrual status at the transaction date.

strengthening

Management continues to refine the Corporation’s credit
standards to meet the changing economic environment. The
Corporation has strengthened its underwriting criteria, as well
as enhanced its line management and collection strategies, in an
attempt to mitigate losses. The commercial banking group
to manage more
critical
continues
effectively the current scenario, focusing strategies on critical
steps in the origination and portfolio management processes to
ensure the quality of incoming loans as well as to detect and
manage potential problem loans early. The consumer lending
area has also tightened the underwriting standards across all
business lines and reduced its exposure in areas that are more
likely to be impacted under the current economic conditions.

areas

Geographic and government risk
The Corporation is exposed to geographical and government
risk. The Corporation’s assets and revenue composition by
geographical area and by business segment reporting are
presented in Note 39 to the consolidated financial statements.
A significant portion of the Corporation’s financial activities
and credit exposure is concentrated in Puerto Rico. The Puerto
Rico economy has experienced recessionary conditions since
2006. Based on information published by the Puerto Rico
Planning Board, the Puerto Rico real gross national product
decreased an estimated 3.6% during fiscal year ended June 30,
2010 and is projected to have declined 1% by the end of fiscal
year ended June 30, 2011.

Economic contraction moderated in the calendar year 2011,
according to government data, with economic indicators
showing some stabilization heading into 2012. The monthly
economic index published by the Government Development
Bank for Puerto Rico (“GDB”), which acts as the U.S.
Commonwealth’s fiscal agent, registered its first positive growth
in December 2011 (0.5%) since March 2006.

Total payroll employment amounted to 934,600 jobs in
December 2011, an increase of 0.2% on an annual basis, and the
third month reflecting positive growth since early 2006. The
unemployment rate in Puerto Rico remains high, registering
14.7% in December 2011, but
is down from 15.7% in
December 2010.

it

Economic growth is still challenged by a lack of job growth
and a housing sector that remains under pressure, but the
government has made progress in addressing the budget deficit
while the banking sector has been substantially recapitalized
and consolidated through FDIC-assisted transactions.

During 2011, the Puerto Rico government signed into law
several economic and fiscal measures to help counter the
prolonged recession. The implementation of a temporary excise
tax on certain multinational manufacturers
allowed the
government to implement a reduction in individual taxes that is
expected to add nearly $1 billion annually to consumers’
purchasing power. The marginal
in
Puerto Rico was also reduced from 39% to 30% in January 2011.
General fund net revenues of the government during the first
six months of
fiscal year 2012 (July to December 2011)
amounted to $3.5 billion, a 10.4% year-over-year increase while
the GDB continued to shore up its liquidity with continued
access to local and U.S. capital markets. Proceeds slated for
infrastructure work from government bond issues held in the
fourth quarter of 2011 amounted to approximately $1.5 billion,
according to the GDB.

corporate

tax rate

Infrastructure projects include an $878 million program to
modernize public schools, the vast majority of which is being
deployed during 2012, and almost $700 million in road
improvements.

into effect

In 2010, the government also enacted a housing-incentive
temporary measures that seek to
law that put
stimulate demand for housing and reduce the significant excess
supply of new homes. The incentives, which were extended
until December 2012 with minor modifications,
include
reductions in taxes and government closing fees, tax exemption
on rental income from new properties for 10 years, exemption
on long-term capital gain tax in future sale of new properties
and no property taxes for five years on new housing, among
others. The incentives, together with the current environment
of low interest rates, continue to attract home buyers into the
market.

Tourism, a recent bright spot, reflected a significant pickup
in visitors during 2011. The monthly average of 182,403 in
tourist hotel registrations in the first 11 months of 2011 marked
a 10-year high. Hotel registrations increased 6.3% on an annual
basis during the first 11 months of 2011, compared with a 4%
increase in 2010.

While the higher number of visitors has yet to produce
significant job gains in that sector, it has paved the way for
the market,
more investments in the high-end sector of

68

including The Dorado Beach Ritz Reserve, which is scheduled
to open in late 2012.

and

provisions

The Puerto Rico economy, however, continues to be
susceptible to fluctuations in the price of crude oil due to its
high dependence on fuel oil for energy production. Lingering
effects from the prolonged recession are still reflected in limited
loan demand and in high levels of non-performing assets, loan
the
particularly
charge-offs,
loss
loan portfolio in Puerto Rico; an
Corporation’s commercial
increase in the rate of
foreclosures and delinquencies on
mortgage loans issued in Puerto Rico; and a reduction in the
value of the Corporation’s loans and loan servicing portfolio, all
of which have adversely affected its profitability. If the price of
crude oil increases and if global economic conditions worsen,
those adverse effects could continue. Also, a potential reduction
spending may also impact growth in the
in consumer
Corporation’s other interest and non-interest revenues.

in

On August 8, 2011, Moody’s Investors Service downgraded
the rating of the outstanding general obligation (GO) bonds of
the Commonwealth of Puerto Rico from ‘A3’ to ‘Baa1’, with
negative outlook. Moody’s new Baa1 rating is at par with Fitch’s
BBB+ and one notch above the BBB rating Puerto Rico received
from S&P last March when the latter upgraded Puerto Rico’s
credit rating for the first time in 28 years.

At December 31, 2011, the Corporation had $1.3 billion of
credit facilities granted to or guaranteed by the Puerto Rico
Government and its political subdivisions, of which $0.1 billion
were uncommitted lines of credit. Of these total credit facilities
granted, $1.2 billion were outstanding at December 31, 2011. A
substantial portion of the Corporation’s credit exposure to the
Government of Puerto Rico is either collateralized loans or
obligations that have a specific source of income or revenues
identified for their repayment. Some of these obligations consist
of senior and subordinated loans to public corporations that
obtain revenues from rates charged for services or products,
such as water and electric power utilities. Public corporations
independence from the central
have varying degrees of
Government
appropriations or other
payments from it. The Corporation also has loans to various
municipalities in Puerto Rico for which, in most cases, the good
faith, credit and unlimited taxing power of the applicable
municipality has been pledged to their repayment. These
municipalities are required by law to levy special property taxes
in such amounts as shall be required for the payment of all of
its general obligation bonds and loans. Another portion of these
loans consists of special obligations of various municipalities
that are payable from the basic real and personal property taxes
collected within such municipalities.

and many receive

Furthermore, at December 31, 2011, the Corporation had
outstanding $158 million in obligations of Puerto Rico, States
and political subdivisions as part of its investment securities
total, $154 million was exposed to the
portfolio. Of

that

69

POPULAR, INC. 2011 ANNUAL REPORT

creditworthiness of
municipalities.

the Puerto Rico Government and its

securities

represented exposure

As further detailed in Notes 8 and 9 to the consolidated
financial statements, a substantial portion of the Corporation’s
investment
to the U.S.
Government in the form of U.S. Government sponsored entities,
as well as agency mortgage-backed and U.S. Treasury securities.
In addition, $639 million of residential mortgages and $215
million in commercial loans were insured or guaranteed by the
U.S. Government or its agencies at December 31, 2011. On
August 5, 2011, Standard & Poor’s lowered its long-term
sovereign credit rating on the United States of America from
AAA to AA+ and on August 8, 2011, Standard & Poor’s lowered
its credit ratings of the obligations of certain U.S. Government
sponsored entities, including FNMA, FHLB and FHLMC, and
linked to long-term U.S.
other agencies with securities
government debt. These downgrades could have a material
adverse impact on global
financial markets and economic
conditions, and its ultimate impact is unpredictable and may not
be immediately apparent. The Corporation does not have any
exposure to European sovereign debt.

Non-Performing Assets
Non-performing assets include primarily past-due loans that are
no longer accruing interest, renegotiated loans, and real estate
property acquired through foreclosure. A summary, including
certain credit quality metrics, is presented in Table 31.

The Corporation’s non-accruing and charge-off policies by

major categories of loan portfolios are as follows:

• Commercial and construction loans - recognition of
interest income on commercial and construction loans is
discontinued when the loans are 90 days or more in
arrears on payments of principal or interest or when other
factors indicate that
the collection of principal and
interest is doubtful. The impaired portions of secured
loans past due as to principal and interest is charged-off
not later than 365 days past due. However, in the case of
collateral dependent
loans individually evaluated for
impairment, the excess of the recorded investment over
the
(portion deemed
uncollectible) is generally promptly charged-off, but in
any event, not later than the quarter following the quarter
in which such excess was first recognized. Commercial
unsecured loans are charged-off no later than 180 days
past due. Overdrafts are generally charged-off no later
than 60 days past their due date.

value of

collateral

fair

the

• Lease financing - recognition of interest income for lease
financing is ceased when loans are 90 days or more in
arrears. Leases are charged-off when they are 120 days in
arrears.

• Mortgage loans - recognition of

income on
mortgage loans is generally discontinued when loans are

interest

90 days or more in arrears on payments of principal or
interest. The impaired portion of a mortgage loan is
charged-off when the loan is 180 days past due. The
interest
Corporation discontinues
income on residential mortgage loans insured by the
Federal Housing Administration (“FHA”) or guaranteed
by the U.S. Department of Veterans Affairs (“VA”) when
18 months delinquent as to principal or interest. The
principal repayment on these loans is insured.

the recognition of

• Consumer loans - recognition of

interest

income on
closed-end consumer loans and home-equity lines of
credit is discontinued when the loans are 90 days or more
in arrears on payments of principal or interest. Income is
generally recognized on open-end consumer loans, except
for home equity lines of credit, until
the loans are
charged-off. Closed-end consumer loans are charged-off
when they are 120 days in arrears. Open-end consumer
loans are charged-off when they are 180 days in arrears.
Overdrafts in excess of 60 days are generally charged-off
no later than 60 days past their due date.

• Troubled debt restructurings (“TDRs”) - loans classified
as TDRs are typically in non-accrual status at the time of
the modification. The TDR loan continues in non-accrual
status until the borrower has demonstrated a willingness
and ability to make the restructured loan payments
(generally at least six months of sustained performance
after the modification (or one year for loans providing for
quarterly or semi-annual payments)) and management
has concluded that it is probable that the borrower would
not be in payment default in the foreseeable future.

• Covered loans acquired in the Westernbank FDIC-assisted
transaction, except
for revolving lines of credit, 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
loans
difference
charged-off
established in purchase accounting are not reported as
charge-offs. Charge-offs will be recorded only to the
extent
losses exceed the purchase accounting
estimates.

expected to be
against

collected. Also,

non-accretable

that

the

Because of the application of ASC Subtopic 310-30 to the
Westernbank acquired loans and the loss protection provided
by the FDIC which limits the risks on the covered loans, the

Corporation has determined to provide certain quality metrics
in this MD&A that exclude such covered loans to facilitate the
comparison between loan portfolios and across periods. Given
the significant amount of covered loans that are past due but
still accruing due to the accounting under ASC Subtopic
310-30, the Corporation believes the inclusion of these loans in
certain asset quality ratios in the numerator or denominator (or
both) would result in a significant distortion to these ratios. In
addition, because charge-offs related to the acquired loans are
recorded against the non-accretable balance, the net charge-off
ratio including the acquired loans is lower for portfolios that
have significant amounts of covered loans. The inclusion of
these loans in the asset quality ratios could result in a lack of
comparability across periods, and could negatively impact
comparability with other portfolios that were not impacted by
the
acquisition accounting. The Corporation believes that
presentation of asset quality measures, excluding covered loans
and
and
denominator, provides a better perspective into underlying
trends related to the quality of its loan portfolio.

from both the numerator

amounts

related

70

At December 31, 2011, non-performing loans secured by
real estate held-in-portfolio, excluding covered loans, amounted
to $1.3 billion in the Puerto Rico operations and $324 million
in the U.S. mainland operations. These figures compare to $811
million in the Puerto Rico operations and $404 million in the
U.S. mainland operations at December 31, 2010. The increase
in the BPPR reportable segment was driven by the commercial
the mortgage loan portfolios. At
real estate as well as
December 31, 2009, these figures were $1.3 billion in Puerto
Rico and $697 million in the U.S. mainland operations.
In addition to the non-performing loans

included in
Table 31, at December 31, 2011, there were $27 million of
performing
in
management’s opinion, are currently subject to potential future
classification as non-performing and are considered impaired,
compared with $111 million at December 31, 2010, and $248
million at December 31, 2009.

covered loans which,

excluding

loans,

Table 31 - Non-Performing Assets

(Dollars in thousands)
Non-accrual loans:
Commercial
Construction
Lease financing
Mortgage
Consumer

Total non-performing loans held-in-portfolio, excluding covered loans
Non-performing loans held-for-sale [2]
Other real estate owned (“OREO”), excluding covered OREO
Total non-performing assets, excluding covered assets
Covered loans and OREO [3]
Total non-performing assets

2011

2010

At December 31,
2009

2008 [1]

2007

$872,873
128,999
5,808
686,502
43,668
1,737,850
262,302
172,497
$2,172,649
192,771
$2,365,420

$725,027
238,554
5,937
542,033
60,302
1,571,853
671,757
161,496
$2,405,106
83,539
$2,488,645

$836,728
854,937
9,655
510,847
64,185
2,276,352
–
125,483
$2,401,835
–
$2,401,835

$464,802
319,438
11,345
338,961
68,263
1,202,809
–
89,721
$1,292,530
–
$1,292,530

$266,790
95,229
10,182
349,381
49,090
770,672
–
81,410
$852,082
–
$852,082

9.60%

8.44%

7.58%

4.67%

$109,569

$316,614

$338,359

$150,545

$239,559

7.30
$119,336

Accruing loans past-due 90 days or more [4] [5]
Excluding covered loans: [6]
Non-performing loans to loans held-in-portfolio
Including covered loans:
Non-performing loans to loans held-in-portfolio
Interest lost
HIP = “held-in-portfolio”
[1] Amounts at December 31, 2008 exclude assets from discontinued operations. Non-performing loans and other real estate from discontinued operations amounted to $3 million
and $0.9 million, respectively, at December 31, 2008.
[2] Non-performing loans held-for-sale consist of $236 million in construction loans, $26 million in commercial loans and none in mortgage loans at December 31, 2011 (December
31, 2010 - $412 million, $61 million and $199 million, respectively).
[3] The amount consists of $84 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $109 million in covered OREO at December 31, 2011
(December 31, 2010 - $26 million and $58 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 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.
[4] The carrying value of covered loans accounted for under ASC Subtopic 310-30 that are contractually 90 days or more past due was $1.2 billion at December 31, 2011
(December 31, 2010 - $916 million). This amount is excluded from the above table as the covered loans’ accretable yield interest recognition is independent from the underlying
contractual loan delinquency status.
[5] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to
non-performing since the principal repayment is insured. These balances include $51 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer
accruing interest at December 31, 2011.
[6] This asset quality ratio has been adjusted to remove the impact of covered loans. Appropriate adjustments to the numerator and denominator have been reflected in the calculation
of this ratio. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator
and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase
accounting.

6.25
$75,684

9.60
$59,982

4.67
$48,707

2.75
$71,037

2.75%

71

POPULAR, INC. 2011 ANNUAL REPORT

Another key measure used to evaluate and monitor the
Corporation’s asset quality is
loan delinquencies. Loans
delinquent 30 days or more and delinquencies, as a percentage
of their related portfolio category at December 31, 2011 and
2010, are presented below.

Table 32 - Loan Delinquencies

(Dollars in millions)

Loans delinquent 30 days or more

2011

2010

$4,454

$4,657

Total delinquencies as a percentage of total

loans:
Commercial
Construction
Lease financing
Mortgage
Consumer
Covered loans
Loans held-for-sale

Total

10.66% 8.61%
49.60
2.92
23.77
4.72
32.20
75.37

55.57
3.35
25.59
5.72
27.56
75.51

17.59% 17.60%

financial

statements pursuant

Accruing loans past due 90 days or more are composed
primarily of credit cards, residential mortgage loans insured by
FHA / VA, and delinquent mortgage loans included in the
to GNMA’s
Corporation’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 to purchase, 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
in some instances, have partial
the sellers / servicers, and,
guarantees under recourse agreements.

Refer to Table 33 for a summary of the activity in the
allowance for loan losses and selected loan losses statistics for
the past 5 years.

Table 33 - Allowance for Loan Losses and Selected Loan Losses Statistics

2011

2010

2009

2008

2007

72

(Dollars in thousands)

Balance at beginning of year
Allowance acquired
Provision for loan losses

Non-covered
loans
$793,225
–
430,085
1,223,310

Covered
loans

$–
–
145,635
145,635

Total
$793,225
–
575,720
1,368,945

Non-covered
loans
$1,261,204
–
1,011,880
2,273,084

Covered
loans
$–
–
–
–

Total
$1,261,204
–
1,011,880
2,273,084

476,499
405,418
15,377
99,835
252,227
1,249,356

38,203
10,431
4,950
5,056
38,064
96,704

$882,807
–
1,405,807
2,288,614

290,547
311,311
22,281
124,781
347,027
1,095,947

27,281
1,386
4,799
4,175
30,896
68,537

438,296
394,987
10,427
94,779
214,163
1,152,652

263,266
309,925
17,482
120,606
316,131
1,027,410

$548,832
–
991,384
1,540,216

$522,232
7,290
341,219
870,741

184,578
120,425
22,761
53,303
264,437
645,504

15,167
–
3,934
425
26,014
45,540

169,411
120,425
18,827
52,878
238,423
599,964

94,992
–
23,722
15,889
173,937
308,540

18,280
1,606
8,695
421
28,902
57,904

76,712
(1,606)
15,027
15,468
145,035
250,636

327,207

–

12,430

–

378,570
43,341
7,376
45,785
196,433
671,505

68,968
20,082
3,765
3,974
40,668
137,457

309,602
23,259
3,611
41,811
155,765
534,048

13,774
4,353
–
826
3,253
22,206

–
1,500
–
15
1
1,516

13,774
2,853
–
811
3,252
20,690

392,344
47,694
7,376
46,611
199,686
693,711

68,968
21,582
3,765
3,989
40,669
138,973

323,376
26,112
3,611
42,622
159,017
554,738

476,499
405,418
15,377
99,835
252,227
1,249,356

38,203
10,431
4,950
5,056
38,064
96,704

438,296
394,987
10,427
94,779
214,163
1,152,652

(1,101)

-

(1,101)

327,207

–
–
–
–
–
–

–
–
–
–
–
–

–
–
–
–
–
–

–

Charge-offs:

Commercial
Construction
Lease financing
Mortgage
Consumer

Recoveries:

Commercial
Construction
Lease financing
Mortgage
Consumer

Net loans charged-off:

Commercial
Construction
Lease financing
Mortgage
Consumer

Net (recoveries) write-

downs related to loans
transferred to loans
held-for-sale

Change in allowance for

loan losses from
discontinued
operations [1]

Balance at end of year

Loans held-in-portfolio

–

–
$690,363 $124,945

–
$815,308

–
$793,225

–
$–

–

–
$793,225 $1,261,204

(45,015)
$882,807

(71,273)
$548,832

Outstanding at year end
Average

$20,602,596
20,496,966

$24,951,299 $20,728,035
22,376,612
25,110,328

$25,564,917 $23,713,113 $25,732,873 $28,021,456
25,741,544 24,650,071 26,162,786 24,908,943

Ratios:
Allowance for loan losses to

year end loans
held-in-portfolio

Recoveries to charge-offs
Net charge-offs to average
loans held-in-portfolio
Allowance for loan losses to

net charge-offs

Provision for loan losses to:
Net charge-offs
Average loans

held-in-portfolio

Allowance to

non-performing loans
held-in-portfolio

3.35%
20.47

2.61

1.29x

0.81

2.10%

3.27%
20.03

2.21

1.47x

1.04

3.83%
7.74

5.15

0.69x

0.88

3.10%
7.74

5.32%
6.25

3.43%
7.05

1.96%
18.77

4.48

4.17

2.29

1.01

0.69x

1.23x

1.47x

2.19x

0.88

1.37

1.65

1.36

2.29%

4.52%

3.93%

5.70%

3.79%

1.37%

39.73

44.76

50.46

49.64

55.40

73.40

71.21

[1] Represents lower provision for loan losses recorded during the period compared to net charge-offs.

73

POPULAR, INC. 2011 ANNUAL REPORT

The following table presents net charge-offs to average loans
held-in-portfolio (“HIP”), excluding covered loans, by loan
category for the years ended December 31, 2011, 2010 and
2009:

Table 34 - Net Charge-Offs to Average Loans HIP

2011

2010

2009

Commercial
Construction
Lease financing
Mortgage
Consumer

Total

2.86% 3.69% 2.00%
5.89
0.63
0.83
4.26

15.30
2.46
2.75
7.28

27.12
1.66
2.08
5.56

2.61% 5.15% 4.17%

Commercial loans
As shown in Table 31, the level of non-performing commercial
loans held-in portfolio at December 31, 2011, compared to
December 31, 2010, increased on a consolidated basis by $148
million, mostly related to the BPPR reportable segment.
the percentage of
Compared to December 31, 2010,
non-performing
to
held-in-portfolio
commercial
loans held-in-portfolio at December 31, 2011
increased from 6.4% to 8.3%. This increase was mainly
attributed to weak economic conditions in Puerto Rico, which

commercial

loans

have continued to impact the commercial loan portfolio. The
percentage
loans
held-in-portfolio to commercial loans held-in-portfolio for the
year ended December 31, 2009 was 6.6%.

non-performing

commercial

of

During the fourth quarter of 2010, the Corporation decided
to promptly charge-off previously reserved impaired amounts
related to collateral dependent
loans at both reportable
segments. For the year ended December 31, 2010, the charge-
offs associated to collateral dependent commercial
loans
amounted to approximately $71.5 million and $36.6 million in
the BPPR and BPNA reportable segments, respectively.

As shown in the table below, the level of non-performing
commercial
loans held-in-portfolio in the Puerto Rico
operations at December 31, 2011 remained high, driven by the
current economic conditions. The level of non-performing
loans held-in-portfolio in the United States
commercial
operations remained stable from December 31, 2010, as the
U.S. mainland continued to reflect certain signs of stabilization.
The following table provides information on commercial
non-performing loans at December 31, 2011, December 31,
2010, and December 31, 2009 and net charge-offs information
for the years ended December 31, 2011, December 31, 2010,
and December 31, 2009 for
the BPPR (excluding the
Westernbank covered loan portfolio) and BPNA reportable
segments.

Table 35 - Commercial Non-Performing Loans and Net Charge-offs

(Dollars in thousands)

BPPR Reportable Segment:
Non-performing commercial loans
Non-performing commercial loans to commercial loans HIP, both

excluding covered loans and loans held-for-sale

Commercial loan net charge-offs
Commercial loan net charge-offs to average commercial loans HIP,

excluding covered loans and loans held-for-sale

BPNA Reportable Segment:
Non-performing commercial loans
Non-performing commercial loans to commercial loans HIP, excluding

loans held-for-sale

Commercial loan net charge-offs
Commercial loan net charge-offs to average commercial loans HIP,

excluding loans held-for-sale

There were 6 commercial loan relationships greater than $10
million in non-accrual status with an outstanding balance of
$116 million at December 31, 2011, compared with 1
commercial
loan relationship with an outstanding debt of
approximately $10 million at December 31, 2010, and 5

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$631,171

$485,469

$516,184

9.75%

$195,388

7.26%

$231,133

7.25%

$124,494

3.00%

3.39%

1.69%

$241,702

$239,558

$320,477

5.95%

$114,214

5.12%

$207,163

5.79%

$138,772

2.64%

4.10%

2.38%

loan relationships with an outstanding debt of
commercial
approximately $100 million at December 31, 2009. Table 36
presents
loans
held-in-portfolio for the BPPR and BPNA segments, and for the
Corporation as a whole.

non-performing

commercial

the

74

Table 36 - Commercial Loans HIP

(In thousands)

Beginning Balance - NPLs
Plus:

New non-performing loans
Advances on existing non-performing loans

Less:

Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Loans in accrual status transfer to HFS

Ending balance - NPLs

At December 31, 2011, additions to commercial loans in
non-performing status at BPPR and BPNA reportable segments
amounted to $524 million and $270 million, respectively. As
explained before, the commercial loan portfolio for the BPPR
reportable segment continues to be impacted by economic
conditions in Puerto Rico, while the commercial loan portfolio
shown signs of
of
stabilization in terms of delinquencies.

the BPNA reportable

segment has

for commercial

The commercial

loan net charge-offs for the year ended
December 31, 2011 decreased at both reportable segments
when compared with the year ended December 31, 2010. As
explained before, during the fourth quarter of 2010,
the
Corporation determined to charge-off previously reserved
impaired amounts of collateral dependent loans both in Puerto
Rico and in the U.S. mainland. As a result of this decision,
charge-offs
loans of approximately $71.5
million and $36.6 million, for the BPPR and BPNA reportable
segments, respectively, were recorded during the fourth quarter
of 2010. Excluding these charge-offs, commercial net charge-
offs of the BPPR reportable segment increased by $35.8 million,
as the economic conditions in Puerto Rico have continued to
impact this portfolio. The decrease in the commercial loan net
charge-offs
also
attributable to a lower level of problem loans, driven by the
credit stabilization at this reportable segment which is reflected
by a relatively stable level of non-performing loans, when
compared to December 31, 2010.

the BPNA reportable

segment was

at

The commercial

loan net charge-offs for the year ended
December 31, 2010 increased at both reportable segments when
compared with the year ended December 31, 2009. The
increase in the BPPR reportable segment was principally due to
that has resulted in lower
the recessionary environment
absorption rates and pressure in real estate values. The increase
in the commercial loan net charge-offs at the BPNA reportable
segment was mostly related to commercial real estate. As
previously explained, the commercial loan net charge-offs for
both reportable segments include the charge-offs associated to
collateral dependent commercial
loans recorded during the
fourth quarter of 2010.

For the year ended December 31, 2011
Popular, Inc.

BPNA

BPPR

$485,469

$239,558

$725,027

524,361
10,037

270,249
260

794,610
10,297

(12,365)
(182,202)
(194,129)
–

(20,815)
(139,934)
(102,140)
(5,476)

(33,180)
(322,136)
(296,269)
(5,476)

$631,171

$241,702

$872,873

The allowance for loan losses corresponding to commercial
loans held-in-portfolio represented 3.89% of that portfolio,
excluding covered loans, at December 31, 2011, compared with
4.06% at December 31, 2010 and 3.46% in 2009. The ratio of
allowance to non-performing loans held-in portfolio in the
commercial loan category was 47.00% at December 31, 2011,
compared with 63.78% at December 31, 2010 and 52.31% in
2009.

The Corporation’s commercial loan portfolio secured by real
estate (“CRE”), excluding construction and covered loans,
amounted to $6.7 billion at December 31, 2011, of which $3.1
billion was secured with owner occupied properties, compared
with $7.0 billion and $3.1 billion, respectively, at December 31,
2010. At December 31, 2009, the Corporation’s CRE portfolio,
excluding construction loans, amounted to $7.5 billion, of
which $3.4 billion was secured with owner occupied properties.
CRE non-performing loans, excluding covered loans, amounted
to $636 million at December 31, 2011, compared to $553
million and $557 million at December 31, 2010 and 2009,
respectively. The CRE non-performing loans ratios for the
Corporation’s Puerto Rico and U.S. mainland operations were
12.58% and 5.91%,
respectively, at December 31, 2011,
compared with 9.61% and 5.79%, respectively, at December 31,
amounted to 8.29% and 6.39%,
2010. These
respectively, at December 31, 2009.

figures

Commercial and industrial loans held-in-portfolio modified
in a TDR often involve temporary interest-only payments, term
extensions, and converting evergreen revolving lines of credit to
long term loans. Commercial real estate loans held-in-portfolio
modified in a TDR often involve reducing the interest rate for a
limited period of time or the remaining term of the loan,
extending the maturity date at an interest rate lower than the
current market
risk, or
reductions in the payment plan. At December 31, 2011, the
loans held-in-portfolio, excluding
Corporation’s commercial
loan
covered loans,
modifications for the BPPR reportable segment and $11 million
for the BPNA reportable segment, which were considered TDRs
since they involved granting a concession to borrowers

included a total of $197 million of

rate for new debt with similar

75

POPULAR, INC. 2011 ANNUAL REPORT

under financial difficulties. The outstanding commitments for
these commercial loan TDRs amounted to $3 million in the
BPPR reportable segment and no commitments outstanding in
the BPNA reportable segment at December 31, 2011.

The commercial loan TDRs in non-performing status for the
BPPR and BPNA reportable segments at December 31, 2011
amounted to $161 million and $11 million, respectively.
loans that have been modified as part of loss
Commercial
mitigation efforts are evaluated individually for impairment.
The commercial
loan TDRs were evaluated for impairment
resulting in a specific reserve of $3 million for the BPPR
reportable segment and $0.5 million for the BPNA reportable
segment at December 31, 2011.

Construction loans
Non-performing construction loans held-in-portfolio decreased
by $109.6 million from December 31, 2010 to December 31,
2011 driven principally by a lower level of problem loans in the
construction loan portfolio classified held-for-investment,
coupled with loan charge-offs, collections and loans returned to
accrual status. The ratio of non-performing construction loans
to construction loans held-in-portfolio, excluding covered
loans, decreased from 47.63% at December 31, 2010 to 41.40%
at December 31, 2011. At December 31, 2009 this ratio was
49.58%. Table 37 presents the non-performing construction
loans held-in-portfolio for the BPPR and BPNA reportable
segments, as well as for the Corporation as a whole.

Table 37 - Construction Loans HIP

(In thousands)
Beginning Balance - NPLs
Plus:

New non-performing loans
Advances on existing non-performing loans

Less:

Non-performing loans transferred to OREO
Non-performing loans charged-off
Loans returned to accrual status / loan collections
Loans in accrual status transfer to HFS

Ending balance - NPLs

For the year ended December 31, 2011

BPPR
$64,678

BPNA
$173,876

Popular, Inc.
$238,554

38,647
205

23,205
135

61,852
340

(4,924)
(13,945)
(30,802)
–
$53,859

(17,008)
(28,714)
(68,810)
(7,544)
$75,140

(21,932)
(42,659)
(99,612)
(7,544)
$128,999

to

31,

2011,

additions

At December

construction
the BPPR and BPNA reportable
non-performing loans at
segments
amounted to $39 million and $23 million,
respectively, a decrease of $168 million and $119 million,
respectively, when compared to the year ended December 31,
2010. As explained before,
the Corporation has reduced
significantly its construction loan portfolio; therefore, the levels
of problem loans remaining at both reportable segments have
declined, driven by the resolution of existing exposures.

There were 4 construction loan relationships greater than
$10 million in non-performing status with an outstanding
balance of $53 million at December 31, 2011, compared with 7
construction loan relationships with an aggregate outstanding
principal balance of $99 million at December 31, 2010, and 22
construction loan relationships with an outstanding balance of
$544 million at December 31, 2009. Although the Corporation
has reduced significantly its construction loan portfolio, this
portfolio is still considered one of the high-risk portfolios of the
Corporation as it continues to be impacted by the economic and
real estate market conditions, particularly in Puerto Rico.

31,

2011,

Construction loan net charge-offs for

the year ended
December
ended
December 31, 2010, decreased by $283.3 million in the BPPR
reportable segment, and $88.4 million in the BPNA reportable
segment. The overall decrease resulted from the steps taken by

compared with the

year

the Corporation to mitigate the overall credit risk of this
portfolio, which included the loans held-for-sale reclassification
that took place in the fourth quarter of 2010. At the BPNA
reportable segment, the decline in construction loan net charge-
offs was prompted by lower levels of problem loans coupled
with certain stabilization observed in the U.S. real estate
market. For the year ended December 31, 2011, the charge-offs
associated to collateral dependent construction loans amounted
to approximately $13 million and $26 million in the BPPR and
BPNA reportable segments, respectively.
Construction loan net charge-offs

the year ended
December 31, 2010, compared with the year ended December 31,
2009, increased by $93.4 million in the BPPR reportable segment,
and decreased by $8.3 million in the BPNA reportable segment.
The increase in the BPPR reportable segment is mainly attributed
to residential real estate construction projects, which have been
impacted by general market conditions, decreases in property
values, oversupply in certain areas, and reduced absorption rates.
At the BPNA reportable segment, the decline in construction loan
net charge-offs was prompted by certain stabilization observed in
the U.S. real estate market. During the fourth quarter of 2010, the
Corporation decided to promptly charge-off impaired amounts of
collateral dependent loans. For the year ended December 31,
2010,
associated to collateral dependent
construction loans amounted to approximately $81.4 million

charge-offs

the

for

and $19.9 million in the BPPR and BPNA reportable segments,
respectively. These impaired amounts were fully reserved in
prior periods.

the

allowance for

collateral. The

Management has identified construction loans considered
impaired and has established specific reserves based on the
value of
loan losses
corresponding to construction loans represented 4.37% of that
portfolio, excluding covered loans, at December 31, 2011,
compared with 9.53% at December 31, 2010, and 19.79% at
December
to
non-performing loans held-in-portfolio in the construction
loans category was 10.55% at December 31, 2011, compared
with 20.01% and 39.92% at December 31, 2010 and 2009,
respectively.

31, 2009. The

allowance

ratio of

the

The BPPR reportable segment’s construction loan portfolio,
excluding covered loans, totaled $161 million at December 31,

76

2011, compared with $168 million at December 31, 2010. The
decrease in the ratio of non-performing construction loans
held-in-portfolio
held-in-portfolio,
excluding covered loans, was primarily attributed to a lower level
of problem loans and net charge-offs activity in this portfolio.

construction

loans

to

The allowance for

loan losses corresponding to the
construction loan portfolio for the BPPR reportable segment
construction loans
totaled $26 million or 16.33% of
held-in-portfolio, excluding covered loans, at December 31,
2011 compared to $16 million or 9.55%, respectively, at
December 31, 2010.

The table that follows provides information on construction
the BPPR
ended December 31,

non-performing loans and net charge-offs
reportable
for
2011, December 31, 2010, and December 31, 2009.

the years

segment

for

Table 38.A - Construction Non-Performing Loans and Net Charge-offs (BPPR)

(Dollars in thousands)
BPPR Reportable Segment:
Non-performing construction loans
Non-performing construction loans to construction loans HIP, both

excluding covered loans and loans held-for-sale

Construction loan net charge-offs
Construction loan net charge-offs to average construction loans HIP,

excluding covered loans and loans held-for-sale

The BPNA reportable segment construction loan portfolio
totaled $151 million at December 31, 2011, compared with
$332 million at December 31, 2010. The allowance for loan
losses corresponding to the construction loan portfolio for the
BPNA reportable segment totaled $7.8 million or 5.15% of
construction loans held-in-portfolio at December 31, 2011

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$53,859

$64,678

$604,610

33.47%
$5,816

3.82%

38.42%

$289,150

55.86%

$195,769

30.41%

14.96%

to

9.52%,

respectively,

$32 million or

compared
at
December 31, 2010. The reduction in reserve levels was mainly
prompted by a lower portfolio balance and lower level of
problem loans. The table that follows provides the credit quality
information for the BPNA reportable segment’s construction
loan portfolio.

Table 38.B - Construction Non-Performing Loans and Net Charge-offs (BPNA)

(Dollars in thousands)
BPNA Reportable Segment:
Non-performing construction loans
Non-performing construction loans to construction loans HIP, both

excluding covered loans and loans held-for-sale

Construction loan net charge-offs
Construction loan net charge-offs to average construction loans HIP,

excluding covered loans and loans held-for-sale

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$75,140

$173,876

$250,327

49.86%

$17,443

52.29%

$105,837

38.99%

$114,156

7.18%

20.93%

15.92%

Construction loans held-in-portfolio modified in a TDR
often involve reducing the interest rate for a limited period of
time or the remaining term of the loan, extending the maturity
date at an interest rate lower than the current market rate for
new debt with similar risk, or reductions in the payment
plan. Construction loans modified in a TDR may also involve
extending the interest-only payment period. At December 31,
2011, there were $5 million and $50 million of construction
loan TDRs for the BPPR and BPNA reportable segments,

respectively, which were in non-performing status. The amount
of outstanding commitments to lend additional funds to debtors
owing loans whose terms have been modified in troubled debt
restructurings amounted to $152 thousand in the BPPR
reportable segment and no commitments outstanding in the
BPNA reportable segment at December 31, 2011. These
construction loan TDRs were individually evaluated for
impairment resulting in no specific reserves for the BPPR and
BPNA reportable segments at December 31, 2011.

77

POPULAR, INC. 2011 ANNUAL REPORT

In the current stressed housing market, the value of the
collateral securing the loan has become the most important
factor in determining the amount of loss incurred and the
appropriate level of the allowance for loan losses. The likelihood
of losses that are equal to the entire recorded investment for a
real estate loan is remote. However, in some cases during recent
quarters declining real estate values have resulted in the
determination that the estimated value of the collateral was
insufficient to cover all of the recorded investment in the loans.

Mortgage loans
Non-performing mortgage loans held-in-portfolio increased $145
million from December 31, 2010 to December 31, 2011, as a result
of an increase of $131 million in the Puerto Rico operations, and
an increase of $14 million in the BPNA reportable segment. The
increase at the BPPR reportable segment was driven principally by
the economic conditions in Puerto Rico, coupled with a higher
level of mortgage loan repurchases under credit
recourse
arrangements. During the year ended December 31, 2011, the
BPPR reportable segment repurchased $241 million of unpaid
principal balance in mortgage loans subject to the credit recourse
provisions, compared to $121 million for
the year ended
December 31, 2010. During the fourth quarter of 2010,
approximately
U.S.
non-conventional residential mortgage loans were reclassified as
loans held-for-sale at the BPNA reportable segment, most of which
were delinquent mortgage loans, mortgages in non-performing
status, or troubled debt restructurings. All of these loans were sold
in the first half of 2011. The mortgage business has continued to
be impacted by the economic conditions in Puerto Rico as
evidenced by the increased levels of non-performing mortgage
loans, and higher delinquency rates. However, the underwriting
criteria and high reinstatement experience associated with the
mortgage loans in Puerto Rico have helped to maintain losses at
manageable levels. Table 39 presents
the non-performing
mortgage loans held-in-portfolio for
the BPPR and BPNA
segments, and for the Corporation as a whole.

$396 million

value)

(book

of

Table 39 - Mortgage Loans HIP

(In thousands)
Beginning Balance - NPLs
Plus:

New non-performing

loans

Less:

Non-performing loans

For the year ended December 31, 2011

BPPR
$518,446

BPNA
$23,587

Popular, Inc.
$542,033

700,083

40,170

740,253

transferred to OREO

(62,533)

(1,319)

(63,852)

Non-performing loans

charged-off
Loans returned to

accrual status / loan
collections
Ending balance - NPLs

(36,956)

(7,654)

(44,610)

(469,761)
$649,279

(17,561)
$37,223

(487,322)
$686,502

31,

additions

At December

2011,
to mortgage
the BPPR and BPNA reportable
non-performing loans at
segments
amounted to $700 million and $40 million,
respectively, as both reportable segments continues to reflect
the impact of the current economic conditions, which have
influenced the residential real estate market.

For the year ended December 31, 2011, the Corporation’s
mortgage loan net charge-offs to average mortgage loans
held-in-portfolio decreased to 0.83%, down by 125 basis points
when compared to the same figure in 2010. The decrease in the
mortgage loan net charge-off ratio was mainly due to lower
in the U.S. mainland non-conventional mortgage
losses
business. For
the
Corporation’s mortgage
to average
loan net
mortgage loans held-in-portfolio amounted to 2.08%, down by
67 basis points when compared to the same figure in 2009.

the year ended December 31, 2010,

charge-offs

At the BPPR reportable segment, the mortgage loan net
charge-offs for the year ended December 31, 2011 amounted to
$27.6 million, an increase of $5.9 million, when compared to
same period in 2010. The mortgage loan net charge-offs for the
year ended December 31, 2009 amounted to $10.7 million. The
increase in mortgage loan net charge-offs was prompted by the
current weak economic conditions. The economy on the Island
remained sluggish during 2011, and the Puerto Rico housing
market has experienced a slowdown in sales activity, as
reflected by the absorption rates of projects financed in the
construction loan portfolio of the Puerto Rico segment.
segment’s mortgage

loans
held-in-portfolio totaled $4.7 billion at December 31, 2011,
compared with $3.6 billion at December 31, 2010. The
allowance for loan losses corresponding to the mortgage loan
portfolio for the BPPR reportable segment totaled $72.3 million
or 1.54% of mortgage loans held-in-portfolio, excluding
covered loans, at December 31, 2011 compared to $42 million
or 1.15%, respectively, at December 31, 2010.

reportable

BPPR

The

Residential mortgage loans modified in a TDR are primarily
comprised of loans where monthly payments are lowered to
accommodate the borrowers’ financial needs for a period of
time, normally five years. After the lowered monthly payment
period ends, the borrower reverts back to paying principal and
interest per the original terms with the maturity date adjusted
accordingly. At December 31, 2011, the mortgage loan TDRs
for the BPPR and BPNA reportable segments amounted to $421
million (including $103 million guaranteed by U.S. sponsored
entities) and $50 million, respectively, of which $210 million
and $9 million, respectively, were in non-performing status.
These mortgage loan TDRs were evaluated for impairment
resulting in a specific allowance for loan losses of $15 million
and $14 million for the BPPR and BPNA reportable segments,
respectively, at December 31, 2011.

78

The table that follows provides information on non-performing mortgage loans held-in-portfolio and net charge-offs for the

BPPR reportable segment.

Table 40.A - Mortgage Non-Performing Loans and Net Charge-offs (BPPR)

(Dollars in thousands)
BPPR Reportable Segment
Non-performing mortgage loans [1]
Non-performing construction loans to mortgage loans HIP, both

excluding covered loans and loans held-for-sale

Mortgage loan net charge-offs
Mortgage loan net charge-offs to average mortgage loans HIP, excluding

covered loans and loans held-for-sale

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$649,279

$518,446

$311,918

13.85%

$27,624

0.66%

14.21%

$21,712

0.68%

9.95%

$10,686

0.38%

[1] Includes $2.0 million in non-performing mortgage loans at the Corporate group (holding company) at December 31, 2011 (December 31, 2010 - $1.0 million).

The BPNA reportable segment mortgage loan portfolio
totaled $829 million at December 31, 2011, compared with
$875 million at December 31, 2010. The BPNA mortgage loans
held-in-portfolio reflected better performance in terms of net
charge-offs during 2011 driven principally by lower portfolio
levels and the fact that 2010 included charge-offs related to

non-performing loans reclassified to held-for-sale in December
2010, which were subsequently sold during the beginning of
2011.

The following table presents the credit quality indicators for

the BPNA reportable segment’s mortgage loan portfolio.

Table 40.B - Mortgage Non-Performing Loans and Net Charge-offs (BPNA)

(Dollars in thousands)
BPNA Reportable Segment
Non-performing mortgage loans
Non-performing mortgage loans to construction loans HIP, both

excluding covered loans and loans held-for-sale

Mortgage loan net charge-offs
Mortgage loan net charge-offs to average mortgage loans HIP, excluding

covered loans and loans held-for-sale

BPNA’s non-conventional mortgage loan portfolio outstanding at
December 31, 2011 amounted to approximately $490 million with a
related allowance for loan losses of $24 million, which represents
4.81% of that particular loan portfolio, compared with $513 million
with a related allowance for loan losses of $22 million or 4.29%,
respectively, at December 31, 2010. The Corporation is no longer
originating non-conventional mortgage loans at BPNA. On
December 31, 2010, BPNA reclassified approximately $396 million
(book value) of U.S. non-conventional residential mortgage loans as
loans held-for-sale. As explained before, these loans were sold
during the first quarter of 2011.

The net charge-offs for BPNA’s non-conventional mortgage
loan portfolio amounted to approximately $6.7 million for the
year ended December 31, 2011. This resulted in a net charge-offs
to average non-conventional mortgage loans held-in-portfolio
ratio of 1.33% for 2011. These figures were approximately $65.9
million or 6.74% for the year ended December 31, 2010.

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$37,223

4.49%

$14,187

1.67%

$23,587

$197,748

2.70%

$73,067

5.36%

13.49 %

$109,920

6.93 %

decrease in the BPNA reportable segment was primarily
associated with home equity lines of credit and closed-end
second mortgages, which are categorized by the Corporation as
consumer
experienced
improvements in terms of delinquencies and net charge-offs,
specifically as compared to 2010 levels. The decrease in the
BPPR reportable segment was mainly driven by an improvement
in the credit quality of the personal auto loan portfolio.

portfolios

These

loans.

have

Additions to consumer non-performing loans during 2011 at
the BPPR and BPNA reportable segments amounted to $90
million and $42 million, respectively.

average

consumer

Consumer loan net charge-offs for 2011 and 2010, as a
loans held-in-portfolio,
percentage of
decreased mostly due to lower delinquencies
in certain
portfolios in the U.S. mainland and in Puerto Rico. The decrease
in the ratio of consumer loan net charge-offs to average
consumer
loans held-in-portfolio in the BPPR reportable
segment was mainly attributed to personal and auto loans.

Consumer loans
Non-performing consumer loans decreased by $17 million from
December 31, 2010 to December 31, 2011, primarily as a result
of a decrease of $11 million in the BPNA reportable segment and
a decrease of $6 million in the BPPR reportable segment. The

At December 31, 2011, the consumer loan TDRs for the
BPPR and BPNA reportable segments amounted to $138 million
and $2 million, respectively, of which $5 million and $1
million, respectively, were in non-performing status. These
consumer loan TDRs were evaluated for impairment resulting

79

POPULAR, INC. 2011 ANNUAL REPORT

in a specific allowance for loan losses of $17 million and $131
thousand
segments,
respectively, at December 31, 2011.

BPNA reportable

BPPR and

for

The table that follows provides information on consumer
the BPPR

non-performing loans and net charge-offs
reportable segment.

for

Table 41.A - Consumer Non-Performing Loans and Net Charge-offs (BPPR)

(Dollars in thousands)

BPPR Reportable Segment
Non-performing consumer loans
Non-performing consumer loans to consumer loans HIP, both

excluding covered loans and loans held-for-sale

Consumer loan net charge-offs
Consumer loan net charge-offs to average consumer loans HIP,

excluding covered loans and loans held-for-sale

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$31,291

$37,236

$36,695

1.05%

$98,647

1.29%

$131,783

1.19%

$168,525

3.40%

4.44%

5.21%

The following table presents the credit quality indicators for the BPNA reportable segment’s consumer loan portfolio.

Table 41.B - Consumer Non-Performing Loans and Net Charge-offs (BPNA)

(Dollars in thousands)

BPNA Reportable Segment
Non-performing consumer loans
Non-performing consumer loans to consumer loans HIP, both excluding

covered loans and loans held-for-sale

Consumer loan net charge-offs
Consumer loan net charge-offs to average consumer loans HIP, excluding

For the years ended
December 31, 2011 December 31, 2010 December 31, 2009

$12,377

$23,066

$27,490

1.76%

$57,118

2.85%

$82,380

2.83%

$147,606

covered loans and loans held-for-sale

7.59%

9.30%

13.31%

for

loans

As previously explained, the decrease in non-performing
consumer
the BPNA reportable segment was
attributed in part to home equity lines of credit and closed-end
second mortgages. As compared to 2010, these loan portfolios
showed signs of
improved performance due to significant
charge-offs recorded in previous quarters improving the quality
of the remaining portfolio, combined with aggressive collection
efforts and loan modification programs. Combined net charge-
offs for E-LOAN’s home equity lines of credit and closed-end
second mortgages amounted to approximately $38.4 million or
9.56% of those particular average loan portfolios for the year
ended December 31, 2011, compared with $58.3 million or
11.96%, respectively, for the year ended December 31, 2010.
With the downsizing of E-LOAN,
this subsidiary ceased
originating these types of loans in 2008. Home equity lending
includes both home equity loans and lines of credit. This type
of lending, which is secured by a first or second mortgage on
the borrower’s residence, allows customers to borrow against
the equity in their home. Real estate market values at the time
the loan or line is granted directly affect the amount of credit
extended and, in addition, changes in these values impact the
severity of losses. E-LOAN’s portfolio of home equity lines of
credit
and closed-end second mortgages outstanding at
December 31, 2011 totaled $365 million with a related
allowance for loan losses of $24 million, representing 6.56% of
that particular portfolio. E-LOAN’s portfolio of home equity
lines of credit and closed-end second mortgages outstanding at

December 31, 2010 totaled $437 million with a related
allowance for loan losses of $41 million, representing 9.29% of
that particular portfolio. At December 31, 2011, home equity
lines of credit and closed-end second mortgages in which
E-LOAN holds both the first and second lien amounted to $540
thousand and $891 thousand, respectively, representing 0.08%
and 0.13%, respectively, of the consumer loan portfolio of the
BPNA reportable segment. At December 31, 2011, 41% are
paying the minimum amount due on the home equity lines of
credit. At December 31, 2011, all closed-end second mortgages
lien mortgage were in
in which E-LOAN holds the first
performing status.

Other real estate
Other real estate represents real estate property acquired
through foreclosure. Other real estate not covered under loss
sharing agreements with the FDIC increased by $11 million
from December 31, 2010 to the same date in 2011. The
increase, driven by the impact of persistent weak economic
conditions, was experienced in the BPPR reportable segment
and included both residential and commercial real estate
properties. Defaulted loans have increased, and these loans
move through the foreclosure process to the other real estate
classification. The combination of increased flow of defaulted
loans from the loan portfolio to other real estate owned and the
slowing of the liquidation market has resulted in an increase in
the number of other real estate units on hand. The BPNA

reportable segment contributed with a decrease in other real
estate properties of $16 million, in part due to the bulk sale of
residential other real estate properties in early 2011 as part of
strategies to reduce risk.

Other real estate covered under loss sharing agreements
with the FDIC amounted to $109 million at December 31,
2011, compared with $58 million at the same date in 2010. The
increase was principally from repossessed commercial real
estate properties. Generally, 80% of the write-downs taken on
these properties based on appraisals or losses on the sale are
covered under the loss sharing agreements.

During 2011, the Corporation transferred $229 million of
loans to other real estate, sold $147 million of
foreclosed
properties and recorded write-downs and other adjustments of
approximately $19 million.

Updated appraisals or third-party broker price opinions of
value (“BPOs”) are obtained to adjust the value of the other real
estate assets. Commencing in 2011, the appraisal for a commercial
or construction other real estate property with a book value
greater than $1 million is updated annually and if lower than $1
million it is updated at least every two years. For residential other
real estate property, the Corporation requests third-party BPOs or
appraisals generally on an annual basis. Appraisals may be
adjusted due to age, collateral inspections and property profiles or
due to general market conditions. The adjustments applied are
based upon internal information like other appraisals for the type
of properties and loss severity information that can provide
historical trends in the real estate market, and may change from
time to time based on market conditions.

For commercial and construction other real estate properties
at the BPPR reportable segment, depending on the type of
property and/or the age of the appraisal, downward adjustments
currently may range between 10% to 45%, including estimated
costs to sell. For commercial and construction properties at the
BPNA reportable segment, the most typically applied collateral
discount rate is 30%. This discount was determined based on a
study of other real estate owned and loan sale transactions
during the past two years, comparing net proceeds received by
the bank relative to the most recent appraised value of the
properties. However, additional haircuts can be applied
the region and the
depending upon the age of appraisal,
condition of the property or project.

In the case of the BPPR reportable segment, for year 2011,
appraisals and BPOs of the subject residential properties were
to downward adjustments of up to approximately
subject
14.4%, including cost to sell of 5%. In the case of the U.S.
mainland residential properties,
the downward adjustment
approximated up to 30%, including cost to sell of 5%.

Troubled debt restructurings
The following tables present
the loans classified as TDRs
according to their accruing status at December 31, 2011 and
December 31, 2010.

80

Table 42.A - TDRs (2011)

(In thousands)

Accruing Non-Accruing

Total

December 31, 2011

Commercial
Construction
Mortgage
Leases
Consumer

$36,848
–
252,277
3,085
134,409

$426,619

$171,520
54,930
218,715
3,118
5,848

$454,131

$208,368
54,930
470,992
6,203
140,257

$880,750

Table 42.B - TDRs (2010)

(In thousands)

Accruing Non-Accruing

Total

December 31, 2010

Commercial
Construction
Mortgage
Consumer

$77,278
–
68,831
123,012

$80,919
92,184
107,791
10,804

$269,121

$291,698

$158,197
92,184
176,622
133,816

$560,819

The Corporation’s TDR loans
totaled $881 million at
December 31, 2011, an increase of $320 million, or 57%, from
December 31, 2010. The increase was mainly due to the
intensification of loss mitigation efforts on the mortgage and
commercial loan portfolios. Mortgage TDRs increased by $294
million, or 167%, during the year ended on December 31, 2011,
including $183 million of accruing loans of which $51 million
were guaranteed by U.S. sponsored agencies.

Refer to Note 11 to the consolidated financial statements for
additional information on modifications considered troubled
and
debt
quantitative data about troubled debt restructurings performed
in the past twelve months.

restructurings,

qualitative

including

certain

Allowance for Loan Losses
The allowance for loan losses, which represents management’s
estimate of credit losses inherent in the loan portfolio,
is
maintained at a sufficient level to provide for estimated credit
losses on individually evaluated loans as well as estimated
credit losses inherent in the remainder of the loan portfolio.
The Corporation’s management evaluates the adequacy of the
allowance for
In this
evaluation, management considers current economic conditions
and the resulting impact on Popular Inc.’s loan portfolio, the
composition of
and risk
loan type
characteristics, historical
loss experience, results of periodic
credit reviews of individual loans, regulatory requirements and
loan impairment measurement, among other factors.

loan losses on a quarterly basis.

the portfolio by

The Corporation must

rely on estimates and exercise
judgment regarding matters where the ultimate outcome is
unknown such as economic developments affecting specific

81

POPULAR, INC. 2011 ANNUAL REPORT

customers, industries or markets. Other factors that can affect
management’s estimates are the years of historical data when
estimating losses, changes in underwriting standards, financial
accounting standards and loan impairment measurements,
among others. Changes in the financial condition of individual
borrowers, in economic conditions, in historical loss experience
and in the condition of the various markets in which collateral
may be sold may all affect the required level of the allowance
for loan losses. Consequently, the business financial condition,
liquidity, capital and results of operations could also be
affected.

The Corporation’s assessment of the allowance for loan
losses is determined in accordance with accounting guidance,
specifically guidance of loss contingencies in ASC Subtopic
450-20
ASC
impairment
Section 310-10-35. Refer to the Critical Accounting Policies /
Estimates section of
the
Corporation’s allowance for loan losses methodology.

this MD&A for a description of

guidance

loan

and

in

As indicated previously in this MD&A, the covered loans
were recognized at fair value at the April 30, 2010 acquisition
date, which included the impact of expected credit losses and
therefore, no allowance for credit losses was recorded at such
date. However, due to credit deterioration after the date of
acquisition, the Corporation recorded an allowance for loan
losses of $125 million at December 31, 2011. Also,
the
Corporation recorded an increase in the FDIC loss share
indemnification asset for the expected reimbursement from the
FDIC under
sharing agreements. Management
determined that there was no need to record an allowance for
loan losses on the covered loans at December 31, 2010.

loss

the

The following tables set forth information concerning the
composition of the Corporation’s allowance for loan losses
(“ALLL”) at December 31, 2011, December 31, 2010 and
December 31, 2009 by loan category and by whether the
allowance and related provisions were calculated individually
pursuant
to the requirements for specific impairment or
through a general valuation allowance.

Table 43.A - Composition of ALLL (2011)

December 31, 2011

Lease

(Dollars in thousands)

Specific ALLL
Impaired loans [1]
Specific ALLL to impaired loans [1]

General ALLL
Loans held-in-portfolio, excluding impaired loans [1]
General ALLL to loans held-in-portfolio, excluding

Commercial Construction

Financing Mortgage

Consumer

Total [2]

$11,795
$574,677

$289
$122,252

2.05%

0.24%

$793
$6,104
12.99%

$29,063
$382,880

$17,046
$140,108

$58,986
$1,226,021

7.59%

12.17%

4.81%

$398,493
$9,960,209

$13,324
$189,376

$4,098
$557,763

$73,198
$5,135,580

$142,264
$3,533,647

$631,377
$19,376,575

impaired loans [1]

4.00%

7.04%

0.73%

1.43%

4.03%

3.26%

Total ALLL
Total non-covered loans held-in-portfolio [1]
ALLL to loans held-in-portfolio [1]

$410,288
$10,534,886

$13,613
$311,628

$4,891
$563,867

$102,261
$5,518,460

$159,310
$3,673,755

$690,363
$20,602,596

3.89%

4.37%

0.87%

1.85%

4.34%

3.35%

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2011, the general allowance on the covered loans amounted to

$98 million while the specific reserve amounted to $27 million.

Table 43.B - Composition of ALLL (2010)

(Dollars in thousands)
Specific ALLL
Impaired loans [1]
Specific ALLL to impaired loans [1]
General ALLL
Loans held-in-portfolio, excluding impaired loans [1]
General ALLL to loans held-in-portfolio, excluding

impaired loans [1]

Commercial Construction

$8,550
$445,968

$216
$231,322

1.92%

0.09%

December 31, 2010

Lease

Financing Mortgage
$5,004
$121,209

$–
$–
–%

4.13%

Consumer
$–
$–
–%

Total [2]

$13,770
$798,499

1.72%

$453,841
$10,947,517

$47,508
$269,529

$13,153
$602,993

$65,864
$4,403,513

$199,089
$3,705,984

$779,455
$19,929,536

4.15%

17.63%

2.18%

1.50%

5.37%

3.91%

Total ALLL
Total non-covered loans held-in-portfolio [1]
ALLL to loans held-in-portfolio [1]

$462,391
$11,393,485

$47,724
$500,851

$13,153
$602,993

$70,868
$4,524,722

$199,089
$3,705,984

$793,225
$20,728,035

4.06%

9.53%

2.18%

1.57%

5.37%

3.83%

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. There was no allowance on these loans at December 31, 2010.

82

Table 43.C - Composition of ALLL (2009)

December 31, 2009

Lease

(Dollars in thousands)

Specific ALLL
Impaired loans
Specific ALLL to impaired loans

General ALLL
Loans held-in-portfolio, excluding impaired loans
General ALLL to loans held-in-portfolio, excluding

Commercial Construction

Financing Mortgage

Consumer

Total

$108,769
$645,513

$162,907
$841,361

16.85%

19.36%

$–
$–

$52,211
$186,747

–%

27.96%

$–
$–
–%

$323,887
$1,673,621

19.35%

$328,940
$12,018,546

$178,412
$883,012

$18,558
$675,629

$102,400
$4,416,498

$309,007
$4,045,807

$937,317
$22,039,492

impaired loans

2.74%

20.20%

2.75%

2.32%

7.64%

4.25%

Total ALLL
Total non-covered loans held-in-portfolio
ALLL to loans held-in-portfolio

$437,709
$12,664,059

$341,319
$1,724,373

$18,558
$675,629

$154,611
$4,603,245

$309,007
$4,045,807

$1,261,204
$23,713,113

3.46%

19.79%

2.75%

3.36%

7.64%

5.32%

Table 44 details the breakdown of the allowance for loan losses by loan categories. The breakdown is made for analytical

purposes, and it is not necessarily indicative of the categories in which future loan losses may occur.

Table 44 - Allocation of the Allowance for Loan Losses

2011

2010

% of loans
in each
category to
total loans ALLL

% of loans
in each
category to
total loans

51.1% $462.4
47.7
1.5
13.1
2.8
70.9
26.8
199.1
17.8

55.0%
2.4
2.9
21.8
17.9

At December 31,
2009

2008

2007

% of loans
in each
category to
total loans ALLL

% of loans
in each
category to
total loans ALLL

% of loans
in each
category to
total loans

53.4% $294.6
170.3
7.3
22.0
2.8
106.3
19.4
289.6
17.1

53.0% $139.0
83.7
8.6
25.6
2.9
70.0
17.4
230.5
18.1

48.8%
6.9
3.9
21.7
18.7

ALLL

$437.7
341.3
18.6
154.6
309.0

100.0% $793.2

100.0% $1,261.2

100.0% $882.8

100.0% $548.8

100.0%

(Dollars in millions) ALLL

Commercial
Construction
Leasing
Mortgage
Consumer

Total [1]

$410.3
13.6
4.9
102.3
159.3

$690.4

[1]Note: For purposes of this table the term loans refers to loans held-in-portfolio excluding covered loans and held-for-sale.

It

reductions

3.35% of

represented

non-covered

At December 31, 2011,

the allowance for loan losses
excluding covered loans decreased by approximately $103
million when compared with the same date in the previous
loans
year.
held-in-portfolio at December 31, 2011, compared with 3.83%
at December 31, 2010. This decrease in the allowance for loan
losses considers
in the Corporation’s general
reserves of approximately $148 million, offset by an increase of
$45 million in the specific reserves. The decrease in the
allowance for loan losses was driven principally by (i) a
reduction of $52 million related to the commercial
loan
portfolio, mainly prompted by a lower portfolio balance and
lower net charge-offs at the BPNA reportable segment, as this
portfolio continues to reflect signs of improvement in terms of
credit performance; (ii) a decrease of $34 million related to the
construction loan portfolio, driven by a reduction of $10
million and $24 million at the BPPR and BPNA reportable

segments, respectively, due to a lower level of problem loans
and net charge-offs at both reportable segments, principally
driven by the held-for-sale reclassification that
took place
during the fourth quarter of 2010 at the BPPR reportable
segment; and (iii) a decline of $40 million in the allowance for
loan losses for the consumer loan portfolio, as the Corporation’s
consumer
signs of
improvement in terms of credit performance. These decreases
were partially offset by an increase in the allowance for loan
losses for the mortgage loan portfolio, driven by higher specific
reserves on mortgage loan TDRs, due to the intensification of
loss mitigation efforts.

loan portfolio continues

to reflect

The Corporation’s recorded investment in loans that were
individually evaluated for
specific
allowance for loan losses increased from December 31, 2010 to
December 31, 2011 mainly related to consumer and mortgage
TDRs.

impairment and their

83

POPULAR, INC. 2011 ANNUAL REPORT

The allowance for loan losses at December 31, 2010
decreased $468 million compared with December 31, 2009. The
decrease was principally related to the commercial and
loan
construction loan portfolios mostly due
reclassifications to held-for-sale in Puerto Rico and to charge-
offs of previously reserved impaired portions in collateral
dependent loans at the BPPR and BPNA reportable segments in
2010. Also, there was a decline in the allowance for loan losses

the

to

for mortgage loans, which was triggered by the transfer to loans
held-for-sale of U.S. non-conventional mortgages, and for the
consumer loan portfolio driven by more stable performance
trends in certain portfolios combined with portfolio reductions
both in the Puerto Rico and the U.S. mainland operations.

The following table presents the Corporation’s recorded
investment in loans that were considered impaired and the related
valuation allowance at December 31, 2011, 2010, and 2009.

Table 45 - Investment in Loans Considered Impaired and the Related Valuation Allowance

(In millions)

Impaired loans:
Valuation allowance
No valuation allowance required

Total impaired loans

2011

2010

2009

Recorded
Investment [1]

Valuation
Allowance [2]

Recorded
Investment [1]

Valuation
Allowance

Recorded
Investment

Valuation
Allowance

$632.9
593.1

$1,226.0

$59.0
–

$59.0

$154.3
644.2

$798.5

$13.8
–

$13.8

$1,263.3
410.3

$1,673.6

$323.9
–

$323.9

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes the specific reserve related to covered loans acquired on the Westernbank FDIC-assisted transaction which amounted to $27 million at December 31, 2011.

With respect to the $593 million portfolio of impaired loans
for which no allowance for loan losses was required at
December 31, 2011, management followed the guidance for
specific impairment of a loan. When a loan is impaired, the
measurement of the impairment may be based on: (1) the
present value of the expected future cash flows of the impaired
loan discounted at the loan’s original effective interest rate;
(2) the observable market price of the impaired loan; or (3) the
fair value of the collateral, if the loan is collateral dependent. A
loan is collateral dependent if the repayment of the loan is
expected to be provided solely by the underlying collateral. The
$593 million impaired loans with no valuation allowance were
in which management
mostly collateral dependent
performed a detailed analysis based on the fair value of the
collateral less estimated costs to sell and determined that the

loans

collateral was deemed adequate to cover any losses at
December 31, 2011.

the

years

loans

during

Average

impaired

ended
December 31, 2011 and December 31, 2010 were $1.1 billion
and $1.5 billion, respectively. Average impaired loans for the
year ended December 31, 2009 amounted to approximately
$1.3 billion. The Corporation recognized interest income on
impaired loans of $20.0 million and $21.8 million for the years
31, 2010,
ended December
respectively. For the year ended December 31, 2009, interest
income recognized on impaired loans amounted to $16.9
million.

31, 2011 and December

The following tables set forth the activity in the specific
reserves for impaired loans for the years ended December 31,
2011 and 2010.

Table 46.A - Activity in Specific ALLL for the Year Ended December 31, 2011

(In thousands)

Commercial Loans Construction Loans Mortgage Loans Consumer Loans Leasing

Total

Specific allowance for loan losses at

January 1, 2011

Provision for impaired loans
Net charge-offs
Net (write-downs) recoveries

Specific allowance for loan losses at

December 31, 2011

$8,550
154,691
(138,741)
(12,705)

$216
39,602
(39,529)
–

$5,004
11,861
(1,608)
13,806

$–
21,347
(4,301)
–

$–
793
–
–

$13,770
228,294
(184,179)
1,101

$11,795

$289

$29,063

$17,046

$793

$58,986

Table 46.B - Activity in Specific ALLL for the Year Ended December 31, 2010

(In thousands)

Commercial Loans Construction Loans Mortgage Loans

Total

Specific allowance for loan losses at January 1, 2010
Provision for impaired loans
Net charge-offs
Write-downs

Specific allowance for loan losses at December 31, 2010

$108,769
194,338
(259,578)
(34,979)

$8,550

$162,907
264,305
(391,861)
(35,135)

$216

$52,211
146,707
(87,538)
(106,376)

$5,004

$323,887
605,350
(738,977)
(176,490)

$13,770

individually evaluated impaired loans

For the year ended December 31, 2011, total net charge-offs
for
amounted to
approximately $184.2 million, of which $127.0 million
pertained to the BPPR reportable segment and $57.2 million to
the BPNA reportable segment. Most of these net charge-offs
were related to the commercial and construction portfolios. As
compared to the year ended December 31, 2010, the decrease in
charge-offs for construction loans considered impaired was
mainly associated to particular borrowers
in the BPPR
reportable segment.

The prolonged weakness in the Puerto Rico economy
continues to have a negative impact on the Corporation’s credit
metrics, particularly real estate related assets. The Corporation,
however, has taken actions to materially reduce the exposure to
high-risk loan portfolios both in Puerto Rico and in the U.S.
as
including
mainland
held-for-sale and subsequent sale of high-risk assets. In the U.S.
mainland, overall, the year 2011 signaled the reversal of the
severe deterioration in credit quality that started in 2006. The
U.S. operations have followed the general credit trends on the
mainland demonstrating improvement.

classification

operations,

the

The Corporation requests updated appraisal reports from
pre-approved appraisers for loans that are considered impaired,
and individually analyzes them following the Corporation’s
reappraisal policy. This policy requires updated appraisals for
loans secured by real estate (including construction loans)
either annually or every two years depending on the total
exposure of
the
the borrower. As a general procedure,
the
Corporation internally reviews appraisals as part of
underwriting and approval process and also for credits
considered impaired. Generally, the specialized appraisal review
unit of the Corporation’s Credit Risk Management Division
following certain materiality
internally reviews appraisals
benchmarks. In addition to evaluating the reasonability of the
appraisal reports, these reviews monitor that appraisals are
performed following the Uniform Standards of Professional
Appraisal Practice (“USPAP”).

Appraisals may be adjusted due to age or general market
conditions. The adjustments applied are based upon internal
severity
information,

like other

appraisals

and/or

loss

84

information that can provide historical trends in the real estate
market. Specifically, in commercial and construction impaired
loans for the BPPR reportable segment, and depending on the
type of property and/or the age of the appraisal, downward
adjustments currently range from 10% to 45% (including costs
to sell). At December 31, 2011, the weighted average discount
rate for the BPPR reportable segment was 23%.

For commercial and construction loans at

the BPNA
reportable segment, downward adjustments to the collateral
value currently range from 30% to 50% depending on the age of
the appraisals and the type,
location and condition of the
property. This discount used was determined based on a study
of other real estate owned and loan sale transactions during the
past two years, comparing net proceeds received by the bank
relative
the
properties. However, additional haircuts can be applied
depending upon the age of appraisal,
the region and the
condition of the project. Factors are based on appraisal changes
and/or trends in loss severities. Discount rates discussed above
include costs to sell and may change from time to time based on
market conditions.

appraised value

the most

recent

to

of

the estimated value of

For mortgage loans secured by residential

real estate
properties, a current assessment of value is made not later than
the contractual due date. Any outstanding
180 days past
balance in excess of
the collateral
property, less estimated costs to sell, is charged-off. For this
purpose,
the Corporation requests third-party Broker Price
Opinion of Value (“BPOs”) of the subject collateral property at
least annually. In the case of the mortgage loan portfolio for the
BPPR reportable segment, BPOs of
the subject collateral
properties are currently subject to downward adjustment (cost
to sell) of 5%. In the case of the U.S. mortgage loan portfolio, a
30% haircut is taken, which includes costs to sell.

Discount rates discussed above include costs to sell and may

change from time to time based on market conditions.

The table that follows presents the approximate amount and
percentage of non-covered impaired loans for which the
Corporation relied on appraisals dated more than one year old
for purposes of
impairment requirements at December 31,
2011.

Table 47 - Non-covered Impaired Loans with Appraisals Dated 1 year or Older

(In thousands)

Total commercial
Total construction

[1]

Based on outstanding balance of total impaired loans.

December 31, 2011

Total Impaired Loans -
Held-in-portfolio (HIP)

# of Loans

Outstanding Principal
Balance

Impaired Loans with
Appraisals Over One-
Year Old [1]

391
47

$530,497
$120,580

39%
17%

85

POPULAR, INC. 2011 ANNUAL REPORT

The percentage of the Corporation’s impaired construction loans that were relied upon “as developed” and “as is” for the period

ended December 31, 2011 is presented in the table below.

Table 48 - Impaired Construction Loans Relied Upon “As is” or “As Developed”

December 31, 2011

“As is”

(In thousands)

Count Amount in $

As a % of total
construction
impaired loans HIP

Count Amount in $

“As developed”

As a % of total
construction
impaired loans HIP

Average % of
completion

Loans held-in-portfolio

28

$56,852

47%

19

$63,728

53%

91%

At December 31, 2011, the Corporation accounted for $64
million impaired construction loans under the “as developed”
value. This approach is used since the current plan is that the
project will be completed and it reflects the best strategy to
reduce potential
the
project. The costs to complete the project and the related
increase in debt are considered an integral part of the individual
reserve determination.

losses based on the prospects of

Costs

to complete are deducted from the subject “as
developed” collateral value on impaired construction loans.
Impairment determinations are calculated following the collateral
dependent method, comparing the outstanding principal balance
of the respective impaired construction loan against the expected
realizable value of the subject collateral. Realizable values of
subject collaterals have been defined as the “as developed”
appraised value less costs to complete, costs to sell and discount
factors. Costs to complete represent an estimate of the amount of
money to be disbursed to complete a particular phase of a
construction project. Costs to sell have been determined as a
percentage of
to cover related
collateral disposition costs (e.g. legal and commission fees). As
discussed previously, discount factors may be applied to the
appraised amounts due to age or general market conditions.

the subject collateral value,

Allowance for loan losses - Covered loan portfolio
The Corporation’s allowance for loan losses at December 31,
2011 includes $125 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 $83 million at
year end; and (ii) acquired loans accounted for under ASC
Subtopic 310-20, which required an allowance for loan losses of
$42 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 Subtopic 310-20 and new loans
the
originated as a result of
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
losses) and loan impairment guidance in ASC
inherent

loan commitments assumed,

loans

Section 310-10-35 for
evaluated for
impairment. Concurrently, the Corporation records an increase
in the FDIC loss share asset for the expected reimbursement
from the FDIC under the loss sharing agreements.

individually

is

for

as well

overseeing

responsible

Enterprise Risk and Operational Risk Management
The Financial and Operational Risk Management Division (the
“FORM Division”)
the
implementation of the Enterprise Risk Management (ERM)
as developing and overseeing the
framework,
implementation of risk programs and reporting that facilitate a
broad integrated view of risks. The FORM Division also leads
the ongoing development of a strong risk management culture
and the framework, policies and committees that support
effective risk governance. For new products and initiatives, the
FORM and Compliance Divisions have put in place processes to
ensure that an appropriate standard readiness assessment is
performed before launching a new product or initiative. Similar
procedures are followed with the Treasury Division for
transactions involving the purchase and sale of assets.
risk can manifest

in various ways,
including errors, fraud, cyber attacks, business interruptions,
inappropriate behavior of employees, and failure to perform in
a timely manner, among others. These events can potentially
result in financial losses and other damages to the Corporation,
including reputational harm. The successful management of
to a diversified
operational
financial services company like Popular because of the nature,
volume and complexity of its various businesses.

risk is particularly important

Operational

itself

senior

To monitor and control operational risk and mitigate related
losses, the Corporation maintains a system of comprehensive
policies and controls. The Corporation’s Operational Risk
Committee (ORCO), which is composed of
level
representatives from the business lines and corporate functions,
provides executive oversight to facilitate consistency of effective
policies, best practices, controls and monitoring tools
for
managing and assessing all types of operational risks across the
Corporation. The FORM Division, within the Corporation’s Risk
Management Group, serves as ORCO’s operating arm and is
responsible for establishing baseline processes
to measure,
monitor,
limit and manage operational risk. In addition, the
Auditing Division provides oversight about policy compliance and
ensures adequate attention is paid to correct the identified issues.

86

All other requirements in ASU 2011-05 are not affected by
this update, including the requirement to report comprehensive
income either in a single continuous financial statement or in
two separate but consecutive financial statements. Public
entities should apply these requirements for fiscal years, and
interim periods within
after
those
December 15, 2011.

beginning

years,

The provisions of

this guidance impact presentation
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-11, Balance Sheet
(Topic 210): Disclosures about Offsetting Assets and
Liabilities (“ASU 2011-11”)
The FASB issued ASU 2011-11 in December 2011. The
in this ASU require an entity to disclose
amendments
information about offsetting and related arrangements to enable
users of its financial statements to understand the effect of
those arrangements on its financial position. To meet this
objective, entities with financial instruments and derivatives
that are either offset on the balance sheet or subject to a master
netting arrangement or similar arrangement shall disclose the
following quantitative information separately for assets and
liabilities in tabular format: a) gross amounts of recognized
assets and liabilities; b) amounts offset to determine the net
amount presented in the balance sheet; c) net amounts
presented in the balance sheet; d) amounts subject to an
enforceable master netting agreement or similar arrangement
not otherwise included in (b), including: amounts related to
recognized
other derivatives
instruments if either management makes an accounting election
not to offset or the amounts do not meet the guidance in ASC
Section 210-20-45 or ASC Section 815-10-45, and also amounts
related to financial collateral (including cash collateral); and e)
the net amount after deducting the amounts in (d) from the
amounts in (c).

instruments

financial

and

In addition to these tabular disclosures, entities are required
to provide a description of the setoff rights associated with
assets and liabilities subject to an enforceable master netting
arrangement.

An entity is required to apply the amendments for annual
reporting periods beginning on or after January 1, 2013, and
interim periods within those annual periods. An entity should
provide
amendments
retrospectively for all comparative periods presented.

required by those

the disclosures

The provisions of

this guidance impact presentation
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

segment

Operational risks fall into two major categories: business
specific and corporate-wide affecting all business lines. The
primary responsibility for
the day-to-day management of
business specific risks relies on business unit managers.
Accordingly, business unit managers are responsible for
ensuring that appropriate risk containment measures, including
corporate-wide or business
specific policies and
procedures, controls and monitoring tools, are in place to
minimize risk occurrence and loss exposures. Examples of
these
data
personnel management
reconciliation processes, transaction processing monitoring and
analysis and contingency plans for systems interruptions. To
manage corporate-wide risks, specialized functions, such as
Legal, Information Security, Business Continuity, and Finance
and Compliance, among others, assist the business units in the
development and implementation of risk management practices
specific to the needs of the individual businesses.

practices,

include

Operational risk management plays a different role in each
category. For business specific risks, the FORM Division works
with the segments to ensure consistency in policies, processes,
and assessments. With respect to corporate-wide risks, such as
information security, business continuity, legal and compliance,
the risks are assessed and a consolidated corporate view is
developed and communicated to the business level. Procedures
exist
that are designed to ensure that policies relating to
conduct, ethics, and business practices are followed. We
internal controls, data
continually monitor the system of
processing
and
processes
procedures to manage operational risk at appropriate, cost-
effective levels. An additional
level of review is applied to
current and potential regulation and its impact on business
processes, to ensure that appropriate controls are put in place
to address regulation requirements. Today’s threats to customer
information and information systems are complex, more wide
spread, continually emerging, and increasing at a rapid pace.
The Corporation continues to invest
in better tools and
processes in all key security areas, including cybersecurity; and
monitors these threats with increased rigor and focus.

corporate-wide

systems,

and

ADOPTION OF NEW ACCOUNTING STANDARDS AND
ISSUED BUT NOT YET EFFECTIVE ACCOUNTING
STANDARDS
FASB Accounting Standards Update 2011-12, Comprehensive
Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, (“ASU 2011-12”)
The FASB issued ASU 2011-12 in December 2011, which defers
indefinitely the new requirement in ASU 2011-05 to present
components of reclassification adjustments out of accumulated
other comprehensive income on the face of
the income
statement by income statement line item.

87

POPULAR, INC. 2011 ANNUAL REPORT

FASB Accounting Standards Update 2011-10, Property,
Plant, and Equipment (Topic 360): Derecognition of in
Substance Real Estate-a Scope Clarification (“ASU 2011-10”)
The FASB issued ASU 2011-10 in December 2011. The objective
of this ASU is to resolve the diversity in practice about whether
the guidance in ASC Subtopic 360-20, “Property, Plant, and
Equipment - Real Estate Sales” applies to a parent that ceases to
have a controlling financial interest in a subsidiary that is in
substance real estate as a result of default on the subsidiary’s
nonrecourse debt. ASU 2011-10 provides that when a parent
(reporting entity) ceases to have a controlling financial interest in
a subsidiary that is in substance real estate as a result of default on
the subsidiary’s nonrecourse debt, the reporting entity should
apply the guidance in ASC Subtopic 360-20 to determine whether
it should derecognize the in substance real estate. Generally, a
reporting entity would not satisfy the requirements to derecognize
the in substance real estate before the legal transfer of the real
estate to the lender and the extinguishment of
the related
nonrecourse indebtedness. That is, even if the reporting entity
ceases to have a controlling financial interest under ASC Subtopic
810-10, the reporting entity would continue to include the real
estate, debt, and the results of the subsidiary’s operations in its
consolidated financial statements until legal title to the real estate
is transferred to legally satisfy the debt.

ASU 2011-10 should be applied on a prospective basis to
deconsolidation events occurring after the effective date; with
prior periods not adjusted even if the reporting entity has
continuing involvement with previously derecognized in
substance real estate entities. For public entities, ASU 2011-10 is
effective for fiscal years, and interim periods within those years,
beginning on or after June 15, 2012. Early adoption is permitted;
however, the Corporation is not early adopting this ASU.

The adoption of this guidance will not have a material effect

on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-
Goodwill and Other (Topic 350): Testing Goodwill for
Impairment (“ASU 2011-08”)
The FASB issued Accounting Standards Update (“ASU”)
No. 2011-08 in September 2011. ASU 2011-08 is intended to
simplify how entities test goodwill for impairment. ASU 2011-08
permits an entity the option to first assess qualitative factors to
determine whether it is “more likely than not” that the fair value
of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step
test described in ASC Topic 350,
goodwill
Intangibles-Goodwill
and Other. The more-likely-than-not
threshold is defined as having a likelihood of more than 50%.
The previous guidance under ASC Topic 350 required an entity
to test goodwill for impairment, on at least an annual basis, by
comparing the fair value of a reporting unit with its carrying
amount, including goodwill (step one). If the fair value of a
reporting unit is less than its carrying amount, then the second

impairment

step of the test must be performed to measure the amount of the
impairment loss, if any. Under the amendments in this ASU, an
entity is not required to calculate the fair value of a reporting
unit unless the entity determines that it is more likely than not
that its fair value is less than its carrying amount.

This ASU also removes the guidance that permitted the
entities to carry forward the calculation of the fair value of the
reporting unit from one year to the next if certain conditions
are met. In addition, the new qualitative indicators replace
those currently used to determine whether an interim goodwill
impairment test is required. These indicators are also applicable
for assessing whether to perform step two for reporting units
with zero or negative carrying amounts.

ASU 2011-08 is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption was permitted, including
for annual and interim goodwill impairment tests performed as
of a date before September 15, 2011, if an entity’s financial
statements for the most recent annual or interim period had not
yet been issued. The Corporation did not elect to adopt early
the provisions of this ASU.

The provisions of this guidance simplify how entities test for
impairment and will not have an impact on the

goodwill
Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income (“ASU 2011-05”)
The FASB issued ASU 2011-05 in June 2011. The amendment of
this ASU allows an entity the option to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate
but consecutive statements. In both choices, an entity is required
to present each component of net income along with total net
income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount
for comprehensive income. However, the requirement to present
components of reclassification adjustments out of accumulated
other comprehensive income on the face of the income statement
by income statement line item has been deferred indefinitely by
ASU 2011-12 as mentioned above. ASU 2011-05 eliminates the
option to present the components of other comprehensive income
as part of the statement of changes in stockholders’ equity. The
amendments to the Codification in this ASU do not change the
items that must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified
to net income. This ASU also does not change the option for an
entity to present components of other comprehensive income
either net of related tax effects or before related tax effects, with
one amount shown for the aggregate income tax expense or
benefit related to the total of other comprehensive income items.

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
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

and

disclosure

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
the
principles
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
instruments that are managed within a
value of
portfolio, application of premiums and discounts in a fair value
measurement,
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.

requirements

quantitative

disclosing

including

financial

The adoption of this guidance is not expected to have a

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

88

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 adoption of this guidance is not expected to have a

material effect on the 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
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.

loan modifications

constitute

troubled

to

The

creditors

new guidance

evaluate
required
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, ASU 2011-02 (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
experiencing financial
determine whether
difficulties; and (5) ends
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.

is
the deferral of

the debtor

For public companies, the new guidance was effective for
interim and annual periods beginning on or after June 15, 2011,
and applied retrospectively to restructurings occurring on or
after the beginning of
the fiscal year of adoption. Early
application was permitted. For purposes of measuring
impairment for receivables that are newly considered impaired
under the new guidance, an entity was required to 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 adopted this guidance in the third quarter
of 2011. Refer to Note 11 to the consolidated financial
statements for the impact of the adoption of this ASU and the
new disclosure requirements.

89

POPULAR, INC. 2011 ANNUAL REPORT

Statistical Summary 2007–2011
Statements of Financial Condition

(In thousands)
Assets
Cash and due from banks
Money market investments:

Federal funds sold and securities purchased under

agreements to resell

Time deposits with other banks
Total money market investments
Trading account securities, at fair value
Investment securities available-for-sale, at fair value
Investment securities held-to-maturity, at amortized cost
Other investment securities, at lower of cost or realizable value
Loans held-for-sale, at lower of cost or fair value
Loans held-in-portfolio:

Loans not covered under loss sharing agreements with the

FDIC

Loans covered under loss sharing agreements with the FDIC
Less - Unearned income

Allowance for loan losses

Total loans held-in-portfolio, net

FDIC loss share asset
Premises and equipment, net
Other real estate not covered under loss sharing agreements with

the FDIC

Other real estate covered under loss sharing agreements with the

FDIC

Accrued income receivable
Mortgage servicing assets, at fair value
Other assets
Goodwill
Other intangible assets
Assets from discontinued operations
Total assets

Liabilities and Stockholders’ Equity
Liabilities:

Deposits:

Non-interest bearing
Interest bearing
Total deposits

Federal funds purchased and assets sold under agreements to

repurchase

Other short-term borrowings
Notes payable
Other liabilities
Liabilities from discontinued operations

Total liabilities
Stockholders’ equity:
Preferred stock
Common stock
Surplus
(Accumulated deficit) retained earnings
Treasury stock - at cost
Accumulated other comprehensive loss, net of tax

Total stockholders’ equity

Total liabilities and stockholders’ equity

At December 31,

2011

2010

2009

2008

2007

$535,282

$452,373

$677,330

$784,987

$818,825

327,668
1,048,506
1,376,174
436,331
5,009,823
125,383
179,880
363,093

181,961
797,334
979,295
546,713
5,236,852
122,354
163,513
893,938

452,932
549,865
1,002,797
462,436
6,694,714
212,962
164,149
90,796

519,218
275,436
794,654
645,903
7,924,487
294,747
217,667
536,058

883,686
123,026
1,006,712
767,955
8,515,135
484,466
216,584
1,889,546

20,703,192
4,348,703
100,596
815,308
24,135,991
1,915,128
538,486

20,834,276
4,836,882
106,241
793,225
24,771,692
2,410,219
545,453

23,827,263
–
114,150
1,261,204
22,451,909
–
584,853

25,857,237
–
124,364
882,807
24,850,066
–
620,807

28,203,566
–
182,110
548,832
27,472,624
–
588,163

172,497

161,496

125,483

89,721

81,410

109,135
125,209
151,323
1,462,393
648,350
63,954
–
$37,348,432

57,565
150,658
166,907
1,449,887
647,387
58,696
–
$38,814,998

–
126,080
169,747
1,324,917
604,349
43,803
–
$34,736,325

–
156,227
176,034
1,119,869
605,792
53,163
12,587
$38,882,769

–
216,114
191,624
1,462,015
630,761
69,503
–
$44,411,437

$5,655,474
22,286,653
27,942,127

$4,939,321
21,822,879
26,762,200

$4,495,301
21,429,593
25,924,894

$4,293,553
23,256,652
27,550,205

$4,510,789
23,823,689
28,334,478

2,141,097
296,200
1,856,372
1,193,883
–
33,429,679

2,412,550
364,222
4,170,183
1,305,312
–
35,014,467

2,632,790
7,326
2,648,632
983,866
–
32,197,508

3,551,608
4,934
3,386,763
1,096,338
24,557
35,614,405

5,437,265
1,501,979
4,621,352
934,481
–
40,829,555

50,160
10,263
4,114,661
(212,726)
(1,057)
(42,548)
3,918,753
$37,348,432

50,160
10,229
4,094,005
(347,328)
(574)
(5,961)
3,800,531
$38,814,998

50,160
6,395
2,804,238
(292,752)
(15)
(29,209)
2,538,817
$34,736,325

1,483,525
1,773,792
621,879
(374,488)
(207,515)
(28,829)
3,268,364
$38,882,769

186,875
1,761,908
568,184
1,319,467
(207,740)
(46,812)
3,581,882
$44,411,437

90

Statistical Summary 2007-2011
Statements of Operations

(In thousands)

Interest income:
Loans
Money market investments
Investment securities
Trading account securities

Total interest income
Less - Interest expense

Net interest income
Provision for loan losses

Net interest income after provision

2011

2010

2009

2008

2007

For the years ended December 31,

$1,694,357
3,596
203,941
35,607

1,937,501
505,509

1,431,992
575,720

$1,676,734
5,384
238,210
27,918

1,948,246
653,381

1,294,865
1,011,880

$1,519,249
8,570
291,988
35,190

1,854,997
753,744

1,101,253
1,405,807

$1,868,462
17,982
343,568
44,111

2,274,123
994,919

1,279,204
991,384

$2,046,437
25,190
441,608
39,000

2,552,235
1,246,577

1,305,658
341,219

for loan losses

856,272

282,985

(304,554)

287,820

964,439

Net gain on sale and valuation
adjustments of investment
securities

Trading account profit
Net (loss) gain on sale of loans,
including adjustments to
indemnity reserves, and valuation
adjustments on loans
held-for-sale

FDIC loss share income (expense)
Fair value change in equity
appreciation instrument
Gain on sale of processing and

technology business
All other operating income

Total non-interest income

Operating expenses:
Personnel costs
All other operating expenses

Total operating expenses

Income (loss) from continuing

operations, before income tax

Income tax expense (benefit)

Income (loss) from continuing

operations

Loss from discontinued operations,

net of income tax

Net Income (Loss)

Net Income (Loss) Applicable to

10,844
5,897

3,992
16,404

219,546
39,740

69,716
43,645

100,869
37,197

(2,177)
66,791

8,323

–
470,599

560,277

453,370
696,927

1,150,297

266,252
114,927

(56,139)
(25,751)

42,555

640,802
666,330

1,288,193

514,198
811,349

1,325,547

245,631
108,230

(35,060)
–

–

–
672,275

896,501

533,263
620,933

1,154,196

(562,249)
(8,302)

6,018
–

–

–
710,595

829,974

608,465
728,263

1,336,728

(218,934)
461,534

60,046
–

–

–
675,583

873,695

620,760
924,702

1,545,462

292,672
90,164

$151,325

$137,401

$(553,947)

$(680,468)

$202,508

–

–

$151,325

$137,401

(19,972)

$(573,919)

(563,435)

$(1,243,903)

(267,001)

$(64,493)

Common Stock

$147,602

$(54,576)

$97,377

$(1,279,200)

$(76,406)

91

POPULAR, INC. 2011 ANNUAL REPORT

Statistical Summary 2007-2011
Average Balance Sheet and Summary of Net Interest Income
On a Taxable Equivalent Basis*

(Dollars in thousands)
Assets
Interest earning assets:
Money market investments

U.S. Treasury securities
Obligations of U.S. Government sponsored

entities

Obligations of Puerto Rico, States and

political subdivisions

Collateralized mortgage obligations and

mortgage-backed securities

Other

Total investment securities

Trading account securities

Non-covered loans
Covered loans

2011

2010

2009

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

$1,152,014

$3,597

0.31%

$1,539,046

$5,384

0.35%

$1,183,209

$8,573

0.72%

50,971

1,502

2.95

80,740

1,527

1.89

70,308

3,452

4.91

1,180,680

49,781

4.22

1,473,227

54,748

3.72

1,977,460

103,303

5.22

139,847

8,972

6.42

228,291

11,171

4.89

342,479

22,048

6.44

3,896,743
226,033

5,494,274

667,277

148,884
13,326

222,465

38,850

21,004,406
4,613,361

1,301,426
412,678

3.82
5.90

4.05

5.82

6.20
8.95

6.69

4,340,545
176,766

6,299,569

493,628

160,632
10,576

238,654

32,333

22,456,846
3,364,932

1,377,871
303,096

25,821,778

1,680,967

3.70
5.98

3.79

6.55

6.14
9.01

6.51

4,757,407
301,649

7,449,303

614,827

200,616
15,046

344,465

40,771

24,836,067

1,540,918

4.22
4.99

4.62

6.63

6.20

24,836,067

1,540,918

6.20

Total loans (net of unearned income)

25,617,767

1,714,104

Total interest earning assets/Interest

income

$32,931,332 $1,979,016

6.01% $34,154,021 $1,957,338

5.73% $34,083,406 $1,934,727

5.68%

Total non-interest earning assets

5,134,936

Total assets from continuing operations

$38,066,268

Total assets from discontinued operations

Total assets

$38,066,268

4,224,945

$38,378,966

$38,378,966

2,478,103

$36,561,509

7,861

$36,569,370

Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other
interest bearing demand accounts

Time deposits
Short-term borrowings
Notes payable
Note issued to the FDIC

Total interest bearing liabilities/Interest

$11,525,060
10,919,907
2,629,979
1,834,915
1,381,981

$68,531
200,956
55,258
148,603
32,161

0.59% $10,951,331
10,967,033
1.84
2,400,653
2.10
2,293,878
8.10
2,753,490
2.33

$93,796
257,085
60,278
183,701
58,521

0.86% $10,342,100
12,192,824
2.34
2,887,727
2.51
8.01
2,945,169
2.13

$107,355
393,906
69,357
183,126

1.04%
3.23
2.40
6.22

expense

28,291,842

505,509

1.79

29,366,385

653,381

2.22

28,367,820

753,744

2.66

Total non-interest bearing liabilities

6,041,590

Total liabilities from continuing

operations

Total liabilities from discontinued

operations

Total liabilities

Stockholders’ equity

34,333,432

34,333,432

3,732,836

Total liabilities and stockholders’ equity

$38,066,268

Net interest income on a taxable equivalent

5,753,414

35,119,799

35,119,799

3,259,167

$38,378,966

5,338,848

33,706,668

10,637

33,717,305

2,852,065

$36,569,370

basis

Cost of funding earning assets

Net interest margin

$1,473,507

$1,303,957

$1,180,983

1.54%

4.47%

1.91%

3.82%

2.21%

3.47%

Effect of the taxable equivalent adjustment

Net interest income per books

41,515

$1,431,992

9,092

$1,294,865

79,730

$1,101,253

* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the
interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and
taxable assets on a taxable basis.

Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.

Statistical Summary 2007-2011
Average Balance Sheet and Summary of Net Interest Income
On a Taxable Equivalent Basis

Average
Rate

Average
Balance

(Dollars in thousands)
Assets
Interest earning assets:
Money market investments

U.S. Treasury securities
Obligations of U.S. Government sponsored

entities

Obligations of Puerto Rico, States and

political subdivisions

Collateralized mortgage obligations and

mortgage-backed securities

Other

Total investment securities

Trading account securities

Non-covered loans
Covered loans

Average
Balance

$699,922

463,268

4,793,935

254,952

2,411,171
266,306

8,189,632

664,907

2008

Interest

$18,790

21,934

243,709

16,760

114,810
14,952

412,165

47,909

26,471,616

1,888,786

Total loans (net of unearned income)

26,471,616

1,888,786

2.68%

4.73

5.08

6.57

4.76
5.61

5.03

7.21

7.14

7.14

2007

Interest

$26,565

21,164

310,632

12,546

148,620
14,085

507,047

40,408

$513,704

498,232

6,294,489

185,035

2,575,941
273,558

9,827,255

652,636

25,380,548

2,068,078

25,380,548

2,068,078

92

Average
Rate

5.17%

4.25

4.93

6.78

5.77
5.15

5.16

6.19

8.15

8.15

Total interest earning assets/Interest

income

$36,026,077

$2,367,650

6.57%

$36,374,143

$2,642,098

7.26%

Total non-interest earning assets

3,417,397

Total assets from continuing operations

$39,443,474

Total assets from discontinued operations

1,480,543

Total assets

$40,924,017

Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other
interest bearing demand accounts

Time deposits
Short-term borrowings
Notes payable
Note issued to the FDIC

Total interest bearing liabilities/Interest

expense

Total non-interest bearing liabilities

Total liabilities from continuing

operations

Total liabilities from discontinued

operations

Total liabilities

Stockholders’ equity

$10,548,563
12,795,436
5,115,166
2,263,272

$177,729
522,394
168,070
126,726

1.68%
4.08
3.29
5.60

994,919

3.24

30,722,437

4,966,820

35,689,257

1,876,465

37,565,722

3,358,295

Total liabilities and stockholders’ equity

$40,924,017

Net interest income on a taxable equivalent

basis

Cost of funding earning assets

Net interest margin

Effect of the taxable equivalent adjustment

Net interest income per books

$1,372,731

93,527

$1,279,204

2.76%

3.81%

3,054,948

$39,429,091

7,675,844

$47,104,935

$10,126,956
11,398,715
8,315,502
1,041,410

30,882,583

4,825,029

35,707,612

7,535,897

43,243,509

3,861,426

$47,104,935

$226,924
538,869
424,530
56,254

2.24%
4.73
5.11
5.40

1,246,577

4.04

$1,395,521

89,863

$1,305,658

3.43%

3.83%

93

POPULAR, INC. 2011 ANNUAL REPORT

Statistical Summary 2010-2011
Quarterly Financial Data

(In thousands, except
per common share information)

Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

2011

2010

Summary of Operations
Interest income
Interest expense

Net interest income
Provision for loan losses
Net gain (loss) on sale and valuation

adjustments of investment securities

Trading account profit (loss)
Gain (loss) on sale of loans, including
valuation adjustments on loans
held-for-sale

Adjustments (expense) to indemnity

reserves on loans sold

FDIC loss share income (expense)
Fair value change in equity appreciation

instrument

Gain on sale of processing and technology

business

Other non-interest income
Operating expenses

Income (loss) before income tax
Income tax expense (benefit)

$453,393
108,613

$491,758
122,447

$506,899
132,357

$485,451
142,092

$507,199
152,624

$521,435
164,657

$492,417
177,822

$427,195
158,278

344,780
179,808

369,311
176,276

374,542
144,317

343,359
75,319

354,575
354,409

356,778
215,013

314,595
202,258

268,917
240,200

2,800
2,610

8,134
2,912

(90)
874

–
(499)

(218)
8,303

3,732
5,860

397
2,464

81
(223)

16,135

20,294

(12,782)

7,244

1,478

4,250

5,078

5,068

(3,481)
17,447

(10,285)
(5,361)

(9,454)
38,670

(9,848)
16,035

(34,511)
(3,046)

(5,823)
(7,668)

(14,389)
(15,037)

(17,290)
–

–

–

578

7,745

7,520

10,641

24,394

–

–
113,848
311,093

3,238
263

–
106,696
282,355

33,070
5,537

–
106,364
281,800

72,585
(38,100)

–
143,691
275,049

157,359
147,227

–
126,080
344,677

(238,905)
(11,764)

640,802
174,100
371,541

596,118
102,032

–
195,920
328,416

–
170,230
280,913

(17,252)
27,237

(94,330)
(9,275)

Net income (loss)

$2,975

$27,533

$110,685

$10,132

$(227,141) $494,086

$(44,489)

$(85,055)

Net income (loss) applicable to common

stock

$2,044

$26,602

$109,754

$9,202

$(227,451) $494,086

$(236,156)

$(85,055)

Net income (loss) per common share -

basic and diluted:

Selected Average Balances
(In millions)
Total assets
Loans
Interest earning assets
Deposits
Interest–bearing liabilities

Selected Ratios
Return on assets
Return on equity

$–

$0.03

$0.11

$0.01

$(0.22)

$0.48

$(0.28)

$(0.13)

$36,744
25,205
31,840
27,524
26,866

$37,994
25,499
33,039
27,562
28,142

$38,781
25,830
33,447
27,644
29,086

$38,770
25,946
33,415
27,279
29,100

$39,427
26,784
34,438
27,144
29,357

$40,274
27,041
35,240
27,111
30,932

$39,817
26,066
35,405
26,783
30,888

$33,916
23,345
31,489
25,541
26,237

0.03%
0.21

0.29%
2.81

1.14%
12.02

0.11%
1.05

(2.29)%
(23.51)

4.87%
56.94

(0.45)% (1.02)%
(6.17)

(14.56)

Note: Because each reporting period stands on its own the sum of the net income (loss) per common share for the quarters is not equal to the net income (loss) per common share
for the years ended December 31, 2011 and 2010. In 2010, this was principally influenced by the issuance of over 383 million new shares of common stock as part of the
depository shares issuance that occurred during May 2010. This event impacted significantly the weighted average common shares considered in the computation.

94

Management’s Report to
Stockholders

To Our Stockholders:

Management’s Assessment of Internal Control Over Financial Reporting

The management of Popular, Inc. (the Corporation) is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities Exchange Act of 1934 and for our
assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes
controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements
for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit
Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those
policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions

of the assets of the Corporation;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of
the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of

the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as
of December 31, 2011. In making this assessment, management used the criteria set forth in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our assessment, management concluded that the Corporation maintained effective internal control over financial

reporting as of December 31, 2011 based on the criteria referred to above.

The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers, LLP, has audited the effectiveness
of the Corporation’s internal control over financial reporting as of December 31, 2011, as stated in their report dated February 29,
2012 which appears herein.

Richard L. Carrión
Chairman of the Board,
President and Chief Executive Officer

Jorge A. Junquera
Senior Executive Vice President
and Chief Financial Officer

95

POPULAR, INC. 2011 ANNUAL REPORT

Report of Independent Registered
Public Accounting Firm

To the Board of Directors and
Stockholders of Popular, Inc.

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of
operations, comprehensive income (loss), changes in stockholders’ equity and cash flows present fairly, in all material respects, the
financial position of Popular, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s
management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
to Stockholders. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting
also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of
the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

96

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
February 29, 2012

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2013
Stamp E16077 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.

97

POPULAR, INC. 2011 ANNUAL REPORT

Consolidated Statements of Financial Condition

(In thousands, except share information)
Assets
Cash and due from banks

Money market investments:
Federal funds sold
Securities purchased under agreements to resell
Time deposits with other banks

Total money market investments

Trading account securities, at fair value:

Pledged securities with creditors’ right to repledge
Other trading securities

Investment securities available-for-sale, at fair value:

Pledged securities with creditors’ right to repledge
Other investment securities available-for-sale

Investment securities held-to-maturity, at amortized cost (fair value 2011 - $125,254; 2010 - $120,873)
Other investment securities, at lower of cost or realizable value (realizable value 2011 - $181,583; 2010 - $165,233)
Loans held-for-sale, at lower of cost or fair value

Loans held-in-portfolio:

Loans not covered under loss sharing agreements with the FDIC
Loans covered under loss sharing agreements with the FDIC
Less - Unearned income

Allowance for loan losses

Total loans held-in-portfolio, net

FDIC loss share asset
Premises and equipment, net
Other real estate not covered under loss sharing agreements with the FDIC
Other real estate covered under loss sharing agreements with the FDIC
Accrued income receivable
Mortgage servicing assets, at fair value
Other assets
Goodwill
Other intangible assets

Total assets

Liabilities and Stockholders’ Equity
Liabilities:

Deposits:

Non-interest bearing
Interest bearing

Total deposits

Assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities

Total liabilities

Commitments and contingencies (See Note 27)

Stockholders’ equity:
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding in both periods presented
Common stock, $0.01 par value; 1,700,000,000 shares authorized in both periods presented; 1,026,346,396 shares issued

(2010 - 1,022,929,158) and 1,025,904,567 shares outstanding (2010 - 1,022,727,802)

Surplus
Accumulated deficit
Treasury stock - at cost, 441,829 shares (2010 - 201,356)
Accumulated other comprehensive loss, net of tax

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

December 31,

2011

2010

$535,282

$452,373

75,000
252,668
1,048,506

1,376,174

402,591
33,740

1,737,868
3,271,955
125,383
179,880
363,093

20,703,192
4,348,703
100,596
815,308

24,135,991

1,915,128
538,486
172,497
109,135
125,209
151,323
1,462,393
648,350
63,954

16,110
165,851
797,334

979,295

492,183
54,530

2,031,123
3,205,729
122,354
163,513
893,938

20,834,276
4,836,882
106,241
793,225

24,771,692

2,410,219
545,453
161,496
57,565
150,658
166,907
1,449,887
647,387
58,696

$37,348,432

$38,814,998

$5,655,474
22,286,653

27,942,127

2,141,097
296,200
1,856,372
1,193,883

$4,939,321
21,822,879

26,762,200

2,412,550
364,222
4,170,183
1,305,312

33,429,679

35,014,467

50,160

50,160

10,263
4,114,661
(212,726)
(1,057)
(42,548)

3,918,753

10,229
4,094,005
(347,328)
(574)
(5,961)

3,800,531

$37,348,432

$38,814,998

Consolidated Statements of Operations

(In thousands, except per share information)
Interest income:

Loans
Money market investments
Investment securities
Trading account securities

Total interest income

Interest expense:

Deposits
Short-term borrowings
Long-term debt

Total interest expense

Net interest income
Provision for loan losses

Net interest income after provision for loan losses

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, including valuation adjustments on loans held-for-sale
Adjustments (expense) to indemnity reserves on loans sold
FDIC loss share income (expense)
Fair value change in equity appreciation instrument
Gain on sale of processing and technology business
Other operating income

Total non-interest income

Operating expenses:
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
FDIC deposit insurance
Loss (gain) on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles

Total operating expenses

Income (loss) from continuing operations, before income tax
Income tax expense (benefit)

Income (loss) from continuing operations
Loss from discontinued operations, net of income tax

Net Income (Loss)

Net Income (Loss) Applicable to Common Stock

Net Income per Common Share - Basic

Net income (loss) from continuing operations
Net loss from discontinued operations

Net income (loss) per common share - basic

Net Income per Common Share - Diluted

Net income (loss) from continuing operations
Net loss from discontinued operations

Net income (loss) per common share - diluted

Dividends Declared per Common Share

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

98

Year ended December 31,

2011

2010

2009

$1,694,357
3,596
203,941
35,607

$1,676,734
5,384
238,210
27,918

$1,519,249
8,570
291,988
35,190

1,937,501

1,948,246

1,854,997

269,487
55,258
180,764

505,509

350,881
60,278
242,222

653,381

1,431,992
575,720

1,294,865
1,011,880

856,272

184,940
239,720
10,844
5,897
30,891
(33,068)
66,791
8,323
–
45,939

560,277

453,370
102,319
43,840
51,885
194,942
27,115
55,067
93,728
8,693
21,778
87,906
9,654

282,985

195,803
377,504
3,992
16,404
15,874
(72,013)
(25,751)
42,555
640,802
93,023

1,288,193

514,198
116,203
85,851
50,608
166,105
38,905
46,671
67,644
38,787
46,789
144,613
9,173

501,262
69,357
183,125

753,744

1,101,253
1,405,807

(304,554)

213,493
394,187
219,546
39,740
5,151
(40,211)
–
–
–
64,595

896,501

533,263
111,035
101,530
52,605
111,287
46,264
38,872
76,796
(78,300)
25,800
125,562
9,482

1,150,297

1,325,547

1,154,196

266,252
114,927

$151,325
–

$151,325

$147,602

245,631
108,230

$137,401
–

$137,401

(562,249)
(8,302)

$(553,947)
(19,972)

$(573,919)

$(54,576)

$97,377

$0.14
–

$0.14

0.14
–

$0.14

$–

$(0.06)
–

$(0.06)

$(0.06)
–

$(0.06)

$–

$0.29
(0.05)

$0.24

$0.29
(0.05)

$0.24

$0.02

99

POPULAR, INC. 2011 ANNUAL REPORT

Consolidated Statements of Changes in
Stockholders’ Equity

(In thousands)
Balance at December 31, 2008
Net loss
Exchange of preferred stock for trust preferred securities

issued

Issuance of common stock in exchange of preferred stock
Issuance of common stock in connection with early

extinguishment of debt

Accretion of discount
Issuance costs
Stock options expense on unexercised options, net of

forfeitures

Change in par value
Dividends declared:
Common stock
Preferred stock

Common stock reissuance
Common stock purchases
Treasury stock retired
Other comprehensive loss, net of tax
Transfer to statutory reserve

Balance at December 31, 2009

Net income
Issuance of stock
Issuance of common stock upon conversion of preferred

stock

Issuance costs
Tax effect from shared-based compensation
Dividends declared:
Preferred stock

Deemed dividend on preferred stock
Common stock purchases
Other comprehensive income, net of tax

Net income
Issuance of stock
Dividends declared:
Preferred stock

Common stock purchases
Other comprehensive loss, net of tax
Transfer to statutory reserve

Balance at December 31, 2011

Common stock,
including
treasury stock

Preferred stock

Surplus

$1,566,277

$1,483,525

$621,879

1,717

1,858

(901,165)
(536,715)

291,974

315,794

Accumulated
other
comprehensive
loss

$(28,829)

Accumulated
deficit

$(374,488)
(573,919)

485,280 [2]
230,388 [2]

(1,689,389) [4]

378
(17)
125,556

4,515 [1]

(4,515) [1]

556 [3]

202
1,689,389 [4]

(5,641)
(39,857)

(125,556)

10,000

(10,000)

(380)

Total

$3,268,364
(573,919)

(415,885)
(12,636)

317,652
–
556

202
–

(5,641)
(39,857)
378
(17)
–
(380)
–

$6,380

$50,160

$2,804,238

$(292,752)

$(29,209)

$2,538,817

1

1,150,000 [5]

152

3,833 [5]

(1,150,000) [5]

1,337,834 [5]
(48,227) [6]
8

(559)

137,401

(310)
(191,667)

34

(483)

7,656

151,325

(3,723)

13,000

(13,000)

137,401
1,150,153

191,667
(48,227)
8

(310)
(191,667)
(559)
23,248

$3,800,531

151,325
7,690

(3,723)
(483)
(36,587)
–

23,248

$(5,961)

(36,587)

$9,206

$50,160

$4,114,661

$(212,726)

$(42,548)

$3,918,753

Balance at December 31, 2010

$9,655

$50,160

$4,094,005

$(347,328)

[1] Accretion of preferred stock discount - 2008 Series C Preferred Stock.
[2] Excess of carrying amount of preferred stock exchanged over fair value of new trust preferred securities and common stock issued.
[3] Net of issuance costs of preferred stock exchanged and issuance costs related to exchange and issuance of new common stock.
[4] Change in par value from $6.00 to $0.01 (not in thousands).
[5] Issuance and subsequent conversion of depositary shares representing interests in shares of contingent convertible non-cumulative preferred stock, Series D, into
common stock.
[6] Issuance costs related to issuance and conversion of depository shares (Preferred Stock - Series D).

Disclosure of changes in number of shares:

Preferred Stock:

Balance at beginning of year
Issuance of stock
Exchange of stock
Conversion of stock

Balance at end of year

Common Stock - issued:

Balance at beginning of year
Issuance of stock
Issuance of stock upon conversion of preferred stock
Treasury stock retired

Balance at end of year

Treasury stock

Common Stock - Outstanding

100

Year ended December 31,
2010

2011

2009

2,006,391
–
–
–

2,006,391

2,006,391
1,150,000 [1]

24,410,000
–

–

(22,403,609) [2]

(1,150,000) [1]

–

2,006,391

2,006,391

1,022,929,158
3,417,238
–
–

1,026,346,396
(441,829)

639,544,895
50,930
383,333,333 [1]

–

1,022,929,158
(201,356)

295,632,080
357,510,076 [3]

–
(13,597,261)

639,544,895
(4,790)

1,025,904,567

1,022,727,802

639,540,105

[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).

[2] Exchange of 21,468,609 Preferred Stock Series A and B for common shares, and exchange of 935,000 Preferred Stock Series C for trust preferred securities.
[3] Shares issued in exchange of Series A and B Preferred Stock and early extinguishment of debt (exchange of trust preferred securities for common stock).

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

101 POPULAR, INC. 2011 ANNUAL REPORT

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Net income (loss)
Other comprehensive (loss) income before tax:
Foreign currency translation adjustment

Reclassification adjustment for losses included in net income

Adjustment of pension and postretirement benefit plans

Amortization of net losses
Amortization of prior service cost

Unrealized holding gains on securities available-for-sale arising during the period

Reclassification adjustment for gains included in net income

Unrealized net losses on cash flow hedges

Reclassification adjustment for net losses included in net income

Other comprehensive (loss) income before tax
Income tax benefit

Total other comprehensive (loss) income, net of tax

Comprehensive income (loss), net of tax

Tax effect allocated to each component of other comprehensive (loss) income:

Year ended December 31,
2010

2009

2011

$151,325

$137,401

$(573,919)

(2,762)
10,084
(134,364)
12,973
(961)
54,216
(8,044)
(2,294)
302

(70,850)
34,263

(36,587)

(442)
4,967
(94,299)
12,196
(1,046)
83,967
(3,483)
(1,228)
964

1,596
21,652

23,248

(1,608)
–
118,291
14,618
(486)
27,223
(173,107)
(1,419)
6,915

(9,573)
9,193

(380)

$114,738

$160,649

$(574,299)

(In thousands)

Adjustment of pension and postretirement benefit plans

Amortization of net losses
Amortization of prior service cost

Unrealized holding gains on securities available-for-sale arising during the period

Reclassification adjustment for gains included in net income

Unrealized net losses on cash flow hedges

Reclassification adjustment for net losses included in net income

Income tax benefit

Disclosure of accumulated other comprehensive loss:

(In thousands)

Foreign currency translation adjustment

Pension and postretirement benefit plans

Tax effect

Net of tax amount

Unrealized holding gains on securities available-for-sale

Tax effect

Net of tax amount

Unrealized net (losses) gains on cash flow hedges

Tax effect

Net of tax amount

Year ended December 31,
2010

2009

2011

$39,978
(3,892)
288
(4,013)
1,219
762
(79)

$34,263

$35,634
(3,659)
314
(11,275)
535
479
(376)

$21,652

$(46,836)
(4,385)
146
(1,306)
62,790
553
(1,769)

$9,193

2011

$(28,829)

(333,287)
117,229

(216,058)

230,746
(27,668)

203,078

(1,057)
318

(739)

At December 31,
2010

$(36,151)

(210,935)
80,855

(130,080)

184,574
(24,874)

159,700

935
(365)

570

2009

$(40,676)

(127,786)
48,566

(79,220)

104,090
(14,134)

89,956

1,199
(468)

731

Accumulated other comprehensive loss

$(42,548)

$(5,961)

$(29,209)

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

Consolidated Statements of Cash Flows

(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Provision for loan losses
Amortization of intangibles
Depreciation and amortization of premises and equipment
Net accretion of discounts and amortization of premiums and deferred fees
Impairment losses on net assets to be disposed of
Impairment losses on long-lived assets
Fair value adjustments of mortgage servicing rights
Fair value change in equity appreciation instrument
FDIC loss share (income) expense
FDIC deposit insurance expense
Adjustments (expense) to indemnity reserves on loans sold
Earnings from investments under the equity method
Earnings from changes in fair value related to instruments measured at fair value pursuant to the fair value option
Stock options expense
Deferred income tax expense (benefit)
(Gain) loss on:

Disposition of premises and equipment
Early extinguishment of debt
Sale and valuation adjustments of investment securities
Sale of loans, including valuation adjustments on loans held-for-sale
Sale of equity method investment
Sale of processing and technology business, net of transaction costs

Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net disbursements on loans held-for-sale
Net (increase) decrease in:

Trading securities
Accrued income receivable
Other assets

Net increase (decrease) in:

Interest payable
Pension and other postretirement benefit obligation
Other liabilities

Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:

Net (increase) decrease in money market investments
Purchases of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from sale of investment securities:

Available-for-sale
Other

Net repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Payments received from FDIC under loss sharing agreements
Cash (paid) acquired related to business acquisitions
Net proceeds from sale of equity method investment
Net proceeds from sale of processing and technology businesses
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of:

Premises and equipment
Foreclosed assets

Net cash provided by investing activities
Cash flows from financing activities:

Net increase (decrease) in:

Deposits
Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings

Payments of notes payable
Proceeds from issuance of notes payable
Proceeds from issuance of common stock
Net proceeds from issuance of depositary shares
Dividends paid
Issuance costs and fees paid on exchange of preferred stock and trust preferred securities
Treasury stock acquired

Net cash used in financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period

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

102

Year ended December 31,

2011

2010

2009

$151,325

$137,401

$(573,919)

575,720
9,654
46,446
(113,046)
4,255
–
37,061
(8,323)
(66,791)
93,728
33,068
(33,769)
–
–
5,862

(5,526)
693
(10,844)
(30,891)
(16,907)
–
(346,004)
165,335
(793,094)

1,143,029
25,449
22,329

(12,471)
(111,288)
(88,327)
525,348
676,673

1,011,880
9,173
58,861
(254,879)
–
–
22,859
(42,555)
25,751
67,644
72,013
(9,863)
–
–
(12,127)

(1,812)
1,171
(3,992)
(15,874)
–
(616,186)
(307,629)
81,370
(735,095)

721,398
11,315
(3,559)

(29,562)
(11,060)
(13,484)
25,758
163,159

1,405,807
9,482
64,451
71,534
–
1,545
32,960
–
–
76,796
40,211
(17,695)
(1,674)
202
(79,890)

(412)
(78,300)
(219,546)
57
–
–
(354,472)
79,264
(1,129,554)

1,542,470
30,601
(259,756)

(47,695)
19,599
16,837
1,202,822
628,903

(396,879)

119,741

(208,143)

(1,357,080)
(74,538)
(172,775)

(764,042)
(97,188)
(64,591)

(4,193,290)
(59,562)
(38,913)

1,360,386
67,236
154,114

262,443
5,094
1,136,058
293,109
(1,131,388)
561,111
(855)
31,503
–
(1,732)
(50,043)

14,939
198,490
899,193

1,179,943
(271,453)
(68,022)
(2,769,477)
432,568
7,690
–
(3,723)
–
(483)
(1,492,957)
82,909
452,373
$535,282

1,865,879
188,129
123,836

397,086
–
1,539,246
34,011
(256,406)
–
261,311
–
642,322
(1,041)
(66,855)

14,460
141,236
4,077,134

(1,553,486)
(220,240)
356,896
(4,260,578)
111,101
153
1,101,773
(310)
–
(559)
(4,465,250)
(224,957)
677,330
$452,373

1,631,607
141,566
75,101

3,825,313
52,294
1,053,747
328,170
(72,675)
–
–
–
–
(1,364)
(69,640)

40,243
149,947
2,654,401

(1,625,598)
(918,818)
2,392
(813,077)
60,675
–
–
(71,438)
(25,080)
(17)
(3,390,961)
(107,657)
784,987
$677,330

103 POPULAR, INC. 2011 ANNUAL REPORT

Notes to Consolidated
Financial Statements

Note 1 - Nature of Operations
Note 2 - Summary of Significant Accounting Policies
Note 3 - New Accounting Pronouncements
Note 4 - Business Combination
Note 5 - Restrictions on Cash and Due from Banks and Highly Liquid

Securities

Note 6 - Securities Purchased under Agreements to Resell
Note 7 - Pledged Assets
Note 8 - Investment Securities Available-For-Sale
Note 9 - Investment Securities Held-to-Maturity
Note 10 - Loans
Note 11 - Allowance for Loan Losses
Note 12 - FDIC Loss Share Asset
Note 13 - Transfers of Financial Assets and Servicing Assets
Note 14 - Premises and Equipment
Note 15 - Other Assets
Note 16 - Goodwill and Other Intangible Assets
Note 17- Deposits
Note 18 - Assets Sold Under Agreements to Repurchase
Note 19 - Other Short-term Borrowings
Note 20 - Notes Payable
Note 21 -Trust Preferred Securities
Note 22 - Exchange offers
Note 23 - Stockholders’ Equity
Note 24 - Regulatory Capital Requirements
Note 25 - Related Party Transactions
Note 26 - Guarantees
Note 27- Commitments and Contingencies
Note 28 - Non-consolidated Variable Interest Entities
Note 29 - Derivative Instruments and Hedging Activities
Note 30 - Fair Value Measurement
Note 31 - Fair Value of Financial Instruments
Note 32 - Net Income (Loss) per Common Share
Note 33 - Other Service Fees
Note 34 - Employee Benefits
Note 35 - Stock-Based Compensation
Note 36 - Rental Expense and Commitments
Note 37 - Income Taxes
Note 38 - Supplemental Disclosure on the Consolidated Statements of Cash

Flows

Note 39 - Segment Reporting
Note 40 - Subsequent Events
Note 41 - Popular, Inc. (Holding company only) Financial Information
Note 42 - Condensed Consolidating Financial Information of Guarantor and

Issuers of Registered Guaranteed Securities

104
104
116
119

121
121
122
123
127
128
136
149
150
154
154
154
158
158
159
160
160
162
163
164
165
169
171
175
177
180
186
188
189
189
196
198
198

202
202
206
206

209

Note 1 - Nature of operations
Popular,
Inc. (the “Corporation”) is a diversified, publicly
owned financial holding company subject to the supervision and
regulation of the Board of Governors of the Federal Reserve
System. The Corporation has operations in Puerto Rico, the
United States, the Caribbean and Latin America. In Puerto Rico,
the Corporation provides retail and commercial banking services
through its principal banking subsidiary, Banco Popular de
Puerto Rico (“BPPR”), as well as 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
its wholly-owned
subsidiary E-LOAN. BPNA is a community bank providing a
broad range of
to the
communities it serves. 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. Note
39 to the consolidated financial statements presents information
about the Corporation’s business segments.

and products

(“BPNA”),

including

financial

services

transactions

Two major

impacted the Corporation’s
operations during 2010. On April 30, 2010, BPPR entered into a
purchase and assumption agreement with the Federal Deposit
Insurance Corporation (the “FDIC”) to acquire certain assets
and assume certain deposits and liabilities of Westernbank
Puerto Rico (“Westernbank”), a Puerto Rico state-chartered
bank
(the
in Mayaguez,
“Westernbank FDIC-assisted transaction”). Westernbank was a
wholly-owned commercial bank subsidiary of W Holding
Company, Inc. and operated in Puerto Rico. Refer to Note 4 to
the consolidated financial statements for detailed information
on this business combination.

headquartered

Puerto Rico

On September 30, 2010, the Corporation completed the sale
of a 51% interest in EVERTEC, including the Corporation’s
merchant acquiring and processing and technology businesses
(the “EVERTEC transaction”), and continues to hold the
remaining 49% ownership interest in the business. Refer to
Note 25 to the consolidated financial
for a
description of the EVERTEC transaction. EVERTEC provides
transaction processing services throughout the Caribbean and
the
Latin America,
Corporation’s
and
transactional processing businesses. EVERTEC owns the ATH
network connecting the automated teller machines (“ATMs”) of
various financial institutions throughout Puerto Rico, the U.S.
Virgin Islands and the British Virgin Islands.

system infrastructures

to service many of

and continues

subsidiaries’

statements

Note 2 - Summary of significant accounting policies
The accounting and financial reporting policies of Popular, Inc.
and its
conform with
accounting principles generally accepted in the United States of
America and with prevailing practices within the financial
services industry.

“Corporation”)

subsidiaries

(the

104

The following is a description of the most significant of

these policies:

Principles of consolidation
The consolidated financial statements include the accounts of
Popular, Inc. and its subsidiaries. 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, it 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
financial condition.

Unconsolidated investments, in which there is at least 20%
ownership, are generally accounted for by the equity method,
with earnings recorded in other operating income. These
investments are included in other assets and the Corporation’s
proportionate share of income or loss is included in other
operating income. Those 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,
income when
the Corporation recognizes
dividends are received. Limited partnerships are accounted for
by the equity method unless the investor’s interest is so “minor”
that the limited partner 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 time of sale,

During the quarter ended March 31, 2011, the Corporation
sold certain residential mortgage loans of BPNA that were
reclassified from held-in-portfolio to held-for-sale in December
2010. The loans were sold at a better price than the price used to
determine their fair value at the time of reclassification to the
the Corporation
held-for-sale category. At
classified $13.8 million of the impact of the better price as a
recovery of the original write-down, which was booked as part of
the activity in the allowance for loan losses. This included an
out-of-period adjustment of $10.7 million since a portion of the
sale was completed just prior to the release of the Corporation’s
Form 10-K for the year ended December 31, 2010. After
the
evaluating the quantitative and qualitative aspects of
the
to
misstatement
adjustment
Corporation’s financial results,
including consideration of the
impact of the one-time adjustment to income tax expense of
$103.3 million from the change in tax rate, offset by the $53.6
million tax benefit related to the timing of loan charge-offs for tax
purposes described in Note 37 to the Corporation’s consolidated
financial
the
misstatement and the out-of-period adjustment are not material to
the 2010 and 2011 financial statements, respectively.

statements, management has determined that

out-of-period

and

the

105 POPULAR, INC. 2011 ANNUAL REPORT

or

assets

arising

liabilities

Business combinations
Business combinations are accounted for under the acquisition
method. Under this method, assets acquired, liabilities assumed
and any noncontrolling interest in the acquiree at the acquisition
date are measured at their fair values as of the acquisition date.
The acquisition date is the date the acquirer obtains control.
Also,
from noncontractual
contingencies are measured at their acquisition date at fair value
only if it is more likely than not that they meet the definition of
an asset or liability. Adjustments subsequently made to the
provisional amounts recorded on the acquisition date as a result
of new information obtained about facts and circumstances that
existed as of the acquisition date but were known to the
Corporation after acquisition will be made retroactively during a
measurement period not
to exceed one year. Furthermore,
acquisition-related restructuring costs that do not meet certain
criteria of exit or disposal activities are expensed as incurred.
Transaction costs are expensed as incurred. Changes in income
tax valuation allowances for acquired deferred tax assets are
recognized in earnings subsequent to the measurement period as
an adjustment to income tax expense. Contingent consideration
classified as an asset or a liability is remeasured to fair value at
each reporting date until the contingency is resolved. The
the contingent consideration are
changes in fair value of
recognized in earnings unless the arrangement is a hedging
instrument for which changes are initially recognized in other
comprehensive income.

There were no significant business combinations during
2011. The Westernbank FDIC-assisted transaction was
accounted for as a business combination in 2010. Note 4 to the
consolidated financial statements provides disclosures on this
business combination.

Deconsolidation of a subsidiary
The Corporation accounts
the deconsolidation of a
for
subsidiary when it ceases to have a controlling financial interest
in the subsidiary. Accordingly, it recognizes a gain or loss in
results of operations measured as the difference between the
sum of the fair value of the consideration received, the fair
value of any retained non-controlling investment in the former
subsidiary and the carrying amount of any non-controlling
interest in the former subsidiary, as compared with the carrying
amount of the former subsidiary’s assets and liabilities. Refer to
Note 25 to the
for
information on the Corporation’s sale of a majority interest in
EVERTEC and the impact of deconsolidating this former
wholly-owned subsidiary.

consolidated financial

statements

Discontinued operations
Components of the Corporation that have been or will be
disposed of by sale, where the Corporation does not have a
significant continuing involvement in the operations after the
disposal, are accounted for as discontinued operations.

The financial results of Popular Financial Holdings (“PFH”)
are reported as discontinued operations in the consolidated
statements of operations for the year ended December 31, 2009.

requires management

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
and
America
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.

to make

estimates

Reclassifications
Certain reclassifications have been made to the 2010 and 2009
consolidated financial statements to conform with the 2011
presentation. Such reclassifications did not have an effect on
previously reported cash flows, shareholders’ equity or net
income.

Fair value measurements
The Corporation determines the fair values of
its financial
instruments based on the fair value framework established in the
guidance for Fair Value Measurements in ASC Subtopic 820-10,
which requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. The standard describes three levels of inputs
that may be used to measure fair value which are (1) quoted
market prices for identical assets or liabilities in active markets,
(2) observable market-based inputs or unobservable inputs that
are corroborated by market data, and (3) unobservable inputs that
are not corroborated by market data. The fair value hierarchy
ranks the quality and reliability of the information used to
determine fair values.

The guidance in ASC Subtopic 820-10 also addresses
measuring fair value in situations where markets are inactive
and transactions are not orderly. Transactions or quoted prices
for assets and liabilities may not be determinative of fair value
when transactions are not orderly, and thus, may require
adjustments to estimate fair value. Price quotes based on
transactions that are not orderly should be given little, if any,
weight
in measuring fair value. Price quotes based on
transactions that are orderly shall be considered in determining
fair value, and the weight given is based on facts and
circumstances. If sufficient
information is not available to
determine if price quotes are based on orderly transactions, less
weight should be given to the price quote relative to other
transactions that are known to be orderly.

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

Investment securities
Investment securities are classified in four categories and
accounted for as follows:

• Debt securities that the Corporation has the intent and
ability to hold to maturity are classified as securities
held-to-maturity and reported at amortized cost. The
Corporation may not sell or transfer held-to-maturity
securities without calling into question its intent to hold
other debt securities to maturity, unless a nonrecurring or
unusual event
that could not have been reasonably
anticipated has occurred. An investment in debt securities
is considered impaired if the fair value of the investment
is less than its amortized cost. For other-than-temporary
impairments the Corporation assess if it has both the
intent and the ability to hold the security for a period of
time sufficient to allow for an anticipated recovery in its
fair value to its amortized cost. For other-than-temporary
impairment not related to a credit loss (defined as the
difference between the present value of the cash flows
expected to be collected and the amortized cost basis) for
recognized in other
a held-to-maturity security is
comprehensive loss and amortized over the remaining life
of the debt security. The amortized cost basis for a debt
security is adjusted by the credit loss amount of other-
than-temporary impairments.

• Debt and equity securities classified as trading securities
are reported at fair value, with unrealized gains and losses
included in non-interest income.

• Debt and equity securities (equity securities with readily
available fair value) not classified as either securities
held-to-maturity or trading securities, and which have a
readily available fair value, are classified as securities
available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of
taxes, in accumulated other comprehensive income or loss.
The specific identification method is used to determine
realized gains and losses on securities available-for-sale,
which are included in net gains or losses on sale and
valuation adjustment of
in the
consolidated statements of operations. Declines in the value

investment

securities

106

of debt and equity securities that are considered other-than-
temporary reduce the value of the asset, and the estimated
loss is recorded in non-interest income. For debt securities,
the Corporation assesses whether (a) it has the intent to sell
the debt security, or (b) it is more likely than not that it will
be required to sell the debt security before its anticipated
recovery. If either of these conditions is met, an other-than-
temporary impairment on the security is recognized. In
instances in which a determination is made that a credit loss
(defined as the difference between the present value of the
cash flows expected to be collected and the amortized cost
basis) exists but the entity does not intend to sell the debt
security and it is not more likely than not that the entity will
be required to sell the debt security before the anticipated
recovery of its remaining amortized cost basis (i.e., the
amortized cost basis less any current-period credit loss), the
impairment is separated into (a) the amount of the total
impairment related to the credit loss, and (b) the amount of
the total impairment related to all other factors. The amount
of the total other-than-temporary impairment related to the
credit loss is recognized in the statement of operations. The
amount of the total impairment related to all other factors is
recognized in other comprehensive loss. The other-than-
temporary impairment analyses for both debt and equity
securities are performed on a quarterly basis.

• Investments in equity or other securities that do not have
readily available fair values are classified as other
investment securities in the consolidated statements of
financial condition, and are subject to impairment testing
if applicable. These securities are stated at the lower of
cost or realizable value. The source of this value varies
according to the nature of the investment, and is primarily
obtained by the Corporation from valuation analyses
prepared by third-parties or from information derived
from financial statements available for the corresponding
venture capital and mutual funds. Stock that is owned by
the Corporation to comply with regulatory requirements,
such as Federal Reserve Bank and Federal Home Loan
Bank (“FHLB”) stock, is included in this category, and
their realizable value equals their cost.

The amortization of premiums is deducted and the accretion
of discounts is added to net interest income based on the
interest method over the outstanding period of the related
securities. The cost of securities sold is determined by specific
losses on sales of
realized gains or
identification. Net
investment securities and unrealized loss valuation adjustments
on securities
considered
other-than-temporary,
available-for-sale, held-to-maturity
investment
securities are determined using the specific identification
method and are reported separately in the consolidated
statements of operations. Purchases and sales of securities are
recognized on a trade date basis.

if
any,
and other

107 POPULAR, INC. 2011 ANNUAL REPORT

Derivative financial instruments
All derivatives are recognized on the statements of financial
condition at fair value. The Corporation’s policy is not to offset
the fair value amounts recognized for multiple derivative
instruments executed with the same counterparty under a
master netting arrangement nor to offset the fair value amounts
recognized for the right to reclaim cash collateral (a receivable)
or the obligation to return cash collateral (a payable) arising
from the same master netting arrangement as the derivative
instruments.

When the Corporation enters into a derivative contract, the
derivative instrument is designated as either a fair value hedge,
cash flow hedge or as a free-standing derivative instrument. For
a fair value hedge, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged asset or
liability or of an unrecognized firm commitment attributable to
the hedged risk are recorded in current period earnings. For a
cash flow hedge, changes in the fair value of the derivative
instrument, to the extent that it is effective, are recorded net of
and
taxes
subsequently reclassified to net income (loss) in the same
period(s) that the hedged transaction impacts earnings. The
ineffective portion of cash flow hedges
immediately
recognized in current earnings. For free-standing derivative
instruments, changes in fair values are reported in current
period earnings.

in accumulated other

comprehensive

income

is

the

includes

documents

relationship

and strategy

for undertaking

Prior to entering a hedge transaction,

the Corporation
formally
between hedging
instruments and hedged items, as well as the risk management
objective
various hedge
transactions. This process
linking all derivative
instruments that are designated as fair value or cash flow
hedges to specific assets and liabilities on the statements of
financial condition or to specific forecasted transactions or firm
commitments along with a formal assessment, at both inception
of the hedge and on an ongoing basis, as to the effectiveness of
the derivative instrument in offsetting changes in fair values or
cash flows of
accounting is
the hedged item. Hedge
discontinued when the derivative instrument is not highly
effective as a hedge, a derivative expires, is sold, terminated,
when it is unlikely that a forecasted transaction will occur or
when it is determined that is no longer appropriate. When
hedge accounting is discontinued the derivative continues to be
carried at fair value with changes in fair value included in
earnings.

quotes,

pricing models,

For non-exchange traded contracts, fair value is based on
dealer
flow
methodologies similar techniques for which the determination
judgment or
of
estimation.

fair may require significant management

discounted

cash

The fair value of derivative instruments considers the risk of
non-performance by the counterparty or the Corporation, as
applicable.

The Corporation obtains or pledges collateral in connection
the

with its derivative activities when applicable under
agreement.

as

are

loans

classified

Loans
Loans
held-in-portfolio when
management has the intent and ability to hold the loan for the
foreseeable future, or until maturity or payoff. The foreseeable
future is a management judgment which is determined based
upon the type of
loan, business strategies, current market
conditions, balance sheet management and liquidity needs.
Management’s view of the foreseeable future may change based
on changes in these conditions. When a decision is made to sell
or securitize a loan that was not originated or initially acquired
with the intent to sell or securitize, the loan is reclassified from
held-in-portfolio into held-for-sale. Due to changing market
conditions or other strategic initiatives, management’s intent
with respect to the disposition of the loan may change, and
accordingly, loans previously classified as held-for-sale may be
reclassified into held-in-portfolio. Loans transferred between
loans held-for-sale and held-in-portfolio classifications are
recorded at the lower of cost or fair value at the date of transfer.
value upon

Purchased loans

accounted at

fair

are

acquisition.

Loans held-for-sale are stated at the lower of cost or fair
value, cost being determined based on the outstanding loan
balance less unearned income, and fair value determined,
generally in the aggregate. Fair value is measured based on
current market prices for similar loans, outstanding investor
commitments, prices of recent sales or discounted cash flow
analyses which utilize inputs and assumptions which are
believed to be consistent with market participants’ views. The
cost basis also includes consideration of deferred origination
fees and costs, which are recognized in earnings at the time of
sale. Upon reclassification to held-for-sale, credit related fair
value adjustments are recorded as a reduction in the allowance
for loan losses (“ALLL”). To the extent that the loan’s reduction
in value has not already been provided for in the allowance for
loan losses, an additional
loan loss provision is recorded.
Subsequent to reclassification to held-for-sale, the amount, by
which cost exceeds fair value, if any, is accounted for as a
valuation allowance with changes therein included in the
determination of net income (loss) for the period in which the
change occurs.

Loans held-in-portfolio are reported at their outstanding
principal balances net of any unearned income, charge-offs,
unamortized deferred fees and costs on originated loans, and
premiums or discounts on purchased loans. Fees collected and
costs incurred in the origination of new loans are deferred and
amortized using the interest method or a method which
approximates the interest method over the term of the loan as
an adjustment to interest yield.

108

The past due status of a loan is determined in accordance
with its contractual repayment terms. Furthermore, loans are
reported as past due when either interest or principal remains
unpaid for 30 days or more in accordance with its contractual
repayment terms.

interest

income on commercial

Non-accrual loans are those loans on which the accrual of
interest is discontinued. When a loan is placed on non-accrual
status, all previously accrued and unpaid interest is charged
against income and the loan is accounted for either on a cash-
basis method or on the cost-recovery method. Loans designated
as non-accruing are returned to accrual status when the
Corporation expects repayment of the remaining contractual
principal and interest.
Recognition of

and
construction loans is discontinued when the loans are 90 days
or more in arrears on payments of principal or interest or when
other factors indicate that
the collection of principal and
interest is doubtful. The impaired portion of secured loan past
due as to principal and interest is charged-off not later than 365
days past due. However, in the case of a collateral dependent
loan individually evaluated for impairment, the excess of the
recorded investment over the fair value of
the collateral
(portion deemed uncollectible) is generally promptly charged-
off, but in any event, not later than the quarter following the
quarter in which such excess was first recognized. Commercial
unsecured loans are charged-off no later than 180 days past
due. Recognition of
income on mortgage loans is
generally discontinued when loans are 90 days or more in
arrears on payments of principal or interest. The impaired
portion of a mortgage loan is charged-off when the loan is 180
days past due. The Corporation discontinues the recognition of
interest on residential mortgage loans insured by the Federal
Housing Administration (“FHA”) or guaranteed by the U.S.
Department of Veterans Affairs
(“VA”) when 18-months
delinquent as to principal or interest. The principal repayment
on these loans is insured. Recognition of interest income on
closed-end consumer loans and home equity lines of credit is
discontinued when the loans are 90 days or more in arrears on
payments of principal or
is generally
recognized on open-end consumer loans, except for home
the loans are charged-off.
equity lines of credit, until
Recognition of interest income for lease financing is ceased
when loans are 90 days or more in arrears. Closed-end
consumer loans and leases are charged-off when they are 120
days in arrears. Open-end (revolving credit) consumer loans are
charged-off when 180 days
in arrears. Commercial and
consumer overdrafts are generally charged-off no later than 60
days past their due date.

interest.

interest

Income

Purchased impaired loans

accounted for under ASC
Subtopic 310-30 are not considered non-performing and
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. Also, loans charged-off against

difference

established

non-accretable

the
purchase
accounting are not reported as charge-offs. Charge-offs on loans
accounted under ASC Subtopic 310-30 are recorded only to the
exceed the non-accretable difference
extent
established with purchase accounting.

losses

that

in

A loan classified as a troubled debt restructuring (“TDR”) is
typically in non-accrual status at the time of the modification.
the
The TDR loan continues in non-accrual status until
borrower has demonstrated a willingness and ability to make
the restructured loan payments (at least six months of sustained
performance after the modification (or one year for loans
and
providing for quarterly or
management has concluded that
the
borrower would not be in payment default in the foreseeable
future.

semi-annual payments))
is probable that

it

Lease financing
The Corporation leases passenger and commercial vehicles and
equipment to individual and corporate customers. The finance
method of accounting is used to recognize revenue on lease
contracts that meet the criteria specified in the guidance for
leases in ASC Topic 840. Aggregate rentals due over the term of
the leases less unearned income are included in finance lease
contracts receivable. Unearned income is amortized using a
method which results in approximate level rates of return on
the principal amounts outstanding. Finance lease origination
fees and costs are deferred and amortized over the average life
of the lease as an adjustment to the interest yield.

Revenue for other leases is recognized as it becomes due

under the terms of the agreement.

Loans acquired in an FDIC-assisted transaction
Loans acquired in a business acquisition are recorded at fair
value at the acquisition date. Credit discounts are included in
the determination of fair value; therefore, an allowance for loan
losses is not recorded at the acquisition date.

The Corporation applied the guidance of ASC Subtopic
310-30 to all
loans acquired in Westernbank FDIC-assisted
transaction (including loans that do not meet scope of ASC
Subtopic 310-30), except for credit cards and revolving lines of
credit that were expressly scoped out from the application of
this guidance since they continued to have revolving privileges
after acquisition. Management used its judgment in evaluating
factors impacting expected cash flows and probable loss
the loan portfolio,
assumptions,
portfolio concentrations, distressed economic
conditions,
quality of underwriting standards of the acquired institution,
reductions
real estate values, among other
considerations that could also impact the expected cash inflows
on the loans.

including the quality of

in collateral

Loans accounted for under ASC Subtopic 310-30 represent
loans showing evidence of credit deterioration and that it is
probable, at the date of acquisition, that the Corporation would

109 POPULAR, INC. 2011 ANNUAL REPORT

not collect all contractually required principal and interest
payments. Generally, acquired loans that meet the definition for
nonaccrual status fall within the Corporation’s definition of
impaired loans under ASC Subtopic 310-30. Also, based on the
fair value determined for the acquired portfolio, acquired loans
that did not meet the definition of nonaccrual status also
resulted in the recognition of a significant discount attributable
to credit quality. Accordingly, an election was made by the
Corporation to apply the accretable yield method (expected
cash flow model of ASC Subtopic 310-30), as a loan with credit
deterioration and impairment,
instead of the standard loan
discount accretion guidance of ASC Subtopic 310-20, for the
loans acquired in the Westernbank FDIC-assisted transaction.
These loans are disclosed as a loan that was acquired with
credit deterioration and impairment.

Under ASC Subtopic 310-30, the covered loans acquired
from the FDIC were aggregated into pools based on loans that
had common risk characteristics. Each loan pool is accounted
for as a single asset with a single composite interest rate and an
aggregate expectation of cash flows. Characteristics considered
in pooling loans in the FDIC-assisted transaction included loan
type, interest rate type, accruing status, amortization type, rate
index and source type. Once the pools are defined,
the
Corporation maintains the integrity of the pool of multiple
loans accounted for as a single asset.

the pool

Under ASC Subtopic 310-30, the difference between the
undiscounted cash flows expected at acquisition and the fair
value in the loans, or the “accretable yield,” is recognized as
income using the effective yield method over the
interest
estimated life of the loan if the timing and amount of the future
cash flows of
estimable. The
is
non-accretable difference represents the difference between
contractually required principal and interest and the cash flows
expected to be collected. Subsequent to the acquisition date,
increases in cash flows over those expected at the acquisition
date are recognized as interest income prospectively. Decreases
in expected cash flows after the acquisition date are recognized
by recording an allowance for loan losses.

reasonably

The fair value discount of lines of credit with revolving
privileges that are accounted for pursuant to the guidance of
ASC Subtopic 310-20 represents the difference between the
contractually required loan payment receivable in excess of the
initial investment in the loan. This discount is accreted into
interest income over the life of the loan if the loan is in
accruing status. Any cash flows collected in excess of the
carrying amount of the loan are recognized in earnings at the
time of collection. The carrying amount of lines of credit with
revolving privileges, which are accounted pursuant
to the
guidance of ASC Subtopic 310-20, are subject to periodic
review to determine the need for recognizing an allowance for
loan losses.

losses

inherent

Allowance for loan losses
The Corporation follows a systematic methodology to establish
and evaluate the adequacy of the allowance for loan losses to
in the loan portfolio. This
provide for
methodology includes the consideration of
factors such as
current economic conditions, portfolio risk characteristics,
prior loss experience and results of periodic credit reviews of
loans. The provision for loan losses charged to
individual
current operations is based on such methodology. Loan losses
are charged and recoveries are credited to the allowance for
loan losses.

loan

The Corporation’s assessment of the allowance for loan
losses is determined in accordance with accounting guidance,
specifically guidance of loss contingencies in ASC Subtopic
ASC
450-20
impairment
and
the
Section 310-10-35. Also,
allowance for loan losses on purchased impaired loans and
purchased loans accounted for under ASC 310-30 by analogy,
by evaluating decreases in expected cash flows after the
acquisition date.

the Corporation determines

guidance

in

allowance

charge-offs

computed over

The accounting guidance provides for the recognition of a
loss
loans. The
for groups of homogeneous
Corporation’s general component of the allowance for loan
losses considers portfolio segments and product types. The
determination for general reserves of the allowance for loan
losses is based on historical net loss rates (including losses from
impaired loans) by loan type and by legal entity adjusted for
recent net charge-off trends and environmental factors. The
loss rates are based on the moving average of
base net
annualized net
three-year
loss period for commercial and construction loan
historical
portfolios, and an 18-month period for consumer
loan
portfolios. The net charge-off trend factors are applied to adjust
the base loss rates based on recent loss trends (last 6 months).
The
and
macroeconomic indicators, are assessed to account for current
market conditions that are likely to cause estimated credit
losses to differ from historical loss experience. The Corporation
reflects the effect of these environmental factors on a loan
that, as appropriate,
group as an adjustment
increases or
loss rate applied to each group.
decreases the historical
Correlation and regression analyses are used to select and
weight these indicators.

factors, which include

environmental

credit

a

According to the accounting guidance criteria for specific
impairment of a loan, the Corporation defines as impaired loans
those commercial and construction borrowers with outstanding
debt of $1 million or more and with interest and /or principal
90 days or more past due. Also, specific commercial borrowers
with outstanding debt of $1 million or over are deemed
impaired when, based on current
information and events,
management considers that it is probable that the debtor would
be unable to pay all amounts due according to the contractual
terms of the loan agreement. Commercial and construction

110

loans

impairment

smaller balance homogeneous

loans that originally met
the Corporation’s threshold for
impairment identification in a prior period, but due to charge-
offs or payments are currently below the $1 million threshold
and are still 90 days past due, except for TDRs, are accounted
for under the Corporation’s general reserve determined under
ASC Subtopic 450-20. Although the accounting codification
guidance for specific impairment of a loan excludes large
that are
groups of
collectively evaluated for
(e.g. mortgage and
consumer loans), it specifically requires that loan modifications
considered troubled debt restructurings (“TDRs”) be analyzed
under its provisions. An allowance for loan impairment is
recognized to the extent that the carrying value of an impaired
loan exceeds the present value of the expected future cash flows
discounted at the loan’s effective rate, the observable market
price of the loan, if available, or the fair value of the collateral if
the loan is collateral dependent. The fair value of the collateral
is generally obtained from appraisals. The Corporation
periodically requires updated appraisal reports for loans that
the
a general procedure,
are
Corporation internally reviews appraisals as part of
the
underwriting and approval process and also for credits
considered impaired.

considered impaired. As

Upon adoption of the amendments in ASU 2011-02 on the
third quarter of 2011,
the Corporation reassessed all
restructurings that occurred on or after January 1, 2011 to
determine if they are considered a TDR. Upon identifying those
receivables as TDRs, the Corporation classified them as impaired
under the guidance in ASC section 310-10-35. The amendments
in ASU 2011-02 require prospective
the
impairment measurement guidance in ASC Section 310-10-35
for those receivables newly identified as impaired. Refer to Note
11 to the consolidated financial statements for disclosures on the
impact of adopting ASU 2011-02.

application of

Troubled debt restructurings
A restructuring constitutes a TDR when the Corporation
separately concludes that both of the following conditions exist:
1) the restructuring constitute a concession and 2) the debtor is
experiencing financial difficulties. The concessions stem from
an agreement between the creditor and the debtor or are
imposed by law or a court. These concessions could include a
reduction in the interest rate on the loan, payment extensions,
forgiveness of principal, forbearance or other actions intended
to maximize collection. A concession has been granted when, as
a result of the restructuring, the Corporation does not expect to
collect all amounts due,
the
original contract rate. If the payment of principal is dependent
on the value of collateral, the current value of the collateral is
taken into consideration in determining the amount of
principal to be collected; therefore, all factors that changed are
considered to determine if a concession was granted, including
the change in the fair value of the underlying collateral that

including interest accrued at

its debt

and projections

involves a degree of

loan
may be used to repay the loan. Classification of
modifications as TDRs
judgment.
Indicators that the debtor is experiencing financial difficulties
which are considered include: (i) the borrower is currently in
default on any of its debt or it is probable that the borrower
would be in payment default on any of
in the
foreseeable future without the modification; (ii) the borrower
has declared or is in the process of declaring bankruptcy;
(iii) there is significant doubt as to whether the borrower will
continue to be a going concern; (iv) the borrower has securities
that have been delisted, are in the process of being delisted, or
are under threat of being delisted from an exchange; (v) based
on estimates
the
borrower’s current business capabilities, it is forecasted that the
entity-specific cash flows will be insufficient to service the debt
(both interest and principal) in accordance with the contractual
through maturity; and
terms of
(vi) absent
the borrower cannot
obtain funds from sources other than the existing creditors at
an effective interest rate equal to the current market interest
rate
a non-troubled debtor. The
identification of TDRs is critical in the determination of the
adequacy of the allowance for loan losses. Loans classified as
TDRs may be excluded from TDR status for certain disclosures
only if performance under the restructured terms exists for a
reasonable period (at
sustained
performance) and the loan yields a market rate.

the current modification,

the existing agreement

that only encompass

twelve months of

similar debt

least

for

for

A loan may be restructured in a troubled debt restructuring
into two (or more) loan agreements, for example, Note A and
Note B. Note A represents the portion of the original loan
principal amount that is expected to be fully collected along
with contractual interest. Note B represents the portion of the
original loan that may be considered uncollectible and charged-
off, but the obligation is not forgiven to the borrower. Note A
may be returned to accrual status provided all of the conditions
for a TDR to be returned to accrual status are met. The modified
loans are considered TDRs and thus, are evaluated under the
framework of ASC Section 310-10-35 as long as the loans are not
part of a pool of loans accounted for under ASC 310-30.

Refer to Note 11 to the consolidated financial statements for
the

additional
Corporation’s determination of the allowance for loan losses.

information

on TDRs

qualitative

and

Reserve for unfunded commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is
included in other liabilities in the consolidated statements of
financial condition. The determination of the adequacy of the
reserve is based upon an evaluation of the unfunded credit
facilities. Net adjustments
to the reserve for unfunded
commitments are included in other operating expenses in the
consolidated statements of operations.

111 POPULAR, INC. 2011 ANNUAL REPORT

FDIC loss share indemnification asset and true-up payment
obligation (contingent consideration)
The acquisition date fair value of the reimbursement that the
Corporation expects to receive from the FDIC under the loss
sharing agreements
is presented as an FDIC loss share
indemnification asset on the consolidated statements of
financial condition. Fair value was estimated using projected
cash flows related to the loss sharing agreements. Refer to Note
4 for additional information on the valuation methodology.

The FDIC loss share indemnification asset for loss share
agreements is measured separately from the related covered
assets as it is not contractually embedded in the assets and is
not transferable with the assets should the assets be sold.

are

recognized in non-interest

The FDIC loss share indemnification asset is recognized on
the same basis as the assets subject to loss share protection. As
such, for covered loans accounted pursuant to ASC Subtopic
310-30, decreases in expected reimbursements from the FDIC
due to improvements in expected cash flows to be received
from borrowers,
income
prospectively over the life of the FDIC loss sharing agreements.
For covered loans accounted for under ASC Subtopic 310-20, as
the loan discount recorded as of the acquisition date was
accreted into income, a reduction of the related indemnification
asset was recorded as a reduction in non-interest income.
Increases in expected reimbursements from the FDIC are
recognized in non-interest income in the same period that the
allowance for credit losses for the related loans is recognized.

The accretion due to discounting of the loss share asset and
changes in expected loss sharing reimbursements is included in
non-interest income, particularly in the category of FDIC loss
share income (expense).

The true-up payment obligation associated with the loss
share agreements, which is described in detail in Note 4 to the
consolidated financial statements, is accounted for at fair value
in accordance with ASC 805-30-25-6 as it
is considered
contingent consideration. The true-up payment obligation is
in the consolidated
included as part of other
statements of financial condition. Any changes in the carrying
value of the obligation is included in the category of FDIC loss
share income (expense) in the consolidated statements of
operations.

liabilities

Transfers and servicing of financial assets
The transfer of an entire financial asset, a group of entire
financial assets, or a participating interest in an entire financial
asset in which the Corporation surrenders control over the
assets is accounted for as a sale if all of the following conditions
set forth in ASC Topic 860 are met: (1) the assets must be
isolated from creditors of the transferor, (2) the transferee must
obtain the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) the transferor cannot maintain effective control
over the transferred assets through an agreement to repurchase

them before their maturity. When the Corporation transfers
financial assets and the transfer fails any one of these criteria,
the Corporation is prevented from derecognizing
the
transferred financial assets and the transaction is accounted for
as a secured borrowing. For federal and Puerto Rico income tax
purposes, the Corporation treats the transfers of loans which do
not qualify as “true sales” under the applicable accounting
guidance, as sales, recognizing a deferred tax asset or liability
on the transaction.

sold;

For transfers of financial assets that satisfy the conditions to
be accounted for as sales, the Corporation derecognizes all
recognizes all assets obtained and liabilities
assets
incurred in consideration as proceeds of the sale, including
servicing assets and servicing liabilities, if applicable; initially
measures at fair value assets obtained and liabilities incurred in
a sale; and recognizes in earnings any gain or loss on the sale.

The guidance on transfer of financial assets requires a true
sale analysis of the treatment of the transfer under state law as if
the Corporation was a debtor under the bankruptcy code. A
true sale legal analysis includes several legally relevant factors,
such as the nature and level of recourse to the transferor, and
the nature of retained interests in the loans sold. The analytical
conclusion as to a true sale is never absolute and unconditional,
but contains qualifications based on the inherent equitable
powers of a bankruptcy court, as well as the unsettled state of
the common law. Once the legal isolation test has been met,
other
the
factors concerning the nature and extent of
transferor’s control over the transferred assets are taken into
account in order to determine whether derecognition of assets
is warranted.

The Corporation sells mortgage loans to the Government
National Mortgage Association (“GNMA”) in the normal course
of business and retains the servicing rights. The GNMA
programs under which the loans are sold allow the Corporation
to repurchase individual delinquent loans that meet certain
criteria. At the Corporation’s option, and without GNMA’s prior
authorization, the Corporation may repurchase the delinquent
loan for an amount equal to 100% of the remaining principal
balance of
the
unconditional ability to repurchase the delinquent loan, the
Corporation is deemed to have regained effective control over
the loan and recognizes the loan on its balance sheet as well as
an offsetting liability, regardless of the Corporation’s intent to
repurchase the loan.

the Corporation has

loan. Once

the

Servicing assets
The Corporation periodically sells or securitizes loans while
retaining the obligation to perform the servicing of such loans.
In addition, the Corporation may purchase or assume the right
to service
the
Corporation undertakes an obligation to service a loan,
management assesses whether a servicing asset or liability
should be recognized. A servicing asset is recognized whenever

loans originated by others. Whenever

All

the

servicer

the compensation for servicing is expected to more than
adequately compensate
for performing the
servicing. Likewise, a servicing liability would be recognized in
the event that servicing fees to be received are not expected to
adequately compensate the Corporation for its expected cost.
Mortgage servicing assets recorded at fair value are separately
presented on the consolidated statements of financial condition.
separately recognized servicing assets are initially
recognized at
fair value. For subsequent measurement of
servicing rights, the Corporation has elected the fair value
method for mortgage loans servicing rights (“MSRs”) while all
other servicing assets, particularly those related to Small
Business Administration (“SBA”) commercial loans, follow the
amortization method. Under
the fair value measurement
method, MSRs are recorded at fair value each reporting period,
and changes in fair value are reported in other service fees in
the
the
consolidated
amortization method,
amortized in
proportion to, and over the period of, estimated servicing
income, and assessed for impairment based on fair value at each
reporting period. Contractual servicing fees including ancillary
income and late fees, as well as fair value adjustments, and
impairment losses, if any, are reported in other service fees in
the consolidated statement of operations. Loan servicing fees,
which are based on a percentage of the principal balances of the
loans serviced, are credited to income as loan payments are
collected.

of
servicing assets

operations. Under

statement

are

The fair value of servicing rights is estimated by using a cash
flow valuation model which calculates the present value of
estimated future net
taking into
consideration actual and expected loan prepayment rates,
discount rates, servicing costs, and other economic factors,
which are determined based on current market conditions.

servicing cash flows,

estimated fair

For purposes of evaluating and measuring impairment of
capitalized servicing assets that are accounted under
the
amortization method, the amount of impairment recognized, if
any, is the amount by which the capitalized servicing assets per
stratum exceed their
value. Temporary
impairment is recognized through a valuation allowance with
changes included in results of operations for the period in
which the change occurs. If it is later determined that all or a
portion of the temporary impairment no longer exists for a
particular stratum, the valuation allowance is reduced through
a recovery in earnings. Any fair value in excess of the cost basis
of the servicing asset for a given stratum is not recognized.
Servicing rights subsequently accounted under the amortization
method
other-than-temporary
impairment. When the recoverability of an impaired servicing
asset accounted under the amortization method is determined
to be remote,
the valuation
the unrecoverable portion of
allowance is applied as a direct write-down to the carrying
value of the servicing rights, precluding subsequent recoveries.

reviewed

also

are

for

112

Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful life of each type of
asset. Amortization of leasehold improvements is computed
over the terms of the respective leases or the estimated useful
lives of
the improvements, whichever is shorter. Costs of
maintenance and repairs which do not improve or extend the
life of the respective assets are expensed as incurred. Costs of
renewals and betterments are capitalized. When assets are
disposed of, their cost and related accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
earnings as realized or incurred, respectively.

incurred during

The Corporation capitalizes interest cost incurred in the
construction of significant real estate projects, which consist
primarily of facilities for its own use or intended for lease. The
amount of interest cost capitalized is to be an allocation of the
the period required to
interest
cost
substantially complete
for
interest
capitalization purposes is to be based on a weighted average
rate on the Corporation’s outstanding borrowings, unless there
is a specific new borrowing associated with the asset. Interest
cost capitalized for the years ended December 31, 2011, 2010
and 2009 was not significant.

asset. The

rate

the

The Corporation has operating lease arrangements primarily
associated with the rental of premises to support its branch
these
network or
arrangements
rent
on
escalations
non-cancellable operating leases with scheduled rent increases
are recognized on a straight-line basis over the lease term.

space. Certain of
for
and provide
expense
Rent

for general office
are non-cancellable

options.

renewal

and

Impairment of long-lived assets
The Corporation evaluates for impairment its long-lived assets
to be held and used, and long-lived assets to be disposed of,
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.

Restructuring costs
A liability for a cost associated with an exit or disposal activity
is recognized and measured initially at its fair value in the
period in which the liability is incurred. If future service is
required for employees to receive the one-time termination
benefit, the liability is initially measured at its fair value as of
the termination date and recognized over the future service
period.

Other real estate
Other real estate, received in satisfaction of debt, is recorded at
the lower of cost (carrying value of the loan) or fair value less
estimated costs of disposal, by charging the allowance for loan
losses. Subsequent to foreclosure, any losses in the carrying
value arising from periodic re-evaluations of the properties, and

113 POPULAR, INC. 2011 ANNUAL REPORT

any gains or losses on the sale of these properties are credited
or charged to expense in the period incurred and are included
as a component of other operating expenses. The cost of
maintaining and operating such properties is expensed as
incurred.

Updated appraisals or third-party broker price opinions of
value (“BPO”) are obtained to adjust the value of the other real
estate assets. The frequency depends on the loan type and total
credit exposure. Commencing in 2011, the appraisal
for a
commercial or construction other real estate property with a
book value greater than $1 million is updated annually and if
lower than $1 million it is updated at least every two years. In
periods prior to the change in the appraisal policy, it was the
Corporation’s practice to require updated appraisals
for
commercial and construction other real estate properties over
$3 million at least annually. Cases between $1 million to $3
million needed to be reappraised at least every 2 years. For
residential mortgage properties, the Corporation requests third-
party BPOs or appraisals. Updated BPOs or appraisals for
are generally requested annually.
residential
Appraisals may be adjusted due to age, collateral inspections
and property profiles or due to general market conditions. The
adjustments applied are based upon internal information like
other appraisals for the type of properties and loss severity
information that can provide historical trends in the real estate
market.

estate

real

Goodwill and other intangible assets
Goodwill is recognized when the purchase price is higher than
the fair value of net assets acquired in business combinations
under the purchase method of accounting. Goodwill is not
amortized, but is tested for impairment at least annually or
more frequently if events or circumstances indicate possible
impairment using a two-step process at each reporting unit
level. The first step of the goodwill impairment test, used to
identify potential
impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
the goodwill of the reporting unit is not considered impaired
and the second step of the impairment test is unnecessary. If
needed, the second step consists of comparing the implied fair
value of the reporting unit goodwill with the carrying amount
of that goodwill. In determining the fair value of a reporting
unit, the Corporation generally uses a combination of methods,
which include market price multiples of comparable companies
and the discounted cash flow analysis. Goodwill impairment
losses are recorded as part of operating expenses in the
consolidated statement of operations.

Other intangible assets deemed to have an indefinite life are
not amortized, but are tested for impairment using a one-step
process which compares the fair value with the carrying
amount of the asset. In determining that an intangible asset has
an indefinite life, the Corporation considers expected cash

and legal,

inflows
competitive,
economic and other factors, which could limit the intangible
asset’s useful life.

contractual,

regulatory,

Other identifiable intangible assets with a finite useful life,
mainly core deposits, are amortized using various methods over
the periods benefited, which range from 4 to 10 years. These
intangibles are evaluated periodically for impairment when
events or changes in circumstances indicate that the carrying
amount may not be recoverable. Impairments on intangible
assets with a finite useful life are evaluated under the guidance
for impairment or disposal of long-lived assets.

Bank-owned life insurance
Bank-owned life insurance represents life insurance on the lives
of certain employees who have provided positive consent
allowing the Corporation to be the beneficiary of the policy.
Bank-owned life insurance policies are carried at their cash
surrender value. The Corporation recognizes income from the
periodic increases in the cash surrender value of the policy, as
well as insurance proceeds received, which are recorded as
other operating income, and are not subject to income taxes.

The cash surrender value and any additional amounts
provided by the contractual terms of the bank-owned insurance
the balance sheet date are
policy that are realizable at
considered in determining the amount that could be realized,
and any amounts that are not immediately payable to the
policyholder in cash are discounted to their present value. In
determining “the amount that could be realized,” it is assumed
that policies will be surrendered on an individual-by-individual
basis.

Assets sold / purchased under agreements to repurchase /
resell
Repurchase and resell agreements are treated as collateralized
financing transactions and are carried at the amounts at which
the assets will be subsequently reacquired or resold as specified
in the respective agreements.

to

agreements

resell. However,

It is the Corporation’s policy to take possession of securities
purchased under
the
counterparties to such agreements maintain effective control
over such securities, and accordingly those securities are not
reflected in the Corporation’s consolidated statements of
financial condition. The Corporation monitors the fair value of
the underlying securities as compared to the related receivable,
including accrued interest.

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 financial condition.

The Corporation may require counterparties to deposit
return collateral pledged, when

collateral or

additional
appropriate.

stated at cost,

Software
Capitalized software is
less accumulated
amortization. Capitalized software includes purchased software
and capitalizable application development costs associated with
internally-developed software. Amortization, computed on a
straight-line method,
the
estimated useful life of the software. Capitalized software is
included in “Other assets” in the consolidated statement of
financial condition.

is charged to operations over

Guarantees, including indirect guarantees of indebtedness of
others
The Corporation, as a guarantor, recognizes at the inception of
a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. Refer to Note 26 to the
consolidated financial statements for further disclosures on
guarantees.

Accounting considerations related to the redemption of
cumulative preferred stock and redemption of the trust
preferred securities
The Corporation applied the guidance in ASC Subsection
260-10-S99 (formerly EITF Topic D-42 “The effect on the
calculation of Earnings per Share for the Redemption or
Induced Conversion of Preferred Stock”) for the redemption of
the Corporation’s cumulative preferred stock, which indicates
that
the
consideration transferred to the holders of the preferred stock
and (2) the carrying amount of the preferred stock in the
registrant’s balance sheet (net of issuance costs) be subtracted
from (or added to) net income to arrive at income available to
common stockholders in the calculation of net income (loss)
per common share.

the difference between (1)

the fair value of

The Corporation treated the redemption of

the trust
preferred securities as an extinguishment of debt pursuant to
the guidance in ASC Subsection 470-50-40 which indicates that
the difference between the reacquisition price and the net
carrying amount of the extinguished debt be recognized as gain
or loss on extinguishment in the results of operations.

Accounting considerations related to the issuance and
conversion of depositary shares contingently convertible
perpetual non-cumulative preferred stock
The contingently convertible perpetual cumulative shares of
preferred stock contained a beneficial conversion feature that
must be settled in shares of Corporation’s common stock.
According to ASC 470-20-25-5, an embedded beneficial
conversion feature present in a convertible instrument shall be
recognized separately at issuance by allocating a portion of the
proceeds equal
feature to
to the intrinsic value of
additional paid-in capital. A contingent beneficial conversion
feature was measured using the commitment date stock price.

that

114

The allocation of the intrinsic value to additional paid-in capital
gave rise to a preferred stock discount which should be
amortized as a deemed dividend on the preferred stocks
through retained earnings. Once the contingency is resolved the
entire preferred stock discount is amortized through retained
earnings. However, since at the time the preferred stocks are
recognized the contingency is already resolved,
the entire
intrinsic value was allocated to retained earnings and the
recognition of the preferred stock discount was not necessary.

The intrinsic value was calculated at the commitment date
as the difference between the conversion price and the fair
value of the common stock multiplied by the number of shares
into which the security was convertible as indicated in ASC
470-20-30-6.

The excess of the fair value of securities issued over the fair
value of securities issuable under the original contractual
conversion terms, which would be an excess consideration,
represents a return to preferred stock shareholders. The excess
consideration is deducted,
in the computation of basic and
dilutive earnings per share, from net income in arriving at net
income applicable to common shareholders.

Treasury stock
Treasury stock is recorded at cost and is carried as a reduction
of stockholders’ equity in the consolidated statements of
financial condition. At the date of retirement or subsequent
reissue, the treasury stock account is reduced by the cost of
such stock. At retirement, the excess of the cost of the treasury
stock over its par value is recorded entirely to surplus. At
reissuance, the difference between the consideration received
upon issuance and the specific cost is charged or credited to
surplus.

Income Recognition - Insurance agency business
Commissions and fees are recognized when related policies are
effective. Additional premiums and rate adjustments are
recorded as they occur. Contingent commissions are recorded
on the accrual basis when the amount to be received is notified
by the insurance company. Commission income from advance
business is deferred. An allowance is created for expected
adjustments
to policy
cancellations.

to commissions

earned relating

is

revenue

banking

Income Recognition - Investment banking revenues and
commissions
Investment
follows:
underwriting fees at the time the underwriting is completed and
income is reasonably determinable; corporate finance advisory
fees as earned, according to the terms of the specific contracts;
and sales commissions on a trade-date basis. Commission
income
securities
transactions are recorded on a trade-date basis.

and expenses

related to

customers’

recorded

as

115 POPULAR, INC. 2011 ANNUAL REPORT

Foreign exchange
Assets and liabilities denominated in foreign currencies are
translated to U.S. dollars using prevailing rates of exchange at
the end of the period. Revenues, expenses, gains and losses are
translated using weighted average rates for the period. The
resulting
from
operations for which the functional currency is other than the
U.S. dollar is reported in accumulated other comprehensive
income (loss), except for highly inflationary environments in
which the effects are included in other operating expenses.

translation adjustment

foreign currency

(“BHD”)

The Corporation holds interests in Centro Financiero BHD,
in the Dominican Republic. Although not
S.A.
significant, some of these businesses are conducted in the
country’s foreign currency. During 2011, the Corporation sold
its equity investments in Consorcio de Tarjetas Dominicanas,
S.A. (“CONTADO”) and Serfinsa, which businesses were also
conducted on their countries foreign currency. Additionally,
during 2011,
in
EVERTEC DE VENEZUELA, C.A. (formerly Red Tranred) as
the Corporation determined to wind-down those operations.

the Corporation wrote-off

its investment

of

as

the

currency

reporting

The Corporation considered Venezuela’s economy as highly
inflationary as of January 1, 2010, and the financial statements
of Red Tranred were remeasured as if the functional currency
such date. ASC
was
Paragraph 830-10-45-11 defines a highly inflationary economy
as one with a cumulative inflation rate of approximately
100 percent or more over a three-year period. Under ASC Topic
830, if a country’s economy is classified as highly inflationary,
the functional currency of the foreign entity operating in that
country must be remeasured to the functional currency of the
reporting entity. The unfavorable impact of remeasuring the
financial statements of Red Tranred at December 31, 2010, was
approximately $1.9 million. Total assets for Red Tranred
remeasured approximated $8.9 million at December 31, 2010.

than not (defined as a likelihood of more than 50 percent) that
such assets will not be realized. Accordingly, the need to
establish valuation allowances for deferred tax assets is assessed
periodically by the Corporation based on the more likely than
not realization threshold criterion. In the assessment for a
valuation allowance, appropriate consideration is given to all
positive and negative evidence related to the realization of the
deferred tax assets. This assessment considers, among other
matters, all sources of taxable income available to realize the
deferred tax asset,
including the future reversal of existing
temporary differences, the future taxable income exclusive of
taxable
reversing temporary differences and carryforwards,
income in carryback years and tax-planning strategies.
In
making such assessments,
is given to
evidence that can be objectively verified.

significant weight

The valuation of deferred tax assets requires judgment in
assessing the likely future tax consequences of events that have
been recognized in the Corporation’s financial statements or tax
returns and future profitability. The Corporation’s accounting
for deferred tax consequences represents management’s best
estimate of those future events.

to

by

taxing

challenge

Such tax positions

Positions taken in the Corporation’s tax returns may be
subject
authorities upon
the
examination. Uncertain tax positions are initially recognized in
the financial statements when it is more likely than not the
position will be sustained upon examination by the tax
authorities.
and
subsequently measured as the largest amount of tax benefit that
is greater than 50% likely of being realized upon settlement
with the tax authority, assuming full knowledge of the position
and all relevant facts. Interest on income tax uncertainties is
classified within income tax expense in the statement of
operations; while the penalties, if any, are accounted for as
other operating expenses.

are both initially

Refer to the disclosure of accumulated other comprehensive
income (loss) included in the accompanying consolidated
statements of comprehensive income (loss) for the outstanding
balances of the foreign currency translation adjustments at
December 31, 2011, 2010 and 2009.

Income taxes
The Corporation recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have
been recognized in the Corporation’s financial statements or tax
are
returns. Deferred income
determined for differences between financial statement and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future. The computation is based on
enacted tax laws and rates applicable to periods in which the
temporary differences are expected to be recovered or settled.

and liabilities

tax assets

The guidance for income taxes requires a reduction of the
carrying amounts of deferred tax assets by a valuation
allowance if, based on the available evidence, it is more likely

The Corporation accounts for the taxes collected from
customers and remitted to governmental authorities on a net
basis (excluded from revenues).

Income tax expense or benefit for the year is allocated
among continuing operations, discontinued operations, and
other comprehensive income, as applicable. The amount
allocated to continuing operations is the tax effect of the pretax
income or loss from continuing operations that occurred during
the year, plus or minus income tax effects of (a) changes in
circumstances that cause a change in judgment about the
realization of deferred tax assets in future years, (b) changes in
tax
and
(d) tax-deductible dividends paid to shareholders, subject to
certain exceptions.

changes

in tax

status,

rates,

laws

(c)

or

Employees’ retirement and other postretirement benefit plans
Pension costs are computed on the basis of accepted actuarial
methods and are charged to current operations. Net pension
costs are based on various actuarial assumptions regarding

future experience under the plan, which include costs for
services rendered during the period, interest costs and return
on plan assets, as well as deferral and amortization of certain
items such as actuarial gains or losses. The funding policy is to
contribute to the plan as necessary to provide for services to
date and for those expected to be earned in the future. To the
extent that these requirements are fully covered by assets in the
plan, a contribution may not be made in a particular year.

The cost of postretirement benefits, which is determined
based on actuarial assumptions and estimates of the costs of
providing these benefits in the future, is accrued during the
years that the employee renders the required service.

The guidance for compensation retirement benefits of ASC
Topic 715 requires the recognition of the funded status of each
defined pension benefit plan, retiree health care and other
financial
postretirement benefit plans on the statement of
condition.

Stock-based compensation
The Corporation opted to use the fair value method of
recording stock-based compensation as described in the
guidance for employee share plans in ASC Subtopic 718-50.

Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of
a business enterprise during a period from transactions and other
events
from
those
investments by owners and distributions
to owners. The
presentation of comprehensive income (loss) is included in
separate consolidated statements of comprehensive income (loss).

and circumstances,

resulting

except

Net income (loss) per common share
Basic income (loss) per common share is computed by dividing
net
income (loss) adjusted for preferred stock dividends,
including undeclared or unpaid dividends if cumulative, and
charges or credits related to the extinguishment of preferred
stock or induced conversions of preferred stock, by the
weighted average number of common shares outstanding
during the year. Diluted income per common share take into
consideration the weighted average common shares adjusted for
the effect of stock options, restricted stock and warrants on
common stock, using the treasury stock method.

Statement of cash flows
For purposes of reporting cash flows, cash includes cash on
hand and amounts due from banks.

116

Note 3 - New accounting pronouncements
FASB Accounting Standards Update 2011-12, Comprehensive
Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05, (“ASU 2011-12”)

The FASB issued ASU 2011-12 in December 2011, which defers
indefinitely the new requirement in ASU 2011-05 to present
components of reclassification adjustments out of accumulated
other comprehensive income on the face of
the income
statement by income statement line item.

All other requirements in ASU 2011-05 are not affected by
this update, including the requirement to report comprehensive
income either in a single continuous financial statement or in
two separate but consecutive financial statements. Public
entities should apply these requirements for fiscal years, and
interim periods within
after
those
December 15, 2011.

beginning

years,

The provisions of

this guidance impact presentation
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-11, Balance Sheet
(Topic 210): Disclosures about Offsetting Assets and
Liabilities (“ASU 2011-11”)
The FASB issued ASU 2011-11 in December 2011. The
amendments
in this ASU require an entity to disclose
information about offsetting and related arrangements to enable
users of its financial statements to understand the effect of
those arrangements on its financial position. To meet this
objective, entities with financial instruments and derivatives
that are either offset on the balance sheet or subject to a master
netting arrangement or similar arrangement shall disclose the
following quantitative information separately for assets and
liabilities in tabular format: a) gross amounts of recognized
assets and liabilities; b) amounts offset to determine the net
amount presented in the balance sheet; c) net amounts
presented in the balance sheet; d) amounts subject to an
enforceable master netting agreement or similar arrangement
not otherwise included in (b), including: amounts related to
other derivatives
recognized
instruments if either management makes an accounting election
not to offset or the amounts do not meet the guidance in ASC
Section 210-20-45 or ASC Section 815-10-45, and also amounts
related to financial collateral (including cash collateral); and e)
the net amount after deducting the amounts in (d) from the
amounts in (c).

instruments

financial

and

In addition to these tabular disclosures, entities are required
to provide a description of the setoff rights associated with
assets and liabilities subject to an enforceable master netting
arrangement.

An entity is required to apply the amendments for annual
reporting periods beginning on or after January 1, 2013, and

117 POPULAR, INC. 2011 ANNUAL REPORT

interim periods within those annual periods. An entity should
provide
amendments
retrospectively for all comparative periods presented.

required by those

the disclosures

The provisions of

this guidance impact presentation
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

interest

FASB Accounting Standards Update 2011-10, Property,
Plant, and Equipment (Topic 360): Derecognition of in
Substance Real Estate-a Scope Clarification (“ASU 2011-
10”)
The FASB issued ASU 2011-10 in December 2011. The
objective of this ASU is to resolve the diversity in practice about
whether the guidance in ASC Subtopic 360-20, “Property,
Plant, and Equipment - Real Estate Sales” applies to a parent
that ceases to have a controlling financial
in a
subsidiary that is in substance real estate as a result of default
on the subsidiary’s nonrecourse debt. ASU 2011-10 provides
that when a parent (reporting entity) ceases to have a
controlling financial interest in a subsidiary that is in substance
real estate as a result of default on the subsidiary’s nonrecourse
debt, the reporting entity should apply the guidance in ASC
Subtopic 360-20 to determine whether it should derecognize
the in substance real estate. Generally, a reporting entity would
not satisfy the requirements to derecognize the in substance
real estate before the legal transfer of the real estate to the
lender and the extinguishment of
the related nonrecourse
indebtedness. That is, even if the reporting entity ceases to have
a controlling financial interest under ASC Subtopic 810-10, the
reporting entity would continue to include the real estate, debt,
and the results of the subsidiary’s operations in its consolidated
financial statements until
title to the real estate is
legal
transferred to legally satisfy the debt.

ASU 2011-10 should be applied on a prospective basis to
deconsolidation events occurring after the effective date; with
prior periods not adjusted even if the reporting entity has
continuing involvement with previously derecognized in
substance real estate entities. For public entities, ASU 2011-10
is effective for fiscal years, and interim periods within those
years, beginning on or after June 15, 2012. Early adoption is
permitted; however, the Corporation is not early adopting this
ASU.

The adoption of this guidance will not have a material effect

on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-
Goodwill and Other (Topic 350): Testing Goodwill for
Impairment (“ASU 2011-08”)
The FASB issued Accounting Standards Update (“ASU”)
No. 2011-08 in September 2011. ASU 2011-08 is intended to
simplify how entities test goodwill
impairment. ASU
2011-08 permits an entity the option to first assess qualitative
factors to determine whether it is “more likely than not” that
the fair value of a reporting unit is less than its carrying amount

for

as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test described in ASC Topic 350,
Intangibles-Goodwill
and Other. The more-likely-than-not
threshold is defined as having a likelihood of more than 50%.
The previous guidance under ASC Topic 350 required an entity
to test goodwill for impairment, on at least an annual basis, by
comparing the fair value of a reporting unit with its carrying
amount, including goodwill (step one). If the fair value of a
reporting unit is less than its carrying amount, then the second
step of the test must be performed to measure the amount of
the impairment loss, if any. Under the amendments in this ASU,
an entity is not required to calculate the fair value of a reporting
unit unless the entity determines that it is more likely than not
that its fair value is less than its carrying amount.

This ASU also removes the guidance that permitted the
entities to carry forward the calculation of the fair value of the
reporting unit from one year to the next if certain conditions
are met. In addition, the new qualitative indicators replace
those currently used to determine whether an interim goodwill
impairment test is required. These indicators are also applicable
for assessing whether to perform step two for reporting units
with zero or negative carrying amounts.

ASU 2011-08 is effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption was permitted, including
for annual and interim goodwill impairment tests performed as
of a date before September 15, 2011, if an entity’s financial
statements for the most recent annual or interim period had not
yet been issued. The Corporation did not elect to adopt early
the provisions of this ASU.

The provisions of this guidance simplify how entities test for
impairment and will not have an impact on the

goodwill
Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income (“ASU 2011-05”)
The FASB issued ASU 2011-05 in June 2011. The amendment of
this ASU allows an entity the option to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two
separate but consecutive statements. In both choices, an entity
is required to present each component of net income along with
total net income, each component of other comprehensive
income along with a total for other comprehensive income, and
a total amount
the
requirement
reclassification
to
adjustments out of accumulated other comprehensive income
on the face of the income statement by income statement line
item has been deferred indefinitely by ASU 2011-12 as
mentioned above. ASU 2011-05 eliminates the option to present
the components of other comprehensive income as part of the

for comprehensive income. However,
present

components

of

statement of changes in stockholders’ equity. The amendments
to the Codification in this ASU do not change the items that
must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net
income. This ASU also does not change the option for an entity
to present components of other comprehensive income either
net of related tax effects or before related tax effects, with one
amount shown for the aggregate income tax expense or benefit
related to the total of other comprehensive income items.

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
an impact on the

disclosure only and will not have
Corporation’s consolidated financial statements.

and

disclosure

requirements

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
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
instruments that are managed within a
portfolio, application of premiums and discounts in a fair value
measurement,
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.

quantitative

disclosing

including

financial

The adoption of this guidance is not expected to have a

material effect on the 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

118

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) 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 adoption of this guidance is not expected to have a

material effect on the 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
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.

loan modifications

constitute

troubled

to

The

creditors

new guidance

evaluate
required
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, ASU 2011-02 (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
experiencing financial
determine whether
difficulties; and (5) ends
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.

is
the deferral of

the debtor

For public companies, the new guidance was effective for
interim and annual periods beginning on or after June 15, 2011,

119 POPULAR, INC. 2011 ANNUAL REPORT

and applied retrospectively to restructurings occurring on or
after the beginning of
the fiscal year of adoption. Early
application was permitted. For purposes of measuring
impairment for receivables that are newly considered impaired
under the new guidance, an entity was required to 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 adopted this guidance in the third quarter
of 2011. Refer to Note 11 to the consolidated financial
statements for the impact of the adoption of this ASU and the
new disclosure requirements.

Note 4 - Business combination
On April 30, 2010, the Corporation’s banking subsidiary, BPPR,
acquired certain assets and assumed certain deposits and
liabilities of Westernbank Puerto Rico from the FDIC, as
receiver for Westernbank. Also, BPPR entered into loss sharing
agreements with the FDIC with respect to a majority of the
acquired loans and other real estate (the “covered assets”).
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
for which the FDIC paid BPPR 80%
reimbursement under the loss sharing agreements. The loss
sharing
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

agreement

applicable

to losses

(In thousands)

Assets:
Cash and money market investments
Investment in Federal Home Loan Bank stock
Loans
FDIC loss share indemnification asset
Other real estate
Core deposit intangible
Receivable from FDIC (associated to the note issued to the FDIC)
Other assets
Goodwill
Total assets

Liabilities:
Deposits
Note issued to the FDIC (including a premium of $12,411 resulting

from the fair value adjustment)

Equity appreciation instrument
True-up payment obligation
Contingent liability on unfunded loan commitments
Accrued expenses and other liabilities
Total liabilities

and BPPR reimbursement to the FDIC for eight years, in each
case, on the same terms and conditions as described above.

is 45 days

recorded as

following the

last day (the

In addition, BPPR agreed to make a true-up payment
obligation (the “true-up payment”) to the FDIC on the date
that
“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 fair value of such
true-up payment obligation is
contingent
consideration, which is included in the caption of other
liabilities in the consolidated statements of financial condition.
Under the loss sharing agreements, BPPR will pay to the FDIC
50% of the excess, if any, of: (i) 20% of the intrinsic loss
estimate of $4.6 billion (or $925 million) (as determined by the
FDIC) less (ii) the sum of: (A) 25% of the asset discount (per
bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-
loss payments (defined as the aggregate of all of the payments
made or payable to BPPR minus the aggregate of all of the
payments made or payable to the FDIC); plus (C) the sum of
the period servicing amounts for every consecutive twelve-
month period prior to and ending on the true-up measurement
date in respect of each of the loss sharing agreements during
which the loss sharing provisions of the applicable loss sharing
agreement is in effect (defined as the product of the simple
average of the principal amount of shared loss loans and shared
loss assets at the beginning and end of such period times 1%).

The following table presents the fair values of major classes
of identifiable assets acquired and liabilities assumed by the
Corporation as of the April 30, 2010 acquisition date.

Book value prior to
purchase
accounting
adjustments

Fair value
adjustments

Additional
consideration

As recorded by
Popular, Inc. on
April 30, 2010

$358,132
58,610
8,554,744
–
125,947
–
–
44,926
–
$9,142,359

$–
–
(3,354,287)
2,425,929
(73,867)
24,415
–
–
86,841
$(890,969)

$–
–
–
–
–
–
111,101
–
–
$111,101

$358,132
58,610
5,200,457
2,425,929
52,080
24,415
111,101
44,926
86,841
$8,362,491

$2,380,170

$11,465

$–

$2,391,635

–
–
–
–
13,925
$2,394,095

–
–
88,181
45,755
–
$145,401

5,770,495
52,500
–
–
–
$5,822,995

5,770,495
52,500
88,181
45,755
13,925
$8,362,491

As part of the transaction, BPPR issued a five-year note to
the FDIC, which was secured by a substantial amount of the
assets,
real estate
including loans and foreclosed other
In
properties, acquired in the FDIC-assisted transaction.
addition, as part of the consideration for the transaction, the
FDIC received a cash-settled equity appreciation instrument,
which is described in detail below.

The following is a description of the methods used to
determine the fair values of significant assets acquired and
liabilities
on the Westernbank FDIC-assisted
transaction:

assumed

Loans
Fair values for loans were based on a discounted cash flow
methodology. Certain loans were valued individually, while
other loans were valued as pools. Aggregation into pools
considered characteristics such as loan type, payment term, rate
type and accruing status. Principal and interest projections
considered prepayment rates and credit loss expectations. The
discount rates were developed based on the relative risk of the
cash flows,
taking into account principally the loan type,
market rates as of the valuation date, liquidity expectations, and
the expected life of the loans.

loss

The

sharing

percentages.

FDIC loss share indemnification asset and true-up payment
obligation
Fair value of the FDIC loss share indemnification asset and
true-up payment obligation was estimated using projected cash
flows related to the loss sharing agreements based on the
expected reimbursements for losses and taking into account the
applicable
expected
reimbursements did not include reimbursable amounts related
to future covered expenditures. The estimates of expected
losses used in valuation of the loss share asset and true-up
payment obligation were consistent with the loss estimates used
in the valuation of the covered assets. The cash flows were
discounted to reflect the estimated timing of the receipt of the
loss share reimbursement from the FDIC and the true-up
payment due to the FDIC at the end of the loss sharing
agreements, to the extent applicable. The discount rate used in
the calculations was determined using a yield of an A-rated
corporate security with a term based on the weighted average
life of the recovery of cash flows plus a risk premium reflecting
the uncertainty related to the timing of cash flows and the
potential rejection of claims by the FDIC. Due to the increased
uncertainty of the true-up payment, an additional risk premium
was added to the discount rate.

Receivable from the FDIC
The note issued to the FDIC as of
the April 30, 2010
transaction date was determined based on a pro-forma
statement of assets acquired and liabilities assumed as of
February 24, 2010, the bid transaction date. The receivable

120

from the FDIC represents an adjustment
to reconcile the
consideration paid based on the assets acquired and liabilities
assumed as of April 30, 2010 compared with the pro-forma
statement as of February 24, 2010. The carrying amount of this
receivable was a reasonable estimate of fair value based on its
short-term nature. The receivable from the FDIC was collected
by BPPR in June 2010 and is reflected as a cash inflow from
financing activities in the consolidated statement of cash flows
for the year ended December 31, 2010. The proceeds were
remitted to the FDIC in July 2010 as a payment on the note.

Other real estate covered under loss sharing agreements
with the FDIC (“OREO”)
OREO includes real estate acquired in settlement of loans.
OREO properties were recorded at estimated fair values less
costs to sell based on management’s assessments of existing
appraisals or broker price opinions. The estimated costs to sell
were based on past experience with similar property types and
terms customary for real estate transactions.

Goodwill
The amount of goodwill is the residual difference in the fair
value of liabilities assumed and net consideration paid to the
FDIC over the fair value of the assets acquired. The goodwill is
deductible for income tax purposes. The goodwill from the
Westernbank FDIC-assisted transaction was assigned to the
BPPR reportable segment.

Core deposit intangible
This intangible asset represents the value of the relationships
that Westernbank had with its deposit customers. The fair value
of this intangible asset was estimated based on a discounted
cash flow methodology that gave appropriate consideration to
expected customer attrition rates, cost of the core deposit base,
interest costs, and the net maintenance cost attributable to
customer deposits, and the cost of alternative funds.

Deposits
The fair values used for the demand and savings deposits that
comprise the transaction accounts acquired, by definition equal
the amount payable on demand at the reporting date. The fair
values for time deposits were estimated using a discounted cash
flow calculation that applies interest rates currently offered to
comparable time deposits with similar maturities.

Contingent liability on unfunded loan commitments
Unfunded loan commitments are contractual obligations to
provide future funding. The fair value of the liability associated
to unfunded loan commitments was principally based on the
expected utilization rate or likelihood that the commitment
would be exercised. The estimated value of the unfunded
commitments was equal to the expected loss associated with the
balance expected to be funded. The expected loss was

121 POPULAR, INC. 2011 ANNUAL REPORT

comprised of both credit and non-credit components; therefore,
the discounts derived from the loan valuation were applied to
the expected balance to be funded to derive the fair value. The
unfunded loan commitments outstanding as of the April 30,
2010 transaction date related principally to commercial and
construction loans and commercial revolving lines of credit.
Losses incurred on loan disbursements made under these
unfunded loan commitments are covered by the FDIC loss
sharing agreements provided that the Corporation complies
with specific requirements under
such agreements. The
contingent liability on unfunded loan commitments is included
as part of “other liabilities” in the consolidated statement of
financial condition.

Deferred taxes
Deferred taxes relate to a difference between the financial
statement and tax basis of the assets acquired and liabilities
assumed in the transaction. Deferred taxes were reported based
upon the principles in ASC Topic 740 “Income Taxes”, and
were measured using the enacted statutory income tax rate to
be in effect for BPPR at the time the deferred tax is expected to
reverse.

For income tax purposes, the Westernbank FDIC-assisted
transaction was accounted for as an asset purchase and the tax
bases of assets acquired were allocated based on fair values
using a modified residual method. Under this method, the
purchase price was allocated among the assets in order of
liquidity (the most liquid first) up to its fair market value.

Note issued to the FDIC
The fair value of the note issued to the FDIC was determined
using discounted cash flows based on market rates available for
debt with similar terms, including consideration that the debt
was collateralized by the assets covered under the loss sharing
agreements.

Equity appreciation instrument
BPPR issued an equity appreciation instrument to the FDIC.
Under the terms of the equity appreciation instrument, the FDIC
had the opportunity to obtain a cash payment with a value equal
to the product of (a) 50 million units and (b) the difference
between (i) Popular, Inc.’s “average volume weighted price” over
the two NASDAQ trading days immediately prior to the exercise
date and (ii) the exercise price of $3.43. The equity appreciation
instrument was exercisable by the holder thereof, in whole or in
part, up to May 7, 2011. The fair value of the equity appreciation
instrument was estimated by determining a call option value using
the Black-Scholes Option Pricing Model. The equity appreciation
instrument was recorded as a liability and any subsequent changes
in its estimated fair value were recognized in earnings. The
changes in the fair value of the equity appreciation instrument are
separately disclosed in the consolidated statements of operations
within the non-interest income category.

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 $838 million at December 31, 2011 (2010 - $835
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
the Corporation
Law, at December 31, 2011 and 2010,
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 December 31, 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
(2010 - $5 million).

At December 31, 2011 and 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 of insured properties.

At December 31, 2010,

the Corporation maintained
restricted cash of $33 million in a money market account in
conjunction with the note issued to the FDIC.

At December 31, 2011,

the Corporation maintained
restricted cash of $14 million to comply with the requirements
of the credit card networks (2010 - $12 million).

At December 31, 2011,

the Corporation maintained
restricted cash of $18 million in money market account as a
guarantee required by a Puerto Rico municipality.

Note 6 - Securities purchased under agreement to resell
The securities purchased underlying the agreements to resell
were delivered to, and are held by, the Corporation. The
counterparties to such agreements maintain effective control
over such securities. The Corporation is permitted by contract
to repledge the securities, and has agreed to resell to the
counterparties the same or substantially similar securities at the
maturity of the agreements.
The fair value of

the collateral securities held by the
Corporation on these transactions at December 31, was as
follows:

(In thousands)

Repledged
Not repledged

Total

2011

2010

$274,829
8,608

$171,833
11,495

$283,437

$183,328

The repledged securities were used as underlying securities

for repurchase agreement transactions.

122

Note 7 – 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, and loan servicing agreements.
The classification and carrying amount of the Corporation’s
pledged assets, in which the secured parties are not permitted
to sell or repledge the collateral, were as follows:

(In thousands)

Investment securities available-for-sale, at fair value
Investment securities held-to-maturity, at amortized cost
Loans held-for-sale measured at lower of cost or fair value
Loans held-in-portfolio covered under loss sharing agreements with the FDIC
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC
Other real estate covered under loss sharing agreements with the FDIC

Total pledged assets

2011

2010

$1,894,651
25,000
5,286
–
10,279,579
–

$1,867,249
25,770
2,862
4,787,002
9,695,200
57,565

$12,204,516

$16,435,648

At

December

Pledged securities and loans that the creditor has the right
by custom or contract to repledge are presented separately on
the consolidated statements of financial condition.
investment
31,

securities
2011,
available-for-sale and held-to-maturity totaling $1.4 billion, and
loans of $0.4 billion, served as collateral to secure public funds
(December 31, 2010 - $1.3 billion and $0.5 billion,
respectively).

At December

the Corporation’s banking
31, 2011,
subsidiaries had short-term and long-term credit
facilities
authorized with the Federal Home Loan Bank system (the
“FHLB”) aggregating $2.0 billion (December 31, 2010 - $1.6
billion). Refer to Notes 19 and 20 to the consolidated financial
statements for borrowings outstanding under these credit
facilities. At December 31, 2011, the credit facilities authorized
with the FHLB were collateralized by $4.9 billion in loans
held-in-portfolio (December 31, 2010 - $3.8 billion). Also,
BPPR had a borrowing capacity at the Fed discount window of

$2.6 billion (December 31, 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 December 31, 2011, the
credit
facilities with the Fed discount window were
collateralized by $4.0 billion in loans held-in-portfolio
(December 31, 2010 - $4.2 billion). These pledged assets are
included in the above table and were not reclassified and
separately reported in the consolidated statement of financial
condition.

In addition, at December 31, 2011, securities sold but not
yet delivered amounting to $68 million were pledged to secure
repurchase agreements.

Loans held-in-portfolio and other real estate owned that are
covered by loss sharing agreements with the FDIC served as
collateral to secure the note issued to the FDIC as part of the
Westernbank FDIC-assisted transaction.

123 POPULAR, INC. 2011 ANNUAL REPORT

Note 8 – 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 December 31, 2011 and 2010 (2009 - only fair value is
presented).

(In thousands)

U.S. Treasury securities
After 1 to 5 years

Total U.S. Treasury securities

Obligations of U.S. Government sponsored entities

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of U.S. Government sponsored entities

Obligations of Puerto Rico, States and political subdivisions

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of Puerto Rico, States and political subdivisions

Collateralized mortgage obligations - federal agencies

After 1 to 5 years
After 5 to 10 years
After 10 years

Total collateralized mortgage obligations - federal agencies

Collateralized mortgage obligations - private label

After 5 to 10 years
After 10 years

Total collateralized mortgage obligations - private label

Mortgage-backed securities

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total mortgage-backed securities

Equity securities (without contractual maturity)

Other

After 5 to 10 years
After 10 years

Total other

Amortized
cost

Gross
unrealized
gains

2011
Gross
unrealized
losses

$34,980

34,980

94,492
655,625
171,633
32,086

953,836

765
14,824
4,595
37,320

57,504

2,424
55,096
1,589,373

1,646,893

5,653
59,460

65,113

57
7,564
111,639
1,870,736

1,989,996

6,594

17,850
6,311

24,161

$3,688

3,688

2,382
25,860
2,969
499

31,710

9
283
54
909

1,255

49
1,446
49,462

50,957

1
–

1

1
328
8,020
141,274

149,623

426

700
101

801

$–

–

–
–
–
–

–

–
31
–
–

31

–
–
208

208

181
7,141

7,322

–
–
1
49

50

104

–
–

–

Fair
value

$38,668

38,668

96,874
681,485
174,602
32,585

985,546

774
15,076
4,649
38,229

58,728

2,473
56,542
1,638,627

1,697,642

5,473
52,319

57,792

58
7,892
119,658
2,011,961

2,139,569

6,916

Weighted
average
yield

3.35%

3.35

3.45
3.38
2.94
3.20

3.30

4.97
4.07
5.33
5.38

5.03

3.28
2.64
2.84

2.83

0.81
2.44

2.30

3.91
3.86
4.66
4.25

4.27

2.96

18,550
6,412

24,962

10.99
3.61

9.06

Total investment securities available-for-sale

$4,779,077

$238,461

$7,715

$5,009,823

3.58%

124

(In thousands)

U.S. Treasury securities
After 1 to 5 years
After 5 to 10 years

Total U.S. Treasury securities

Obligations of U.S. Government sponsored entities

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of U.S. Government sponsored entities

Obligations of Puerto Rico, States and political subdivisions

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of Puerto Rico, States and political

subdivisions

Collateralized mortgage obligations - federal agencies

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total collateralized mortgage obligations - federal agencies

Collateralized mortgage obligations - private label

After 5 to 10 years
After 10 years

Total collateralized mortgage obligations - private label

Mortgage-backed securities

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total mortgage-backed securities

Equity securities (without contractual maturity)

Other

After 5 to 10 years
After 10 years

Total other

2010

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value

Weighted
average
yield

2009

Fair
value

$7,001
28,676

35,677

153,738
1,000,955
1,512
–

1,156,205

10,404
15,853
20,765
5,505

52,527

77
1,846
107,186
1,096,271

1,205,380

10,208
79,311

89,519

2,983
15,738
170,662
2,289,210

2,478,593

8,722

17,850
7,805

25,655

$122
2,337

2,459

2,043
53,681
36
–

55,760

19
279
43
52

393

1
105
1,507
32,248

33,861

31
78

109

101
649
10,580
86,870

98,200

855

262
–

262

$–
–

–

–
661
–
–

661

–
5
194
19

218

–
–
936
11

947

158
4,532

4,690

–
3
3
632

638

102

–
69

69

$7,123
31,013

38,136

1.50%
3.81

3.36

$–
30,452

30,452

155,781
1,053,975
1,548
–

1,211,304

10,423
16,127
20,614
5,538

3.39
3.72
6.30
–

3.68

3.92
4.52
5.07
5.28

356,915
1,235,469
28,492
27,060

1,647,936

–
22,303
50,527
7,779

52,702

4.70

80,609

78
1,951
107,757
1,128,508

1,238,294

10,081
74,857

84,938

3,084
16,384
181,239
2,375,448

2,576,155

9,475

3.88
4.77
2.50
2.87

2.84

1.20
2.29

2.17

3.62
3.98
4.71
4.26

4.29

3.43

18,112
7,736

25,848

10.98
3.62

8.74

41
4,995
127,098
1,468,056

1,600,190

20,232
97,326

117,558

27,390
30,940
214,261
2,937,588

3,210,179

7,790

–
–

–

Total investment securities available-for-sale

$5,052,278

$191,899

$7,325

$5,236,852

3.78% $6,694,714

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

125 POPULAR, INC. 2011 ANNUAL REPORT

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.

The following table presents the aggregate amortized cost
investment securities available-for-sale at

and fair value of
December 31, 2011, by contractual maturity.

(In thousands)

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total
Equity securities

Total investment securities

available-for-sale

Amortized cost Fair value

$95,314
715,417
366,466
3,595,286

4,772,483
6,594

$97,706
745,594
379,474
3,780,133

5,002,907
6,916

$4,779,077

$5,009,823

of

Proceeds

from the

investment

securities
sale
available-for-sale during 2011 were $262.4 million (2010 -
$397.1 million; 2009 - $3.8 billion). Gross realized gains and
losses on the sale of investment securities available-for-sale, for
the years ended December 31, 2011, 2010 and 2009 were as
follows:

(In thousands)

Gross realized gains
Gross realized losses

Net realized gains on sale of
investment securities
available-for-sale

For the year ended December 31,
2010

2011

2009

$8,514
(130)

$3,768
(6)

$184,705
(361)

$8,384

$3,762

$184,344

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 December 31, 2011, and 2010.

(In thousands)

Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - federal agencies
Collateralized mortgage obligations - private label
Mortgage-backed securities
Equity securities

Total investment securities available-for-sale in an unrealized loss

Less than 12 months

At December 31, 2011
12 months or more

Total

Fair
value

$7,817
90,543
13,595
5,577
5,199

Gross
unrealized
losses

$28
208
539
14
95

Fair
value

$191
–
44,148
1,466
2

Gross
unrealized
losses

$3
–
6,783
36
9

Fair
value

$8,008
90,543
57,743
7,043
5,201

Gross
unrealized
losses

$31
208
7,322
50
104

position

$122,731

$884

$45,807

$6,831

$168,538

$7,715

(In thousands)

Obligations of U.S. Government sponsored entities
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - federal agencies
Collateralized mortgage obligations - private label
Mortgage-backed securities
Equity securities
Other

Total investment securities available-for-sale in an unrealized loss

Less than 12 months

At December 31, 2010
12 months or more

Total

Fair
value

$24,284
19,357
40,212
21,231
33,261
3
7,736

Gross
unrealized
losses

$661
213
945
292
406
8
69

Fair
value

$–
303
2,505
52,302
9,257
43
–

Gross
unrealized
losses

$–
5
2
4,398
232
94
–

Fair
value

$24,284
19,660
42,717
73,533
42,518
46
7,736

Gross
unrealized
losses

$661
218
947
4,690
638
102
69

position

$146,084

$2,594

$64,410

$4,731

$210,494

$7,325

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-
the value of a debt security is reduced and a
temporary,
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
(5) any rating changes by a rating agency,
payments,
(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.

such date. At December 31, 2011,

At December 31, 2011, management performed its quarterly
analysis of all debt securities in an unrealized loss position.
Based on the analyses performed, management concluded that
security was other-than-temporarily
no individual debt
impaired as of
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
December 31, 2011. During the year ended December 31, 2011,
the Corporation recorded $340 thousand in losses on certain
equity securities considered other-than-temporary impairment
(2010 - $264 thousand). Management has the intent and ability
to hold the investments in equity securities that are at a loss
position at December 31, 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” (“private-label CMO”) are
primarily related to securities backed by residential mortgages.
In addition to verifying the credit ratings for the private-label

126

loan-to-value, FICO score,

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,
and
the weighted average
delinquency and foreclosure rates of the underlying assets in
the securities. At December 31, 2011, there were no “sub-
prime” securities in the Corporation’s private-label CMOs
portfolios. For private-label CMOs with unrealized losses at
December 31, 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 December 31, 2011,
thus
management expects to recover the amortized cost basis of the
securities.

and

(includes

available-for-sale

The following table states the name of issuers, and the
aggregate amortized cost and fair value of the securities of such
issuer
held-to-maturity
in which the aggregate amortized cost of such
securities),
securities
equity. This
exceeds
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.

stockholders’

10% of

2011

2010

(In
thousands)

FNMA
FHLB
Freddie Mac

Amortized
cost

$1,049,315
553,940
984,270

Fair value

$1,089,069
578,617
1,010,669

Amortized
cost

$ 757,812
1,003,395
637,644

Fair value

$ 789,838
1,056,549
654,495

127 POPULAR, INC. 2011 ANNUAL REPORT

Note 9 - 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 December 31, 2011 and 2010 (2009 – only amortized cost is
presented).

(In thousands)

Obligations of Puerto Rico, States and political subdivisions

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of Puerto Rico, States and political subdivisions

Collateralized mortgage obligations - private label

After 10 years

Total collateralized mortgage obligations - private label

Other

After 1 to 5 years

Total other

Amortized
cost

Gross
unrealized
gains

2011
Gross
unrealized
losses

Fair
value

Weighted
average
yield

$7,275
11,174
18,512
62,012

98,973

160

160

26,250

26,250

$6
430
266
40

742

–

–

83

83

$–
–
90
855

945

9

9

–

–

$7,281
11,604
18,688
61,197

98,770

151

151

26,333

26,333

2.24%
5.80
5.99
4.11

4.51

5.45

5.45

3.41

3.41

Total investment securities held-to-maturity

$125,383

$825

$954

$125,254

4.28%

(In thousands)

U.S. Treasury securities

Within 1 year

Total U.S. Treasury securities

Obligations of Puerto Rico, States and political subdivisions

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total obligations of Puerto Rico, States and political

subdivisions

Collateralized mortgage obligations - private label

After 10 years

Total collateralized mortgage obligations - private label

Other

Within 1 year
After 1 to 5 years

Total other

2010
Gross
unrealized
gains

Gross
unrealized
losses

Fair
value

2009
Weighted
average
yield

Amortized
cost

$–

–

6
333
115
–

454

–

–

–
–

–

$1

1

$25,872

25,872

0.11%

0.11

–
–
268
1,649

2,156
15,862
17,441
55,053

5.33
4.10
5.96
4.25

$25,777

25,777

7,015
109,415
17,112
48,600

1,917

90,512

4.58

182,142

10

10

–
7

7

166

166

4,080
243

4,323

5.45

5.45

1.15
1.20

1.15

220

220

3,573
1,250

4,823

Amortized
cost

$25,873

25,873

2,150
15,529
17,594
56,702

91,975

176

176

4,080
250

4,330

Total investment securities held-to-maturity

$122,354

$454

$1,935

$120,873

3.51%

$212,962

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.

(In thousands)

Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years

Total investment securities held-to-maturity

128

The following tables present the aggregate amortized cost
and fair value of investments securities held-to-maturity at
December 31, 2011, by contractual maturity.

Amortized cost Fair value

$7,275
37,424
18,512
62,172

$7,281
37,937
18,688
61,348

$125,383

$125,254

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 December 31, 2011 and 2010:

(In thousands)

Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - private label

Total investment securities held-to-maturity in an unrealized loss

Less than 12 months

At December 31, 2011
12 months or more

Total

Fair
value

$10,323
–

Gross
unrealized
losses

$92
–

Fair
value

$31,062
151

Gross
unrealized
losses

$853
9

Fair
value

$41,385
151

Gross
unrealized
losses

$945
9

position

$10,323

$92

$31,213

$862

$41,536

$954

(In thousands)

U.S. Treasury securities
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - private label
Other

Total investment securities held-to-maturity in an unrealized loss

Less than 12 months

At December 31, 2010
12 months or more

Total

Fair
value

$25,872
51,995
–
243

Gross
unrealized
losses

$1
1,915
–
7

Fair
value

$–
773
166
–

Gross
unrealized
losses

$–
2
10
–

Fair
value

$25,872
52,768
166
243

Gross
unrealized
losses

$1
1,917
10
7

position

$ 78,110

$1,923

$939

$12

$ 79,049

$1,935

As indicated in Note 8 to these consolidated financial
statements, management evaluates investment securities for
OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political
subdivisions” classified as held-to-maturity at December 31,
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.

Note 10 - Loans
The risks of
the Westernbank FDIC-assisted transaction
acquired loans are significantly different from those loans not
covered under the FDIC loss sharing agreements because of the
the
loss protection provided by the FDIC. Accordingly,
Corporation presents
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”.

to the loss

subject

loans

For a summary of the accounting policy related to loans,
interest recognition and allowance for loan losses refer to the
summary of significant accounting policies included in Note 2
to these consolidated financial statements.

129 POPULAR, INC. 2011 ANNUAL REPORT

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

and 2010.

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total loans held-in-portfolio [a]

Total loans HIP at
Covered loans at
Non-covered loans at
December 31, 2011 December 31, 2011 December 31, 2011

$6,689,686
3,845,200
311,628
5,518,460
563,867

1,230,029
557,894
1,130,593
518,476
236,763

$2,271,295
241,447
546,826
1,172,954
–

–
–
–
–
116,181

$8,960,981
4,086,647
858,454
6,691,414
563,867

1,230,029
557,894
1,130,593
518,476
352,944

$20,602,596

$4,348,703

$24,951,299

[a]

Loans held-in-portfolio at December 31, 2011 are net of $101 million in unearned income and exclude $363 million in loans held-for-sale.

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total loans held-in-portfolio[a]

Non-covered loans at
December 31, 2010

Covered loans at

Total loans HIP at
December 31, 2010 December 31, 2010

$7,006,676
4,386,809
500,851
4,524,722
602,993

1,132,308
568,353
1,236,067
503,757
265,499

$2,463,549
303,632
640,492
1,259,459
–

–
–
–
–
169,750

$9,470,225
4,690,441
1,141,343
5,784,181
602,993

1,132,308
568,353
1,236,067
503,757
435,249

$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 December 31, 2011 and 2010 by main
categories.

(In thousands)

December 31, 2011

December 31, 2010

Commercial
Construction
Mortgage

Total

$26,198
236,045
100,850

$363,093

$60,528
412,744
420,666

$893,938

During the year ended December 31, 2011, the Corporation
recorded purchases of mortgage loans amounting to $1.3
billion. In addition, during the year ended December 31, 2011,
the Corporation
cards
relationships with balances of approximately $131 million.
There were no significant purchases of commercial and
construction loans during 2011.

purchases

recorded

credit

of

The Corporation sold approximately $350 million of
residential mortgage loans during the year ended December 31,
2011. Also, the Corporation securitized approximately $907
million of mortgage loans to Government National Mortgage
Association (“GNMA”) mortgage-backed securities during the
year ended December 31, 2011. Furthermore, the Corporation
securitized approximately $206 million of mortgage loans in
Federal Mortgage Association (“FNMA”) mortgage-backed
securities during the year ended December 31, 2011.

During the

the Corporation
third quarter of 2011,
transferred $27 million of commercial and construction loans
held-in-portfolio to loans
to held-for-sale at a value of
$14 million. This resulted in a write-down at the time of
transfer of $12.7 million. Also, during the quarter ended
September 30, 2011, these loans as well as other construction
and commercial loans held-for sale with a combined book value

of $128 million were sold to a newly created joint venture in
which the Corporation holds a minority interest. Refer to Note
28 to the consolidated financial statements for details of this
transaction. Besides this sale, the Corporation sold commercial
and construction loans with a book value of approximately $30
million during the year ended December 31, 2011.

tables

present

following

Non–covered loans
The
loans
held-in-portfolio that are in non-performing status and accruing
loans past due 90 days or more by loan class at December 31,
2011 and 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

non-covered

130

financial

statements pursuant

they have the option (but not

Corporation’s
to GNMA’s
buy-back option program. Servicers of loans underlying GNMA
mortgage-backed securities must report as their own assets the
the
defaulted loans that
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
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.

instances, have partial guarantees under

Total [1]

$1,371,242

$307,960

$366,608

[1] For purposes of this table non-performing loans exclude $262 million in non-performing loans held-for-sale.

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

At December 31, 2011

Puerto Rico

U.S. mainland

Popular, Inc.

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

$453,879
177,292
53,859
649,279
5,642

–
–
19,317
6,830
5,144

$–
675
–
280,912
–

25,748
157
–
–
468

$182,158
59,544
75,140
37,223
166

735
10,065
1,516
34
27

$–
–
–
–
–

–
–
–
–
–

$–

$636,037
236,836
128,999
686,502
5,808

735
10,065
20,833
6,864
5,171

$–
675
–
280,912
–

25,748
157
–
–
468

$1,737,850

$307,960

At December 31, 2010

Puerto Rico

U.S. mainland

Popular, Inc.

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

$370,677
114,792
64,678
518,446
5,674

–
–
22,816
7,528
6,892

$–
–
–
292,387
–

33,514
–
–
–
1,442

$182,456
57,102
173,876
23,587
263

–
17,562
5,369
135
–

$–
–
–
–
–

–
–
–
–
–

$–

$553,133
171,894
238,554
542,033
5,937

–
17,562
28,185
7,663
6,892

$–
–
–
292,387
–

33,514
–
–
–
1,442

$1,571,853

$327,343

Total [1]

$1,111,503

$327,343

$460,350

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

At December 31, 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 December 31, 2011 include $44 million
in consumer loans (December 31, 2010 - $60 million).

131 POPULAR, INC. 2011 ANNUAL REPORT

The following tables present loans by past due status at December 31, 2011 and 2010 for non-covered loans held-in-portfolio

(net of unearned income).

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total

December 31, 2011
Puerto Rico
Past due

30-59
days
$56,597
46,013
608
202,072
7,927

60-89
days
$21,586
17,233
21,055
98,565
2,301

14,507
155
17,583
22,677
1,740
$369,879

11,479
395
10,434
5,883
1,442
$190,373

90 days or more
$453,879
177,967
53,859
930,191
5,642

Total
past due
$532,062
241,213
75,522
1,230,828
15,870

Current
$3,075,090
2,622,217
85,419
3,458,655
532,836

25,748
157
19,317
6,830
5,612
$1,679,202

51,734
707
47,334
35,390
8,794
$2,239,454

1,164,086
19,344
935,854
480,874
226,310
$12,600,685

Loans held-
in-portfolio
Puerto Rico
$3,607,152
2,863,430
160,941
4,689,483
548,706

1,215,820
20,051
983,188
516,264
235,104
$14,840,139

December 31, 2011
U.S. mainland
Past due

30-59
days
$69,079
24,436
3,921
30,594
201

314
7,090
3,574
106
29
$139,344

60-89
days
$6,882
7,858
-
13,190
204

229
3,587
2,107
37
10
$34,104

90 days or more
$182,158
59,544
75,140
37,223
166

735
10,065
1,516
34
27
$366,608

Total
past due
$258,119
91,838
79,061
81,007
571

1,278
20,742
7,197
177
66
$540,056

Loans held-
in-portfolio
U.S. mainland
$3,082,534
981,770
150,687
828,977
15,161

14,209
537,843
147,405
2,212
1,659
$5,762,457

Current
$2,824,415
889,932
71,626
747,970
14,590

12,931
517,101
140,208
2,035
1,593
$5,222,401

December 31, 2011
Popular, Inc.
Past due

30-59
days
$125,676
70,449
4,529
232,666
8,128

14,821
7,245
21,157
22,783
1,769
$509,223

60-89
days
$28,468
25,091
21,055
111,755
2,505

11,708
3,982
12,541
5,920
1,452
$224,477

90 days or more
$636,037
237,511
128,999
967,414
5,808

Total
past due
$790,181
333,051
154,583
1,311,835
16,441

Current
$5,899,505
3,512,149
157,045
4,206,625
547,426

26,483
10,222
20,833
6,864
5,639
$2,045,810

53,012
21,449
54,531
35,567
8,860
$2,779,510

1,177,017
536,445
1,076,062
482,909
227,903
$17,823,086

Loans held-
in-portfolio
Popular, Inc.
$6,689,686
3,845,200
311,628
5,518,460
563,867

1,230,029
557,894
1,130,593
518,476
236,763
$20,602,596

December 31, 2010
Puerto Rico
Past due

30-59
days
$47,064
34,703
6,356
188,468
10,737

60-89
days
$25,547
23,695
3,000
83,789
2,274

90 days or more
$370,677
114,792
64,678
810,833
5,674

Total
past due
$443,288
173,190
74,034
1,083,090
18,685

Current
$3,412,310
2,688,228
94,322
2,566,610
554,102

16,073
21,004
22,076
3,799
$350,280

12,758
11,830
5,301
1,318
$169,512

33,514
22,816
7,528
8,334
$1,438,846

62,345
55,650
34,905
13,451
$1,958,638

1,054,081
965,610
459,745
252,048
$12,047,056

December 31, 2010
U.S. mainland
Past due

30-59
days
$68,903
30,372
30,105
38,550
1,008

343
6,116
5,559
375
$181,331

60-89
days
$10,322
15,079
292
12,751
224

357
6,873
2,689
98
$48,685

90 days or more
$182,456
57,102
173,876
23,587
263

–
17,562
5,369
135
$460,350

Total
past due
$261,681
102,553
204,273
74,888
1,495

700
30,551
13,617
608
$690,366

Current
$2,889,397
1,422,838
128,222
800,134
28,711

15,182
537,802
201,190
8,499
$6,031,975

December 31, 2010
Popular, Inc.
Past due

30-59
days
$115,967
65,075
36,461
227,018
11,745

16,416
6,116
26,563
22,451
3,799
$531,611

60-89
days
$35,869
38,774
3,292
96,540
2,498

13,115
6,873
14,519
5,399
1,318
$218,197

90 days or more
$553,133
171,894
238,554
834,420
5,937

Total
past due
$704,969
275,743
278,307
1,157,978
20,180

Current
$6,301,707
4,111,066
222,544
3,366,744
582,813

33,514
17,562
28,185
7,663
8,334
$1,899,196

63,045
30,551
69,267
35,513
13,451
$2,649,004

1,069,263
537,802
1,166,800
468,244
252,048
$18,079,031

132

Loans held-
in-portfolio
Puerto
Rico
$3,855,598
2,861,418
168,356
3,649,700
572,787

1,116,426
1,021,260
494,650
265,499
$14,005,694

Loans held-
in-portfolio
U.S.
mainland
$3,151,078
1,525,391
332,495
875,022
30,206

15,882
568,353
214,807
9,107
$6,722,341

Loans held-
in-portfolio
Popular,
Inc.
$7,006,676
4,386,809
500,851
4,524,722
602,993

1,132,308
568,353
1,236,067
503,757
265,499
$20,728,035

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto

Total

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Home equity lines of credit
Personal
Auto
Other

Total

133 POPULAR, INC. 2011 ANNUAL REPORT

The following table provides a breakdown of
in

held-for-sale
non-performing
December 31, 2011 and 2010 by main categories.

(“LHFS”)

status

loans
at

(In thousands)

December 31, 2011 December 31, 2010

Commercial
Construction
Mortgage

Total

$26,198
236,045
59

$262,302

$60,528
412,204
199,025

$671,757

The components of the net financing leases receivable at

December 31, 2011 and 2010 were as follows:

(In thousands)

Total minimum lease payments
Estimated residual value of leased property
Deferred origination costs, net of fees
Less - Unearned financing income

Net minimum lease payments

Less - Allowance for loan losses

2011

2010

$520,226
134,194
6,691
97,244

563,867
4,891

$551,000
147,667
7,109
102,783

602,993
13,153

$558,976

$589,840

At December 31, 2011, future minimum lease payments are

expected to be received as follows:

$154,005
127,280
100,748
80,011
58,182

$520,226

(In thousands)

2012
2013
2014
2015
2016 and thereafter

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer

Total [1]

on

pools

based

aggregated

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
similar
into
characteristics. Each loan pool is accounted for as a single asset
rate and an aggregate
with a single composite interest
expectation of cash flows. The covered loans which are
accounted for under ASC Subtopic 310-30 by the Corporation
are not considered non-performing and will continue to have
an accretable yield as long as there is a reasonable expectation
about the timing and amount of cash flows expected to be
collected. The Corporation measures additional losses for this
portfolio when it is probable the Corporation will be unable to
collect all cash flows expected at acquisition plus additional
cash flows expected to be collected arising from changes in
estimates after acquisition. Lines of credit with revolving
privileges that were acquired as part of the Westernbank FDIC-
assisted transaction are accounted for under the guidance of
ASC Subtopic 310-20, which requires that any differences
between the contractually required loan payment receivable in
excess of the Corporation’s initial investment in the loans be
accreted into interest income. Loans accounted for under ASC
Subtopic 310-20 are placed in non-accrual status when past due
in accordance with the Corporation’s non-accruing policy and
any accretion of discount is discontinued.

The

following

in
non-performing status and accruing loans past-due 90 days or
more by loan class at December 31, 2011 and 2010.

presents

covered

loans

table

December 31, 2011
Accruing
loans past due 90
days or more

Non-
accrual
loans

December 31, 2010
Accruing
loans past due 90
days or more

Non-
accrual
loans

$14,241
63,858
4,598
423
516

$83,636

$125
1,392
5,677
113
377

$7,684

$14,172
10,635
1,168
–
–

$25,975

$–
60
–
8,648
2,308

$11,016

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

The following tables present loans by past due status at December 31, 2011 and 2010 for covered loans held-in-portfolio. The

information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

134

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer

Total covered loans

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer

Total covered loans

December 31, 2011
Covered loans
Past due

30-59
days

$35,286
4,438
997
32,371
2,913

60-89
days

$25,273
1,390
625
28,238
3,289

90 days or
more

Total past
due

$519,222
99,555
434,661
196,541
15,551

$579,781
105,383
436,283
257,150
21,753

Current

$1,691,514
136,064
110,543
915,804
94,428

Covered loans
held-in-
portfolio

$2,271,295
241,447
546,826
1,172,954
116,181

$76,005

$58,815

$1,265,530

$1,400,350

$2,948,353

$4,348,703

December 31, 2010
Covered loans
Past due

30-59
days

$108,244
12,091
23,445
80,978
8,917

60-89
days

$89,403
5,491
11,906
34,897
4,483

90 days or
more

Total past
due

$434,956
32,585
351,386
119,745
14,612

$632,603
50,167
386,737
235,620
28,012

Current

$1,830,946
253,465
253,755
1,023,839
141,738

Covered loans
held-in-
portfolio

$2,463,549
303,632
640,492
1,259,459
169,750

$233,675

$146,180

$953,284

$1,333,139

$3,503,743

$4,836,882

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”),
the
and loans that were considered to be performing at

acquisition date and are accounted for by analogy to ASC
Subtopic 310-30 (“non-credit impaired loans”). Refer to Note 2
in these consolidated financial statements 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.

(In thousands)

Contractually-required principal and interest
Non-accretable difference

Cash flows expected to be collected
Accretable yield

Fair value of loans accounted for under ASC Subtopic 310-30

Non-credit
impaired loans

April 30, 2010
Credit impaired
loans

$7,855,033
2,154,542

5,700,491
1,487,634

$4,212,857

$1,995,580
1,248,365

747,215
50,425

Total

$9,850,613
3,402,907

6,447,706
1,538,059

$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 for under ASC Subtopic 310-30
amounted to $8.1 billion at the April 30, 2010 transaction date.

135 POPULAR, INC. 2011 ANNUAL REPORT

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

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer

Carrying amount
Allowance for loan losses

December 31, 2011
Carrying amount

Non-credit
impaired loans

Credit impaired
loans

$1,920,141
85,859
279,561
1,065,842
95,048

3,446,451
(62,951)

$215,560
4,621
260,208
102,027
7,604

590,020
(20,526)

December 31, 2010
Carrying amount

Non-credit
impaired loans

Credit impaired
loans

$2,133,600
117,869
341,866
1,156,879
144,165

3,894,379
–

$247,654
8,257
292,341
87,062
10,235

645,549
–

Total

$2,135,701
90,480
539,769
1,167,869
102,652

4,036,471
(83,477)

Total

$2,381,254
126,126
634,207
1,243,941
154,400

4,539,928
–

Carrying amount, net of allowance

$3,383,500

$569,494

$3,952,994

$3,894,379

$645,549

$4,539,928

to ASC Subtopic 310-30,

The outstanding principal balance of

covered loans
accounted pursuant
including
amounts charged off by the Corporation, amounted to $6.0
billion at December 31, 2011 (December 31, 2010 - $7.7
billion). At December 31, 2011, none of the acquired loans
from the Westernbank FDIC-assisted transaction accounted for
under ASC Subtopic 310-30 were considered non-performing
interest income, through accretion of the
loans. Therefore,

difference between the carrying amount of the loans and the
expected cash flows, was recognized on all acquired loans.

acquired loans

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

(In thousands)

Beginning balance
Additions
Accretion
Change in expected cash flows

Ending balance

(In thousands)

Beginning balance
Additions
Accretion
Collections

Accretable yield
For the year ended

December 31, 2011
Credit
impaired
loans

Non-credit
impaired
loans

Total

December 31, 2010
Credit
impaired
loans

Non-credit
impaired
loans

$1,307,927
–
(271,760)
392,597

$23,181
–
(80,641)
98,955

$1,331,108
–
(352,401)
491,552

$–
1,487,634
(179,707)
–

$–
50,425
(27,244)
–

Total

$–
1,538,059
(206,951)
–

$1,428,764

$41,495

$1,470,259

$1,307,927

$23,181

$1,331,108

Carrying amount of loans accounted for pursuant to ASC 310-30
For the year ended

December 31, 2011
Credit
impaired
loans

Non-credit
impaired
loans

December 31, 2010
Credit
impaired
loans

Non-credit
impaired
loans

Total

$3,894,379
–
271,760
(719,688)

$645,549
–
80,641
(136,170)

$4,539,928
–
352,401
(855,858)

$–
4,212,857
179,707
(498,185)

$–
696,790
27,244
(78,485)

Total

$–
4,909,647
206,951
(576,670)

Ending balance
Allowance for loan losses ASC 310-30 covered loans

$3,446,451
(62,951)

$590,020
(20,526)

$4,036,471
(83,477)

$3,894,379
–

$645,549
–

$4,539,928
–

$3,383,500

$569,494

$3,952,994

$3,894,379

$645,549

$4,539,928

136

During the year ended December 31, 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 year ended
December 31, 2011.

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:

(In thousands)

(In thousands)

Balance at beginning of period
Provision for loan losses
Net charge-offs

Balance at end of period

ASC 310-30 loans
December 31, 2011

Fair value of loans accounted under ASC Subtopic

310-20

$–
89,802
(6,325)

Gross contractual amounts receivable (principal and

interest)

Estimate of contractual cash flows not expected to be

$83,477

collected

$290,810

$457,201

$164,427

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

The Corporation accounts for lines of credit with revolving
privileges under the accounting guidance of ASC Subtopic

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

Covered loans accounted for under ASC Subtopic 310-20

amounted to $0.3 billion at December 31, 2011 and 2010.

Note 11 – Allowance for loan losses

The following tables present the changes in the allowance for loan losses for the years ended December 31, 2011, 2010, and

2009.

(In thousands)

Balance at beginning of period
Provision for loan losses
Charge-offs
Recoveries
Net recovery (write-down) related to loans transferred to LHFS

Non-covered
loans

$793,225
430,085
(671,505)
137,457
1,101

2011
Covered
loans

2010

2009

Total

Total

Total

$–
145,635
(22,206)
1,516
–

$793,225
575,720
(693,711)
138,973
1,101

$1,261,204
1,011,880
(1,249,356)
96,704
(327,207)

$882,807
1,405,807
(1,095,947)
68,537
–

Balance at end of period

$690,363

$124,945

$815,308

$793,225

$1,261,204

The Corporation’s allowance for loan losses at December 31,
2011 includes $125 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 $83 million at
year end; and (ii) acquired loans accounted for under ASC
Subtopic 310-20, which required an allowance for loan losses of
$42 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 commitments assumed,

loan losses in the current period. For purposes of
loans
accounted for under ASC Subtopic 310-20 and new loans
the
originated as a result of
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
evaluated for
Section 310-10-35 for
impairment. Concurrently, the Corporation records an increase
in the FDIC loss share asset for the expected reimbursement
from the FDIC under the loss sharing agreements.

individually

loans

137 POPULAR, INC. 2011 ANNUAL REPORT

The following tables present the changes in the allowance
for loan losses (“ALLL”) by portfolio segment for the years
ended December 31, 2011 and 2010. Also, the tables present
information at December 31, 2011 and 2010 regarding loan

ending balances and the ALLL by portfolio segment and
whether such loans and the ALLL pertain to loans individually
or collectively evaluated for impairment.

For the year ended December 31, 2011

Puerto Rico

(In thousands)
Allowance for credit losses:
Beginning balance

Provision
Charge-offs
Recoveries
Write-down related to loans transferred to LHFS

Ending balance

Allowance for credit losses:
Specific ALLL non-covered loans
General ALLL non-covered loans
ALLL - non-covered loans

Specific ALLL covered loans
General ALLL covered loans
ALLL - covered loans

Total ALLL

Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding

impaired loans

Non-covered loans held-in-portfolio

Impaired covered loans
Covered loans held-in-portfolio excluding impaired

loans

Covered loans held-in-portfolio

Total loans held-in-portfolio

Commercial Construction Mortgage

Leasing

Consumer

Total

$256,643
315,150
(238,789)
29,627
(12,706)
$349,925

$10,407
245,046
255,453

27,086
67,386
94,472

$16,074
18,880
(19,914)
11,245
–
$26,285

$289
5,561
5,850

–
20,435
20,435

$42,029
64,038
(30,040)
1,605
–
$77,632

$14,944
57,378
72,322

–
5,310
5,310

$7,154
941
(6,527)
3,083
–
$4,651

$133,531
88,222
(135,804)
33,905
–
$119,854

$793
3,858
4,651

–
–
–

$16,915
98,211
115,126

–
4,728
4,728

$455,431
487,231
(431,074)
79,465
(12,706)
$578,347

$43,348
410,054
453,402

27,086
97,859
124,945

$349,925

$26,285

$77,632

$4,651

$119,854

$578,347

$403,089

$49,747

$333,346

$6,104

$137,582

$929,868

6,067,493
6,470,582

76,798

2,435,944
2,512,742

111,194
160,941

–

546,826
546,826

4,356,137
4,689,483

542,602
548,706

2,832,845
2,970,427

13,910,271
14,840,139

–

1,172,954
1,172,954

–

–
–

–

76,798

116,181
116,181

4,271,905
4,348,703

$8,983,324

$707,767

$5,862,437

$548,706

$3,086,608

$19,188,842

For the year ended December 31, 2011

U.S. mainland

(In thousands)
Allowance for credit losses:
Beginning balance

Provision (reversal of provision)
Charge-offs
Recoveries
Net recovery related to loans transferred to LHFS

Ending balance

Allowance for credit losses:
Specific ALLL
General ALLL

Total ALLL

Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio, excluding impaired loans
Total loans held-in-portfolio

Commercial Construction Mortgage Leasing Consumer

Total

$205,748
63,301
(153,555)
39,341
–
$154,835

$1,388
153,447

$154,835

$31,650
(6,444)
(27,780)
10,337
–
$7,763

$–
7,763

$7,763

$28,839
1,480
(16,571)
2,384
13,807
$29,939

$14,119
15,820

$29,939

$5,999
(5,592)
(849)
682
–
$240

$65,558
35,744
(63,882)
6,764
–
$44,184

$337,794
88,489
(262,637)
59,508
13,807
$236,961

$–
240

$131
44,053

$15,638
221,323

$240

$44,184

$236,961

$171,588
3,892,716
$4,064,304

$72,505
78,182
$150,687

$49,534
779,443
$828,977

$–
15,161
$15,161

$2,526
700,802
$703,328

$296,153
5,466,304
$5,762,457

(In thousands)
Allowance for credit losses:
Beginning balance

Provision (reversal of provision)
Charge-offs
Recoveries
Net (write-down) recovery related to loans

transferred to loans held-for-sale

Ending balance
Allowance for credit losses:
Specific ALLL non-covered loans
General ALLL non-covered loans
ALLL - non-covered loans

Specific ALLL covered loans
General ALLL covered loans
ALLL - covered loans

Total ALLL
Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding impaired

loans

Non-covered loans held-in-portfolio

Impaired covered loans
Covered loans held-in-portfolio excluding impaired

loans

Covered loans held-in-portfolio

Total loans held-in-portfolio

138

For the year ended December 31, 2011

Popular, Inc.

Commercial Construction Mortgage

Leasing

Consumer

Total

$462,391
378,451
(392,344)
68,968

(12,706)
$504,760

$11,795
398,493
410,288

27,086
67,386
94,472

$47,724
12,436
(47,694)
21,582

–
$34,048

$289
13,324
13,613

–
20,435
20,435

$70,868
65,518
(46,611)
3,989

$13,153
(4,651)
(7,376)
3,765

$199,089
123,966
(199,686)
40,669

13,807
$107,571

–
$4,891

–
$164,038

$29,063
73,198
102,261

–
5,310
5,310

$793
4,098
4,891

–
–
–

$17,046
142,264
159,310

–
4,728
4,728

$793,225
575,720
(693,711)
138,973

1,101
$815,308

$58,986
631,377
690,363

27,086
97,859
124,945

$504,760

$34,048

$107,571

$4,891

$164,038

$815,308

$574,677

$122,252

$382,880

$6,104

$140,108

$1,226,021

9,960,209
10,534,886

76,798

2,435,944
2,512,742

189,376
311,628

–

546,826
546,826

5,135,580
5,518,460

557,763
563,867

3,533,647
3,673,755

19,376,575
20,602,596

–

1,172,954
1,172,954

–

–
–

–

76,798

116,181
116,181

4,271,905
4,348,703

$13,047,628

$858,454

$6,691,414

$563,867

$3,789,936

$24,951,299

December 31, 2010

Puerto Rico

(In thousands)
Allowance for credit losses:
Beginning balance

Provision (reversal of provision)
Charge-offs
Recoveries
Net (write-down) recovery related to loans

transferred to LHFS

Ending balance
Allowance for credit losses:
Specific ALLL non-covered loans
General ALLL non-covered loans

Total ALLL [1]
Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding impaired

loans

Non-covered loans held-in-portfolio

Impaired covered loans
Covered loans held-in-portfolio excluding impaired

loans

Covered loans held-in-portfolio

Total loans held-in-portfolio

Commercial Construction Mortgage

Leasing

Consumer

Total

$231,844
294,069
(251,845)
20,712

(38,137)
$256,643

$214,998
181,912
(290,065)
915

(91,686)
$16,074

$24,911
38,830
(22,579)
867

–
$42,029

$12,204
1,409
(10,517)
4,058

$171,901
93,413
(162,516)
30,733

–
$7,154

–
$133,531

$655,858
609,633
(737,522)
57,285

(129,823)
$455,431

$8,550
248,093

$216
15,858

$5,004
37,025

$–
7,154

$–
133,531

$13,770
441,661

$256,643

$16,074

$42,029

$7,154

$133,531

$455,431

$310,582

$65,698

$121,209

$–

$–

$497,489

6,406,434
6,717,016

–

2,767,181
2,767,181

102,658
168,356

–

640,492
640,492

3,528,491
3,649,700

572,787
572,787

2,897,835
2,897,835

13,508,205
14,005,694

–

1,259,459
1,259,459

–

–
–

–

–

169,750
169,750

4,836,882
4,836,882

$9,484,197

$808,848

$4,909,159

$572,787

$3,067,585

$18,842,576

[1] At December 31, 2010, there was no allowance for loan losses on the covered loan portfolio.

139 POPULAR, INC. 2011 ANNUAL REPORT

(In thousands)

Allowance for credit losses:
Beginning balance

Provision (reversal of provision)
Charge-offs
Recoveries
Net (write-down) recovery related to loans

transferred to LHFS

Ending balance

Allowance for credit losses:
Specific ALLL
General ALLL

Total ALLL

Loans held-in-portfolio:
Impaired loans
Loans held-in-portfolio, excluding impaired loans

Total loans held-in-portfolio

(In thousands)

Allowance for credit losses:
Beginning balance

Provision (reversal of provision)
Charge-offs
Recoveries
Net (write-down) recovery related to loans

transferred to loans held-for-sale

Ending balance

Allowance for credit losses:
Specific ALLL non-covered loans
General ALLL non-covered loans

Total ALLL [1]

Loans held-in-portfolio:
Impaired non-covered loans
Non-covered loans held-in-portfolio excluding

impaired loans

Non-covered loans held-in-portfolio

Impaired covered loans
Covered loans held-in-portfolio excluding impaired

loans

Covered loans held-in-portfolio

Total loans held-in-portfolio

December 31, 2010

U.S. mainland

Commercial Construction Mortgage

Leasing

Consumer

Total

$212,221
200,690
(224,654)
17,491

$126,321
11,166
(115,353)
9,516

$129,700
169,590
(77,256)
4,189

$-
9,967
(4,860)
892

$137,104
10,834
(89,711)
7,331

$605,346
402,247
(511,834)
39,419

–

–

(197,384)

–

–

(197,384)

$205,748

$31,650

$28,839

$5,999

$65,558

$337,794

$–
205,748

$–
31,650

$–
28,839

$–
5,999

$–
65,558

$–
337,794

$205,748

$31,650

$28,839

$5,999

$65,558

$337,794

$135,386
4,541,083

$4,676,469

$165,624
166,871

$332,495

$–
875,022

$–
30,206

$–
808,149

$301,010
6,421,331

$875,022

$30,206

$808,149

$6,722,341

December 31, 2010

Popular, Inc.

Commercial Construction Mortgage

Leasing

Consumer

Total

$444,065
494,759
(476,499)
38,203

$341,319
193,078
(405,418)
10,431

$154,611
208,420
(99,835)
5,056

$12,204
11,376
(15,377)
4,950

$309,005
104,247
(252,227)
38,064

$1,261,204
1,011,880
(1,249,356)
96,704

(38,137)

(91,686)

(197,384)

–

–

(327,207)

$462,391

$47,724

$70,868

$13,153

$199,089

$793,225

$8,550
453,841

$216
47,508

$5,004
65,864

$–
13,153

$–
199,089

$13,770
779,455

$462,391

$47,724

$70,868

$13,153

$199,089

$793,225

$445,968

$231,322

$121,209

$–

$–

$798,499

10,947,517

11,393,485

–

2,767,181

2,767,181

269,529

500,851

–

640,492

640,492

4,403,513

602,993

3,705,984

19,929,536

4,524,722

602,993

3,705,984

20,728,035

–

1,259,459

1,259,459

–

–

–

–

–

169,750

169,750

4,836,882

4,836,882

$14,160,666

$1,141,343

$5,784,181

$602,993

$3,875,734

$25,564,917

[1] At December 31, 2010, there was no allowance for loan losses on the covered loan portfolio.

140

Impaired loans
The following tables present loans individually evaluated for impairment at December 31, 2011 and 2010.

December 31, 2011

Puerto Rico

Impaired Loans – With an Allowance

Impaired Loans With
No Allowance

Impaired Loans – Total

Recorded
investment

$53,906
42,294
1,672
333,346
6,104
137,582
75,798

Unpaid
principal
balance

$64,275
55,180
2,369
336,682
6,104
137,582
75,798

Related
allowance

Recorded
investment

$4,152
6,255
289
14,944
793
16,915
27,086

$223,468
83,421
48,075
–
–
–
1,000

Unpaid
principal
balance

$284,039
115,245
101,042
–
–
–
1,000

Recorded
investment

$277,374
125,715
49,747
333,346
6,104
137,582
76,798

Unpaid
principal
balance

$348,314
170,425
103,411
336,682
6,104
137,582
76,798

Related
allowance

$4,152
6,255
289
14,944
793
16,915
27,086

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer
Covered loans

Total Puerto Rico

$650,702

$677,990

$70,434

$355,964

$501,326

$1,006,666

$1,179,316

$70,434

December 31, 2011

U.S. mainland

Impaired Loans – With an Allowance

Impaired Loans With
No Allowance

Impaired Loans – Total

Recorded
investment

$3,443
12,505
–
39,570
2,526

Unpaid
principal
balance

$3,443
12,505
–
39,899
2,526

Related
allowance

Recorded
investment

$868
520
–
14,119
131

$127,504
28,136
72,505
9,964
–

Unpaid
principal
balance

$166,087
31,117
99,208
9,964
–

Recorded
investment

$130,947
40,641
72,505
49,534
2,526

Unpaid
principal
balance

$169,530
43,622
99,208
49,863
2,526

Related
allowance

$868
520
–
14,119
131

$58,044

$58,373

$15,638

$238,109

$306,376

$296,153

$364,749

$15,638

December 31, 2011

Popular, Inc.

Impaired Loans – With an Allowance

Impaired Loans With
No Allowance

Impaired Loans – Total

Recorded
investment

$57,349
54,799
1,672
372,916
6,104
140,108
75,798

Unpaid
principal
balance

$67,718
67,685
2,369
376,581
6,104
140,108
75,798

Related
allowance

Recorded
investment

$5,020
6,775
289
29,063
793
17,046
27,086

$350,972
111,557
120,580
9,964
–
–
1,000

Unpaid
principal
balance

$450,126
146,362
200,250
9,964
–
–
1,000

Recorded
investment

$408,321
166,356
122,252
382,880
6,104
140,108
76,798

Unpaid
principal
balance

$517,844
214,047
202,619
386,545
6,104
140,108
76,798

Related
allowance

$5,020
6,775
289
29,063
793
17,046
27,086

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer

Total U.S. mainland

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer
Covered loans

Total Popular, Inc.

$708,746

$736,363

$86,072

$594,073

$807,702

$1,302,819

$1,544,065

$86,072

141 POPULAR, INC. 2011 ANNUAL REPORT

December 31, 2010

Puerto Rico

Impaired Loans – With an Allowance

Impaired Loans
With No Allowance

Impaired Loans – Total

Recorded
investment
$ 11,403
23,699
4,514
114,733
$154,349

Unpaid
principal
balance
$ 13,613
28,307
10,515
115,595
$168,030

Related
allowance
$ 3,590
4,960
216
5,004
$13,770

Recorded
investment
$208,891
66,589
61,184
6,476
$343,140

Unpaid
principal
balance
$256,858
79,917
99,016
6,476
$442,267

Recorded
investment
$220,294
90,288
65,698
121,209
$497,489

Unpaid
principal
balance
$270,471
108,224
109,531
122,071
$610,297

Related
allowance
$ 3,590
4,960
216
5,004
$13,770

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Total Puerto Rico

There were no leases, consumer, or covered loans individually evaluated for impairment in the Puerto Rico portfolio at December 31, 2010.

December 31, 2010

U.S. mainland

Impaired Loans – With an Allowance

Impaired Loans
With No Allowance

Impaired Loans – Total

Recorded
investment
$–
–
–
$–

Unpaid
principal
balance
$–
–
–
$–

Related
allowance
$–
–
–
$–

Recorded
investment
$101,856
33,530
165,624
$301,010

Unpaid
principal
balance
$152,876
44,443
248,955
$446,274

Recorded
investment
$101,856
33,530
165,624
$301,010

Unpaid
principal
balance
$152,876
44,443
248,955
$446,274

Related
allowance
$–
–
–
$–

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Total U.S. mainland

There were no leases, consumer or 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

Recorded
investment
$ 11,403
23,699
4,514
114,733
$154,349

Unpaid
principal
balance
$ 13,613
28,307
10,515
115,595
$168,030

Related
allowance
$ 3,590
4,960
216
5,004
$13,770

Recorded
investment
$310,747
100,119
226,808
6,476
$644,150

Unpaid
principal
balance
$409,734
124,360
347,971
6,476
$888,541

Recorded
investment
$322,150
123,818
231,322
121,209
$798,499

Unpaid
principal
balance
$ 423,347
152,667
358,486
122,071
$1,056,571

Related
allowance
$ 3,590
4,960
216
5,004
$13,770

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Total Popular, Inc.

The following table presents the average recorded investment and interest income recognized on non-covered impaired loans

for the years ended December 31, 2011 and 2010.

(In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer
Covered loans
Total Popular, Inc.

December 31, 2011

Puerto Rico

U.S. mainland

Popular, Inc.

Average
recorded
investment
$248,834
108,002
57,723
227,278
3,052
68,791
38,399
$752,079

Interest
income
recognized
$2,931
1,468
49
11,587
–
–
1,013
$17,048

Average
recorded
investment
$116,402
37,086
119,065
24,767
–
1,263
–
$298,583

Interest
income
recognized
$1,020
720
158
1,038
–
–
–
$2,936

Average
recorded
investment
$365,236
145,088
176,788
252,045
3,052
70,054
38,399
$1,050,662

Interest
income
recognized
$3,951
2,188
207
12,625
–
–
1,013
$19,984

142

December 31, 2010

Puerto Rico

U.S. mainland

Popular, Inc.

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

$255,283
158,376
507,166
78,496

$5,753
2,601
1,626
3,739

$130,437
55,895
195,358
158,152

$999,321

$13,719

$539,842

$1,261
189
1,000
5,678

$8,128

$385,720
214,271
702,524
236,648

$7,014
2,790
2,626
9,417

$1,539,163

$21,847

(In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage

Total Popular, Inc.

Modifications
Troubled debt
restructurings related to non-covered loan
portfolios amounted to $881 million at December 31, 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 $152 thousand related to the
construction loan portfolio and $3 million related to the
commercial loan portfolio at December 31, 2011 (December 31,
2010 - $3 million and $1 million, respectively).

as

receivables

restructurings,

troubled debt

As a result of adopting the amendments in Accounting
Standards Update No. 2011-02, the Corporation reassessed all
restructurings that occurred on or after January 1, 2011 for
identification as troubled debt restructurings. Upon identifying
those
the
Corporation identified them as impaired under the guidance in
ASC 310-10-35. The amendments in Accounting Standards
Update No. 2011-02 require prospective application of the
impairment measurement guidance in ASC 310-10-35 for those
receivables newly identified as impaired. At December 31, 2011,
the recorded investment in receivables for which the modified
loans were newly considered troubled debt restructurings under
the provisions of ASU No. 2011-02 amounted to $27 million.
The
associated with those
receivables, on the basis of a current evaluation of loss, was
$1.6 million as of December 31, 2011, compared with $1.7
million under the previous evaluation of loss when the loans
were not considered troubled debt restructurings.

allowance

losses

credit

for

involve

payments,

temporary

interest-only

and the modification constitutes

A modification of a loan constitutes a troubled debt
is experiencing
restructuring (“TDR”) when a borrower
financial difficulty
a
concession. Commercial and industrial loans modified in a TDR
often
term
extensions, and converting evergreen revolving credit lines to
long term loans. Commercial real estate and construction loans
modified in a TDR often involve reducing the interest rate for a
limited period of time or the remaining term of the loan,
extending the maturity date at an interest rate lower than the
current market
risk, or
reductions in the payment plan. Construction loans modified in
a TDR may also involve extending the interest-only payment
period. Residential mortgage loans modified in a TDR are

rate for new debt with similar

primarily comprised of loans where monthly payments are
lowered to accommodate the borrowers’ financial needs for a
period of time, normally five years. After the lowered monthly
payment period ends, the borrower reverts back to paying
principal and interest per the original terms with the maturity
date adjusted accordingly. Home equity modifications are made
infrequently and are not offered if the Corporation also holds
the first mortgage. Home equity modifications are uniquely
each
designed
borrower. Automobile loans modified in a TDR are primarily
comprised of loans where the Corporation has lowered monthly
payments by extending the term. Credit cards modified in a
TDR are primarily comprised of loans where monthly payments
are lowered to accommodate the borrowers’ financial needs for
a period of time, normally up to 24 months.

to meet

specific

needs

the

of

already been taken against

Loans modified in a TDR that are not accounted pursuant to
ASC 310-30 are typically already in non-accrual status at the
time of the modification and partial charge-offs have in some
cases
the outstanding loan
balance. The TDR loan continues in non-accrual status until the
borrower has demonstrated a willingness and ability to make
the restructured loan payments (generally at least six months of
sustained performance after the modification (or one year for
loans providing for quarterly or semi-annual payments)) and
management has concluded that
the
borrower would not be in payment default in the foreseeable
future.

is probable that

it

the Corporation’s

Loans modified in a TDR may have the financial effect to the
Corporation of increasing the specific allowance for loan losses
associated with the loan. Consumer and residential mortgage
loans modified under
loss mitigation
programs that are determined to be TDRs are individually
evaluated for impairment based on an analysis of discounted
cash flows. For the residential mortgage TDRs, the Corporation
performs the impairment analysis of discounted cash flows
giving consideration to probability of default and loss-given-
foreclosure on those estimated cash flows, and records
impairment by charging the provision for loan losses with a
loan losses.
corresponding credit
Consumer
loss
mitigation programs that are determined to be TDRs are also
analysis of
individually reviewed under

for
the Corporation’s

loans modified under

an impairment

allowance

to the

143 POPULAR, INC. 2011 ANNUAL REPORT

discounted cash flows and do not give consideration to default
pre- or post-modification. Commercial and construction loans
that have been modified as part of loss mitigation efforts are
evaluated individually for impairment. The vast majority of the
Corporation’s modified commercial
loans are measured for
impairment using the estimated fair value of the collateral, as
these are normally considered as collateral dependent loans. In
the Corporation measures modified
very few instances,
commercial
values
estimated realizable
determined by discounting the expected future cash flows.
Construction loans that have been modified are also accounted
for as collateral dependent loans. The Corporation determines

loans

their

at

the fair value measurement dependent upon its exit strategy of
the particular asset(s) acquired in foreclosure. The discounted
cash flows analyses for the commercial and construction TDRs,
currently, do not consider a default component. As indicated
the Corporation’s modified
above,
commercial
are measured for
impairment using the estimated fair value of the collateral, thus
the consideration of the default rates in the evaluation of TDRs
in these portfolios is not deemed material.

and construction loans

the vast majority of

The following tables present the loan count by type of
modification for those loans modified in a TDR during the year
ended December 31, 2011.

Puerto Rico
For the year ended December 31, 2011

Reduction in
interest rate

Extension of maturity
date

Combination of
reduction in interest
rate and extension of
maturity date

55
95
4
448
–

1,404
2,169
–
46

4,221

23
47
–
1,032
162

–
55
3
–

1,322

–
–
–
284
3

–
–
5
–

292

Other

–
–
–
300
–

1,247
–
–
–

1,547

U.S. mainland
For the year ended December 31, 2011

Reduction in
interest rate

Extension of maturity
date

Combination of
reduction in interest
rate and extension of
maturity date

Other

–
–
–
18

–

18

–
1
–
5

–

6

–
–
–
348

3

351

2
1
5
3

–

11

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer:

Other consumer

Total

Popular, Inc.
For the year ended December 31, 2011

Reduction in
interest rate

Extension of maturity
date

Combination of
reduction in interest
rate and extension of
maturity date

55
95
4
466
–

1,404
2,169
–
46

4,239

23
48
–
1,037
162

–
55
3
–

1,328

–
–
–
632
3

–
–
5
3

643

144

Other

2
1
5
303
–

1,247
–
–
–

1,558

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

The following tables present by class, quantitative information related to loans modified as TDRs during the year ended

December 31, 2011.

(Dollars in thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

(Dollars in thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Consumer:

Other consumer

Total

Puerto Rico
For the year ended December 31, 2011

Pre-modification
outstanding recorded
investment

Post-modification
outstanding recorded
investment

Increase (decrease) in the
allowance for loan losses as
a result of modification

Loan count

78
142
4
2,064
165

2,651
2,224
8
46

7,382

$78,344
28,617
3,194
291,006
3,702

23,563
27,688
93
192

$78,344
28,617
3,194
320,781
3,553

26,444
27,671
95
188

$(60)
795
(292)
9,653
34

113
645
–
–

$456,399

$488,887

$10,888

U.S. mainland
For the year ended December 31, 2011

Pre-modification
outstanding recorded
investment

Post-modification
outstanding recorded
investment

Increase (decrease) in the
allowance for loan losses as
a result of modification

Loan count

2
2
5
374

3

386

$12,633
11,878
16,189
37,722

1,559

$79,981

$9,355
9,742
16,432
39,184

1,683

$76,396

$(420)
(420)
(313)
12,419

–

$11,266

145 POPULAR, INC. 2011 ANNUAL REPORT

(Dollars in thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

Popular, Inc.
For the year ended December 31, 2011

Pre-modification
outstanding recorded
investment
$90,977
40,495
19,383
328,728
3,702

Post-modification
outstanding recorded
investment
$87,699
38,359
19,626
359,965
3,553

23,563
27,688
93
1,751
$536,380

26,444
27,671
95
1,871
$565,283

Loan count

80
144
9
2,438
165

2,651
2,224
8
49
7,768

Increase (decrease) in the
allowance for loan losses as
a result of modification

$(480)
375
(605)
22,072
34

113
645
–
–
$22,154

Two loans comprising a recorded investment at

loan
splitting of approximately $6.5 million were restructured into
multiple notes during 2011, of which $3.4 million were
recorded as charged-offs. The renegotiations of these loans were
made after analyzing the borrowers’ capacity to repay the debt,
collateral and ability to perform under the modified terms. The
recorded investment on these commercial TDRs amounted to
$3.5 million at December 31, 2011 with a related allowance for
loan losses amounting to approximately $57 thousand. The
loans were in non-accruing status at December 31, 2011.

to payment default

The following tables present by class, TDRs that were
subject
from January 1, 2011 through
December 31, 2011 and that had been modified as a TDR
during the twelve months preceding the default date. Payment
default is defined as a restructured loan becoming 90 days past
due after being modified, foreclosed or charged-off, whichever
occurs first. The recorded investment at December 31, 2011 is
inclusive of all partial paydowns and charge-offs
since
modification date. Loans modified as a TDR that were fully paid
down, charged-off or foreclosed upon by period end are not
reported.

Puerto Rico
Defaulted during the year ended December 31, 2011

(Dollars In thousands)
Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

(Dollars In thousands)
Commercial real estate
Commercial and industrial
Construction
Total

Recorded investment as
of first default
date during the year ended
December 31, 2011
$13,182
4,681
-
81,200
872

4,667
1,293
-
29
$105,924

Loan count

19
25
-
522
42

463
231
-
2
1,304

Recorded investment as
of first default
date during the year ended
December 31, 2011
$2,906
1,552
24,876
$29,334

Loan count
2
2
20
24

U.S. mainland
Defaulted during the year ended December 31, 2011

Popular, Inc.
Defaulted during the year ended December 31, 2011

(Dollars In thousands)

Commercial real estate
Commercial and industrial
Construction
Mortgage
Leasing
Consumer:

Credit cards
Personal
Auto
Other

Total

Commercial, consumer and mortgage loans modified in a
TDR are closely monitored for delinquency as an early indicator
loans modified in a TDR
If
of possible future default.
subsequently default, the Corporation evaluates the loan for
possible further impairment. The allowance for loan losses may
be increased or partial charge-offs may be taken to further
write-down the carrying value of the loan.

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”.

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
risk,
profitability, liquidity and capitalization better than
industry standards.

position, minimal

operating

146

Recorded investment as
of first default
date during the year ended
December 31, 2011

Loan count

21
27
20
522
42

463
231
-
2

$16,088
6,233
24,876
81,200
872

4,667
1,293
-
29

1,328

$135,258

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

requires

average

above

risk,

Special Mention (Scale 10) - Loans classified as special
that deserve
mention have potential weaknesses
management’s close attention.
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.

If

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
the debt. They are
jeopardize the liquidation of
the
characterized by the distinct possibility that
institution will sustain some loss if the deficiencies are
not corrected.

the weaknesses inherent

Doubtful (Scale 13) - Loans classified as doubtful have
in those classified as
all
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 effected in the
future.

147 POPULAR, INC. 2011 ANNUAL REPORT

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
information, historical
their debts such as current financial
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
In these
circumstances, the credit facilities are specifically evaluated to
assign the appropriate risk rating classification.

the Corporation for

a modification.

The Corporation has a Credit Process Review Group within
the Corporate Credit Risk Management Division (“CCRMD”),
which performs annual comprehensive credit process reviews of
several middle markets, construction, asset-based and corporate
banking lending groups in BPPR. This group evaluates the credit

risk profile of each originating unit along with each unit’s credit
administration effectiveness, including the assessment of the risk
rating representative of the current credit quality of the loans, and
the evaluation of collateral documentation. The monitoring
performed by this group contributes to assess compliance with
credit policies and underwriting standards, determine the current
level of credit risk, evaluate the effectiveness of
the credit
management process and identify control deficiencies that may
arise in the credit-granting process. Based on its findings, the
Credit Process Review Group recommends corrective actions, if
necessary,
that help in maintaining a sound credit process.
CCRMD has contracted an outside loan review firm to perform
the credit process reviews for the portfolios of commercial and
construction loans in the U.S. mainland operations. The CCRMD
participates in defining the review plan with the outside loan
review firm and actively participates in the discussions of the
results of the loan reviews with the business units. The CCRMD
may periodically review the work performed by the outside loan
review firm. CCRMD reports the results of the credit process
reviews to the Risk Management Committee of the Corporation’s
Board of Directors.

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

(In thousands)
Puerto Rico [1]
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer
Total Puerto Rico
U.S. mainland
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer
Total U.S. mainland
Popular, Inc.
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer
Total Popular, Inc.

Watch

$379,318
248,188
627,506
2,245
–
–
–
$629,751

$315,877
32,900
348,777
3,202
–
–
–
$351,979

$695,195
281,088
976,283
5,447
–
–
–
$981,730

Special
Mention

$327,555
282,935
610,490
27,820
–
–
–
$638,310

$91,511
34,834
126,345
26,293
–
–
–
$152,638

$419,066
317,769
736,835
54,113
–
–
–
$790,948

December 31, 2011

Substandard Doubtful

Loss

Sub-total

$910,198
433,756
1,343,954
68,816
626,771
1,365
53,649
$2,094,555

$511,595
132,526
644,121
108,079
37,236
166
5,666
$795,268

$1,421,793
566,282
1,988,075
176,895
664,007
1,531
59,315
$2,889,823

$7,517
3,326
10,843
1,586
–
–
–
$12,429

$–
–
–
–
–
–
–
$–

$–
1,458
1,458
–
–
4,277
4,015
$9,750

$–
–
–
–
–
–
6,712
$6,712

$7,517
3,326
10,843
1,586
–
–
–
$12,429

$–
1,458
1,458
–
–
4,277
10,727
$16,462

$1,624,588
969,663
2,594,251
100,467
626,771
5,642
57,664
$3,384,795

$918,983
200,260
1,119,243
137,574
37,236
166
12,378
$1,306,597

$2,543,571
1,169,923
3,713,494
238,041
664,007
5,808
70,042
$4,691,392

Pass/
Unrated

Total

$1,982,564
1,893,767
3,876,331
60,474
4,062,712
543,064
2,912,763
$11,455,344

$3,607,152
2,863,430
6,470,582
160,941
4,689,483
548,706
2,970,427
$14,840,139

$2,163,551
781,510
2,945,061
13,113
791,741
14,995
690,950
$4,455,860

$3,082,534
981,770
4,064,304
150,687
828,977
15,161
703,328
$5,762,457

$4,146,115
2,675,277
6,821,392
73,587
4,854,453
558,059
3,603,713
$15,911,204

$6,689,686
3,845,200
10,534,886
311,628
5,518,460
563,867
3,673,755
$20,602,596

The following table presents the weighted average obligor risk rating at December 31, 2011 for those classifications that

148

consider a range of rating scales.

Weighted average obligor risk rating
Puerto Rico: [1]

Commercial real estate
Commercial and industrial

Total Commercial

Construction

U.S. mainland:

Commercial real estate
Commercial and industrial

Total Commercial

Construction

(Scales 11 and 12)
Substandard

(Scales 1 through 8)
Pass

11.49
11.39

11.46

11.76

Substandard

11.34
11.41

11.35

11.70

6.95
6.62

6.79

7.84

Pass

7.09
6.89

7.04

7.00

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

(In thousands)
Puerto Rico [1]
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer

Total Puerto Rico
U.S. mainland
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer

Total U.S. mainland
Popular, Inc.
Commercial real estate
Commercial and industrial

Total Commercial

Construction
Mortgage
Leasing
Consumer

Watch

Special
Mention

$439,004
608,250

$346,985
245,250

1,047,254
38,921
–
–
–

592,235
12,941
–
–
–

December 31, 2010

Substandard Doubtful

Loss

Sub-total

Pass/
Unrated

Total

$622,675
345,266

967,941
67,271
550,933
5,539
47,907

$6,302
3,112

9,414
15,939
–
–
–

$–
1,436

1,436
–
–
5,969
4,227

$1,414,966
1,203,314

$2,440,632
1,658,104

$3,855,598
2,861,418

2,618,280
135,072
550,933
11,508
52,134

4,098,736
33,284
3,098,767
561,279
2,845,701

6,717,016
168,356
3,649,700
572,787
2,897,835

$1,086,175

$605,176

$1,639,591

$25,353

$11,632

$3,367,927

$10,637,767

$14,005,694

$302,347
62,552

364,899
30,021
–
–
–

$93,564
81,224

174,788
40,022
–
–
–

$650,118
250,843

900,961
257,651
23,587
–
14,240

$–
–

–
–
–
–
–

$–
–

$1,046,029
394,619

$2,105,049
1,130,772

$3,151,078
1,525,391

–
–
–
–
8,825

1,440,648
327,694
23,587
–
23,065

3,235,821
4,801
851,435
30,206
785,084

4,676,469
332,495
875,022
30,206
808,149

$394,920

$214,810

$1,196,439

$–

$8,825

$1,814,994

$4,907,347

$6,722,341

$741,351
670,802

$440,549
326,474

$1,272,793
596,109

1,412,153
68,942
–
–
–

767,023
52,963
–
–
–

1,868,902
324,922
574,520
5,539
62,147

$6,302
3,112

9,414
15,939
–
–
–

$–
1,436

$2,460,995
1,597,933

$4,545,681
2,788,876

1,436
–
–
5,969
13,052

4,058,928
462,766
574,520
11,508
75,199

7,334,557
38,085
3,950,202
591,485
3,630,785

$7,006,676
4,386,809

11,393,485
500,851
4,524,722
602,993
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

149 POPULAR, INC. 2011 ANNUAL REPORT

The following table presents the weighted average obligor risk rating at December 31, 2010 for those classifications that

consider a range of rating scales.

Weighted average obligor risk rating
Puerto Rico: [1]

Commercial real estate
Commercial and industrial

Total Commercial

Construction

U.S. mainland:

Commercial real estate
Commercial and industrial

Total Commercial

Construction

(Scales 11 and 12)
Substandard

(Scales 1 through 8)
Pass

11.64
11.24

11.49

11.77

Substandard

11.29
11.17

11.25

11.66

6.68
6.76

6.71

7.49

Pass

7.11
6.98

7.07

8.00

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

Note 12 - FDIC loss share asset
As indicated in Note 4 to the consolidated financial statements,
in connection with the Westernbank FDIC-assisted transaction,
BPPR entered into loss share agreements with the FDIC with

respect to the covered loans and other real estate owned. The
following table sets forth the activity in the FDIC loss share
asset for the periods presented.

(In thousands)

Balance at beginning of year
FDIC loss share indemnification asset recorded at business combination
(Amortization) accretion of loss share indemnification asset, net
Credit impairment losses to be covered under loss sharing agreements
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments

accounted for under ASC Subtopic 310-20

Payments received from FDIC under loss sharing agreements
Other adjustments attributable to FDIC loss sharing agreements

Balance at December 31

2011

2010

$2,410,219
–
(10,855)
110,457

$–
2,425,929
73,487
–

(33,221)
(561,111)
(361)

(95,383)
–
6,186

$1,915,128

$2,410,219

Also related to the loss share agreements and as disclosed in
Note 4 to the consolidated financial statements, BPPR has
agreed to make a true-up payment to the FDIC on a pre-
determined date following the true-up measurement date of the
final shared-loss month, or upon the final disposition of all
covered assets under the loss share agreements in the event
losses on the loss share agreements fail to reach expected levels.
The
contingent
consideration, is recorded separately from the loss share asset
and is classified as other
in the consolidated
statements of financial condition. At December 31, 2011, the
carrying amount of the true-up payment obligation amounted
to $98 million (2010 - $92 million).

estimated true-up payment,

liabilities

form of

a

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:

family shared-loss

• 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
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 the Federal Home Loan Mortgage
Corporation (“FHLMC”), as in effect from time to time,
and in accordance with accepted mortgage servicing
practices of prudent lending institutions;

loans,

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

• use

reasonable

commercially

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;

efforts

• retain sufficient staff to perform the duties under the loss

share agreements;

• adopt and implement accounting,

reporting,
systems with respect

record-
to the

keeping and similar
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;
• file monthly and quarterly certificates with the FDIC
and

amount of

charge-offs

losses,

specifying
the
recoveries; and

• maintain books and records sufficient

to ensure and
document compliance with the terms of the loss share
agreements.

150

Note 13 - Transfers of financial assets and 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
certain
loans. As
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
to Note 26 to the consolidated financial
FNMA. Refer
statements for a description of such arrangements.

the Corporation has made

seller,

a

result of

incurred as

No liabilities were

these
securitizations during the years ended December 31, 2011 and
recourse
2010 because they did not contain any credit
arrangements. The Corporation recorded a net gain $24.1
million and $15.0 million, respectively, during the years ended
December 31, 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 years ended December 31, 2011 and 2010:

(In thousands)

Assets

Trading account securities:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA

Total trading account securities

Mortgage servicing rights

Total

(In thousands)

Assets

Investments securities available for sale:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA

Total investment securities available-for-sale

Trading account securities:
Mortgage-backed securities - GNMA
Mortgage-backed securities - FNMA

Total trading account securities

Mortgage servicing rights

Total

Proceeds obtained during the year ended December 31, 2011

Level 1

Level 2

Level 3

Initial fair value

–
–

–

–

–

$907,238
206,437

$1,113,675

–

$1,113,675

–
–

–

$18,826

$18,826

$907,238
206,437

$1,113,675

$18,826

$1,132,501

Proceeds obtained during the year ended December 31, 2010

Level 1

Level 2

Level 3

Initial fair value

–
–

–

–
–

–

–

–

$6,554
–

$6,554

$635,575
171,252

$806,827

–

$813,381

–
–

–

$4,147
–

$4,147

$14,691

$18,838

$6,554
–

$6,554

$639,722
171,252

$810,974

$14,691

$832,219

Residential mortgage loans serviced for others were $17.3

billion at December 31, 2011 (2010 - $18.4 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
speed assumptions) and other changes,
and prepayment
including changes due to collection / realization of expected
cash flows. Mortgage servicing fees, excluding fair value
adjustments, for the year ended December 31, 2011 amounted
to $49.2 million (2010 - $47.7 million; 2009 - $46.5 million).
The banking subsidiaries receive servicing fees based on a
percentage of the outstanding loan balance. At December 31,
2011, those weighted average mortgage servicing fees were
0.27% (2010 - 0.27%). Under these servicing agreements, the
banking
earn significant
prepayment penalty fees on the underlying loans serviced.

subsidiaries do not

generally

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 years ended December 31, 2011 and 2010 were as
follows:

Prepayment speed
Weighted average life
Discount rate (annual rate)

2011

2010

5.8%

5.9%

17.3 years

17.1 years

11.5%

11.4%

151 POPULAR, INC. 2011 ANNUAL REPORT

During the years ended December 31, 2011 the Corporation
retained servicing rights on whole loan sales
involving
approximately $134 million in principal balance outstanding
(December 31, 2010 - $86 million), with net realized gains of
approximately $2.9 million (December 31, 2010 - $1.9 million).
All loan sales performed during the year ended December 31,
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
considerations.
Prepayment speeds are adjusted for the Corporation’s loan
characteristics and portfolio behavior.

among other

and late

fees,

The following table presents the changes in MSRs measured
using the fair value method for the years ended December 31,
2011 and 2010.

Residential MSRs

(In thousands)

Fair value at beginning of period
Purchases
Servicing from securitizations or asset

transfers

Changes due to payments on loans [1]
Reduction due to loan repurchases
Changes in fair value due to changes in

valuation model inputs or assumptions [2]

Other disposals

Fair value at end of period

2011

2010

$ 166,907 $169,747
4,693

1,732

19,971
(13,156)
(3,717)

15,326
(13,985)
(2,911)

(20,188)
(226)

(5,963)
–

$ 151,323 $166,907

[1] Represents changes due to collection / realization of expected cash flows over time.
[2] Change in fair value during 2011 was principally related to an increase in the
delinquency, foreclosure and base cost assumption.

152

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 December 31, 2011 and
2010 were as follows:

Originated MSRs

(In thousands)
Fair value of retained interests
Weighted average life
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

Weighted average discount rate (annual rate)

Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

December 31, 2011 December 31, 2010

$99,280
13.0 years

7.7%

$(2,744)
$(5,800)

12.6%

$(3,913)
$(7,948)

$101,675
12.5 years

8.0%

$(3,413)
$(6,651)

12.8%

$(4,479)
$(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 December 31, 2011
and 2010 were as follows:

Purchased MSRs

(In thousands)

Fair value of retained interests
Weighted average life
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

Weighted average discount rate (annual rate)

Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

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 December 31, 2011, the Corporation serviced $3.5 billion
(2010 - $4.0 billion) in residential mortgage loans with credit
recourse to the Corporation.

Under

the Corporation, as
servicer, has the right to repurchase, at its option and without

the GNMA securitizations,

(In thousands)

Balance at beginning of year
Rights originated / purchased
Amortization

Balance at end of year
Less: Valuation allowance

Balance at end of year, net of valuation allowance

Fair value at end of year

December 31, 2011 December 31, 2010

$52,043
14.6 years

6.9%

$(1,887)
$(3,303)

11.4%

$(2,376)
$(4,214)

$65,232
12.7 years

7.9%

$(1,963)
$(3,956)

11.5%

$(2,353)
$(4,671)

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. At December 31, 2011, the
Corporation had recorded $180 million in mortgage loans on
its financial statements related to this buy-back option program
(2010 - $168 million).

The Corporation has also identified the rights to service a
portfolio of Small Business Administration (“SBA”) commercial
loans as another class of servicing rights. The SBA servicing
rights are measured at the lower of cost or fair value method.
The following table presents the activity in the SBA servicing
rights for the years ended December 31, 2011 and 2010. During
2011 and 2010, the Corporation did not execute any sale of
SBA loans.

2011

2010

$1,697
–
(610)

$1,087
–

$2,758
–
(1,061)

$1,697
–

$1,087

$1,697

$3,336

$4,274

153 POPULAR, INC. 2011 ANNUAL REPORT

SBA loans

serviced for others were $514 million at

December 31, 2011 (2010 - $531 million).

In 2011 and 2010, weighted average servicing fees on the

SBA serviced loans were approximately 1.04%.

Key economic assumptions used to estimate the fair value of
SBA loans and the sensitivity to immediate changes in those
assumptions were as follows:

SBA Loans

(In thousands)

Carrying amount of retained interests
Fair value of retained interests
Weighted average life
Weighted average prepayment speed (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

Weighted average discount rate (annual rate)

Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change

Quantitative information about delinquencies, net credit
losses, and components of securitized financial assets and other
assets managed together with them by the Corporation,
ended
including its own loan portfolio,

the years

for

2011

2010

$1,087
$3,336
3.2 years

$1,697
$4,274
3.2 years

5.5%

$(46)
$(95)
13.0%

$(103)
$(210)

8.0%

$(86)
$(178)

13.0%

$(130)
$(265)

December 31, 2011 and 2010, are disclosed in the following
tables. Loans securitized/sold represent loans in which the
Corporation has continuing involvement in the form of credit
recourse.

(In thousands)

Loans (owned and managed):
Commercial
Construction
Lease financing
Mortgage
Consumer
Covered loans
Less:

Loans securitized / sold
Loans held-for-sale

Loans held-in-portfolio

(In thousands)

Loans (owned and managed):
Commercial
Construction
Lease financing
Mortgage
Consumer
Covered loans
Less:

Loans securitized / sold
Loans held-for-sale

Loans held-in-portfolio

2011

Total principal amount of loans,
net of unearned

Principal amount 60 days or
more past due

Net credit losses

$10,561,084
547,673
563,867
9,076,243
3,673,755
4,348,703

(3,456,933)
(363,093)

$24,951,299

2010

$953,305
386,099
8,313
1,382,534
105,644
1,324,345

(301,960)
(263,648)

$3,594,632

$310,219
35,347
3,611
29,439
155,765
20,690

(1,434)
1,101

$554,738

Total principal amount of loans,
net of unearned

Principal amount 60 days or
more past due

Net credit losses

$11,454,013
913,595
602,993
8,927,303
3,705,984
4,836,882

(3,981,915)
(893,938)

$25,564,917

$860,554
654,050
8,435
1,554,033
136,483
183,799

(423,345)
–

$2,974,009

$476,433
486,673
10,427
293,582
214,163
–

(1,419)
(327,207)

$1,152,652

154

Note 14 - Premises and equipment
The premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:

(In thousands)

Land

Useful life in
years

Buildings
Equipment
Leasehold improvements

7-50
1-10
3-10

2011

2010

$108,468

$103,632

493,746
312,975
88,882

494,512
324,106
86,117

Note 16 - Goodwill and other intangible assets
The changes in the carrying amount of goodwill for the years
ended December 31, 2011, and 2010, allocated by reportable
segments and corporate group, were as follows (refer to Note
39 for the definition of the Corporation’s reportable segments):

2011

Balance at
January 1,
2011

Goodwill
on
acquisition

Purchase
accounting
adjustments Other

Balance at
December 31,
2011

(In thousands)

Banco Popular de Puerto

Less - Accumulated
depreciation and
amortization

Subtotal

Construction in progress

Total premises and
equipment, net

895,603

904,735

Rico

$245,309

$1,035

$(72)

Banco Popular North

America

402,078

–

–

Total Popular, Inc.

$647,387

$1,035

$(72)

$–

–

$–

$246,272

402,078

$648,350

471,083

467,706

424,520

437,029

5,498

4,792

$538,486

$545,453

(In thousands)

2010

Balance at
January 1,
2010

Goodwill
on
acquisition

Purchase
accounting
adjustments Other

Balance at
December 31,
2010

Depreciation and amortization of premises and equipment
for the year 2011 was $46.4 million (2010 -$58.9 million; 2009
- $64.4 million), of which $23.8 million (2010 - $24.4 million;
2009 - $24.1 million) was charged to occupancy expense and
$22.6 million (2010 - $34.5 million; 2009 - $40.3 million) was
charged to equipment, communications and other operating
expenses. Occupancy expense is net of rental income of $23.3
million (2010 - $27.1 million; 2009 - $26.6 million).

Note 15 - Other assets
The caption of other assets in the consolidated statements of
financial condition consists of the following major categories:

(In thousands)

2011

2010

Net deferred tax assets (net of

valuation allowance)

Investments under the equity method
Bank-owned life insurance program
Prepaid FDIC insurance assessment
Other prepaid expenses
Derivative assets
Securities sold not yet delivered
Others

$429,691
313,152
238,077
58,082
77,335
61,886
69,535
214,635

$388,466
299,185
237,997
147,513
75,149
72,510
23,055
206,012

Total other assets

$1,462,393

$1,449,887

Banco Popular de Puerto

Rico

$157,025

$88,284

Banco Popular North

America
Corporate

402,078
45,246

–
–

Total Popular, Inc.

$604,349

$88,284

$–

–
–

$–

$–

$245,309

–
(45,246)

402,078
–

$(45,246)

$647,387

The goodwill recognized in the BPPR reportable segment
during 2011 is related to the acquisition of the Wells Fargo
Advisors’ Puerto Rico branch.

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.

On September 30, 2010, the Corporation completed the sale
of the processing and technology business of EVERTEC, which
resulted in a $45 million reduction of goodwill
for the
Corporation.

155 POPULAR, INC. 2011 ANNUAL REPORT

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

Corporate group.

(In thousands)

Banco Popular de Puerto Rico
Banco Popular North America

Total Popular, Inc.

(In thousands)

Banco Popular de Puerto Rico
Banco Popular North America
Corporate

Total Popular, Inc.

2011

Balance at
January 1,
2011
(gross amounts)

$245,309
566,489

$811,798

Accumulated
impairment
losses

$–
164,411

$164,411

Balance at
January 1,
2011
(net amounts)

Balance at
December 31,
2011
(gross amounts)

$245,309
402,078

$647,387

$246,272
566,489

$812,761

Accumulated
impairment
losses

$–
164,411

$164,411

Balance at
December 31,
2011
(net amounts)

$246,272
402,078

$648,350

2010

Balance at
January 1, 2010
(gross amounts)

Accumulated
impairment
losses

Balance at
January 1,
2010
(net amounts)

Balance at
December 31,
2010
(gross amounts)

Accumulated
impairment
losses

Balance at
December 31,
2010
(net amounts)

$157,025
566,489
45,429

$768,943

$–
164,411
183

$164,594

$157,025
402,078
45,246

$604,349

$245,309
566,489
–

$811,798

$-
164,411
–

$164,411

$245,309
402,078
–

$647,387

The accumulated impairment losses in the BPNA reportable

segment are associated with E-LOAN.

At December 31, 2011 and 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:

2011
Accumulated
Amortization

2010
Accumulated
Amortization

Gross
Amount

Gross
Amount

$80,591

$38,199

$80,591

$29,817

19,953
242

4,643
103

5,092
189

3,430
43

(In thousands)

Core deposits
Other customer
relationships
Other intangibles

Total

$100,786

$42,945

$85,872

$33,290

During the year ended December 31, 2011, the Corporation
recognized $14 million in customer relationships associated
the Citibank American Airlines
with the purchase of

co-branded credit card portfolio for Puerto Rico and the U.S.
Virgin Islands and the acquisition of certain assets and
liabilities of the Wells Fargo Advisors Puerto Rico branch.
These customer relationship assets are to be amortized to
operating expenses ratably on a monthly basis over a 10-year
period.

During the year ended December 31, 2011, the Corporation
recognized $9.7 million in amortization expense related to
other intangible assets with definite useful lives (2010 - $9.2
million; 2009 - $9.5 million).

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

(In thousands)

Year 2012
Year 2013
Year 2014
Year 2015
Year 2016

$10,049
9,825
9,182
7,038
6,753

Under

applicable

standards,

the reporting unit

for each reporting unit

Results of the Goodwill Impairment Test
The Corporation’s goodwill and other identifiable intangible
assets having an indefinite useful life are tested for impairment.
Intangibles with indefinite lives are evaluated for impairment at
least annually and on a more frequent basis if events or
circumstances indicate impairment could have taken place.
Such events could include, among others, a significant adverse
change in the business climate, an adverse action by a regulator,
an unanticipated change in the competitive environment and a
decision to change the operations or dispose of a reporting unit.
goodwill
accounting
impairment analysis is a two-step test. The first step of the
goodwill impairment test involves comparing the fair value of
the reporting unit with its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds its carrying
is considered not
amount, goodwill of
impaired; however, if the carrying amount of the reporting unit
exceeds its fair value, the second step must be performed. The
second step involves calculating an implied fair value of
for which the first step
goodwill
indicated possible impairment. The implied fair value of
goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination, which is the
excess of the fair value of the reporting unit, as determined in
the first step, over the aggregate fair values of the individual
assets,
liabilities and identifiable intangibles (including any
unrecognized intangible assets, such as unrecognized core
deposits and trademark) as if the reporting unit was being
acquired in a business combination and the fair value of the
reporting unit was the price paid to acquire the reporting unit.
The Corporation estimates the fair values of the assets and
liabilities of a reporting unit, consistent with the requirements
of the fair value measurements accounting standard, which
defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair
value of the assets and liabilities reflects market conditions,
thus volatility in prices could have a material impact on the
determination of the implied fair value of the reporting unit
goodwill at
test date. The adjustments to
measure the assets, liabilities and intangibles at fair value are
for the purpose of measuring the implied fair value of goodwill
and such adjustments are not reflected in the consolidated
statement of financial condition. If the implied fair value of
goodwill exceeds the goodwill assigned to the reporting unit,
there is no impairment. If the goodwill assigned to a reporting
unit exceeds the implied fair value of
the goodwill, an
impairment charge is recorded for the excess. An impairment
loss recognized cannot exceed the amount of goodwill assigned
to a reporting unit, and the loss establishes a new basis in the
goodwill. Subsequent reversal of goodwill impairment losses is
not permitted under applicable accounting standards.

the impairment

156

The Corporation performed the annual goodwill impairment
evaluation for the entire organization during the third quarter
of 2011 using July 31, 2011 as the annual evaluation date. The
reporting units utilized for this evaluation were those that are
one level below the business segments, which are the legal
entities within the reportable segment. The Corporation follows
push-down accounting, as such all goodwill is assigned to the
reporting units when carrying out a business combination.
In determining the fair value of a reporting unit,

the
Corporation generally uses
combination of methods,
a
including market price multiples of comparable companies and
as discounted cash flow analysis.
transactions,
Management evaluates the particular circumstances of each
reporting unit in order to determine the most appropriate
valuation methodology. The Corporation evaluates the results
obtained under each valuation methodology to identify and
understand the key value drivers in order to ascertain that the
results obtained are reasonable and appropriate under the
circumstances. Elements considered include current market
and economic conditions, developments in specific lines of
business, and any particular features in the individual reporting
units.

as well

The computations require management to make estimates
and assumptions. Critical assumptions that are used as part of
these evaluations include:

• a selection of comparable publicly traded companies,

based on nature of business, location and size;

• a selection of comparable acquisition and capital raising

transactions;

• the discount rate applied to future earnings, based on an

estimate of the cost of equity;

• the potential future earnings of the reporting unit; and

• the market growth and new business assumptions.

For purposes of the market comparable approach, valuations
were determined by calculating average price multiples of
relevant value drivers from a group of companies that are
comparable to the reporting unit being analyzed and applying
those price multiples to the value drivers of the reporting unit.
Multiples used are minority based multiples and thus, no
control premium adjustment
is made to the comparable
companies market multiples. While the market price multiple is
not an assumption, a presumption that it provides an indicator
of the value of the reporting unit is inherent in the valuation.
The determination of the market comparables also involves a
degree of judgment.

For purposes of

the discounted cash flows

(“DCF”)
approach, the valuation is based on estimated future cash flows.
The financial projections used in the DCF valuation analysis for
each reporting unit are based on the most recent (as of the
the
valuation date)

financial projections presented to

157 POPULAR, INC. 2011 ANNUAL REPORT

/ Liability Management Committee
Corporation’s Asset
(“ALCO”). The growth assumptions
included in these
projections are based on management’s expectations for each
reporting unit’s financial prospects considering economic and
industry conditions as well as particular plans of each entity
(i.e. restructuring plans, de-leveraging, etc.). The cost of equity
used to discount the cash flows was calculated using the
Ibbotson Build-Up Method and ranged from 13.51% to 19.40%
for the 2011 analysis. The Ibbotson Build-Up Method builds up
a cost of equity starting with the rate of return of a “risk-free”
asset (20-year U.S. Treasury note) and adds to it additional risk
elements such as equity risk premium, size premium and
industry risk premium. The resulting discount rates were
analyzed in terms of reasonability given the current market
conditions and adjustments were made when necessary.

For BPNA, the only reporting unit that failed Step 1, the
Corporation determined the fair value of Step 1 utilizing a DCF
approach and a market value approach. The market value
approach is based on a combination of price multiples from
raising
comparable companies and multiples from capital
transactions of comparable companies. The market multiples
used included “price to book” and “price to tangible book”. The
Step 1 fair value for BPNA under both valuation approaches
(market and DCF) was below the carrying amount of its equity
book value as of the valuation date (July 31), requiring the
completion of Step 2. In accordance with accounting standards,
the Corporation performed a valuation of all assets and
liabilities of BPNA, including any recognized and unrecognized
intangible assets, to determine the fair value of BPNA’s net
assets. To complete Step 2, the Corporation subtracted from
BPNA’s Step 1 fair value the determined fair value of the net
assets to arrive at the implied fair value of goodwill. The results
of the Step 2 indicated that the implied fair value of goodwill is
$1.1 billion, which exceeded the goodwill carrying value of
$402 million at July 31, 2011 by $701 million, resulting in no
goodwill impairment. The reduction in BPNA’s Step 1 fair value
was offset by a reduction in the fair value of its net assets,
resulting in an implied fair value of goodwill that exceeds the
recorded book value of goodwill.

The analysis of the results for Step 2 indicates that the
reduction in the fair value of the reporting unit was mainly
attributed to the deteriorated fair value of the loan portfolios
and not to the fair value of the reporting unit as a going
concern. The current negative performance of the reporting
unit is principally related to deteriorated credit quality in its
loan portfolio, which is consistent with the results of the Step 2
analysis. The fair value determined for BPNA’s loan portfolio in
the July 31, 2011 annual test represented a discount of 28.0%,
compared with 21.5% at December 31, 2010. The discount is
mainly attributed to market participant’s expected rate of
returns, which affected the market discount on the commercial
and construction loan portfolios of BPNA.

If the Step 1 fair value of BPNA declines further in the future
without a corresponding decrease in the fair value of its net
assets or if loan discounts improve without a corresponding
increase in the Step 1 fair value, the Corporation may be
impairment charge. The
required to record a goodwill
Corporation
assist
engaged
management
in the annual evaluation of BPNA’s goodwill
(including Step 1 and Step 2) as well as BPNA’s loan portfolios
as of the July 31, 2011 valuation date. Management discussed
the methodologies, assumptions and results supporting the
relevant values for conclusions and determined they were
reasonable.

third-party

valuator

to

a

the

as part of

Furthermore,

analyses, management
performed a reconciliation of
the aggregate fair values
determined for the reporting units to the market capitalization
the fair value results
of Popular,
determined for the reporting units in the July 31, 2011 annual
assessment were reasonable.

Inc. concluding that

The goodwill impairment evaluation process requires the
Corporation to make estimates and assumptions with regard to
the fair value of the reporting units. Actual values may differ
significantly from these estimates. Such differences could result
in future impairment of goodwill that would, in turn, negatively
impact the Corporation’s results of operations and the reporting
units where the goodwill
in the
is
Corporation’s market capitalization could increase the risk of
goodwill impairment in the future.

recorded. Declines

Management monitors events or changes in circumstances
between annual tests to determine if these events or changes in
circumstances would more likely than not reduce the fair value
of a reporting unit below its carrying amount.

there is no goodwill

Management continued monitoring the fair value of the
reporting units, particularly BPPR and BPNA that represent,
between this two reporting entities, approximately 97% of the
Corporation goodwill balance at December 31, 2011. As part of
the monitoring process, management performed an assessment
for BPPR and BPNA at December 31, 2011. The Corporation
determined BPPR’s and BPNA’s fair values utilizing the same
valuation approaches (market and DCF) used in the annual
goodwill impairment test. The determined fair value for BPPR
at December 31, 2011 exceeded its carrying amount concluding
that
the
determined fair value at December 31, 2011 continued to be
below its carrying amount under all valuation approaches. The
fair value determination of BPNA’s assets and liabilities was
updated
valuation
methodologies consistent with the July 31, 2011 test. The
results of the BPNA assessment at December 31, 2011 indicated
that the implied fair value of goodwill exceeded the goodwill
carrying amount, resulting in no goodwill impairment. The
results obtained in the December 31, 2011 assessment of BPNA
were consistent with the results of the annual impairment test
in that the reduction in the fair value of BPNA was mainly

impairment. For BPNA,

at December

utilizing

2011

31,

158

At December 31, 2011,

the Corporation had brokered

deposits amounting to $3.4 billion (2010 - $2.3 billion).

The aggregate amount of overdrafts in demand deposit
accounts that were reclassified to loans was $13 million at
December 31, 2011 (2010 - $52 million).

Note 18 – Assets sold under agreements to repurchase
The following table summarizes certain information on assets
sold under agreements to repurchase at December 31, 2011,
2010, and 2009:

(Dollars in thousands)

2011

2010

2009

Assets sold under

agreements to repurchase

$2,141,097 $2,412,550 $2,632,790

Maximum aggregate balance

outstanding at any
month-end

Average monthly aggregate
balance outstanding

Weighted average interest

rate:
For the year
At December 31

$2,822,308 $2,672,553 $3,938,845

$2,480,490 $2,356,100 $2,844,975

2.20%
2.57%

2.55%
2.34%

2.45%
2.42%

The repurchase agreements outstanding at December 31,
2011 were collateralized by $1.8 billion in investment securities
available for sale, $403 million in trading securities and $
68 million in securities sold not yet delivered in other assets
(2010 - $2.1 billion in investment securities available for sale
and $492 million in trading securities). 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 statement of
financial
condition.

In addition, there were repurchase agreements outstanding
collateralized by $274 million (2010 - $172 million) in
securities purchased underlying agreements to resell to which
the
right
the Corporation has
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 financial condition.

to repledge.

the

is

It

attributable to a significant reduction in the fair value of BPNA’s
loan portfolio.

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

The valuation of the E-LOAN trademark was performed
using the “relief-from-royalty” valuation approach. The basis of
the “relief-from-royalty” method is that, by virtue of having
ownership of the trademark, the Corporation is relieved from
having to pay a royalty, usually expressed as a percentage of
revenue, for the use of trademark. The main attributes involved
in the valuation of this intangible asset include the royalty rate,
revenue projections that benefit from the use of this intangible,
after-tax royalty savings derived from the ownership of the
intangible, and the discount rate to apply to the projected
benefits to arrive at the present value of this intangible. Since
estimates are an integral part of this trademark impairment
analysis, changes in these estimates could have a significant
impact on the calculated fair value. There were no impairments
recognized during the years ended December 31, 2011 and
2010 related to E-LOAN’s trademark.

Note 17 – Deposits
Total interest bearing deposits consisted of:

(In thousands)

Savings accounts
NOW, money market and other

December 31,

2011

2010

$6,473,215

$6,177,074

interest bearing demand deposits

5,103,398

4,756,615

Total savings, NOW, money market
and other interest bearing demand
deposits

Certificates of deposit:
Under $100,000
$100,000 and over

11,576,613

10,933,689

6,473,095
4,236,945

6,238,229
4,650,961

Total certificates of deposit

10,710,040

10,889,190

Total interest bearing deposits

$22,286,653

$21,822,879

A summary of certificates of deposit by maturity at

December 31, 2011, follows:

(In thousands)

2012
2013
2014
2015
2016
2017 and thereafter

Total certificates of deposit

$6,873,895
1,598,877
833,916
764,247
569,217
69,888

$10,710,040

159 POPULAR, INC. 2011 ANNUAL REPORT

The following table presents the liability associated with the
repurchase transactions (including accrued interest),
their
maturities and weighted average interest rates. Also, it includes
the
the carrying value and approximate market value of
collateral (including accrued interest) at December 31, 2011

and 2010. The information excludes repurchase agreement
transactions which were collateralized with securities or other
assets held-for-trading purposes or which have been obtained
under agreements to resell.

2011

2010

Repurchase
liability

Carrying
value of
collateral

Market
value of
collateral

Weighted
average
interest
rate

Repurchase
liability

Carrying
value of
collateral

Market
value of
collateral

Weighted
average
interest
rate

$121,004
348,100

$126,317
393,998

$126,317
393,998

0.37%
3.55

$205,320
373,333

$216,530
426,664

$216,530
426,664

0.37%
4.22

469,104

520,315

520,315

2.73

578,653

643,194

643,194

2.85

39,148
6,369
633,930

679,447

43,009
7,011
628,243

678,263

43,009
7,011
628,243

678,263

194,958
43,704
130,003

240,675
47,388
291,096

240,675
47,388
291,096

0.46
4.37
3.99

3.79

0.59
4.37
3.52

84,345
32,261
561,790

678,396

90,434
32,415
644,943

767,792

90,434
32,415
644,943

767,792

280,951
89,561
173,840

329,634
103,398
244,078

329,634
103,398
244,078

0.33
5.29
4.40

3.94

0.38
0.38
4.26

368,665

579,159

579,159

2.08

544,352

677,110

677,110

1.62

$1,517,216

$1,777,737

$1,777,737

3.05% $1,801,401

$2,088,096

$2,088,096

2.89%

(Dollars in thousands)

Obligations of U.S. government

sponsored entities
Within 30 days
After 90 days

Total obligations of U.S.
government sponsored
entities

Mortgage-backed securities

Within 30 days
After 30 to 90 days
After 90 days

Total mortgage-backed securities

Collateralized mortgage

obligations
Within 30 days
After 30 to 90 days
After 90 days

Total collateralized mortgage

obligations

Total

Note 19 - Other short-term borrowings
The following table presents a breakdown of other short-term
borrowings at December 31, 2011 and 2010.

(In thousands)

2011

2010

Advances with the FHLB paying interest at
maturity, at fixed rates of 0.31% (2010 -
0.36% to 0.44%)

Term funds purchased paying interest at
maturity, at fixed rates from 1.15% to
1.25%

Securities sold not yet purchased
Others

$295,000

$300,000

–
–
1,200

52,500
10,459
1,263

Total other short-term borrowings

$296,200

$364,222

The maximum aggregate balance outstanding at any
month-end was approximately $391 million (2010 - $364
million; 2009 - $205 million). The weighted average interest
rate of other short-term borrowings at December 31, 2011 was
0.35% (2010 - 0.54%; 2009 - 2.74%). The average aggregate
balance outstanding during the year was approximately $
149 million (2010 - $45 million; 2009 - $43 million). The
weighted average interest rate during the year was 0.55% (2010
- 1.13%; 2009 - 0.95%).

Note 20 presents additional

information with respect to

available credit facilities.

160

agreement with the FDIC and all proceeds derived from such
assets, including cash inflows from claims to the FDIC under
the loss sharing agreements. Proceeds received from such
sources were used to pay the note under the conditions
stipulated in the agreement. The note had been paid in full as of
December 31, 2011 without any penalty.

The following table presents the aggregate amounts by

contractual maturities of notes payable at December 31, 2011.

2012
2013
2014
2015
2016
Later years
No stated maturity

Subtotal
Less: Discount

Total

$642,568

$385,000

Year

Note 20 - Notes payable
Notes payable outstanding at December 31, 2011 and 2010,
consisted of the following:

(In thousands)

2011

2010

Advances with the FHLB with

maturities ranging from 2012 to 2021
paying interest at monthly fixed rates
ranging from 0.66% to 4.95% (2010 -
3.52% to 4.95%)

Note issued to the FDIC paying interest
monthly at an annual fixed rate of
2.50%

Term notes with maturities ranging
from 2012 to 2016 paying interest
semiannually at fixed rates ranging
from 5.25% to 7.86% (2010 - 5.25%
to 13.00%)

Term notes with maturities ranging
from 2012 to 2013 paying interest
monthly at a floating rate of 3.00%
over the 10-year U.S. Treasury note
rate

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 21)

Junior subordinated deferrable interest
debentures (related to trust preferred
securities) ($936,000 less discount of
$465,963 as of 2011 and $491,019 at
2010) with no stated maturity and a
contractual fixed interest rate of
5.00% until, but excluding
December 5, 2013 and 9.00%
thereafter (Refer to Note 21) [1]

Others

Total notes payable

–

2,492,928

278,309

381,133

588

1,010

439,800

439,800

470,037
25,070

444,981
25,331

$1,856,372

$4,170,183

(In thousands)

$214,868
98,800
189,648
36,096
311,472
535,451
936,000

2,322,335
465,963

$1,856,372

features. The maximum borrowing capacity

At December 31, 2011, the Corporation had borrowing
facilities available with the FHLB whereby the Corporation
could borrow up to $2.0 billion based on the assets pledged
with the FHLB at that date (2010 - $1.6 billion). The FHLB
advances at December 31, 2011 are collateralized with
mortgage loans, and do not have restrictive covenants or
callable
is
dependent on certain computations as determined by the FHLB,
which consider the amount and type of assets available for
collateral.
Also,

the
discount window of the Federal Reserve Bank of New York. At
December 31, 2011, the borrowing capacity at the discount
window approximated $2.6 billion (2010 -$2.7 billion), which
remained unused at December 31, 2011 and 2010. The facility
is a collateralized source of credit that is highly reliable even
under difficult market conditions.

the Corporation has a borrowing facility at

Note: Key index rates as of December 31, 2011 and December 31, 2010, respectively,
were as follows: 3-month LIBOR rate =0.58% and 0.30%; 10-year U.S. Treasury note
=1.88% and 3.30%.
[1] The debentures are perpetual and may be redeemed by the Corporation at any time,
subject to the consent of the Board of Governors of the Federal Reserve System. The
discount on the debentures is being amortized over an estimated 30-year term that
started in August 2009. The effective interest rate taking into account the discount
accretion was approximately 16% at December 31, 2011 and 2010.

As indicated in Note 4 to the consolidated financial
statements, 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 had full recourse to BPPR. The note issued to the
FDIC was collateralized by the loans (other than certain
real estate acquired in the
consumer

loans) and other

four

Note 21 - Trust preferred securities
At December 31, 2011 and 2010,
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
In
subordinated debentures”) issued by the Corporation.
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

161 POPULAR, INC. 2011 ANNUAL REPORT

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
financial 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.

The following table presents financial data pertaining to the

different trusts at December 31, 2011 and 2010.

(Dollars in thousands)

Issuer

Capital securities
Distribution rate

Common securities
Junior subordinated debentures aggregate liquidation

amount

Stated maturity date
Reference notes

BanPonce
Trust I

Popular
Capital Trust I

Popular
North America
Capital Trust I

Popular
Capital Trust Il

Popular
Capital Trust III

$52,865

$181,063

$91,651

$101,023

8.327%
$1,637

6.700%
$5,601

6.564%
$2,835

6.125%
$3,125

$54,502

$104,148
February 2027 November 2033 September 2034 December 2034
[2],[4],[5]

$186,664

[1],[3],[6]

[1],[3],[5]

[2],[4],[5]

$94,486

$935,000
5.000% until,
but excluding
December 5,
2013 and
9.000%
thereafter
$1,000

$936,000
Perpetual
[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 $470 million at December 31, 2011 ($936 million aggregate liquidation amount, net of $466 million discount) and $445 million
at December 31, 2010 ($936 million aggregate liquidation amount, net of $491 million discount).

represent

In accordance with the Federal Reserve Board guidance, the
restricted core capital
trust preferred securities
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 December 31, 2011 and
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
this limit generally may be
capital elements in excess of
to further limitations.
included in Tier 2 capital, subject
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
December 31, 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 December 31, 2011, the
securities
of
remaining
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.

$935 million

preferred

trust

162

Note 22 – Exchange offers
During 2009, the Corporation completed certain exchange transactions involving preferred stock, common stock and trust
preferred securities (also referred to as “capital securities”). The sections below describe such transactions.

Exchange of preferred stock for common stock
The exchange by holders of the Corporation’s shares of the Series A and B non-cumulative preferred stock for shares of common
stock in 2009 resulted in the extinguishment of such shares of preferred stock and an issuance of shares of common stock.

The following table presents the results of the exchange offer with respect to the Series A and B preferred stock.

Title of securities
Series A Preferred Stock
Series B Preferred Stock

Per security
liquidation
preference
amount
$25
$25

Shares of
preferred
stock
exchanged
6,589,274
14,879,335

Shares of
preferred
stock
outstanding
after
exchange
885,726
1,120,665

Aggregate
liquidation
preference
amount
after exchange
(in thousands)
$22,143
$28,017

Shares of
common
stock issued
52,714,192
119,034,680

The exchange of shares of preferred stock for shares of
common stock resulted in a favorable impact to accumulated
deficit of $230.4 million, which is also considered in the
income (loss) per common share computations. Refer to Note
32 to the
such
computations.

consolidated financial

statements

for

Common stock issued in connection with the early
extinguishment of debt (exchange of trust preferred
securities for common stock)
During 2009,
the Corporation exchanged trust preferred
securities with a liquidation preference value of $465 million
issued by different trusts (BanPonce Trust I, Popular Capital
Trust I, Popular North America Capital Trust I and Popular
Capital Trust II) for 185,761,204 shares of common stock of the
Corporation. The trust preferred securities were delivered to
the trusts in return for the junior subordinated debentures
(recorded as notes payable in the Corporation’s financial
statements) that had been issued by the Corporation to the
trusts. The junior subordinated debentures were submitted for
cancellation by the indenture trustee under the applicable
indenture. The Corporation recognized a pre-tax gain of $80.3
the applicable junior
million on the extinguishment of
in the
subordinated
consolidated statement of operations for
the year ended
December 31, 2009. This transaction was accounted for as an
early extinguishment of debt. The increase in stockholders’
equity related to the exchange of trust preferred securities for
shares of common stock was approximately $390 million, net of
issuance
early
extinguishment of debt.

debentures, which was

and including

gain on the

included

costs,

the

Exchange of preferred stock held by the U.S. Treasury for
trust preferred securities
In August 2009, the United States Department of the Treasury
(“U.S. Treasury”) agreed with the Corporation to exchange all

935,000 shares of the Corporation’s outstanding Fixed Rate
Cumulative Perpetual Preferred Stock, Series C (the “Series C
Preferred Stock”), owned by the U.S Treasury, for 935,000
newly issued Popular Capital Trust III trust preferred securities.
In connection with this exchange, the trust used the Series C
preferred stock, together with the proceeds of the issuance and
sale by the trust to the Corporation of $1 million aggregate
its fixed rate common securities, to
liquidation amount of
purchase $936 million aggregate principal amount of the junior
subordinated debentures issued by the Corporation. The Series
C Preferred Stock were issued to the U.S. Department of
Treasury (“U.S. Treasury”) in December 2008 under the U.S.
Treasury’s Troubled Asset Relief Program (“TARP”) Capital
Purchase Program.

to all

senior debt. The obligations of

The obligations of the Corporation to the holders of the
Popular Capital Trust III trust preferred securities under the
guarantee
agreement dated August 24, 2009 constitute
unsecured obligations and rank subordinate and junior in right
of payment
the
Corporation under the guarantee agreement rank pari-passu
with the obligations of Popular under any similar guarantee
agreements issued by the Corporation on behalf of the holders
of preferred or capital securities issued by any statutory trust.
the Corporation has
agreement,
Under
guaranteed the payment of the liquidation amount of the trust
preferred securities upon liquidation of the trust, but only to
the extent that the trust has funds available to make such
payments.

guarantee

the

recognition of

This transaction with the U.S. Treasury was accounted for as
an extinguishment of previously issued Series C preferred
this transaction included
stock. The accounting impact of
(1)
and
derecognition of the Series C preferred stock; (2) recognition of
a favorable impact to accumulated deficit resulting from the
excess of (a) the carrying amount of the securities exchanged
(the Series C preferred stock) over (b) the fair value of the

subordinated debentures

junior

163 POPULAR, INC. 2011 ANNUAL REPORT

consideration exchanged (the trust preferred securities); (3) the
reversal of any unamortized discount outstanding on the Series
C preferred stock; and (4) recognition of issuance costs. The
reduction in total stockholders’ equity related to the U.S.
Treasury exchange transaction at
the exchange rate was
approximately $416 million, which was principally impacted by
the reduction of $935 million of aggregate
liquidation
preference value of the Series C preferred stock, partially offset
by the $519 million discount on the junior subordinated
debentures described in item (2) above. This discount and debt
issue costs are amortized through interest expense using the
interest yield method over the estimated life of the junior
subordinated debentures, which was estimated to be 30 years.

This particular exchange resulted in a favorable impact to
accumulated deficit on the exchange date of $485.3 million,
which is also considered in the income (loss) per common
share computations. Refer to Note 32 to the consolidated
financial statements for a reconciliation of net income (loss) per
common share.

Note 23 - Stockholders’ equity
The Corporation has 30,000,000 shares of authorized preferred
stock that may be issued in one or more series, and the shares
of each series shall have such rights and preferences as shall be
fixed by the Board of Directors when authorizing the issuance
of that particular series. The Corporation’s shares of preferred
stock issued and outstanding at December 31, 2011 and 2010
consisted of:

• 6.375% non-cumulative monthly income preferred stock,
2003 Series A, no par value, liquidation preference value
of $25 per share. Holders on record of the 2003 Series A
Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors of the Corporation or
an authorized committee thereof, out of funds legally
available, non-cumulative cash dividends at the annual
rate per share of 6.375% of their liquidation preference
value, or $0.1328125 per share per month. These shares
of preferred stock are perpetual, nonconvertible, have no
preferential rights to purchase any securities of
the
Corporation and are redeemable solely at the option of the
Corporation with the consent of the Board of Governors
of the Federal Reserve System. The redemption price per
share is $25.00. The shares of 2003 Series A Preferred
Stock have no voting rights, except for certain rights in
instances when the Corporation does not pay dividends
for a defined period. These shares are not subject to any
sinking fund requirement. Cash dividends declared and
paid on the 2003 Series A Preferred Stock amounted to
$1.4 million for the year ended December 31, 2011 (2010
- $117.6 thousand; 2009 - $6.0 million). Outstanding
shares of 2003 Series A Preferred Stock amounted to
885,726 at December 31, 2011, 2010 and 2009.

• 8.25% non-cumulative monthly income preferred stock,
2008 Series B, no par value, liquidation preference value
of $25 per share. The shares of 2008 Series B Preferred
Stock were issued in May 2008. Holders of record of the
2008 Series B Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors of the
Corporation or an authorized committee thereof, out of
funds legally available, non-cumulative cash dividends at
the annual rate per share of 8.25% of their liquidation
preferences, or $0.171875 per share per month. These
shares of preferred stock are perpetual, nonconvertible,
have no preferential rights to purchase any securities of
the Corporation and are redeemable solely at the option of
the Corporation with the consent of
the Board of
Governors of the Federal Reserve System beginning on
May 28, 2013. The redemption price per share is $25.50
from May 28, 2013 through May 28, 2014, $25.25 from
May 28, 2014 through May 28, 2015 and $25.00 from
May 28, 2015 and thereafter. Cash dividends declared and
paid on the 2008 Series B Preferred Stock amounted to
$2.3 million for the year ended December 31, 2011 (2010
- $192.6 thousand; 2009 - $16.5 million). Outstanding
shares of 2008 Series B Preferred Stock amounted to
1,120,665 at December 31, 2011, 2010 and 2009.

As part of the Series C Preferred Stock transaction with the
U.S. Treasury effected on December 5, 2008, the Corporation
issued to the U.S. Treasury a warrant to purchase 20,932,836
shares of the Corporation’s common stock at an exercise price
of $6.70 per share, which continues to be outstanding in full
and without amendment at December 31, 2011. The warrant is
immediately exercisable, subject to certain restrictions, and has
a 10-year term. The exercise price and number of shares subject
to the warrant are both subject to anti-dilution adjustments.
The U.S. Treasury may not exercise voting power with respect
to shares of common stock issued upon exercise of the warrant.
The trust preferred securities issued to the U.S. Treasury, which
are described in Notes 21 and 22 to the financial statements,
the warrant or the shares issuable upon exercise of the warrant
are not subject to any contractual restriction on transfer.

The Corporation’s common stock trades on the NASDAQ
Stock Market (the “NASDAQ”) under the symbol BPOP. The
Corporation voluntarily delisted its 2003 Series A and 2008
Series B Preferred Stock from the NASDAQ effective October 8,
2009.

On May 4, 2010,

following stockholder approval,

the
Corporation amended its restated certificate of incorporation to
provide for an increase in the number of shares of
the
Corporation’s common stock authorized for issuance from
700 million shares to 1.7 billion shares.

In April 2010, the Corporation raised $1.15 billion through
the sale of 46,000,000 depositary shares, each representing a
1/40th interest in a share of Contingent Convertible Perpetual

164

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
the Puerto Rico
the prior consent of
dividends without
Commissioner of Financial Institutions. The failure to maintain
sufficient statutory reserves would preclude BPPR from paying
dividends. BPPR’s statutory reserve fund amounted to $415
million at December 31, 2011 (2010 and 2009 - $402 million).
During 2011, $13 million was transferred to the statutory
reserve account (2009 - $10 million). There were no transfers
to the statutory reserve during 2010. BPPR was in compliance
with the statutory reserve requirement in 2011, 2010 and 2009.

Failure

agencies.

Note 24 - Regulatory capital requirements
The Corporation and its banking subsidiaries are subject to
various regulatory capital requirements imposed by the federal
banking
to meet minimum capital
requirements can lead to certain mandatory and additional
discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation’s consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Federal
Reserve Board and the other bank regulators have adopted
quantitative measures which assign risk weightings to assets
and off-balance sheet items and also define and set minimum
regulatory capital requirements. Rules adopted by the federal
banking agencies provide that a depository institution will be
deemed to be well capitalized if it maintains a leverage ratio of
at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a
least 10%. Management has
total
determined that at December 31, 2011 and 2010,
the
Corporation exceeded all capital adequacy requirements to
which it is subject.

risk-based ratio of at

At December 31, 2011 and 2010, BPPR and BPNA were
well-capitalized under the regulatory framework for prompt
corrective action. At December 31, 2011, management believes
that there were no conditions or events since the most recent
notification date that could have changed the institution’s
category.

The Corporation has been designated by the Federal Reserve
Board as a Financial Holding Company (“FHC”) and is eligible
to engage in certain financial activities permitted under the
Gramm-Leach-Bliley Act of 1999.

Non-Cumulative Preferred Stock, Series D, no par value, $1,000
liquidation preference per
share. The preferred stock
represented by depositary shares automatically converted into
shares of the Corporation’s common stock at a conversion rate
of 8.3333 shares of common stock for each depositary share on
May 11, 2010. The conversion of the depositary shares of
preferred stock resulted in the issuance of 383,333,333
additional shares of common stock. The net proceeds from the
public offering amounted to approximately $1.1 billion, after
deducting the underwriting discount and estimated offering
expenses. Note 32 to the consolidated financial statements
provides information on the impact of the conversion on net
income per common share.

As described in Note 22 to the financial statements, during
2009,
the Corporation issued 357,510,076 new shares of
common stock in exchange of its Series A and Series B preferred
stocks and trust preferred securities, which resulted in an
increase in common stockholders’ equity of $923 million. This
increase included newly issued common stock and surplus of
$612.4 million and a favorable impact to accumulated deficit of
$311 million,
including $80.3 million in gains on the
extinguishment of junior subordinated debentures that relate to
the trust preferred securities.
On February 19, 2009,

the
the Board of Directors of
Corporation resolved to retire 13,597,261 shares of
the
Corporation’s common stock that were held by the Corporation
as treasury shares. It is the Corporation’s accounting policy to
account, at retirement, for the excess of the cost of the treasury
stock over its par value entirely to surplus. The impact of the
retirement is reflected in the consolidated statements of changes
in stockholders’ equity.

The Corporation’s common stock ranks junior to all series of
preferred stock as to dividend rights and / or as to rights on
liquidation, dissolution or winding up of the Corporation.
Dividends on each series of preferred stocks are payable if
declared. The Corporation’s ability to declare or pay dividends
its common
on, or purchase, redeem or otherwise acquire,
stock is subject to certain restrictions in the event that the
Corporation fails to pay or set aside full dividends on the
preferred stock for the latest dividend period. The ability of the
Corporation to pay dividends in the future is limited by
regulatory requirements
the Corporation’s
agreements with the U.S. Treasury, legal availability of funds,
recent and projected financial
levels and
liquidity of the Corporation, general business conditions and
other factors deemed relevant by the Corporation’s Board of
Directors.

results, capital

and approval,

During the years ended December 31, 2011 and 2010, the
Corporation did not declare dividends on its common stock
(2009 - cash dividends of $0.02 per common share outstanding
or $5.6 million).

165 POPULAR, INC. 2011 ANNUAL REPORT

The following tables present the Corporation’s risk-based

capital and leverage ratios at December 31, 2011 and 2010.

(Dollars in
thousands)

Total Capital (to
Risk-Weighted
Assets):
Corporation
BPPR
BPNA

Tier I Capital (to
Risk-Weighted
Assets):
Corporation
BPPR
BPNA

Tier I Capital (to

Average
Assets):
Corporation

BPPR

BPNA

Actual

Capital adequacy minimum
requirement

Amount

Ratio

Amount

Ratio

2011

$4,212,070
2,595,068
1,256,906

17.25% $1,953,146
1,451,841
14.30
462,172
21.76

$3,899,593
2,177,865
1,182,642

15.97% $976,573
725,920
12.00
231,086
20.47

$3,899,593

2,177,865

1,182,642

8.11

10.90% $1,073,512
1,431,350
805,263
1,073,684
246,256
328,341

14.41

8%
8
8

4%
4
4

3%
4
3
4
3
4

(Dollars in thousands)

Amount

Ratio

Actual

2010

Capital
adequacy
minimum
requirement
Amount Ratio

The following table presents the minimum amounts and
ratios for the Corporation’s banks to be categorized as well-
capitalized under prompt corrective action.

(In thousands)

Amount

Ratio

Amount

Ratio

2011

2010

Total Capital (to Risk-
Weighted Assets):

BPPR
BPNA

Tier I Capital (to Risk-
Weighted Assets):

BPPR
BPNA

Tier I Capital (to

Average Assets):

BPPR
BPNA

$1,814,801
577,715

10% $1,866,629
659,718
10

10%
10

$1,088,881
346,629

6% $1,119,978
395,831
6

$1,342,105
410,426

5% $1,439,570
450,799
5

6%
6

5%
5

Note 25 – Related party transactions
The Corporation grants loans to its directors, executive officers
and certain related individuals or organizations in the ordinary
course of business. The movement and balance of these loans
were as follows:

(In thousands)

Balance at December 31, 2009
New loans
Payments
Other changes

Balance at December 31, 2010
New loans
Payments
Other changes

Balance at December 31, 2011

Executive
Officers Directors

Total

$57,861
93,591
(47,886)
(4,040)

$99,526
31,035
(24,948)
(65)

$52,569
91,701
(47,646)
(579)

$96,045
28,266
(24,223)
–

$100,088

$105,548

$5,292
1,890
(240)
(3,461)

$3,481
2,769
(725)
(65)

$5,460

Total Capital (to Risk-
Weighted Assets):

Corporation
BPPR
BPNA

Tier I Capital (to Risk-
Weighted Assets):

Corporation
BPPR
BPNA

Tier I Capital (to

Average Assets):

Corporation

BPPR

BPNA

$4,062,298 15.79% $2,057,677
1,493,303
2,451,042 13.13
527,775
1,244,884 18.87

$3,733,776 14.52% $1,028,839
746,652
2,028,968 10.87
263,887
1,159,245 17.57

$3,733,776

2,028,968

1,159,245 12.86

7.05

9.70% $1,154,718
1,539,624
863,742
1,151,656
270,480
360,639

The amounts reported as “other changes” include changes in

At December

the status of those who are considered related parties.
31, 2011,

the Corporation’s banking
subsidiaries held deposits from related parties, excluding
EVERTEC, amounting to $36 million (2010 - $45 million).

From time to time, the Corporation, in the ordinary course
of business, obtains services from related parties or makes
contributions to non-profit organizations that have some
association with the Corporation. Management believes the
terms of such arrangements are consistent with arrangements
entered into with independent third parties.

During 2011, the Corporation engaged,

in the ordinary
course of business, the legal services of certain law firms in
Puerto Rico, in which the Secretary of the Board of Directors of
Popular, Inc. and immediate family members of one executive
officer of the Corporation acted as senior counsel or as partner.
The fees paid to these law firms for the year 2011 amounted to
approximately $3.0 million (2010 - $2.4 million).

8%
8
8

4%
4
4

3%
4
3
4
3
4

For the year ended December 31, 2011, the Corporation
made contributions of approximately $0.6 million to Banco
Popular Foundations, which are not-for-profit corporations
dedicated to philanthropic work (2010 - $0.6 million).

In August 2009, BPPR sold part of the real estate assets and
related construction permits of a residential construction
project, which had been received by BPPR from a commercial
customer as part of a workout agreement, to a limited liability
company (the “LLC”) for $13.5 million. The LLC is controlled
by two family members of an executive officer of
the
Corporation, one which is a director of the Corporation. BPPR
received two offers from reputable developers and builders, and
the LLC offered the higher amount. The sales price represented
the value of the real estate according to an appraisal report.
BPPR provided a loan facility, consisting of a term loan and a
to finance the acquisition and
revolving line of credit,
completion of the residential construction project. The loan is
collateralized by the real estate acquired. The loans were in
non-accrual status at December 31, 2011 and 2010. At
December 30, 2010, the Corporation had recognized a loss of
$8.6 million out of the unpaid principal balance of $15.7
million of the loan facilities made to the LLC. During 2011, the
Corporation made advances on the facilities amounting to $4.3
million and received payments amounting to $2.1 million. At
December 31, 2011, the carrying value of the loan, which is
classified as held-for-sale, amounted to $6.8 million, which was
net of a valuation allowance of $2.3 million.

the time of

A director of the Corporation and entities controlled by him
have a series of loan relationships with BPPR, which were
approved for restructuring in December 2011. The aggregate
amount of the credit facilities to be restructured approximated
$1.8 million, of which approximately $1.5 million was
the
outstanding at
restructuring, certain lines of credit were approved for
conversion to term loans. While the director and the entities
controlled by him were current on their payment obligations to
the modified credit
BPPR as of the date of the approval,
facilities are considered troubled debt restructurings because of
the approved term extensions which could be viewed as an
accommodation to a borrower to ensure continued compliance
with its obligations.

the approval. As part of

In October 2007, a corporation, in which a family member
of a director owns a 50% equity interest, obtained a $3.9
million loan from BPPR to acquire a parcel of property on
which it intended to develop a residential project in Puerto
Rico. Certain of
the director’s family members personally
guaranteed the loan. The borrower also obtained a $250,000
unsecured line of credit from BPPR. The project was never
constructed as a result of a series of legal challenges regarding
the zoning approvals and went into default.

BPPR commenced foreclosure and collection proceedings
against both the borrower and the guarantors in April 2010. At

166

family members of a director of

December 31, 2011, the loan was classified as held-for-sale and
is not accruing interest. At December 31, 2011, the carrying
value of the loan amounted to $2.0 million, with no valuation
allowance required.
In June 2006,

the
Corporation, obtained a $828,000 mortgage loan from Popular
Mortgage, Inc., a subsidiary of BPPR (“Popular Mortgage”),
secured by a residential property. The loan was a fully
amortizing 30-year loan with a fixed annual rate of 7%. The
director was not a director of the Corporation at the time the
loan was made. The borrowers became delinquent on their
payments commencing in July 2010 and after exhausting
various collection and loss mitigation, efforts BPPR commenced
foreclosure procedures in November 2010. The balance due on
the loan at December 31, 2011, including accumulated interest,
the
was approximately $890,000. At December 31, 2011,
Corporation had recorded a loss of approximately $65,000 on
this loan.

In November 2007, family members of an executive officer
and member of the Board of Directors of the Corporation,
obtained a $1.35 million mortgage loan from Popular Mortgage,
secured by a residential property. The loan was a fully
amortizing 30-year loan with a fixed annual rate of 7%. The
borrowers became delinquent on their payments commencing
in September 2009 and after exhausting various collection and
loss mitigation efforts BPPR commenced foreclosure procedures
in October 2011. The balance due on the loan at December 31,
2011, including accumulated interest, was approximately $1.58
million. At December 31, 2011, the Corporation had recorded a
loss of approximately $500,000 on this loan.

The Corporation has had loan transactions with the
Corporation’s directors and officers, and with their associates,
and proposes to continue such transactions in the ordinary
course of
its business, on substantially the same terms,
including interest rates and collateral, as those prevailing for
comparable loan transactions with third parties, except as
disclosed above. Except as discussed above, the extensions of
credit have not involved and do not currently involve more
than normal risks of collection or present other unfavorable
features.

Sale of Processing and Technology Business and Related
party transactions with EVERTEC, as an affiliate
In 2010, the Corporation entered into a merger agreement,
dated as of June 30, 2010, to sell a 51% interest in EVERTEC,
including the merchant acquiring business of BPPR (the
“EVERTEC transaction”),
to funds managed by Apollo
Management, L.P. (“Apollo”), an unrelated third-party, in a
In connection with the EVERTEC
leveraged
transaction,
internal
completed
reorganization transferring certain intellectual property assets
and interests in certain foreign subsidiaries to EVERTEC,
including BPPR’s merchant acquiring business and TicketPop

the Corporation

buyout.

an

167 POPULAR, INC. 2011 ANNUAL REPORT

divisions. The Corporation retained EVERTEC’s operations in
Venezuela and certain related contracts as an indirect wholly-
owned subsidiary. The Corporation also retained equity
interests in the processing businesses of Servicios Financieros,
S.A. de C.V.
and Consorcio de Tarjetas
Dominicanas, S.A. (“CONTADO”). On September 30, 2010,
EVERTEC DE VENEZUELA, C.A. became a subsidiary of PIBI
and EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA was
transferred from Popular International Bank, Inc. (“PIBI”) to
EVERTEC.

(“Serfinsa”)

On September 30, 2010, the Corporation completed the
EVERTEC transaction. Following the consummation of the
EVERTEC transaction, EVERTEC is now a wholly-owned
subsidiary of Carib Holdings, Inc., a newly formed entity that is
operated as a joint venture, with Apollo and the Corporation
initially owning 51% and 49%, respectively, subject to pro rata
dilution for certain issuances of capital stock to EVERTEC
management.
In connection with the leveraged buyout,
EVERTEC issued financing in the form of unsecured senior
notes and a participation in a syndicated loan (senior secured
credit facility). The Corporation invested $35 million in senior
unsecured notes issued by EVERTEC ($17.85 million, net of
elimination related to the 49% ownership interest
the
the Corporation initially
maintained by Popular). Also,
provided financing to EVERTEC by acquiring $58.2 million of
the syndicated loan ($29.7 million, net of the elimination of the
49% equity interest).

income

As a result of the sale, the Corporation recognized a pre-tax
gain, net of transaction costs, of approximately $616.2 million
($531.0 million after-tax), of which $640.8 million was
separately disclosed within non-interest
in the
consolidated statement of operations and $24.6 million was
included as operating expenses (transaction costs) for the year
ended December 31, 2010. Approximately $94.0 million of the
pre-tax gain was the result of marking the Corporation’s
retained interest in the EVERTEC business at fair value. This
portion of the gain was non-cash. The investment in EVERTEC
was initially recorded at a fair value of $177 million at
September 30, 2010. The equity value of the Corporation’s
retained interest in the former subsidiary, as determined in an

orderly transaction between market participants, takes into
consideration the buyer’s enterprise value of EVERTEC 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.

As part of the EVERTEC transaction, on September 30,
2010, the Corporation entered into certain ancillary agreements
pursuant to which, among other things, EVERTEC provides
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 by providing
various services, in each case for initial terms of fifteen years.

The Corporation’s investment in EVERTEC, including the
impact of intra-entity eliminations, amounted to $203 million
at December 31, 2011 (2010 - $197 million), and is included as
part of “other assets” in the consolidated statements of financial
condition.

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 following table presents the Corporation’s proportionate
share of income (loss) from EVERTEC for the years ended
December 31, 2011 and 2010. The unfavorable impact of the
elimination in non-interest income presented in the table is
principally offset by the elimination of 49% of the professional
fees (operating expenses) paid by the Corporation to EVERTEC
during the same period.

(In thousands)

2011

2010

Share of income from the equity investment

in EVERTEC

$13,936

$574

Intra-company eliminations considered in
other operating income (detailed in next
table)

Share of income (loss) from the equity
investment in EVERTEC, net of
eliminations

(52,218)

(15,438)

$(38,282) $(14,864)

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
years ended December 31, 2011 and 2010. Items that represent
expenses to the Corporation are presented with parenthesis.
For consolidation purposes, the Corporation eliminates 49% of
the income (expense) between EVERTEC and the Corporation
consolidated
from the

corresponding

categories

in the

168

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.

(In thousands)

100%

2011

Popular’s 49%
interest
(eliminations)

51% majority
interest

$3,619

$1,773

$1,846

2010

Popular’s 49%
interest
(eliminations)

51% majority
interest

Category

$582

$606

Interest income

100%

$1,188

Interest income on loan to EVERTEC
Interest income on investment

securities issued by EVERTEC

Interest expense on deposits
ATH and credit cards interchange

income from services to
EVERTEC

Processing fees on services provided

by EVERTEC

Rental income charged to EVERTEC
Transition services provided to

3,850
(627)

1,887
(307)

1,963
(320)

963
(93)

472
(46)

491
(47)

Interest income
Interest expense

27,300

13,377

13,923

1,688

827

861 Other service fees

(149,156)
7,063

(73,086)
3,461

(76,070)
3,602

(37,579)
2,009

(18,414)
984

(19,165)
1,025

Professional fees
Net occupancy
Other operating
expenses

EVERTEC

Total

1,382

677

705

321

157

164

$(106,569)

$(52,218)

$(54,351)

$(31,503)

$(15,438)

$(16,065)

The Corporation had the following financial condition accounts outstanding with EVERTEC at December 31, 2011 and 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.

(In thousands)

Loans
Investment securities
Deposits
Accounts receivables (Other assets)
Accounts payable (Other liabilities)

At December 31, 2011

At December 31, 2010

100%

$53,215
35,000
54,288
5,132
14,684

51% majority
interest

$27,140
17,850
27,687
2,617
7,489

100%

$58,126
35,000
38,761
3,922
17,416

51% majority
interest

$29,644
17,850
19,768
2,000
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 $15.0 million at December 31, 2011 (2010 -
$20.1 million). Also, EVERTEC had an existing letter of credit
issued by BPPR, which amounted to $2.9 million at
December 31, 2011 and 2010. 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 CONTADO to EVERTEC, subject to complying
with certain rights of first refusal in favor of the Serfinsa and
CONTADO shareholders. During the year ended December 31,
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 year ended December 31, 2011, the Corporation
sold its equity investment in Serfinsa and recognized a gain of

169 POPULAR, INC. 2011 ANNUAL REPORT

approximately $212 thousand, net of tax. The Corporation’s
investment in Serfinsa, accounted for under the equity method,
amounted to $1.8 million at December 31, 2010.

Note 26 - Guarantees
The Corporation has obligations upon the occurrence of certain
events under
guarantees provided in certain
contractual agreements as summarized below.

financial

If

credit

institutions,

standby letters of

the Corporation recognizes at

The Corporation issues financial standby letters of credit
and has risk participation in standby letters of credit issued by
in each case to guarantee the
other financial
the
performance of various customers to third parties.
customers failed to meet its financial or performance obligation
to the third party under the terms of the contract, then, upon
their request, the Corporation would be obligated to make the
payment to the guaranteed party. At December 31, 2011, the
Corporation recorded a liability of $0.5 million (December 31,
2010 - $0.5 million), which represents the unamortized balance
of the obligations undertaken in issuing the guarantees under
issued or modified after
the
December 31, 2002. In accordance with the provisions of ASC
Topic 460,
fair value the
obligation at inception of the standby letters of credit. The fair
value approximates the fee received from the customer for
issuing such commitments. These fees are deferred and are
recognized over the commitment period. The contracts amount
in standby letters of credit outstanding at December 31, 2011
and 2010, shown in Note 27 represent the maximum potential
future payments that the Corporation could be
amount of
required to make under
the guarantees in the event of
nonperformance by the customers. These standby letters of
credit are used by the customers as a credit enhancement and
typically expire without being drawn upon. The Corporation’s
standby letters of credit are generally secured, and in the event
of nonperformance by the customers, the Corporation has
rights to the underlying collateral provided, which normally
includes cash, marketable securities, real estate, receivables,
and others. 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
loans
Small Business Administration (“SBA”) commercial
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
loan documentation, collateral,
borrower creditworthiness,
prepayment and early payment defaults. The Corporation may
be required to repurchase the loans under the credit recourse
agreements or representation and warranties.

the recourse arrangements

At December 31, 2011, the Corporation serviced $3.5 billion
(December 31, 2010 - $4.0 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
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 2011, the
Corporation repurchased approximately $241 million of unpaid
principal balance in mortgage loans subject
to the credit
recourse provisions (2010 - $121 million). 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 December 31,
the
2011,
estimated credit loss exposure related to loans sold or serviced
with credit recourse amounted to $59 million (December 31,
2010 - $54 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 financial condition during the years ended December 31,
2011 and 2010.

the Corporation’s liability established to cover

(In thousands)

Balance as of beginning of period
Additions for new sales
Provision for recourse liability
Net charge-offs / terminations

Balance as of end of period

2011

2010

$53,729
–
43,828
(38,898)

$15,584
–
53,979
(15,834)

$58,659

$53,729

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
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
expected loss, which
different

loan segmentations. The

actual defaults

and historical

loss

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 ratios, and
loan aging, among others.

the

loans

characteristics

When the Corporation sells or securitizes mortgage loans, it
generally makes customary representations and warranties
the
regarding
sold. The
of
in Puerto Rico group
Corporation’s mortgage operations
conforming mortgage loans into pools which are exchanged for
FNMA and GNMA mortgage-backed securities, which are
generally sold to private investors, or are sold 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
loss related to the loans. Repurchases under
subsequent
representation and warranty arrangements
in which the
Corporation’s Puerto Rico banking subsidiaries were obligated
to repurchase the loans amounted to $22 million in unpaid
principal balance with losses amounting to $2.5 million for the
year ended December 31, 2011. A substantial amount of these
loans
to performing status or have mortgage
insurance, and thus the ultimate losses on the loans are not
deemed significant.

reinstate

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
representation and
repurchase from the investors under
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 $3.5 billion at
December 31, 2011. The Corporation recorded a representation
and warranty reserve for the amount of the proceeds received
from the third-party financial
institution. At December 31,
2011, this reserve amounted to $8.5 million. The reduction was
principally the result of refinement in reserve estimates based
on historical claims and loss expectations.

170

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
December 31, 2011, the Corporation serviced $17.3 billion in
mortgage loans for third-parties, including the loans serviced
with credit recourse (December 31, 2010 - $18.4 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,
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
December 31, 2011, the outstanding balance of funds advanced
by the Corporation under
such mortgage loan servicing
agreements was approximately $32 million (December 31, 2010
- $24 million). To the extent the mortgage loans underlying the
Corporation’s
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.

in the meantime,

experience

servicing

portfolio

At December 31, 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 December 31, 2011, the
Corporation’s
from such
representation and warranty arrangements amounted to $11
million, which was included as part of other liabilities in the
consolidated statement of financial condition (December 31,
2010 - $31 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
customary
associated
expected
representation and warranty arrangements. The
analysis
incorporates expectations on future disbursements based on

E-LOAN’s

estimated

reserve

losses

losses

for

to

171 POPULAR, INC. 2011 ANNUAL REPORT

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
loan data. Make-whole events are typically
the historical
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
ended
December 31, 2011 and 2010.

condition for

financial

years

the

(In thousands)

Balance as of beginning of period
Additions for new sales
(Credit) provision for representation and

warranties

Net charge-offs / terminations
Other - settlements paid

Balance as of end of period

2011

2010

$30,659
–

$33,294
–

(4,936)
(2,198)
(12,900)

18,594
(12,229)
(9,000)

$10,625

$30,659

certain representations or warranties

During 2008, the Corporation provided indemnification for
the breach of
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 December 31, 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
December 31, 2011 are related principally to make-whole
arrangements. At December 31, 2011, the Corporation’s reserve
related to PFH’s indemnity arrangements amounted to $1
million (December 31, 2010 - $8 million), and is included as
financial
other liabilities in the consolidated statement of
condition. The
at December 31, 2011
reserve balance
contemplates historical indemnity payments. The substantial
reduction from December 31, 2010 to 2011 was principally as a
the major
result
counterparties. 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

arrangements with

settlement

of

PFH,
included in the consolidated statement of
condition for the years ended December 31, 2011 and 2010.

financial

(In thousands)

Balance as of beginning of period
Additions for new sales
Provision for representation and warranties
Net charge-offs / terminations
Other - settlements paid

Balance as of end of period

2011

2010

$8,058
–
–
(292)
(6,682)

$9,405
–
911
(1,678)
(580)

$1,084

$8,058

and

guarantees

amounting

PIHC fully

certain
unconditionally
borrowing obligations issued by certain of its wholly-owned
consolidated subsidiaries
to $0.7 billion at
December 31, 2011 (December 31, 2010 - $0.6 billion). In
addition, at December 31, 2011 and December 31, 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 21 to
the consolidated financial statements for further information on
the trust preferred securities.

the financial needs of

Note 27 – 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
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 financial
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 financial condition.

Financial

instruments with off-balance sheet credit risk,
whose contract amounts represent potential credit risk at
December 31, 2011 and 2010 were as follows:

(In thousands)

2011

2010

Commitments to extend credit:

Credit card lines
Commercial lines of credit
Other unused credit commitments

Commercial letters of credit
Standby letters of credit
Commitments to originate mortgage

$3,833,012
2,039,629
358,572
11,632
124,709

$3,583,430
1,920,056
375,565
12,532
140,064

loans

53,323

47,493

At December 31, 2011,

the Corporation maintained a
losses
reserve of approximately $15 million for potential
associated with unfunded loan commitments
related to
commercial and consumer lines of credit (2010 - $21 million),
including $5 million of
the
contingent liability on unfunded loan commitments recorded
with the Westernbank FDIC-assisted transaction (2010 - $6
million).

the unamortized balance of

Other commitments
At December 31, 2011, the Corporation also maintained other
non-credit commitments for $10 million, primarily for the
acquisition of other investments (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 39 to the consolidated financial statements.

The Corporation’s loan portfolio is diversified by loan
category. However, approximately $12.5 billion, or 61% of the
Corporation’s loan portfolio not covered under the FDIC loss
sharing
at
December 31, 2011, consisted of real estate related loans,
including residential mortgage loans, construction loans and
commercial loans secured by commercial real estate (2010 -
$12.0 billion, or 58%).

held-for-sale,

agreements,

excluding

loans

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 December 31,
2011, the Corporation had approximately $1.3 billion 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 (2010 -
$1.4 billion and $199 million, respectively). Of the total credit
facilities granted, $1.2 billion was outstanding at December 31,
2011 (2010 - $1.1 billion). Furthermore, at December 31, 2011,
the Corporation had $154 million in obligations issued or
guaranteed by the Puerto Rico Government, its municipalities
and public corporations as part of its investment securities
portfolio (2010 - $145 million).

Other contingencies
As indicated in Notes 4 and 12 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

172

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
obligation was estimated at $98 million at December 31, 2011
(2010 - $92 million).

litigation,

Legal Proceedings
The nature of Popular’s business ordinarily results in a certain
number of claims,
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
in connection with outstanding legal
and contingencies
proceedings utilizing the latest
information available. For
matters where it is probable that the Corporation will incur a
material loss and the amount can be reasonably estimated, the
Corporation establishes
loss. Once
established, the accrual is adjusted on at least a quarterly basis
as appropriate to reflect any relevant developments. For matters
where a material loss is not probable or the amount of the loss
cannot be estimated, no accrual is established.

an accrual

the

for

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 $15
million at December 31, 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
such
uncertainty of
proceedings. Accordingly, management’s estimate will change
from time-to-time, and actual losses may be more or less than
the current estimate.

the various potential outcomes of

and available

While the final outcome of legal proceedings is inherently
uncertain, based on information currently available, advice of
counsel,
coverage, management
insurance
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
if
possible that

the ultimate resolution of

these matters,

173 POPULAR, INC. 2011 ANNUAL REPORT

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)
Inc. ERISA Litigation
class action entitled In re Popular,
(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, the 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
the
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
(and Rule 10b-5
the Exchange Act
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 statute

limitations

grounds

and

of

On November 30, 2009, plaintiffs in the ERISA case filed a
consolidated

complaint. The

action

consolidated

class

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
to the amended complaint. Shortly
submitted an answer
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.

restitution,

costs and disbursements,

The derivative actions (García v. Carrión, et al. and Díaz v.
Carrión, et al.) were brought purportedly for the benefit of
Inc. against certain executive
nominal defendant Popular,
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,
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.

28,

2010,

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
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.

action moved

in that

plaintiff

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
conditions
understanding,
including court approval of a final settlement agreement in
consideration for
settlement and release of all
defendants, the parties agreed that the amount of $37.5 million
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, which the Court
granted on June 20, 2011. On or about July 5, 2011, the
amount of $37.5 million was paid to the settlement fund by or

to certain customary

the full

subject

174

2011,

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). On January
certain individual
18,
shareholders filed a suit captioned Montilla-Rojo et al. v.
Popular, Inc., et al., against the Corporation and certain officers
asserting claims under the federal securities laws similar or
identical to those in the Hoff action. On February 25, 2011,
those shareholders
filed an amended complaint asserting
additional legal theories. On June 19, 2011, certain of those
shareholders sought leave to intervene in the securities class
action. On June 28, 2011, the Court denied their motion to
intervene as untimely. On or about October 11, 2011, certain
individual shareholders, including shareholders represented by
counsel in the Montilla-Rojo action, filed requests to opt-out of
the proposed settlement in the Hoff securities class action.
Other purported shareholders represented by the same counsel,
filed an objection to the settlement. On November 22, 2011, the
plaintiffs in the Montilla-Rojo action filed a second amended
complaint asserting additional legal theories. On December 2,
2011, the parties to the Montilla-Rojo action filed a joint motion
to stay the proceedings in light of the pending appeal in the
related Hoff securities class action. The Court granted the
motion to stay on December 13, 2011. With the January 27,
2012 voluntary dismissal of the appeal (below), the stay was
lifted and defendants’ response to the Montilla-Rojo second
amended complaint is pending.

On November 2, 2011, the Court in the Hoff securities class
action announced at a hearing on the proposed settlement that
it would deny certain individual shareholders’ requests to opt
out, overrule the objection to the settlement and grant final
approval in a written order to follow, which order and final
judgment were issued on the same date. On November 29,
2011, the individual shareholders whose requests to opt-out
were rejected and the objectors to the settlement appealed from
the final judgment to the United States Court of Appeals for the
First Circuit. On December 21, 2011, the lead plaintiffs in the
Hoff action filed a motion for an order requiring the objectors to
post a bond to cover the costs associated with the objectors’
appeal, which the Court granted on January 9, 2012. On
January 17, 2012, the objectors moved for reconsideration of
the order requiring them to post a bond. On January 24, 2012,
the Court denied the objectors’ motion for reconsideration. On
January 27, 2012, the objectors filed a motion informing the
Court that they would voluntarily dismiss the appeal with
prejudice, which the Court noted on January 30, 2012.

In April 2011, the parties to the García and Díaz actions
entered into a separate memorandum of understanding. 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,

175 POPULAR, INC. 2011 ANNUAL REPORT

fees and expenses of counsel

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
for the
million of attorneys’
plaintiffs, all of which were covered by insurance),
the
settlement did 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. On
the
that same date,
settlement. On September 23, 2011, the court in Díaz entered a
separate judgment approving the final settlement as well.

the Court granted final approval of

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
the full
settlement agreement and in consideration for
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
was set for August 26, 2011. On that date, the Court stated that
it would approve the settlement but requested that plaintiffs’
counsel submit certain supporting documentation prior to
issuing its final approval. Such final approval is still pending.

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 agreement in the ERISA class
action is not final and is subject to a number of future events,
including the issuance of the final approval order and/or the
expiration of the time to appeal such orders. The settlements in
the Hoff class action and the derivative actions have been finally
approved and the period for any appeal has expired.

In addition to the foregoing, Banco Popular is a defendant in
two class 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 and others similarly
situated who he purports to represent have suffered damages
because of Banco Popular’s allegedly fraudulent overdraft fee
practices in connection with debit card transactions. Such
practices allegedly consist of:
the reorganization of
electronic debit transactions in high-to-low order so as to

(a)

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.

In January 2012, the parties to the Almeyda action entered
into a memorandum of understanding. 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, the parties agreed that the amount
of $0.4 million will be paid by defendants, which amount, net
of attorneys’ fees, shall be donated to one or more non-profit
consumer financial counselling services organizations based in
Puerto Rico. A settlement stipulation and a joint motion for
preliminary approval of such settlement will be filed with the
Court by March 14, 2012.

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
their alleged breach of certain
insurance companies
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.

for

the

More specifically, plaintiffs - Guillermo García Lamadrid
and Benito del Cueto Figueras - are suing Defendant BPPR for
they (and others) experienced through their
the losses
investment
RG Financial Corporation-backed
in
Conservation Trust Fund securities. Plaintiffs essentially claim
that Banco Popular allegedly breached its purported fiduciary
duty 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
with gross negligence. 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.

Note 28 - 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
rights. The
risk have no
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.

substantial decision-making

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
as
of
consolidated
available-for-sale or trading securities.

statement

condition

financial

should be made

to determine whether

ASU 2009-17 requires that an ongoing primary beneficiary
assessment
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
these VIEs, and therefore, are not
primary beneficiary of
required to be consolidated in the Corporation’s financial
statements at December 31, 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
the
the guaranteed mortgage securitization transactions,
of
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

176

party VIEs in which it has no other form of continuing
involvement. Refer to Note 30 to the consolidated financial
statements for additional information on the debt securities
outstanding at December 31, 2011 and 2010, which are
classified as available-for-sale and trading securities in the
Corporation’s consolidated statement of financial condition. In
addition, the Corporation may retain the right to service the
in those government-sponsored special
transferred loans
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
the Corporation
the servicing fees that
Subtopic 810-10,
receives for its servicing role are considered variable interests in
the VIEs since the servicing fees are subordinated to the
principal and interest
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.

that

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 December 31, 2011 and 2010.

(In thousands)

Assets

Servicing assets:

Mortgage servicing rights

Total servicing assets

Other assets:

Servicing advances

Total other assets

Total

Maximum exposure to loss

2011

2010

$101,511

$107,313

$101,511

$107,313

$3,027

$3,027

$2,706

$2,706

$104,538

$110,019

$104,538

$110,019

The size of

in which the
the non-consolidated VIEs,
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 December 31, 2011 ($9.3 billion at
December 31, 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
December 31, 2011 and 2010 will not be recovered. The agency
the maximum
debt securities are not
exposure to loss since they are guaranteed by the related
agencies.

included as part of

177 POPULAR, INC. 2011 ANNUAL REPORT

In September of 2011, BPPR sold construction and
commercial real estate loans with a fair value of $148 million,
and most of which were non-performing, to a newly created
joint venture, PRLP 2011 Holdings, LLC. The joint venture is
majority owned by Caribbean Property Group (“CPG”),
Goldman Sachs & Co. and East Rock Capital LLC. The joint
venture was created for the limited purpose of acquiring the
loans from BPPR; servicing the loans through a third-party
servicer; ultimately working out, resolving and/or foreclosing
the loans; and indirectly owning, operating, constructing,
developing, leasing and selling any real properties acquired by
foreclosure,
the joint venture through deed in lieu of
foreclosure, or by resolution of any loan.

and

related

BPPR provided financing to the joint venture for the
acquisition of the loans in an amount equal to the sum of 57%
of the purchase price of the loans, or $84 million, and $2
million of closing costs, for a total acquisition loan of $86
million. The acquisition loan has a 5-year maturity and bears a
variable interest at 30-day LIBOR plus 300 basis points and is
secured by a pledge of all of the acquiring entity’s assets. In
addition, BPPR provided the joint venture with a non-revolving
facility of $68.5 million to cover unfunded
advance
commitments
certain
costs-to-complete
construction projects, and a revolving working capital line of
$20 million to fund certain operating expenses of the joint
venture. Cash proceeds received by the joint venture will be
first used to cover debt service payments for the acquisition
loan, advance facility, and the working capital line described
above which must be paid in full before proceeds can be used
for other purposes. The distributable cash proceeds will be
determined based on a pro-rata basis in accordance with the
respective equity ownership percentages. BPPR’s equity interest
in the joint venture ranks pari-passu with those of other parties
involved. As part of the transaction, BPPR received $48 million
in cash and a 24.9% equity interest in the joint venture. The
Corporation is not required to provide any other financial
support to the joint venture.

to

BPPR accounted for this transaction as a true sale pursuant
to ASC Subtopic 860-10 and thus recognized the cash received,
its equity investment in the joint venture, and the acquisition
loan provided to the joint venture and derecognized the loans
sold.

The Corporation has determined that PRLP 2011 Holdings,
LLC is a VIE but is not the primary beneficiary. All decisions
are made by CPG (or an affiliate thereof) (the “Manager”),
except
for certain limited material decisions which would
require the unanimous consent of all members. The Manager is
authorized to execute and deliver on behalf of the joint venture
any and all documents, contracts, certificates, agreements and
instruments, and to take any action deemed necessary in the
benefit of the joint venture. Also, the Manager delegates the
day-to-day management and servicing of the loans to CPG
Island Servicing, LLC, an affiliate of CPG, which contracted

Archon, an affiliate of Goldman Sachs, to act as subservicer, but
it
servicing
responsibilities.

responsibility

oversee

such

has

the

to

The Corporation holds variable interests in this VIE in the
form of the 24.9% equity interest and the financing provided to
the joint venture.

The initial fair value of the Corporation’s equity interest in
the joint venture was determined based on the fair value of the
loans transferred to the joint venture of $148 million, which
represented the purchase price of the loans agreed by the
parties and was an arm’s-length transaction between market
participants in accordance with ASC Topic 820, reduced by the
acquisition loan provided by BPPR to the joint venture, for a
total net equity of $63 million. Accordingly, the 24.9% equity
interest held by the Corporation was valued at $16 million.
Thus, the fair value of the equity interest is considered a Level 2
fair value measurement since the inputs were based on
observable market inputs. After initial recognition, the equity
interest will be accounted for using the equity method of
accounting pursuant to ASC Subtopic 323-10.

The following table presents the carrying amount and
classification of the assets related to the Corporation’s variable
interests in the non-consolidated VIE, PRLP 2011 Holdings,
LLC and its maximum exposure to loss at December 31, 2011.

(In thousands)

Assets

Loans held-in-portfolio:
Acquisition loan
Working capital line advances
Advance facility advances

Total loans held-in-portfolio

Other assets:

Investment in PRLP 2011 Holdings LLC

Total other assets

Total

Maximum exposure to loss

$85,825
2,208
3,256

$91,289

$16,122

$16,122

$107,411

$107,411

The Corporation determined that under a maximum
exposure to loss worst case scenario the carrying amount of the
acquisition loan, the advances on the advance facility and
working capital line, if any, and the equity interest held by the
Corporation at December 31, 2011 will not be recovered.

Note 29 - Derivative instruments and hedging activities
The following discussion and tables provide a description of the
derivative instruments used as part of the Corporation’s interest
rate risk management strategies. The use of derivatives is
incorporated as part of the Corporation’s overall interest rate
risk management strategy to minimize significant unplanned
fluctuations in earnings and cash flows that are caused by
interest rate volatility. The Corporation’s goal is to manage
interest rate sensitivity by modifying the repricing or maturity

interest

the net

characteristics of certain balance sheet assets and liabilities so
that
income is not, on a material basis,
adversely affected by movements in interest rates. The
Corporation uses derivatives in its trading activities to facilitate
customer transactions, and as means of risk management. As a
result of interest rate fluctuations, hedged fixed and variable
interest rate assets and liabilities will appreciate or depreciate in
this unrealized appreciation or
fair value. The effect of
depreciation is expected to be substantially offset by the
Corporation’s gains or losses on the derivative instruments that
are linked to these hedged assets and liabilities. As a matter of
policy, the Corporation does not use highly leveraged derivative
instruments for interest rate risk management.

contract,

a derivative

By using derivative instruments, the Corporation exposes itself
to credit and market risk. If a counterparty fails to fulfill its
the
performance obligations under
Corporation’s credit risk will equal the fair value of the derivative
asset. Generally, when the fair value of a derivative contract is
positive, this indicates that the counterparty owes the Corporation,
thus creating a repayment risk for the Corporation. To manage the
level of credit risk, the Corporation deals with counterparties of
good credit standing, enters into master netting agreements
whenever possible and, when appropriate, obtains collateral. On
the other hand, when the fair value of a derivative contract is
negative, the Corporation owes the counterparty and, therefore, the
fair value of derivatives liabilities incorporates nonperformance risk
or the risk that the obligation will not be fulfilled.

Market risk is the adverse effect that a change in interest
rates, currency exchange rates, or implied volatility rates might
have on the value of a financial instrument. The Corporation

178

manages the market risk associated with interest rates and, to a
limited extent, with fluctuations in foreign currency exchange
rates by establishing and monitoring limits for the types and
degree of risk that may be undertaken. The Corporation
regularly measures this risk by using static gap analysis,
simulations and duration analysis.

Pursuant to the Corporation’s accounting policy, the fair
value of derivatives is not offset with the amounts for the right
to reclaim cash collateral or the obligation to return cash
collateral. At December 31, 2011, the amount recognized for
the right
to reclaim cash collateral under master netting
agreements was $72 million and the amount recognized for the
obligation to return cash collateral was $2 million (December
31, 2010 - $86 million and $3 million, respectively).

covenants

tied to the

Certain of the Corporation’s derivative instruments include
corresponding banking
financial
subsidiary’s well-capitalized status and credit rating. These
agreements could require exposure collateralization, early
termination or both. The aggregate fair value of all derivative
instruments with contingent features that were in a liability
position at December 31, 2011 was $57 million (December 31,
2010 - $67 million). Based on the contractual obligations
established on these derivative instruments, the Corporation
has fully collateralized these positions by pledging collateral of
$72 million at December 31, 2011 (December 31, 2010 - $86
million).

Financial instruments designated as cash flow hedges or
non-hedging derivatives outstanding at December 31, 2011 and
December 31, 2010 were as follows:

(In thousands)
Derivatives designated as hedging

instruments:
Forward contracts
Total derivatives designated as hedging

instruments

Derivatives not designated as hedging

instruments:
Forward contracts

Interest rate swaps
Foreign currency forward contracts
Interest rate caps
Interest rate floors
Indexed options on deposits
Bifurcated embedded options

Notional amount

Derivative assets

Derivative liabilities

At December 31,
2010
2011

Statement of
condition
classification

Fair value at
December 31,
2010
2011

Statement of
condition
classification

Fair value at
December 31,
2010
2011

$137,301

$256,480

Other assets

$6

$1,774 Other liabilities

$1,179

$839

$137,301

$256,480

$6

$1,774

$1,179

$839

$114,809

1,351,386
1,006
–
22,664
73,224
82,154

$278,052 Trading account
securities
Other assets
Other assets
Other assets
Other assets
Other assets
–

1,641,180
819
156,303
22,973
76,984
72,921

$1

$483 Other liabilities

$236

$1,736

51,078
20
–
233
10,549
–

62,175 Other liabilities
7 Other liabilities
– Other liabilities
240 Other liabilities
–
– Interest bearing
deposits

8,314

56,963
14
–
233
–
8,075

66,685
4
–
240
–
6,840

Total derivatives not designated as

hedging instruments:

$1,645,243 $2,249,232

Total derivative assets and liabilities

$1,782,544 $2,505,712

$61,881 $71,219

$61,887 $72,993

$65,521 $75,505

$66,700 $76,344

179 POPULAR, INC. 2011 ANNUAL REPORT

Cash Flow Hedges
The Corporation utilizes forward contracts to hedge the sale of
mortgage-backed securities with duration terms over one
month. Interest rate forwards are contracts for the delayed
delivery of securities, which the seller agrees to deliver on a
specified future date at a specified price or yield. These forward
contracts are hedging a forecasted transaction and thus qualify
for cash flow hedge accounting. Changes in the fair value of the
derivatives are recorded in other comprehensive income (loss).
The amount included in accumulated other comprehensive

income (loss) corresponding to these forward contracts is
expected to be reclassified to earnings in the next twelve
months. These contracts have a maximum remaining maturity
of 79 days at December 31, 2011.

are

that

For cash flow hedges, net gains (losses) on derivative
contracts
reclassified from accumulated other
comprehensive income (loss) to current period earnings are
included in the line item in which the hedged item is recorded
and during the period in which the forecasted transaction
impacts earnings, as presented in the tables below.

Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)

$(2,294)

$(2,294)

(In thousands)

Forward contracts

Total

Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)

$(1,228)

$(1,228)

(In thousands)

Forward contracts

Total

Amount of net gain (loss)
recognized in OCI on
derivatives (effective
portion)

$(1,419)
–

$(1,419)

(In thousands)

Forward contracts
Interest rate swaps

Total

Year ended December 31, 2011

Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion, ineffective portion,
and amount excluded from
effectiveness testing)

Trading account profit

Year ended December 31, 2010

Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion, ineffective portion,
and amount excluded from
effectiveness testing)

Trading account profit

Year ended December 31, 2009

Classification in the statement of
operations of the net gain (loss)
reclassified from AOCI into income
(effective portion, ineffective portion,
and amount excluded from
effectiveness testing)

Trading account profit
Interest expense

Amount of net gain (loss)
reclassified from AOCI
into income
(effective portion)

Amount of net gain (loss)
recognized in income on
derivatives (ineffective
portion and amount
excluded from
effectiveness testing)

$(302)

$(302)

$(116)

$(116)

Amount of net gain (loss)
reclassified from AOCI
into income
(effective portion)

Amount of net gain (loss)
recognized in income on
derivatives (ineffective
portion and amount
excluded from
effectiveness testing)

$(964)

$(964)

$–

$–

Amount of net gain (loss)
reclassified from AOCI
into income
(effective portion)

Amount of net gain (loss)
recognized in income on
derivatives (ineffective
portion and amount
excluded from
effectiveness testing)

$(4,535)
(2,380)

$(6,915)

$125
–

$125

Fair Value Hedges
At December 31, 2011 and 2010, there were no derivatives designated as fair value hedges.

180

Non-Hedging Activities

For the year ended December 31, 2011, the Corporation recognized a loss of $42.3 million (2010 – loss of $15.0 million; 2009 –

loss of $19.5 million) related to its non-hedging derivatives, as detailed in the table below.

(In thousands)

Forward contracts
Interest rate swaps
Credit derivatives
Foreign currency forward contracts
Foreign currency forward contracts
Indexed options on deposits
Bifurcated embedded options

Total

Amount of Net Gain (Loss) Recognized in Income on Derivatives

Classification of Net Gain (Loss)
Recognized in Income on Derivatives

Year ended
December 31,
2011

Year ended
December 31,
2010

Year ended
December 31,
2009

Trading account profit
Other operating income
Other operating income
Other operating income
Interest expense
Interest expense
Interest expense

$(41,837)
(1,382)
–
23
3
(20)
920

$(42,293)

$(15,791)
(910)
–
10
3
1,247
408

$(15,033)

$(12,485)
(6,468)
(2,599)
25
(4)
1,209
788

$(19,534)

Forward Contracts
The Corporation has forward contracts to sell mortgage-backed
securities, which are accounted for as trading derivatives.
Changes in their fair value are recognized in trading account
profit (loss).

Interest Rates Swaps and Foreign Currency and Exchange
Rate Commitments
In addition to using derivative instruments as part of its interest
rate risk management strategy, the Corporation also utilizes
derivatives, such as interest rate swaps and foreign exchange
forward contracts, in its capacity as an intermediary on behalf
of its customers. The Corporation minimizes its market risk
and credit risk by taking offsetting positions under the same
terms
and
monitoring procedures. Market value changes on these swaps
and other derivatives are recognized in earnings in the period of
change.

and conditions with credit

approvals

limit

Interest Rate Caps and Floors
The Corporation enters into interest rate caps and floors as an
intermediary on behalf of its customers and simultaneously
takes offsetting positions under the same terms and conditions,
thus minimizing its market and credit risks.

820-10 “Fair Value Measurements

Note 30 – Fair value measurement
ASC Subtopic
and
Disclosures” establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value
into three levels
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:

in order

• 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
the
counterparty
amounts
Corporation’s credit standing, constraints on liquidity and
unobservable parameters that are applied consistently.

quality,

reflect

credit

that

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.

181 POPULAR, INC. 2011 ANNUAL REPORT

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 December 31, 2011 and 2010:

(In thousands)
Assets
Investment securities available-for-sale:
U.S. Treasury securities
Obligations of U.S. Government sponsored entities
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - federal agencies
Collateralized mortgage obligations - private label
Mortgage-backed securities
Equity securities
Other
Total investment securities available-for-sale
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities - federal agencies
Other
Total trading account securities
Mortgage servicing rights
Derivatives
Total assets
Liabilities
Derivatives
Contingent consideration
Total liabilities

(In thousands)

Assets

Investment securities available-for-sale:
U.S. Treasury securities
Obligations of U.S. Government sponsored entities
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations - federal agencies
Collateralized mortgage obligations - private label
Mortgage-backed securities
Equity securities
Other
Total investment securities available-for-sale
Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities - federal agencies
Other
Total trading account securities
Mortgage servicing rights
Derivatives
Total assets
Liabilities
Derivatives
Trading liabilities

Equity appreciation instrument

Contingent consideration
Total liabilities

Level 1

At December 31, 2011
Level 2

Level 3

Balance

$–
–
–
–
–
–
3,465
–
$3,465

$–
–
–
–
$–
$–
–
$3,465

$38,668
985,546
58,728
1,697,642
57,792
2,132,134
3,451
24,962
$4,998,923

$90,332
737
303,428
13,212
$407,709
$–
61,887
$5,468,519

$–
–
–
–
–
7,435
–
–
$7,435

$–
2,808
21,777
4,036
$28,621
$151,323
–
$187,379

$38,668
985,546
58,728
1,697,642
57,792
2,139,569
6,916
24,962
$5,009,823

$90,332
3,545
325,205
17,248
$436,330
$151,323
61,887
$5,659,363

$–
–
$–

$(66,700)
–
$(66,700)

$–
(99,762)
$(99,762)

$(66,700)
(99,762)
$(166,462)

Level 1

At December 31, 2010
Level 2

Level 3

Balance

$–
–
–
–
–
–
3,952
–
$3,952

$–
–
–
–
$–
$–
–
$3,952

$38,136
1,211,304
52,702
1,238,294
84,938
2,568,396
5,523
25,848
$5,225,141

$16,438
769
472,806
30,423
$520,436
$–
72,993
$5,818,570

$–
–
–
–
–
7,759
–
–
$7,759

$–
2,746
20,238
2,810
$25,794
$166,907
–
$200,460

$38,136
1,211,304
52,702
1,238,294
84,938
2,576,155
9,475
25,848
$5,236,852

$16,438
3,515
493,044
33,233
$546,230
$166,907
72,993
$6,022,982

$–
–
–
–
$–

$(76,344)
(10,459)
(9,945)
–
$(96,748)

$–
–
–
(92,994)
$(92,994)

$(76,344)
(10,459)
(9,945)
(92,994)
$(189,742)

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years
ended December 31, 2011, 2010, and 2009.

Year ended December 31, 2011

182

(In millions)

Assets

Investment securities
available-for-sale:

Mortgage-backed securities

Total investment securities

available-for-sale

Trading account securities:
Collateralized mortgage

obligations
Mortgage- backed

securities-federal agencies

Other

Total trading account

securities

Mortgage servicing rights

Total assets

Liabilities

Contingent consideration

Total liabilities

Balance at
December 31,
2010

Initial
fair value on
acquisition

Gains (losses)
included in

earnings/OCI Purchases Sales Settlements

Balance at
December 31,
2011

$8

$8

$3

20
3

$26

$167

$201

$(93)

$(93)

$–

$–

$–

–
–

$–

$–

$–

$(1)

$(1)

$–

$–

$–

–
–

$–

$(37)

$(37)

$(6)

$(6)

$–

$–

$–

14
4

$18

$21

$39

$–

$–

$–

$–

$–

(10)
(3)

$(13)

$–

$(13)

$–

$–

$(1)

$(1)

$–

(2)
–

$(2)

$–

$(3)

$–

$–

$7

$7

$3

22
4

$29

$151

$187

$(100)

$(100)

[a] Gains (losses) are included in OCI.
[b] Gains (losses) are included in “Trading account profit” in the Statement of Operations.
[c] Gains (losses) are included in “Other service fees” in the Statement of Operations.
[d] Gains (losses) are included in “FDIC loss share (expense) income” in the Statement of Operations.

Changes in
unrealized
gains (losses)
included in
earnings/OCI
related to
assets still
held at
December 31,
2011

$–

$– [a]

$–

–
1

$1 [b]

$(20) [c]

$(19)

$(6) [d]

$(6)

183 POPULAR, INC. 2011 ANNUAL REPORT

Year ended December 31, 2010

Balance at
December 31,
2009

Initial
fair value
on
acquisition

Gains (losses)
included in

earnings/OCI Issuances Purchases Sales Settlements

Transfers
in (out) of
Level 3

Balance at
December 31,
2010

Changes in
unrealized
gains (losses)
included in
earnings/OCI
related to
assets still
held at
December 31,
2010

(In millions)

Assets

Investment
securities
available-for-
sale:

Mortgage-backed

securities

Total investment

securities
available-for-
sale

Trading account
securities:
Collateralized
mortgage
obligations
Mortgage-backed
securities -
federal agencies

Other

Total trading
account
securities

Mortgage servicing

rights

Total assets

Liabilities

Contingent

$34

$34

$3

224
3

$230

$170

$434

$–

$–

$–

–
–

$–

$–

$–

$1

$3

$–

$–

$(3)

$(27)

$8

$–

$1

$3

$–

$–

$(3)

$(27)

$8

$– [a]

$–

3
–

$3

$(23)

$(19)

$(4)

$(4)

–
–

$–

$–

$3

$–

$–

$–

$–

$–

$–

$–

23
1

(49)
(1)

(11)
–

(170)
–

$3

20
3

$–

–
–

$24

$(50)

$(11)

$(170)

$26

$– [b]

$20

$44

$–

$–

$–

$(50)

$(14)

$(197)

$167

$201

$(17) [c]

$(17)

$–

$–

$–

$–

$–

$–

$–

$–

$(93)

$(93)

$(4) [d]

$(4)

consideration

Total liabilities

$–

$–

$(89)

$(89)

[a] Gains (losses) are included in OCI.
[b] Gains (losses) are included in “Trading account profit” in the Statement of Operations.
[c] Gains (losses) are included in “Other services fees” in the Statement of Operations.
[d] Gains (losses) are included in “FDIC loss share (expense) income” in the Statement of Operations.

Year ended December 31, 2009

(In millions)
Assets
Investment securities available-for-sale:
Mortgage-backed securities
Total investment securities available-for-sale
Trading account securities:
Collateralized mortgage obligations
Mortgage-backed securities - federal agencies

Other

Total trading account securities
Mortgage servicing rights
Loans measured at fair value pursuant to fair value

option
Total assets

Balance at
December 31,
2008

Gains (losses)
included in
earnings/OCI

Purchases,
sales,
issuances,
and
settlements
(net)

Balance
at
December 31,
2009

$37
$37

$3
292
5
$300
$176

$5
$518

$–
$–

$–
3
(1)
$2
$(31)

$1
$(28)

$(3)
$(3)

$–
(71)
(1)
$(72)
$25

$(6)
$(56)

$34
$34

$3
224
3
$230
$170

$–
$434

184

Changes in
unrealized
gains (losses)
included in
earnings/OCI
related to
assets still
held at
December 31,
2009

$–
$– [a]

$–
6
–
$6 [b]
$(18) [c]

$– [d]

$(12)

[a] Gains (losses) are included in OCI.
[b] Gains (losses) are included in “Trading account profit” in the Statement of Operations.
[c] Gains (losses) are included in “Other services fees” in the Statement of Operations.
[d] Gains (losses) are included in “Loss from discontinued operations, net of tax” 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 years ended December 31, 2011 and 2009. There were $197
million in transfers out of Level 3 for financial instruments
measured at fair value on a recurring basis during the year
ended December 31, 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
these transfers were
recognized as of the end of the reporting period. There were no
transfers in and/or out of Level 1 during 2011, 2010, and 2009.

to the Corporation’s policy,

Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2011, 2010, and 2009 for

Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

2011

Total gains
(losses) included in
earnings

Changes in
unrealized gains
(losses) relating to
assets still held at
reporting date

Total gains
(losses) included
in earnings

2010

Changes in
unrealized gains
(losses) relating to
assets still
held at reporting date

2009

Changes in
unrealized gains
(losses) relating to
assets still
held at reporting date

Total gains
(losses) included
in earnings

$(6)

(37)

–

–
$(43)

$(6)

(20)

1

–
$(25)

$(4)

(23)

3

–
$(24)

$(4)

(17)

–

–
$(21)

$–

(31)

2

1
$(28)

$–

(18)

6

–
$(12)

(In millions)
FDIC loss share
(expense)
income
Other service

fees

Trading account

profit
Loss from

discontinued
operations,
net of tax
Total

185 POPULAR, INC. 2011 ANNUAL REPORT

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,
impaired loans
requiring specific reserves under ASC Section 310-10-35
“Accounting by Creditors for Impairment of a Loan”, or write-

identification of

downs of
individual assets. The following table presents
financial and non-financial assets that were subject to a fair
value measurement on a nonrecurring basis during the years
ended December 31, 2011, 2010, and 2009, and which were
still
financial
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.

included in the consolidated statement of

Carrying value at December 31, 2011 Carrying value at December 31, 2010 Carrying value at December 31, 2009

(In millions)

Loans [1]
Loans

held-for-sale [2]

Other real estate
owned [3]
Other foreclosed

assets [3]

Level 3

$96

Total

$96

84

91

–

84

91

–

Total

$271

$271

Write-
downs

$(6)

(30)

(23)

(1)

$(60)

Level 3

$204

Total

$204

Write-
downs

$(14)

Level 3

$877

Total

$877

671

671

(342)

45

–

45

–

(28)

(1)

–

60

5

–

60

5

Write-
downs

$(250)

(3)

(28)

(1)

$920

$920

$(385)

$942

$942

$(282)

[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 and other collateral 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
instruments
aggregate fair value amounts of
disclosed do not represent management’s estimate of
the
underlying value of the Corporation.

the financial

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

and

States

of Puerto Rico,

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 derived from similar bonds defined by
credit quality and market
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.

sector. Their

• Collateralized mortgage obligations: Agency and private-
label collateralized mortgage obligations (“CMOs”) are
priced based on a bond’s theoretical value derived 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,
the price. Corporate
demand and supply also affect
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
servicing fees, portfolio characteristics,
model
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.

considers

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.

Contingent consideration liability
Fair value of
the true-up payment obligation (contingent
consideration) to the FDIC as it relates to the Westernbank
FDIC-assisted transaction was estimated using projected cash
outflows related to the loss sharing agreements at the true-up
measurement date, taking into consideration the intrinsic loss
estimate, asset premium/discount, cumulative shared loss

186

payments, and the cumulative servicing amount related to the
loan portfolio. Refer to Note 4 to the consolidated financial
statements for a description of the true up payment formula.
The loss share cash outflows expected to be paid to the FDIC
were discounted using a term equivalent rate taking into
consideration BPPR’s credit rating.

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 outstanding
investor
and
discounted cash flow models which incorporate internally-
developed assumptions
loss
estimates. These loans are classified as Level 3.

for prepayments and credit

secondary market

commitments,

prices,

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 31 - 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.

187 POPULAR, INC. 2011 ANNUAL REPORT

interest

In different

instruments.

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

the underlying value of

the Corporation’s value

that
as

is,

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 financial 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 FDIC equity
appreciation instrument, which expired in May 2011,
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 financial 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
instruments with similar characteristics. Trading
financial
account securities and securities available-for-sale are reported
at their respective fair values in the consolidated statements of
financial condition since they are marked-to-market
for
accounting purposes.

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
at
December 31, 2011 and 2010.

instruments

similar

rates

for

(regular

agreements

including repurchase

As part of the fair value estimation procedures of certain
liabilities,
and
structured) and FHLB advances, the Corporation considered,
its
where applicable,
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.

the collateralization levels as part of

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.

188

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

(In thousands)

Financial Assets:
Cash and money market investments
Trading account securities
Investment securities available-for-sale
Investment securities held-to-maturity
Other investment securities
Loans held-for-sale
Loans not covered under loss sharing agreement with the FDIC
Loans covered under loss sharing agreements with the FDIC
FDIC loss share asset
Financial Liabilities:
Deposits
Assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Contingent consideration
Equity appreciation instrument

December 31, 2011

December 31, 2010

Carrying amount

Fair value

Carrying amount

Fair value

$1,911,456
436,331
5,009,823
125,383
179,880
363,093
19,912,233
4,223,758
1,915,128

$27,942,127
2,141,097
296,200
1,856,372
99,762
–

$1,911,456
436,331
5,009,823
125,254
181,583
390,783
16,753,889
4,663,327
1,755,295

$28,057,343
2,273,802
296,200
1,722,831
99,762
–

$1,431,668
546,713
5,236,852
122,354
163,513
893,938
19,934,810
4,836,882
2,410,219

$26,762,200
2,412,550
364,222
4,170,183
92,994
9,945

$1,431,668
546,713
5,236,852
120,873
165,233
902,371
17,137,805
4,744,680
2,475,158

$26,873,408
2,503,320
364,222
4,067,818
92,994
9,945

(In thousands)

Commitments to extend credit
Letters of credit

Notional amount

Fair value

Notional amount

Fair value

$6,231,213
136,341

$2,062
2,339

$5,879,051
152,596

$983
3,318

Note 32 – 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 years
ended December 31, 2011, 2010 and 2009:

(In thousands, except per share information)

Net income (loss) from continuing operations
Net loss from discontinued operations
Preferred stock dividends
Deemed dividend on preferred stock [1]
Preferred stock discount accretion
Favorable impact from exchange of shares of Series A and B preferred stock for common

stock, net of issuance costs

Favorable impact from exchange of Series C preferred stock for trust preferred securities

Net income (loss) applicable to common stock

Average common shares outstanding
Average potential dilutive common shares

Average common shares outstanding - assuming dilution

Basic and diluted EPS from continuing operations
Basic and diluted EPS from discontinued operations

Basic and dilutive EPS

2011

$151,325
–
(3,723)
–
–

2010

$137,401
–
(310)
(191,667)
–

–
–

–
–

$147,602

$(54,576)

2009

$(553,947)
(19,972)
(39,857)
–
(4,515)

230,388
485,280

$97,377

1,021,793,932
1,101,030

885,154,040
–

408,229,498
–

1,022,894,962

885,154,040

408,229,498

$0.14
–

$0.14

$(0.06)
–

$(0.06)

$0.29
(0.05)

$0.24

[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.

189 POPULAR, INC. 2011 ANNUAL REPORT

from exercise,

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
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 year ended December 31, 2011,

there were
options
2,092,873 weighted
outstanding
2,715,852).
2,471,424;
(2010
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 December 31, 2011.

antidilutive
2009

average
–

stock
–

Note 33 – Other service fees
The following table presents the major categories of other
service fees for the years ended December 31, 2011, 2010 and
2009.

(In thousands)

Debit card fees
Insurance fees
Credit card fees and discounts
Sale and administration of
investment products

Mortgage servicing fees, net of

fair value adjustments

Trust fees
Processing fees
Other fees

2011

2010

2009

$49,459
54,390
49,049

$100,639
49,768
84,786

$110,040
50,132
94,636

34,388

37,783

34,134

12,098
15,333
6,839
18,164

24,801
14,217
45,055
20,455

15,086
12,455
55,005
22,699

Total other service fees

$239,720

$377,504

$394,187

Note 34 – Employee benefits
Pension and benefit restoration plans
Certain employees of BPPR and BPNA are covered by
non-contributory defined benefit pension plans. Pension
benefits are based on age, years of credited service, and final
average compensation.

BPPR’s non-contributory, defined benefit retirement plan is
currently closed to new hires and to employees who at
December 31, 2005 were under 30 years of age or were credited
with less than 10 years of benefit service. Effective May 1, 2009,
the accrual of the benefits under the BPPR retirement plan (the
“P.R. Plans”) were frozen to all participants. Pursuant to the
amendment, the retirement plan participants will not receive
for compensation earned and service
any additional credit

performed after April 30, 2009 for purposes of calculating
benefits under the retirement plan. The retirement plan’s
benefit
formula is based on a percentage of average final
compensation and years of service. Normal retirement age
under the retirement plans is age 65 with 5 years of service.
Pension costs are funded in accordance with minimum funding
standards under the Employee Retirement Income Security Act
of 1974 (“ERISA”). Benefits under the BPPR retirement plan are
subject
limits on
compensation and benefits. Benefits under restoration plans
restore benefits to selected employees that are limited under the
retirement plan due to U.S. Internal Revenue Code limits and a
compensation definition that
amounts deferred
pursuant to nonqualified arrangements. The freeze applied to
the restoration plan as well.

Internal Revenue Code

to the U.S.

excludes

In October 2011, the Corporation implemented a voluntary
retirement program for retirement-eligible participants of the
pension plan. Under the voluntary retirement program, a
participant who elected to retire as of February 1, 2012 was
provided a benefit equal to one-year of their current base pay
rate. Approximately, 958 participants were eligible for the
voluntary retirement program and 369 participants retired
under the program. Participants could elect to receive their
program benefit in the form of a lump sum on February 1, 2012
or as an immediate annuity commencing on such date. The
pension plan benefit obligation reflects the retirement for all
employees who accepted the voluntary retirement program.

During

During the third quarter of 2010, the Corporation amended
the pension benefits as a result of the EVERTEC sale described
in Note 25 to the consolidated financial statements. As a result
of such amendment, the EVERTEC employees that were not
eligible for retirement at the time of sale may become eligible
subsidized retirement benefits provided they reach
for
retirement age while working with the acquiring institution.
its U.S.A.
the Corporation
non-contributory, defined benefit retirement plan (the “U.S.
Plan”), which had been frozen since 2007. The U.S. retirement
plan assets were distributed to plan participants during the
fourth quarter of 2010.
The Corporation’s

to make annual
contributions to the plans, when necessary, in amounts which
fully provide for all benefits as they become due under the
plans.

funding policy is

settled

2010,

The Corporation’s pension fund investment strategy is to
in a prudent manner for the exclusive purpose of
invest
providing benefits to participants. A well defined internal
structure has been established to develop and implement a risk-
controlled investment strategy that is targeted to produce a
total return that, when combined with the bank’s contributions
to the fund, will maintain the fund’s ability to meet all required
benefit obligations. Risk is controlled through diversification of
asset types, such as investments in domestic and international
equities and fixed income.

Equity investments include various types of stock and index
funds. Also, this category includes Popular, Inc.’s common
stock. Fixed income investments include U.S. Government
securities and other U.S. agencies’ obligations, corporate bonds,
mortgage loans, mortgage-backed securities and index funds,
among others. A designated committee periodically reviews the
performance of
investments and assets
allocation. The Trustee and the money managers are allowed to
exercise
limitations
established by the pension plans’ investment policies. The plans
forbid money managers to enter into derivative transactions,
unless approved by the Trustee.

the pension plans’

investment

discretion,

subject

to

The overall expected long-term rate-of-return-on-assets
assumption reflects the average rate of earnings expected on the
funds invested or to be invested to provide for the benefits
included in the benefit obligation. The assumption has been
determined by reflecting expectations regarding future rates of
return for the plan assets, with consideration given to the
distribution of the investments by asset class and historical
rates of return for each individual asset class. This process is
reevaluated at least on an annual basis and if market, actuarial
and economic conditions change, adjustments to the rate of
return may come into place.

190

The plans’ target allocation based on market value for years
is summarized in the

2011 and 2010, by asset category,
table below.

Equity
Debt securities
Cash and cash equivalents

Minimum
allotment

Maximum
allotment

0%
0%
0%

70%
100%
100%

The following table presents the composition of the assets of

the pension and benefit restoration plans.

(In thousands)

2011

2010

Investments, at fair value:

Allocated share of Master Trust net

assets

Popular, Inc. common stock
Private equity investment

Total investments

Cash and cash equivalents

Total assets

$574,673
3,817
937

$455,102
8,622
836

579,427

464,560

96

18

$579,523

$464,578

Certain assets of the plans are maintained, for investment
purposes only, on a commingled basis with the assets of the
Popular Savings Plan in a Master Trust (the “Master Trust”).
Neither the pension or benefit restoration plan has any interest
in the specific assets of
the Master Trust, but maintains
beneficial interests in such assets. The Master Trust is managed
by the Trust Division of BPPR and by several
investment
managers.

At December 31, 2011, the pension and restoration plans’
interest in the net assets of the Master Trust was approximately
91.0% (2010 - 88.4%).

The following table sets forth by level, within the fair value hierarchy, the plans’ assets at fair value at December 31, 2011 and

2010, excluding the plans’ interest in the Master Trust because that information is presented in a separate table.

(In thousands)

Equity securities
Private equity investments
Cash and cash equivalents

Total assets, excluding interest in Master Trust

2011

2010

Level 1 Level 2 Level 3

Total

Level 1 Level 2 Level 3

Total

$3,817
–
96

$3,913

$–
–
–

$–

$–
937
–

$3,817
937
96

$8,622
–
18

$937

$4,850

$8,640

$–
–
–

$–

$–
836
–

$836

$8,622
836
18

$9,476

Following

the plans’
methodologies used for assets measured at fair value:

a description of

is

valuation

• Equity securities - Equity securities with quoted market
prices obtained from an active exchange market are
classified as Level 1.

• Private equity investments - Private equity investments
include an investment in a private equity fund. This fund
value is recorded at the net asset value (NAV) of the fund

which is affected by the changes of the fair value of the
investments held in the fund. This fund is classified as
Level 3.

• Cash and cash equivalents - The carrying amount of cash
and cash equivalents are reasonable estimates of their fair
value since they are available on demand or due to their
short-term maturity.

191 POPULAR, INC. 2011 ANNUAL REPORT

The following table presents the changes in Level 3 assets measured at fair value.

(In thousands)

Balance at beginning of year
Actual return on plan assets:

Change in unrealized gain (loss) relating to instruments still held at the reporting date

Purchases, sales, issuances, settlements, paydowns and maturities (net)

Balance at end of year

2011

2010

$836

$939

101
–

(48)
(55)

$937

$836

Master Trust
The following table presents the investments held in the Master Trust at December 31, 2011 and 2010, broken down by level
within the fair value hierarchy.

(In thousands)

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

2011

2010

Obligations of the U.S. Government and its

agencies

Corporate bonds and debentures
Equity securities
Index fund - equity
Index fund - fixed income
Foreign equity fund
Foreign index fund
Commodity fund
Mortgage - backed securities
Private equity investments
Cash and cash equivalents
Accrued investment income

$–
–
239,754
39,897
–
–
–
–
–
–
10,490
–

$182,892
44,463
–
–
2,396
59,699
24,676
14,568
10,570
–
–
–

$–
–
–
–
–
–
–
–
–
937
–
1,574

$182,892
44,463
239,754
39,897
2,396
59,699
24,676
14,568
10,570
937
10,490
1,574

$–
–
228,054
2,267
–
–
–
–
–
–
25,926
–

$50,417
47,263
–
–
2,284
65,491
–
17,409
72,959
–
–
–

$–
–
–
–
–
–
–
–
–
836
–
1,655

$50,417
47,263
228,054
2,267
2,284
65,491
–
17,409
72,959
836
25,926
1,655

Total assets

$290,141

$339,264

$2,511

$631,916

$256,247

$255,823

$2,491

$514,561

The closing prices reported in the active markets in which
the securities are traded are used to value the investments in
the Master Trust.

Following is a description of the Master Trust’s valuation

methodologies used for investments measured at fair value:

• Obligations of U.S. Government and its agencies - The fair
value of Obligations of U.S. Government and agencies
obligations is based on an active exchange market and is
based on quoted market prices for similar securities.
These securities are classified as Level 2. U.S. agency
structured notes are priced based on a bond’s theoretical
value from similar bonds defined by credit quality and
market sector and for which the fair value incorporates an
option adjusted spread in deriving their fair value. These
securities are classified as Level 2.

• Corporate bonds and debentures - Corporate bonds and
debentures are valued at fair value at the closing price
reported in the active market in which the bond is traded.
These securities are classified as Level 2.

• Investments in index funds - Equity with quoted market
prices obtained from an active exchange market and high
liquidity are classified as Level 1.

• Investments in index funds - Fixed income,

foreign
equity, foreign index and commodity funds are valued at
the net asset value (NAV) of shares held by the plan at
year end. These securities are classified as Level 2.

• Mortgage-backed securities - Certain agency mortgage
and other asset 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.

• Private equity investments - Private equity investments
include an investment in a private equity fund. The fund
value is recorded at its net asset value (NAV) which is
affected by the changes in the fair market value of the
investments held in the fund. This fund is classified as
Level 3.

• Equity securities - Equity securities with quoted market
prices obtained from an active exchange market and high
liquidity are classified as Level 1.

• Cash and cash equivalents - The carrying amount of cash
and cash equivalents is a reasonable estimate of the fair
value since it is available on demand.

192

There were no transfers in and/or out of Level 3 for financial
instruments measured at fair value on a recurring basis during
the years ended December 31, 2011 and 2010. There were no
transfers in and/or out of Level 1 and Level 2 during the years
ended December 31, 2011 and 2010.

Information on the shares of common stock held by the
pension and restoration plans held is provided in the table that
follows.

Shares of Popular, Inc. common stock
Fair value of shares of Popular, Inc.

2011

2010

2,745,720

2,745,720

common stock

$3,816,551

$8,621,561

Dividends paid on shares of Popular,

Inc. common stock held by the plan

$–

$–

• Accrued investment income - Given the short-term nature
of these assets, their carrying amount approximates fair
value. Since there is a lack of observable inputs related to
these are reported as
instrument
Level 3.

specific attributes,

The preceding valuation methods may produce a fair value
calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, although the plan
believes its valuation methods are appropriate and consistent
with other market participants,
of different
methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair
value measurement at the reporting date.

the use

The following table presents the changes in the Master
Trust’s Level 3 assets measured at fair value for the years ended
December 31, 2011 and 2010.

(In thousands)

Balance at beginning of year
Actual return on plan assets:

Change in unrealized gain (loss) relating to

instruments still held at the reporting date

Settlements

Balance at end of year

2011

2010

$2,491

$2,613

101
(81)

(58)
(64)

$2,511

$2,491

The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial

statements at December 31, 2011 and 2010.

(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Termination benefit loss
Actuarial loss
Benefits paid
Benefit obligation at end of year
Change in fair value of plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Amounts recognized in accumulated other comprehensive loss:
Net loss
Accumulated other comprehensive loss (AOCL)
Reconciliation of net liabilities:
Net liabilities at beginning of year
Amount recognized in AOCL at beginning of year, pre-tax
Amount prepaid (accrued) at beginning of year
Net periodic benefit credit (cost)
Additional benefit cost
Contributions
Amount prepaid (accrued) at end of year
Amount recognized in AOCL
Net liabilities at end of year

Pension plans

Benefit restoration plans

2011

2010

2011

2010

$603,254
31,139
15,559
87,403
(30,906)
$706,449

$442,566
14,929
124,552
(30,906)
$551,141

$557,308
31,513
–
58,019
(43,586)
$603,254

$413,631
45,932
26,589
(43,586)
$442,566

$30,301
1,581
–
5,695
(1,138)
$36,439

$22,012
757
6,751
(1,138)
$28,382

$281,431
$281,431

$176,910
$176,910

$14,387
$14,387

$(160,688) $(143,677)
146,935
176,910
3,258
16,222
(9,396)
908
(4,229)
(15,559)
26,589
124,552
16,222
126,123
(281,431)
(176,910)
$(155,308) $(160,688)

$(8,289)
8,237
(52)
(369)
–
6,751
6,330
(14,387)
$(8,057)

$26,396
1,537
–
3,235
(867)
$30,301

$20,501
2,333
45
(867)
$22,012

$8,237
$8,237

$(5,896)
6,119
223
(320)
–
45
(52)
(8,237)
$(8,289)

193 POPULAR, INC. 2011 ANNUAL REPORT

The table below presents a breakdown of the plans’ liabilities at December 31, 2011 and 2010.

(In thousands)

Current liabilities
Non-current liabilities

Pension plans
2010
2011

$–
155,308

$–
160,688

Benefit restoration plans

2011

$50
8,007

2010

$51
8,238

The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended

December 31, 2011 and 2010.

(In thousands)

Pension plans

2011

2010

Benefit
restoration plans
2010
2011

Accumulated other comprehensive loss at beginning of year

$176,910

$146,935

$8,237

$6,119

Increase (decrease) in AOCL:
Recognized during the year:

Actuarial losses

Occurring during the year:
Net actuarial losses

Total increase in AOCL

Accumulated other comprehensive loss at end of year

(11,314)

(12,974)

(591)

(397)

115,835

104,521

42,949

29,975

6,741

6,150

2,515

2,118

$281,431

$176,910

$14,387

$8,237

The following table presents the amounts in accumulated other comprehensive loss that are expected to be recognized as

components of net periodic benefit cost during 2012.

(In thousands)

Net loss

Pension plans Benefit restoration plans

$21,703

$1,293

The following table presents information for plans with an accumulated benefit obligation in excess of plan assets.

(In thousands)

Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets

The actuarial assumptions used to determine the benefit obligations were as follows:

Discount rate:
P.R. Plans

Rate of compensation increase - weighted average:

P.R. Plans

Pension plans

Benefit restoration
plans

2011

2010

2011

2010

$706,449
706,449
551,141

$603,254
603,254
442,566

$36,439
36,439
28,382

$30,301
30,301
22,012

2011

2010

4.40% 5.30%

–

–

The following table presents the actuarial assumptions used to determine the components of net periodic benefit cost.

Pension plans
2010

2011

2009

Benefit restoration
plans
2010

2011

2009

Discount rate:
P.R. Plans
U.S. Plans

Discount rate at remeasurement
Expected return on plan assets
Rate of compensation increase - weighted average:

P.R. Plans
U.S. Plans

5.30% 5.90% 6.10% 5.30% 5.90% 6.10%

–
–

–
6.70%
8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

4.00
6.70%

–
–

–
–

–
–

–
–

–
–

4.50%
–

–
–

–
–

4.50%
–

194

The following table presents the components of net periodic benefit cost.

(In thousands)

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Recognized net actuarial loss

Net periodic benefit (credit) cost
Settlement loss
Termination benefit loss
Curtailment loss (gain)

Total benefit cost

The Corporation expects to pay the following contributions

to the benefit plans during 2012.

(In thousands)

Pension plan
Benefit restoration plans

2012

$–
$50

Benefit payments projected to be made from the pension and

benefit restoration plans are presented in the table below.

(In thousands)

Pension plan

2012
2013
2014
2015
2016
2017 - 2021

$43,642
35,973
35,986
36,283
36,871
193,834

Benefit
restoration
plans

$1,414
1,543
1,670
1,896
2,000
11,079

Pension plans
2010

2011

$–
31,139
(43,361)
–
11,314

(908)
–
15,559
–

$–
31,513
(30,862)
–
8,745

9,396
4,229
–
–

2009

$3,330
32,672
(25,543)
44
13,794

24,297
–
–
820

Benefit restoration plans
2009
2010
2011

$–
1,581
(1,803)
–
591

$–
1,537
(1,614)
–
397

369
–
–
–

320
–
–
–

$340
1,616
(1,239)
(9)
869

1,577
–
–
(340)

$14,651

$13,625

$25,117

$369

$320

$1,237

The following table presents the status of the Corporation’s
unfunded postretirement health care benefit plan and the
related amounts
recognized in the consolidated financial
statements at December 31, 2011 and 2010.

(In thousands)

2011

2010

Change in benefit obligation:
Benefit obligation at beginning of the year
Service cost
Interest cost
Temporary deviation loss
Termination benefit loss
Benefits paid
Actuarial loss

$164,313
2,016
8,543
437
–
(6,108)
11,788

$111,628
1,727
6,434
86
671
(5,068)
48,835

Benefit obligation end of year

$180,989

$164,313

Amounts recognized in accumulated other

comprehensive loss:
Net prior service cost
Net loss

$(200)
37,669

$(1,161)
26,949

Postretirement health care benefits
In addition to providing pension benefits, BPPR provides
certain health care benefits for certain retired employees.
Regular employees of BPPR, hired before February 1, 2000, may
become eligible for health care benefits, provided they reach
retirement age while working for BPPR. Certain employees who
elected to retire as of February 1, 2012 under the voluntary
retirement program were also eligible to receive postretirement
health care benefits. During 2010, the Corporation amended
the postretirement benefits as a result of the EVERTEC sale
described in Note 25 to the consolidated financial statements.
As a result of such amendment, the EVERTEC employees may
become eligible for health care benefits provided they reach
retirement age while working with the acquiring institution.

Accumulated other comprehensive loss

$37,469

$25,788

Reconciliation of net liability:
Net liability at beginning of year
Amount recognized in accumulated other

comprehensive loss (income) at
beginning of year, pre-tax

Amount accrued at beginning of year
Additional benefit cost
Net periodic benefit cost
Contributions

Amount accrued at end of year
Amount recognized in accumulated other

comprehensive loss

Net liability at end of year

$(164,313) $(111,628)

25,788

(25,268)

(138,525)
(437)
(10,666)
6,108

(136,896)
(757)
(5,940)
5,068

(143,520)

(138,525)

(37,469)

(25,788)

$(180,989) $(164,313)

195 POPULAR, INC. 2011 ANNUAL REPORT

The table below presents a breakdown of

the liability

associated with the postretirement health care benefit plan.

(In thousands)

Current liabilities
Non-current liabilities

2011

2010

$6,939
174,050

$6,159
158,154

The following table presents the changes in accumulated
the

comprehensive

(income),

pre-tax,

loss

for

other
postretirement health care benefit plan.

The following tables present the discount rate and assumed
health care cost trend rates used to determine the benefit
obligation and the net periodic benefit
the
postretirement health care benefit plan.

cost

for

To determine benefit obligation:

Discount rate
Initial health care cost trend rates:
Medicare Advantage plans
All other plans

2011

2010

4.40% 5.30%

25.00% 25.00%
7.00
5.00% 5.00%
2016

2014

6.50

(In thousands)

Accumulated other comprehensive loss

2011

2010

Ultimate health care cost trend rate
Year that the ultimate trend rate is reached

(income) at beginning of year

$25,788

$(25,268)

Increase (decrease) in accumulated other

comprehensive loss (income):

Recognized during the year:

Prior service credit
Actuarial (losses) gains
Occurring during the year:
Net actuarial losses

Total increase in accumulated other

comprehensive loss

Accumulated other comprehensive loss at

961
(1,068)

1,046
1,175

11,788

48,835

11,681

51,056

end of year

$37,469

$25,788

The following table presents the amounts in accumulated
other comprehensive loss that are expected to be recognized as
components of net periodic benefit cost for the postretirement
health care benefit plan during 2012.

(In thousands)

Net prior service credit
Net loss

2012

$(200)
$2,161

The following table presents the components of net periodic

postretirement health care benefit cost.

(In thousands)

Service cost
Interest cost
Amortization of prior service credit
Recognized net actuarial loss (gain)

Net periodic benefit cost
Temporary deviation loss
Termination benefit loss

Total benefit cost

2011

2010

2009

$2,016
8,543
(961)
1,068

10,666
437
–

$1,727
6,434
(1,046)
(1,175)

5,940
86
671

$2,195
8,105
(1,046)
–

9,254
–
–

$11,103

$6,697

$9,254

To determine net periodic benefit cost:

2011

2010

2009

Discount rate
Initial health care cost trend rates:
Medicare Advantage plans
All other plans

Ultimate health care cost trend rate
Year that the ultimate trend rate is

reached

5.30% 5.90% 6.10%

25.00% 7.00% 7.50%
6.50
7.00
5.00% 5.00% 5.00%

7.50

2014

2014

2014

Assumed health care trend rates generally have a significant
effect on the amounts reported for a health care plan. The
following table presents the effects of changes in the assumed
health care cost trend rates.

(In thousands)

Effect on total service cost and interest

cost components

Effect on postretirement benefit

1-percentage
point
increase

1-percentage
point
decrease

$ 299

$ (370)

obligation

$6,680

$(7,837)

The Corporation expects to contribute $7.4 million to the
postretirement benefit plan in 2012 to fund current benefit
payment requirements.
payments

the
postretirement health care benefit plan are presented in the
following table.

be made

projected

Benefit

on

to

(In thousands)

2012
2013
2014
2015
2016
2017 - 2021

$7,438
7,472
7,666
7,872
8,185
46,871

196

Note 35 - 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,
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.

the Corporation’s

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
termination of
to an acceleration clause at
year, subject
employment due to retirement.

(Not in thousands)

Exercise price range
per share

$14.39 - $18.50
$19.25 - $27.20

$14.39 - $27.20

Weighted-average
exercise price of
options
outstanding

Weighted-average
remaining
life of options
outstanding
in years

$15.85
$25.27

$20.78

0.76
2.51

1.68

Options
exercisable
(fully vested)

985,702
1,083,749

2,069,451

Weighted-average
exercise price of
options
exercisable

$15.85
$25.27

$20.78

Options
outstanding

985,702
1,083,749

2,069,451

There was no intrinsic value of options outstanding at
December 31, 2011 and 2010 (2009 - $0.2 million). There was

no intrinsic value of options exercisable at December 31, 2011,
2010, and 2009.

197 POPULAR, INC. 2011 ANNUAL REPORT

The following table summarizes the stock option activity

and related information:

(Not in thousands)

Outstanding at January 1, 2009
Granted
Exercised
Forfeited
Expired

Outstanding at December 31,

2009
Granted
Exercised
Forfeited
Expired

Outstanding at December 31,

2010
Granted
Exercised
Forfeited
Expired

Options
outstanding

Weighted-average
exercise price

2,965,843
–
–
(59,631)
(353,549)

2,552,663
–
–
–
(277,497)

2,275,166
–
–
–
(205,715)

$20.59
–
–
26.42
19.25

$20.64
–
–
–
20.43

$20.67
–
–
–
19.55

Outstanding at December 31,

2011

2,069,451

$20.78

The stock options exercisable at December 31, 2011 totaled
2,069,451 (2010 - 2,275,166; 2009 - 2,466,276). There were no
stock options exercised during the years ended December 31,
2011, 2010 and 2009. Thus, there was no intrinsic value of
options exercised during the years ended December 31, 2011,
2010 and 2009.

There were no new stock option grants issued by the
Corporation under the Stock Option Plan during 2011, 2010
and 2009.

There was no stock option expense recognized for the years
ended December 31, 2011 and 2010 (2009 - $0.2 million, with
a tax benefit of $92 thousand).

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. The restricted shares
granted consistent with the requirements of the Troubled Asset
Relief Program (“TARP”) Interim Final Rule vest in two years
from grant date.

The following table summarizes the restricted stock activity

under the Incentive Plan for members of management.

(Not in thousands)

Non-vested at January 1, 2009
Vested
Forfeited

Non-vested at December 31, 2009
Granted
Vested
Forfeited

Non-vested at December 31, 2010
Granted
Vested
Forfeited

Restricted
stock

248,339
(104,791)
(5,036)

138,512
1,525,416
(340,879)
(191,313)

1,131,736
1,559,463
(51,563)
(220,293)

Non-vested at December 31, 2011

2,419,343

Weighted-average
grant date
fair value

$22.83
21.93
19.95

$23.62
2.70
7.87
3.24

$3.61
3.24
9.00
4.20

$3.20

During the year ended December 31, 2011, 1,559,463 shares
of
restricted stock (2010- 1,525,416) were awarded to
management under the Incentive Plan, from which 1,110,454
shares
(2010- 1,305,035) were awarded to management
consistent with the requirements of the TARP Interim Final
Rule. During the year ended December 31, 2009, no shares of
restricted stock were awarded to management under the
Incentive Plan.

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 year ended December 31, 2011,
no performance shares were granted under this plan (2010 -
42,859; 2009 - 35,397).

During the year ended December 31, 2011, the Corporation
recognized $2.2 million of restricted stock expense related to
management
incentive awards, with a tax benefit of $0.5
million (2010 - $1.0 million, with a tax benefit of $0.4 million;
2009 - $1.5 million, with a tax benefit of $0.6 million). During
the year ended December 31, 2011, the fair market value of the
restricted stock vested was $0.5 million at grant date and $0.1
million at vesting date. This triggers a shortfall of $0.4 million
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 year ended December 31,
2011 (2010 - $0.5 million, with a tax benefit of $0.2 million;
2009 - $0.6 million, with a tax benefit of $0.1 million). The
total unrecognized compensation cost related to non-vested
restricted stock awards and performance shares to members of
management at December 31, 2011 was $4.0 million and is
expected to be recognized over a weighted-average period of 1.9
years.

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

(Not in thousands)

Nonvested at January 1, 2009
Granted
Vested
Forfeited

Non-vested at December 31, 2009
Granted
Vested
Forfeited

Non-vested at December 31, 2010
Granted
Vested
Forfeited

Restricted
stock

–
270,515
(270,515)
–

–
305,898
(305,898)
–

–
301,632
(301,632)
–

Non-vested at December 31, 2011

–

Weighted-average
grant date
fair value

–
$2.62
2.62
–

–
$2.95
2.95
–

–
$2.67
2.67
–

–

During the year ended December 31, 2011, the Corporation
granted 301,632 shares of restricted stock to members of the
Board of Directors of Popular, Inc. and BPPR, which became
vested at grant date (2010 - 305,898; 2009 - 270,515). During
this period,
the Corporation recognized $0.5 million of
restricted stock expense related to these restricted stock grants,

198

with a tax benefit of $0.1 million (2010 - $0.5 million, with a
tax benefit of $0.2 million; 2009 - $0.5 million, with a tax
benefit of $0.2 million). The fair value at vesting date of the
restricted stock vested during the year ended December 31,
2011 for directors was $0.8 million.

Note 36 - Rental expense and commitments
At December 31, 2011, the Corporation was obligated under a
number of non-cancelable leases for land, buildings, and
equipment which require rentals as follows:

Year

2012
2013
2014
2015
2016
Later years

Minimum
payments
(In thousands)
$41,054
38,790
37,189
35,179
30,921
193,478

$376,611

Total rental expense for the year ended December 31, 2011
was $49.9 million (2010 - $60.7 million; 2009 - $65.6 million),
which is
and
communication expenses, according to their nature.

included in net occupancy,

equipment

Note 37 - Income taxes
The components of
income tax expense (benefit) for the
continuing operations for the years ended December 31, are
summarized in the following table.

(In thousands)

2011

2010

2009

Current income tax expense:
Puerto Rico
Federal and States

Subtotal

Deferred income tax (benefit)

expense:
Puerto Rico
Federal and States
Adjustment for enacted

$107,343
1,722

$119,729
628

$75,368
3,012

109,065

120,357

78,380

(99,636)
2,211

(510)
(11,617)

(54,747)
(19,584)

changes in income tax laws

103,287

–

(12,351)

Subtotal

5,862

(12,127)

(86,682)

Total income tax expense

(benefit)

$114,927

$108,230

$(8,302)

199 POPULAR, INC. 2011 ANNUAL REPORT

The reasons for the difference between the income tax expense (benefit) applicable to income before provision for income taxes

and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:

(Dollars in thousands)

Computed income tax at statutory rates
Benefit of net tax exempt interest income
Effect of income subject to preferential tax rate
Deferred tax asset valuation allowance
Non-deductible expenses
Difference in tax rates due to multiple jurisdictions
Initial adjustment in deferred tax due to change in tax rate
Recognition of tax benefits from previous years [1]
States taxes and others

Income tax expense (benefit)

[1] Due to ruling and closing agreement discussed below.

Amount

$ 79,876
(31,379)
(1,802)
7,192
21,756
(8,555)
103,287
(53,615)
(1,833)

$114,927

2011

% of pre-tax
income

30%
(12)
(1)
3
8
(3)
39
(20)
(1)

43%

2010

2009

Amount

$ 100,586
(7,799)
(143,844)
143,754
28,130
13,908
–
–
(26,505)

$ 108,230

% of pre-tax
income

41%
(3)
(59)
59
11
6
–
–
(11)

44%

Amount

$(230,241)
(50,261)
(1,842)
282,933
–
40,625
(12,351)
–
(37,165)

$

(8,302)

% of pre-tax
income

41%
9
–
(50)
–
(7)
2
–
6

1%

recorded on the financial

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
the P.R. Treasury and the
purposes. On June 30, 2011,
Corporation signed a closing agreement in which both parties
agreed that for tax purposes the deductions related to certain
charge-offs
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 million 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.

statements of

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.

reflect

Deferred income taxes

tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their tax
bases. Significant components of the Corporation’s deferred tax
assets and liabilities at December 31 were as follows:

the net

(In thousands)

2011

2010

Deferred tax assets:
Tax credits available for carryforward
Net operating loss and other
carryforward available

Postretirement and pension benefits
Deferred loan origination fees
Allowance for loan losses
Deferred gains
Accelerated depreciation
Intercompany deferred gains
Other temporary differences

$3,459

$5,833

1,174,488
104,663
6,788
605,105
11,763
5,527
4,344
27,341

1,222,717
131,508
8,322
426,180
13,056
7,108
5,480
26,063

Total gross deferred tax assets

1,943,478

1,846,267

Deferred tax liabilities:
Differences between the assigned values

and the tax bases of assets and
liabilities recognized in purchase
business combinations

Difference in outside basis between

financial and tax reporting on sale of a
business

FDIC-assisted transaction
Unrealized net gain on trading and

available-for-sale securities
Deferred loan origination costs
Other temporary differences

32,293

31,846

20,721
142,000

73,991
4,277
6,187

11,120
96,940

52,186
6,911
1,392

Total gross deferred tax liabilities

279,469

200,395

Valuation allowance

Net deferred tax asset

1,259,358

1,268,589

$404,651

$377,283

The net deferred tax asset shown in the table above at
December 31, 2011 is reflected in the consolidated statements
of financial condition as $430 million in net deferred tax assets
(in the “other assets” caption) (2010 - $388 million in deferred
tax asset in the “other assets” caption) and $25 million in
deferred tax liabilities (in the “other liabilities” caption) (2010 -
$11 million in deferred tax liabilities in the “other liabilities”
reflecting the aggregate deferred tax assets or
caption),
liabilities
the
of
Corporation.

subsidiaries

tax-paying

individual

of

At December 31, 2011, the Corporation had total tax credits
of $3.5 million that will reduce the regular income tax liability
in future years expiring in annual installments through the year
2015.

Included as part of the other carryforwards available are
$35.7 million related to contributions to Banco Popular de
Puerto Rico qualified pension plan that have no expiration date.
Additionally, the deferred tax asset related to the net operating
loss carryforwards (“NOLs”) outstanding at December 31, 2011
expires as follows:

(In thousands)
2013
2016
2017
2018
2019
2021
2022
2023
2027
2028
2029
2030
2031

$1,447
7,320
8,542
16,239
230
76
971
1,248
65,165
510,675
195,014
193,707
138,154
$1,138,788

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,
reversing
future taxable income exclusive of
temporary differences and carryforwards, taxable income in
prior carryback years and tax-planning strategies.

200

The Corporation’s U.S. mainland operations are in a
cumulative loss position for the three-year period ended
December 31, 2011 taking into account
taxable income
adjusted by temporary differences. For purposes of assessing
the realization of the deferred tax assets in the U.S. mainland
operations, this cumulative taxable loss position is considered
significant negative evidence, which evaluated along with of all
sources of taxable income available to realize the deferred tax
asset, has caused management to conclude that it is more-
likely-than-not that the Corporation will not be able to fully
realize the deferred tax assets in the future. At December 31,
2011, the Corporation recorded a valuation allowance of $1.3
billion on the deferred tax assets of
its U.S. operations
(December 31, 2010 - $1.3 billion).

At December 31, 2011, the Corporation’s deferred tax assets
related to its Puerto Rico operations amounted to $429 million.
The Corporation’s Puerto Rico banking operation is in a
cumulative loss position for the three-year period ended
December 31, 2011 taking into account
taxable income
adjusted by temporary differences. This cumulative loss
position was mainly due to the performance of the construction
and commercial real estate loan portfolios, including the losses
related to the reclassification and sale of certain loans
pertaining to those portfolios. 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 ten years;
(iii) unrealized gain on appreciated assets that could be realized
to increase taxable income; and (iv) the financial results of the
operations showed an improvement in the profitability of the
business during 2011. 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.

In summary,

tax purposes.

As indicated earlier, in May 2011, the Corporation received
a Ruling from the P.R. Treasury establishing the treatment of
the loan charge-offs for
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

At December 31, 2011,

the related accrued interest
approximated $5.5 million (2010 - $6.1 million). The interest
expense recognized during 2011 was $0.3 million (2010 - $0.9
million). Management determined that, as of December 31,
2011 and 2010, there was no need to accrue for the payment of
penalties. The Corporation’s policy is to report interest related
to unrecognized tax benefits in income tax expense, while the
penalties, if any, are reported in other operating expenses in the
consolidated statements of operations.

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 $24.2 million at December 31, 2011 (2010 -
$31.6 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 statute of limitations, changes in
management’s judgment about the level of uncertainty, status of
examinations,
and the
addition or elimination of uncertain tax positions.

litigation and legislative

activity,

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. As of
December 31, 2011, the following years remain subject to
examination: U.S. Federal jurisdiction - 2008 through 2011 and
Puerto Rico - 2007 through 2011. 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.

201 POPULAR, INC. 2011 ANNUAL REPORT

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
take any tax deduction for bad debts related to the
not
construction and commercial loan portfolios on the tax returns
for 2009 and 2010. It was also agreed that such deferred
deductions will be taken on an evenly basis over taxable years
2013 through 2016, even though 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 Department on the 2009 return.
On the other hand, the Corporation reduce its deferred tax
asset related to the carryover of net operating losses previously
recorded in the year 2010 and for the six-month period ended
June 30, 2011 and increase 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’s 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 Puerto Rico Internal Revenue Code,

the
Corporation and its subsidiaries are treated as separate taxable
entities and are not entitled to file consolidated tax returns. The
Code provides a dividends-received deduction of 100% on
dividends received from “controlled” subsidiaries subject to
taxation in Puerto Rico and 85% on dividends received from
other taxable domestic corporations.

Under

The Corporation’s federal income tax provision (benefit) for
2011 was $1.1 million (2010 - ($8.9) million; 2009 - ($12.9)
million). The intercompany settlement of taxes paid is based on
tax sharing agreements which generally allocate taxes to each
entity based on a separate return basis.
presents

reconciliation

following

The

of

a

table
unrecognized tax benefits.

(In millions)

Balance at January 1, 2010
Additions for tax positions related to 2010
Additions for tax positions taken in prior years
Reduction as a result of lapse of statute of limitations
Reduction for tax positions of prior years
Reduction as a result of settlements

Balance at December 31, 2010
Additions for tax positions related to 2011
Additions for tax positions taken in prior years
Reduction as a result of lapse of statute of limitations
Reduction as a result of settlements

Balance at December 31, 2011

$41.8
4.4
3.5
(4.9)
(4.2)
(14.3)

$26.3
3.7
2.1
(6.0)
(6.6)

$19.5

Note 38 - Supplemental disclosure on the consolidated statements of cash flows
Additional disclosures on cash flow information and non-cash activities for the years ended December 31, 2011, 2010 and 2009 are
listed in the following table:

202

(In thousands)
Income taxes paid
Interest paid
Non-cash activities:

Loans transferred to other real estate
Loans transferred to other property

Total loans transferred to foreclosed assets
Transfers from loans held-in-portfolio to loans held-for-sale
Transfers from loans held-for-sale to loans held-in-portfolio
Loans securitized into investment securities[1]
Net (recoveries) write-downs related to loans transferred to loans held-for-sale
Securities sold not yet delivered
Recognition of mortgage servicing rights on securitizations or asset transfers
Gain on retained interest (sale of EVERTEC)
Treasury stock retired
Change in par value of common stock
Loans sold to a joint venture in exchange for an acquisition loan and an equity interest in the joint

venture

Conversion of preferred stock to common stock:

Preferred stock converted
Common stock issued

Trust preferred securities exchanged for new common stock issued:

Trust preferred securities exchanged
Common stock issued

Preferred stock exchanged for new common stock issued:

Preferred stock exchanged (Series A and B)
Common stock issued

Preferred stock exchanged for new trust preferred securities issued:

Preferred stock exchanged (Series C)
Trust preferred securities issued (junior subordinated debentures)

[1]

Includes loans securitized into trading securities and subsequently sold before year end.

2011

$171,818
517,980

$229,064
26,148

255,212
121,225
28,535
1,101,800
(1,101)
69,535
19,971
–
–
–

2010

$41,052
682,943

2009

$23,622
801,475

$183,901
37,383

221,284
1,020,889
12,388
817,528
327,207
23,055
15,326
93,970
–
–

$146,043
37,529

183,572
33,072
180,735
1,355,456
–
29,988
23,795
–
207,139
1,689,389

102,353

–

(1,150,000)
1,341,667

–

–
–

–
–

–
–

–
–

–
–

–
–

–
–

–
–

(397,911)
317,652

(524,079)
293,691

(901,165)
415,885

For the year ended December 31, 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 assets
acquired and liabilities assumed from the Westernbank FDIC-
assisted transaction. The cash received in the transaction, which
is presented in the investing
amounted to $261 million,
activities section of the Consolidated Statements of Cash Flows
as “Cash acquired related to business acquisitions”.

the effect of

Note 39 - Segment Reporting
The Corporation’s
two
corporate
reportable segments – Banco Popular de Puerto Rico and Banco
Popular North America.

consists of

structure

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

and

segment

reportable segment through June 30, 2010. As a result of the
the Corporation no longer presents EVERTEC as a
sale,
financial
reportable
historical
therefore,
acquiring
the processing and merchant
information for
businesses was 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 CONTADO and Serfinsa, which were included in
the EVERTEC reportable segment through June 30, 2010. As
indicated in Note 25 to the consolidated financial statements,
the Corporation sold its equity investments in CONTADO and
Serfinsa during 2011. In 2011, the Corporation recorded $4.3
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.

203 POPULAR, INC. 2011 ANNUAL REPORT

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

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 December 31, 2011, additional disclosures
are provided for the business areas included in this reportable
segment, as described below:

• Commercial

It

banking

represents

includes aspects of

the Corporation’s
banking operations conducted at BPPR, which are
targeted mainly to corporate, small and middle size
the lending and
businesses.
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
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.

Popular Mortgage

financing, while

• Other

services

financial

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.

are

accounting policies of

The
the
segments
Transactions between reportable
conducted at market
eliminated for reporting consolidated results of operations.

individual operating
the Corporation.
are primarily
that are

segments
resulting in profits

the
those of

rates,

same

as

The tables that follow present the results of operations and

total assets by reportable segments:

December 31, 2011

(In thousands)

Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Loss on early extinguishment of debt
Other operating expenses
Income tax expense

Net income

Segment assets

Banco Popular

Banco Popular

Intersegment

de Puerto Rico

North America

Eliminations

$

$ 1,240,700
487,238
488,459
6,933
37,180
693
845,821
119,819

$ 295,602
88,482
74,896
2,721
7,665
–
237,967
3,745

$

231,475

$

29,918

$

–
–
–
–
–
–
–
–

–

$28,423,064

$8,581,209

$(26,447)

December 31, 2011

Reportable

(In thousands)

Segments

Corporate

Eliminations Total Popular, Inc.

Net interest income (loss)
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Loss on early

extinguishment of debt
Other operating expenses
Income tax expense

$1,536,302
575,720
563,355
9,654
44,845

$(105,267)
–
66,473
–
1,601

693
1,083,788

8,000
71,586

(benefit)

123,564

(9,145)

Net income (loss)

$261,393

$(110,836)

$957
–
(69,551)
–
–

–
(69,870)

508

$768

$1,431,992
575,720
560,277
9,654
46,446

8,693
1,085,504

114,927

$151,325

Segment assets

$36,977,826

$5,348,638 $(4,978,032)

$37,348,432

December 31, 2010

December 31, 2009

(In thousands)

de Puerto Rico

North America

Eliminations

(In thousands)

Banco Popular

Banco Popular

Intersegment

Reportable

Segments

Corporate

Eliminations

Total Popular, Inc.

204

Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Loss on early extinguishment of debt
Other operating expenses
Income tax expense

Net income (loss)

Segment assets

$1,095,932
609,630
448,301
5,449
38,364
1,171
815,947
27,120

$309,985
402,250
54,570
3,181
9,109
21,866
264,110
4,318

$46,552

$(340,279)

$–
–
–
–
–
–
–
–

$–

$29,429,358

$8,973,984

$(28,662)

December 31, 2010

Reportable

(In thousands)

Segments

Corporate

Eliminations Total Popular, Inc.

Net interest income (loss)
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Loss on early

extinguishment of debt
Other operating expenses
Income tax expense

$1,405,917
1,011,880
502,871
8,630
47,473

$(111,747)
–
912,555
543
11,388

23,037
1,080,057
31,438

15,750
263,270
76,995

$695
–
(127,233)
–
–

–
(124,601)
(203)

$1,294,865
1,011,880
1,288,193
9,173
58,861

38,787
1,218,726
108,230

Net (loss) income

$(293,727)

$432,862

$(1,734)

$137,401

Net interest income

(loss)

$1,182,058

$(81,817)

$1,012

$1,101,253

Provision for loan

losses

Non-interest income
Amortization of
intangibles

Depreciation expense
Loss (gain) on early
extinguishment of
debt

Other operating
expenses

Income tax (benefit)

expense

1,405,807
697,010

–
337,182

–
(137,691)

1,405,807
896,501

8,672
48,469

810
15,982

–
–

9,482
64,451

1,959

(78,337)

(1,922)

(78,300)

1,007,930

281,938

(131,305)

1,158,563

(26,193)

17,295

596

(8,302)

Net (loss) income

$(567,576)

$17,677

$(4,048)

$(553,947)

Segment assets

$34,418,353

$5,546,045

$(5,228,073)

$34,736,325

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

December 31, 2011

Banco Popular de Puerto Rico

Commercial

Banking

Consumer

and Retail

Banking

Other

Financial

Total Banco

Popular de

Services

Eliminations

Puerto Rico

Segment assets

$38,374,680

$5,583,501 $(5,143,183)

$38,814,998

(In thousands)

December 31, 2009

(In thousands)

Net interest income
Provision for loan losses
Non-interest income
Amortization of intangibles
Depreciation expense
Loss on early extinguishment of debt
Other operating expenses
Income tax benefit

Net income (loss)

Segment assets

Banco Popular

Banco Popular

Intersegment

de Puerto Rico

North America

Eliminations

$866,589
623,532
666,779
5,031
37,680
1,959
708,207
(1,308)

$315,469
782,275
30,231
3,641
10,811
–
299,726
(24,896)

$–
–
–
–
(22)
–
(3)
11

$158,267

$(725,857)

$14

$23,611,755

$10,846,748

$(40,150)

Net interest
income

Provision for loan

losses
Non-interest
income

Amortization of
intangibles
Depreciation
expense
Loss on early

extinguishment
of debt

Other operating
expenses
Income tax
expense

Net income

$501,946

$727,050

$11,600

$104

$1,240,700

356,905

130,333

–

–

487,238

173,764

209,100

105,632

(37)

488,459

103

6,175

16,928

19,297

655

955

693

–

–

–

–

–

6,933

37,180

693

257,830

523,423

64,759

(191)

845,821

38,332

$4,919

67,678

13,707

$189,244

$37,156

102

$156

119,819

$231,475

Segment assets

$13,643,862

$20,035,526

$1,225,247 $(6,481,571) $28,423,064

205 POPULAR, INC. 2011 ANNUAL REPORT

December 31, 2010

Banco Popular de Puerto Rico

Consumer

Other

Commercial

and Retail

Financial

Total Banco

Popular de

December 31, 2010

Banco Popular North America

Banco Popular

Total Banco

Popular North

(In thousands)

Banking

Banking

Services

Eliminations

Puerto Rico

(In thousands)

North America

E-LOAN

Eliminations

America

Net interest income
Provision for loan

losses

Non-interest income
Amortization of
intangibles

Depreciation expense
Loss on early

extinguishment of
debt

Other operating
expenses

Income tax (benefit)

$443,242

$643,076

$9,392

$222

$1,095,932

464,214
133,674

145,416
211,242

–
103,552

–
(167)

609,630
448,301

Net interest income
Provision for loan losses
Non-interest income (loss)
Amortization of
intangibles

558
16,760

4,313
20,464

578
1,140

1,171

–

–

–
–

–

5,449
38,364

Depreciation expense
Loss on early

extinguishment of debt
Other operating expenses
Income tax expense

1,171

$305,893
400,077
73,032

3,181
8,539

21,866
256,855
1,589

$4,148
2,173
(18,462)

–
570

–
7,255
2,729

$(56)
–
–

$309,985
402,250
54,570

–
–

–
–
–

3,181
9,109

21,866
264,110
4,318

272,755

477,859

65,619

(286)

815,947

Net loss

$(313,182)

$(27,041)

$(56)

$(340,279)

Segment assets

$9,632,188

$490,845

$(1,149,049)

$8,973,984

expense

(68,791)

79,206

16,575

Net (loss) income

$(109,751)

$127,060

$29,032

130

$211

27,120

$46,552

Segment assets

$15,625,030 $21,483,403 $462,771 $(8,141,846) $29,429,358

December 31, 2009

Banco Popular de Puerto Rico

Consumer

Other

Commercial

and Retail

Financial

Total Banco

Popular de

(In thousands)

Banking

Banking

Services

Eliminations

Puerto Rico

$299,668

$554,677

$11,716

$528

$866,589

427,501
159,242

196,031
407,527

–
100,698

–
(688)

623,532
666,779

December 31, 2009

Banco Popular North America

Banco Popular

Total Banco

Popular North

(In thousands)

North America

E-LOAN

Eliminations

America

Net interest income
Provision for loan losses
Non-interest income (loss)
Amortization of
intangibles

Depreciation expense
Other operating expenses
Income tax benefit

$303,700
641,668
70,059

3,641
9,627
283,113
(7,665)

$10,593
140,607
(39,706)

–
1,184
16,610
(17,231)

$1,176
–
(122)

$315,469
782,275
30,231

–
–
3
–

3,641
10,811
299,726
(24,896)

162
16,187

4,177
20,237

692
1,256

1,959

–

–

–
–

–

5,031
37,680

Net loss

$(556,625)

$(170,283)

$1,051

$(725,857)

Segment assets

$11,478,201

$560,885

$(1,192,338)

$10,846,748

1,959

Geographic Information

211,933

434,337

62,211

(274)

708,207

(In thousands)

2011

2010

2009

Net interest income
Provision for loan

losses

Non-interest income
Amortization of
intangibles

Depreciation expense
Loss on early

extinguishment of
debt

Other operating
expenses

Income tax (benefit)

Revenues: [1]
Puerto Rico
United States
Other

Total consolidated revenues from

continuing operations

$1,551,518
347,460
93,291

$2,138,629
339,664
104,765

$1,566,081
306,667
125,006

$1,992,269

$2,583,058

$1,997,754

[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, gain on sale of processing and technology business and other
operating income.

expense

(105,470)

87,281

16,831

Net (loss) income

$(93,362)

$220,141

$31,424

50

$64

(1,308)

$158,267

Segment assets

$9,679,767 $17,285,538 $467,645 $(3,821,195) $23,611,755

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

December 31, 2011

Banco Popular North America

Banco Popular

Total Banco

Popular North

(In thousands)

North America

E-LOAN

Eliminations

America

Net interest income
Provision for loan losses
Non-interest income
Amortization of
intangibles

Depreciation expense
Other operating expenses
Income tax expense

$294,224
61,753
69,269

2,721
7,665
229,998
3,745

$1,378
26,729
5,627

–
–
7,969
–

Net income (loss)

$57,611

$(27,693)

$–
–
–

–
–
–
–

$–

$295,602
88,482
74,896

2,721
7,665
237,967
3,745

$29,918

Segment assets

$9,289,507

$418,436

$(1,126,734)

$8,581,209

206

Selected Balance Sheet Information

(In thousands)

Puerto Rico

Total assets
Loans
Deposits
United States
Total assets
Loans
Deposits

Other

Total assets
Loans
Deposits [1]

2011

2010

2009

$27,410,644
18,594,751
20,696,606

$ 8,708,709
5,845,359
6,151,959

$ 1,229,079
874,282
1,093,562

$28,556,279
18,729,654
19,149,753

$ 9,087,737
6,978,007
6,566,710

$ 1,170,982
751,194
1,045,737

$22,480,832
14,176,793
16,634,123

$11,033,114
8,825,559
8,242,604

$ 1,222,379
801,557
1,048,167

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

Note 40 - Subsequent events
Subsequent events are events and transactions that occur after
the balance sheet date but before the 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
and
sheet date. The Corporation has
transactions occurring subsequent to December 31, 2011. Such
evaluation resulted in no adjustments or additional disclosures
in the consolidated financial statements for the year ended
December 31, 2011, other than information updated in the legal
proceedings in Note 27.

evaluated events

Note 41 - Popular, Inc. (holding company only) financial

information

The following condensed financial
information presents the
financial position of Popular, Inc. Holding Company only at
December 31, 2011 and 2010, and the results of its operations
and cash flows for each of the three years in the period ended
December 31, 2011.

Statements of Condition

(In thousands)

Assets
Cash
Money market investments
Investments securities available-for-sale, at fair value
Investments securities held-to-maturity, at amortized cost (includes $185,000 in subordinated notes from

BPPR)

Other investment securities, at lower of cost or realizable value
Investment in BPPR and subsidiaries, at equity
Investment in Popular International Bank and subsidiaries, at equity
Investment in other subsidiaries, at equity
Advances to subsidiaries
Loans to affiliates
Loans

Less - Allowance for loan losses

Premises and equipment
Investments in equity investees
Other assets

Total assets

Liabilities and Stockholders’ equity
Notes payable
Accrued expenses and other liabilities
Stockholders’ equity

Total liabilities and stockholders’ equity

December 31,

2011

2010

$6,365
42,239
35,700

185,000
10,850
2,626,951
1,241,170
119,166
193,900
53,214
2,501
8
2,533
195,193
24,750

$1,638
1
35,263

210,872
10,850
2,521,684
1,193,413
121,161
412,200
61,460
2,422
60
2,830
181,009
67,264

$4,739,524

$4,822,007

760,849
59,922
3,918,753

835,793
185,683
3,800,531

$4,739,524

$4,822,007

207 POPULAR, INC. 2011 ANNUAL REPORT

Statements of Operations

(In thousands)

Income:

Dividends from subsidiaries
Interest on money market
Interest on investments securities
Gain on sale of processing and technology business
Earnings from investments under the equity method
Other operating income (loss)
Gain on sale and valuation adjustment of investment securities
Interest on advances to subsidiaries
Interest on loans to affiliates
Interest on loans

Total income

Expenses:

Interest expense
Loss (gain) on early extinguishment of debt
Operating expenses

Total expenses

(Loss) income before income taxes and equity in undistributed earnings (losses) of subsidiaries
Income taxes

(Loss) income before equity in undistributed earnings (losses) of subsidiaries
Equity in undistributed earnings (losses) of subsidiaries

Net income (loss)

Year ended December 31,
2010

2009

2011

$20,000
8
16,224
-
14,186
8,959
-
4,847
3,831
235

$168,100
55
23,579
640,802
3,402
(120)
-
5,739
1,738
150

$160,625
109
37,120
-
692
-
3,008
8,133
888
127

68,290

843,445

210,702

94,615
8,000
1,066

103,681

(35,391)
2,786

(38,177)
189,502

111,809
15,750
35,923

163,482

679,963
80,444

599,519
(462,118)

74,980
(26,439)
7,018

55,559

155,143
(891)

156,034
(729,953)

$151,325

$137,401

$(573,919)

Statements of Cash Flows

(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Equity in undistributed (earnings) losses of subsidiaries and dividends from subsidiaries
Net accretion of discounts and amortization of premiums and deferred fees
Earnings from investments under the equity method
Stock options expense
Deferred income tax expense (benefit)
(Gain) loss on:

Early extinguishment of debt
Sale and valuation adjustments of investment securities
Sale of equity method investments
Sale of processing and technology business, net of transaction costs

Net decrease in other assets
Net increase (decrease) in:

Interest payable
Other liabilities

Total adjustments
Net cash (used in) provided by operating activities
Cash flows from investing activities:

Net (increase) decrease in money market investments
Purchases of investment securities:

Available-for-sale
Held-to-maturity

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

Available-for-sale
Held-to-maturity

Proceeds from sale of investment securities:

Available-for-sale

Capital contribution to subsidiaries
Transfer of shares of a subsidiary
Net change in advances to subsidiaries and affiliates
Net (disbursements) repayments on loans
Net proceeds from sale of equity method investments
Net proceeds from sale of processing and technology business
Acquisition of premises and equipment
Proceeds from sale of:

Premises and equipment
Foreclosed assets

Net cash provided by (used in) investing activities
Cash flows from financing activities:

Net increase (decrease) in:

Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings

Payments of notes payable and subordinated notes
Proceeds from issuance of common stock
Net proceeds from issuance of depositary shares
Dividends paid
Issuance costs and fees paid on exchange of preferred stock and trust preferred securities
Treasury stock acquired
Return of capital

Net cash (used in) provided by financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period

208

Year ended December 31,
2010

2009

2011

$151,325

$137,401

$(573,919)

(189,502)
25,042
(14,186)
-
13,965

-
-
(5,493)
-
7,563

(3,467)
(84,434)
(250,512)
(99,187)

(42,237)

-
(37,093)

462,118
21,282
(3,402)
-
8,831

-
-
-
(616,186)
7,263

(528)
42,578
(78,044)
59,357

729,953
7,100
(692)
91
(1,850)

(26,439)
(3,008)
-
-
22,774

6,455
(1,797)
732,587
158,668

49

89,643

(35,000)
(52,796)

(249,603)
(51,539)

-
62,980

-
297,747

14,226
27,318

-
-
-
226,546
(131)
(10,690)
-
(594)

135
-
198,916

-
-
(100,000)
7,690
-
(3,723)
-
(483)
1,514
(95,002)
4,727
1,638
$6,365

-
(1,345,000)
-
(366,394)
(56)
-
617,976
(890)

426,666
(940,000)
(42,971)
714,000
3,578
-
-
(310)

183
74
(884,107)

14,943
47
5,998

-
(24,225)
(250,000)
153
1,100,155
(310)
-
(559)
-
825,214
464
1,174
$1,638

(44,471)
(18,544)
-
-
-
(71,438)
(29,024)
(17)
-
(163,494)
1,172
2
$1,174

209 POPULAR, INC. 2011 ANNUAL REPORT

Notes payable at December 31, 2011 mature as follows:

Year

2012
2013
2014
2015
2016
Later years
No stated maturity

Subtotal
Less: discount

Total

(In thousands)

$–
–
–
–
–
290,812
936,000

1,226,812
(465,963)

$760,849

Note 42 – Condensed consolidating financial information of

guarantor and issuers of registered guaranteed
securities

the financial position of Popular,

The following condensed consolidating financial information
presents
Inc. Holding
Company (“PIHC”) (parent only), Popular International Bank,
Inc. (“PIBI”), Popular North America, Inc. (“PNA”) and all
other subsidiaries of the Corporation at December 31, 2011 and
2010, and the results of their operations and cash flows for
periods ended December 31, 2011, 2010 and 2009.

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.

the existing federal banking regulations,

A source of income for PIHC consists of dividends from
BPPR. Currently, the prior approval of the Federal Reserve
Bank of New York and the Office of the Commissioner of
Financial
Institutions of Puerto Rico is necessary for the
payment of any dividends by BPPR to PIHC. Furthermore,
under
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 December 31, 2011,
BPPR had a dividend capacity of approximately $243 million
(December 31, 2010 - $78 million); however, the prior approval
continues to be necessary. BPNA could not have declared any
dividends without the prior approval of the Federal Reserve
Bank of New York.

210

Condensed Consolidating Statement of Condition

(In thousands)

Assets
Cash and due from banks
Money market investments
Trading account securities, at fair value
Investment securities available-for-sale, at fair value
Investment securities held-to-maturity, at amortized cost
Other investment securities, at lower of cost or realizable value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or fair value

Loans held-in-portfolio:

Loans not covered under loss sharing agreements with the

FDIC

Loans covered under loss sharing agreements with the FDIC
Less - Unearned income

Allowance for loan losses

Total loans held-in-portfolio, net

FDIC loss share asset
Premises and equipment, net
Other real estate not covered under loss sharing agreements with

the FDIC

Other real estate covered under loss sharing agreements with the

FDIC

Accrued income receivable
Mortgage servicing assets, at fair value
Other assets
Goodwill
Other intangible assets

Total assets

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:

Non-interest bearing
Interest bearing

Total deposits

Assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Subordinated notes
Other liabilities

Total liabilities

Stockholders’ equity:
Preferred stock
Common stock
Surplus
Accumulated deficit
Treasury stock, at cost
Accumulated other comprehensive (loss) income, net of tax

At December 31, 2011

Popular Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries and
eliminations

Elimination
entries

Popular, Inc.
Consolidated

$6,365
42,239
–
35,700
185,000
10,850
3,987,287
–

$391
15,456
–
3,370
1,000
1
1,147,617
–

$932
552
–
–
–
4,492
1,627,313
–

249,615
–
–
8

249,607

–
2,533

–

–
1,512
–
217,877
–
554

–
–
–
–

–

–
–

–

–
15
–
78,221
–
–

–
–
–
–

–

–
118

–

–
113
–
13,222
–
–

$534,796
1,357,890
436,331
4,988,390
124,383
164,537
–
363,093

20,673,552
4,348,703
100,596
815,300

24,106,359

1,915,128
535,835

172,497

109,135
123,858
151,323
1,183,103
648,350
63,400

$(7,202)
(39,963)
–
(17,637)
(185,000)
–
(6,762,217)
–

$535,282
1,376,174
436,331
5,009,823
125,383
179,880
–
363,093

(219,975)
–
–
–

20,703,192
4,348,703
100,596
815,308

(219,975)

24,135,991

–
–

–

–
(289)
–
(30,030)
–
–

1,915,128
538,486

172,497

109,135
125,209
151,323
1,462,393
648,350
63,954

$4,739,524

$1,246,071

$1,646,742

$36,978,408

$(7,262,313)

$37,348,432

$–
–

–

–
–
760,849
–
59,922

820,771

$–
–

–

–
–
–
–
4,901

4,901

$–
–

–

–
30,500
427,297
–
42,269

500,066

$5,689,034
22,302,798

27,991,832

2,165,157
459,600
668,226
185,000
1,133,815

$(33,560)
(16,145)

$5,655,474
22,286,653

(49,705)

27,942,127

(24,060)
(193,900)
–
(185,000)
(47,024)

2,141,097
296,200
1,856,372
–
1,193,883

32,603,630

(499,689)

33,429,679

50,160
10,263
4,106,134
(204,199)
(1,057)
(42,548)

–
4,066
4,092,743
(2,883,705)
–
28,066

–
2
4,103,208
(3,013,481)
–
56,947

–
51,564
5,870,287
(1,532,810)
–
(14,263)

–
(55,632)
(14,057,711)
7,421,469
–
(70,750)

50,160
10,263
4,114,661
(212,726)
(1,057)
(42,548)

Total stockholders’ equity

3,918,753

1,241,170

1,146,676

4,374,778

(6,762,624)

3,918,753

Total liabilities and stockholders’ equity

$4,739,524

$1,246,071

$1,646,742

$36,978,408

$(7,262,313)

$37,348,432

211 POPULAR, INC. 2011 ANNUAL REPORT

Condensed Consolidating Statement of Condition

(In thousands)

Assets
Cash and due from banks
Money market investments
Trading account securities, at fair value
Investment securities available-for-sale, at fair value
Investment securities held-to-maturity, at amortized cost
Other investment securities, at lower of cost or realizable value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or fair value

Loans held-in-portfolio:

Loans not covered under loss sharing agreements with the FDIC
Loans covered under loss sharing agreements with the FDIC
Less - Unearned income

Allowance for loan losses

Total loans held-in-portfolio, net

FDIC loss share asset
Premises and equipment, net
Other real estate not covered under loss sharing agreements with the

FDIC

Other real estate covered under loss sharing agreements with the FDIC
Accrued income receivable
Mortgage servicing assets, at fair value
Other assets
Goodwill
Other intangible assets

Total assets

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:

Non-interest bearing
Interest bearing

Total deposits

Assets sold under agreements to repurchase
Other short-term borrowings
Notes payable
Subordinated notes
Other liabilities

Total liabilities

Stockholders’ equity:
Preferred stock
Common stock
Surplus
Accumulated deficit
Treasury stock, at cost
Accumulated other comprehensive (loss) income, net of tax

Total stockholders’ equity

At December 31, 2010

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries and
eliminations

Elimination
entries

Popular, Inc.
Consolidated

$

1,638 $
1
–
35,263
210,872
10,850
3,836,258
–

618 $

7,512
–
3,863
1,000
1
1,096,907
–

1,576 $
261
–
–
–
4,492
1,578,986
–

451,723 $
979,232
546,713
5,216,013
95,482
148,170
–
893,938

(3,182)
(7,711)
–
(18,287)
(185,000)
–
(6,512,151)
–

$

452,373
979,295
546,713
5,236,852
122,354
163,513
–
893,938

476,082
–
–
60

476,022

–
2,830

–
–
1,510
–
246,209
–
554

1,285
–
–
–

1,285

–
–

–
–
33
–
86,116
–
–

–
–
–
–

–

20,798,876
4,836,882
106,241
793,165

(441,967)
–
–
–

20,834,276
4,836,882
106,241
793,225

24,736,352

(441,967)

24,771,692

–
122

2,410,219
542,501

–
–

2,410,219
545,453

–
–
111
–
15,105
–
–

161,496
57,565
149,101
166,907
1,127,870
647,387
58,142

–
–
(97)
–
(25,413)
–
–

161,496
57,565
150,658
166,907
1,449,887
647,387
58,696

$4,822,007 $ 1,197,335 $ 1,600,653 $38,388,811 $ (7,193,808)

$38,814,998

$

– $
–

–

– $
–

–

– $ 4,961,417 $
21,830,669
–

(22,096)
(7,790)

$ 4,939,321
21,822,879

–

26,792,086

(29,886)

26,762,200

–
–
835,793
–
185,683

1,021,476

–
–
–
–
3,921

3,921

–
32,500
430,121
–
47,169

2,412,550
743,922
2,905,554
185,000
1,120,650

–
(412,200)
(1,285)
(185,000)
(52,111)

2,412,550
364,222
4,170,183
–
1,305,312

509,790

34,159,762

(680,482)

35,014,467

50,160
10,229
4,085,478
(338,801)
(574)
(5,961)

–
4,066
4,158,157
(2,958,347)
–
(10,462)

–
2
4,066,208
(3,000,682)
–
25,335

–
51,633
5,862,091
(1,714,659)
–
29,984

–
(55,701)
(14,077,929)
7,665,161
–
(44,857)

50,160
10,229
4,094,005
(347,328)
(574)
(5,961)

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 $38,388,811 $ (7,193,808)

$38,814,998

212

Condensed Consolidating Statement of Operations

(In thousands)
Interest and Dividend Income:

Dividend income from subsidiaries
Loans
Money market investments
Investment securities
Trading account securities

Total interest and dividend income

Interest Expense:

Deposits
Short-term borrowings
Long-term debt

Total interest expense
Net interest (expense) income
Provision for loan losses
Net interest (expense) income after provision for loan losses
Service charges on deposit accounts
Other service fees
Net (loss) gain on sale and valuation adjustments of

investment securities
Trading account profit
Net gain on sale of loans, including valuation adjustments on

loans held-for-sale

Adjustments (expense) to indemnity reserves on loans sold
FDIC loss share income
Fair value change in equity appreciation instrument
Other operating income (loss)

Total non-interest income (loss)

Operating Expenses:
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
FDIC deposit insurance
Loss on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles

Total operating expenses

Year ended December 31, 2011

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries and
eliminations

Elimination
entries

Popular, Inc.
Consolidated

$20,000
8,913
8
16,224
–
45,145

–
50
94,565
94,615
(49,470)
–
(49,470)
–
–

$–
16
93
55
-
164

–
–
–
–
164
–
164
–
–

–
–

(87)
–

–
–
–
–
23,145
23,145

28,524
3,396
3,210
2,269
10,820
421
1,894
–
8,000
–
(49,468)
–
9,066

–
–
–
–
33,543
33,456

471
32
4
–
203
10
–
–
–
–
3,872
–
4,592

$–
–
4
322
–
326

–
883
31,438
32,321
(31,995)
–
(31,995)
–
–

–
–

–
–
–
–
(499)
(499)

–
3
–
–
11
10
–
–
–
–
443
–
467

$–
1,692,390
3,646
200,224
35,607
1,931,867

269,892
59,230
66,749
395,871
1,535,996
575,720
960,276
184,940
255,668

10,931
5,897

30,891
(33,068)
66,791
8,323
41,522
571,895

424,375
95,427
40,626
49,616
256,791
26,674
53,173
93,728
693
21,778
135,337
9,654
1,207,872

$(20,000)
(6,962)
(155)
(12,884)
–
(40,001)

(405)
(4,905)
(11,988)
(17,298)
(22,703)
–
(22,703)
–
(15,948)

$–
1,694,357
3,596
203,941
35,607
1,937,501

269,487
55,258
180,764
505,509
1,431,992
575,720
856,272
184,940
239,720

–
–

10,844
5,897

–
–
–
–
(51,772)
(67,720)

–
3,461
–
–
(72,883)
–
–
–
–
–
(2,278)
–
(71,700)

30,891
(33,068)
66,791
8,323
45,939
560,277

453,370
102,319
43,840
51,885
194,942
27,115
55,067
93,728
8,693
21,778
87,906
9,654
1,150,297

(Loss) income before income tax and equity in earnings

(losses) of subsidiaries
Income tax expense (benefit)
(Loss) income before equity in earnings (losses) of

subsidiaries

Equity in undistributed earnings (losses) of subsidiaries
Net Income (Loss)

(35,391)
2,786

29,028
4,888

(32,961)
(955)

324,299
107,700

(18,723)
508

266,252
114,927

(38,177)
189,502
$151,325

24,140
(13,398)
$10,742

(32,006)
19,206
$(12,800)

216,599
–
$216,599

(19,231)
(195,310)
$(214,541)

151,325
–
$151,325

213 POPULAR, INC. 2011 ANNUAL REPORT

Condensed Consolidating Statement of Operations

(In thousands)
Interest and Dividend Income:

Dividend income from subsidiaries
Loans
Money market investments
Investment securities
Trading account securities

Total interest and dividend income

Interest Expense:

Deposits
Short-term borrowings
Long-term debt

Total interest expense
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after provision for loan losses
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, including valuation adjustments on

loans held-for-sale

Adjustments (expense) to indemnity reserves on loans sold
FDIC loss share expense
Fair value change in equity appreciation instrument
Gain on sale of processing and technology business
Other operating income (loss)

Total non-interest income (loss)

Operating Expenses:
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
FDIC deposit insurance
Loss on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles

Total operating expenses

Year ended December 31, 2010

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries
and eliminations

Elimination
entries

Popular, Inc.
Consolidated

$168,100
7,627
55
23,579
–
199,361

–
46
111,763
111,809
87,552
–
87,552
–
–

–
–

–
–
–
–
640,802
3,282
644,084

22,575
2,941
2,887
1,816
31,590
481
1,275
–
15,750
19
(27,661)
–
51,673

$7,500
19
252
31
–
7,802

–
–
–
–
7,802
–
7,802
–
–

–
–

–
–
–
–
–
21,807
21,807

439
34
2
–
22
21
–
–
–
–
(399)
–
119

$–
–
2
322
–
324

–
510
30,586
31,096
(30,772)
–
(30,772)
–
–

$–
1,675,477
5,383
235,521
27,918
1,944,299

351,180
65,550
121,328
538,058
1,406,241
1,011,880
394,361
195,803
382,350

$(175,600)

$–
(6,389) 1,676,734
5,384
238,210
27,918
(203,540) 1,948,246

(308)
(21,243)
–

350,881
(299)
60,278
(5,828)
242,222
(21,455)
(27,582)
653,381
(175,958) 1,294,865
– 1,011,880
282,985
195,803
377,504

(175,958)
–
(4,846)

–
–

3,992
16,404

–
–

3,992
16,404

–
–
–
–
–
(3,980)
(3,980)

15,874
(72,013)
(25,751)
42,555
–
90,546
649,760

–
3
–
–
11
14
–
–
–
–
432
–
460

491,583
112,240
82,962
48,792
154,347
38,389
45,396
67,644
23,037
46,770
173,990
9,173
1,294,323

15,874
–
(72,013)
–
(25,751)
–
42,555
–
640,802
–
93,023
(18,632)
(23,478) 1,288,193

(399)
985
–
–
(19,865)
–
–
–
–
–
(1,749)
–

514,198
116,203
85,851
50,608
166,105
38,905
46,671
67,644
38,787
46,789
144,613
9,173
(21,028) 1,325,547

Income (loss) before income tax and equity in losses of

subsidiaries

Income tax expense (benefit)
Income (loss) before equity in losses of subsidiaries
Equity in undistributed losses of subsidiaries
Net Income (Loss)

(35,212)
29,490
679,963
(296)
3,243
80,444
(34,916)
26,247
599,519
(462,118)
(338,246)
(378,892)
$137,401 $(352,645) $(373,162)

(250,202)
25,101
(275,303)
–
$(275,303)

(178,408)
(262)
(178,146)
1,179,256
$1,001,110

245,631
108,230
137,401
–
$137,401

214

Condensed Consolidating Statement of Operations

(In thousands)
Interest and Dividend Income:

Dividend income from subsidiaries
Loans
Money market investments
Investment securities
Trading account securities

Total interest and dividend income

Interest expense:

Deposits
Short-term borrowings
Long-term debt

Total interest expense
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after provision for loan losses
Service charges on deposit accounts
Other service fees
Net gain (loss) on sale and valuation adjustments of investment

securities

Trading account profit
Net gain on sale of loans, including valuation adjustments on

loans held-for-sale

Adjustments (expense) to indemnity reserves on loans sold
Other operating income (loss)

Total non-interest income (loss)

Operating Expenses:
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
FDIC deposit insurance
(Gain) loss on early extinguishment of debt
Other real estate owned (OREO) expenses
Other operating expenses
Amortization of intangibles

Total operating expenses

Income (loss) before income tax and equity in losses of

subsidiaries

Income tax (benefit) expense
Income (loss) before equity in losses of subsidiaries
Equity in undistributed losses of subsidiaries
Loss from continuing operations
Loss from discontinued operations, net of tax
Equity in undistributed losses of discontinued operations
Net loss

Year ended December 31, 2009

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries and
eliminations

Elimination
entries

Popular, Inc.
Consolidated

$160,625
9,148
109
37,120
–
207,002

–
169
74,811
74,980
132,022
–
132,022
–
–

$7,500
–
1,306
70
–
8,876

–
–
–
–
8,876
–
8,876
–
–

$20,000
44
2,156
703
–
22,903

–
45
58,581
58,626
(35,723)
–
(35,723)
–
–

$–
1,518,431
8,573
281,887
35,190
1,844,081

504,732
77,548
78,609
660,889
1,183,192
1,405,807
(222,615)
213,493
401,934

$(188,125)

$–
(8,374) 1,519,249
8,570
(3,574)
291,988
(27,792)
35,190
–
(227,865) 1,854,997

501,262
(3,470)
69,357
(8,405)
183,125
(28,876)
753,744
(40,751)
(187,114) 1,101,253
– 1,405,807
(304,554)
213,493
394,187

(187,114)
–
(7,747)

3,008
–

–
–
692
3,700

(10,934)
–

–
–
16,558
5,624

28,156
2,613
3,683
3,544
15,676
443
1,182
–
(26,439)
(33)
(48,246)
–
(19,421)

427
30
–
–
14
20
–
–
–
–
(400)
–
91

–
–

229,530
39,740

(2,058)
–

219,546
39,740

–
–
(1,184)
(1,184)

–
3
4
–
(55)
23
–
–
(51,897)
–
238
–
(51,684)

5,151
(40,211)
52,778
902,415

–
–
(4,249)
(14,054)

5,151
(40,211)
64,595
896,501

505,698
108,389
97,843
49,061
100,831
45,778
37,690
76,796
1,959
25,833
175,678
9,482
1,235,038

(1,018)
–
–
–
(5,179)
–
–
–
(1,923)
–
(1,708)
–

533,263
111,035
101,530
52,605
111,287
46,264
38,872
76,796
(78,300)
25,800
125,562
9,482
(9,828) 1,154,196

155,143
(891)
156,034
(709,981)
(553,947)
–
(19,972)

14,777
14,409
21,601
26
(6,824)
14,383
(735,305)
(739,039)
(742,129)
(724,656)
–
–
(19,972)
(19,972)
$(573,919) $(744,628) $(762,101)

(555,238)
(29,729)
(525,509)
–
(525,509)
(19,972)
–
$(545,481)

(191,340)
691
(192,031)
2,184,325
1,992,294
–
59,916

(562,249)
(8,302)
(553,947)
–
(553,947)
(19,972)
–
$2,052,210 $(573,919)

215 POPULAR, INC. 2011 ANNUAL REPORT

Condensed Consolidating Statement of Cash Flows

(In thousands)

Cash flows from operating activities:
Net income (loss)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Equity in undistributed (earnings) losses of subsidiaries
Provision for loan losses
Amortization of intangibles
Depreciation and amortization of premises and equipment
Net accretion of discounts and amortization of premiums and deferred fees
Impairment losses on net assets to be disposed of
Fair value adjustments of mortgage servicing rights
Fair value change in equity appreciation instrument
FDIC loss share income
FDIC deposit insurance expense
Adjustments (expense) to indemnity reserves on loans sold
(Earnings) losses from investments under the equity method
Deferred income tax expense (benefit)
Loss (gain) on:

Disposition of premises and equipment
Early extinguishment of debt
Sale and valuation adjustment of investment securities
Sale of loans, including valuation adjustments on loans held for sale
Sale of equity method investments

Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net disbursements on loans held-for-sale
Net (increase) decrease in:

Trading securities
Accrued income receivable
Other assets

Net increase (decrease) in:

Interest payable
Pension and other postretirement benefits obligations
Other liabilities

Total adjustments

Net cash (used in) provided by operating activities

Cash flows from investing activities:

Net increase in money market investments
Purchases of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from sale of investment securities:

Available for sale
Other

Net repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Payments received from FDIC under loss sharing agreements
Cash paid related to business acquisitions
Net proceeds from sale of equity method investments
Capital contribution to subsidiary
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of:

Premises and equipment
Foreclosed assets

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Net increase (decrease) in:

Deposits
Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings

Payments of notes payable
Proceeds from issuance of notes payable
Proceeds from issuance of common stock
Dividends paid to parent company
Dividends paid
Treasury stock acquired
Return of capital
Capital contribution from parent

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period

Cash and due from banks at end of period

Year ended December 31, 2011

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries
and eliminations

Elimination
entries

Popular, Inc.
Consolidated

$ 151,325

$ 10,742

$(12,800)

$

216,599

$(214,541)

$

151,325

(189,502)
–
–
750
25,042
–
–
–
–
–
–
(14,186)
13,965

7
–
–
–
(5,493)
–
–
–

–
(2)
6,808

(3,467)
–
(84,434)

(250,512)

(99,187)

13,398
–
–
–
–
4,255
–
–
–
–
–
(20,083)
3,735

–
–
87
–
(11,414)
–
–
–

–
(17)
10,666

–
–
(7,524)

(6,897)

3,845

(19,206)
–
–
3
176
–
–
–
–
–
–
500
(932)

–
–
–
–
–
–
–
–

–
–
2,316

(56)
–
(2,354)

(19,553)

(32,353)

–
575,720
9,654
45,693
(137,614)
–
37,061
(8,323)
(66,791)
93,728
33,068
–
(11,414)

(5,533)
693
(10,931)
(30,891)
–
(346,004)
165,335
(793,094)

1,143,029
25,276
(3,993)

(8,968)
(111,288)
3,342

597,755

814,354

195,310
–
–
–
(650)
–
–
–
–
–
–
–
508

–
–
–
–
–
–
–
–

–
192
6,532

20
–
2,643

204,555

(9,986)

–
575,720
9,654
46,446
(113,046)
4,255
37,061
(8,323)
(66,791)
93,728
33,068
(33,769)
5,862

(5,526)
693
(10,844)
(30,891)
(16,907)
(346,004)
165,335
(793,094)

1,143,029
25,449
22,329

(12,471)
(111,288)
(88,327)

525,348

676,673

(42,237)

(7,944)

(291)

(378,659)

32,252

(396,879)

–
(37,093)
–

–
62,980
–

–
–
226,415
–
–
–
–
(10,690)
–
–
(594)

135
–

–
(1,000)
–

–
1,000
–

–
–
193
–
–
–
–
42,193
(37,000)
–
–

–
–

–
–
–

–
–
–

–
–
–
–
–
–
–
–
–
–
–

–
–

198,916

(2,558)

(291)

–
–
–
(100,000)
–
7,690
–
(3,723)
(483)
1,514
–

(95,002)

4,727
1,638

–
–
–
–
–
–
–
–
–
(1,514)
–

(1,514)

(227)
618

–
–
(2,000)
(3,000)
–
–
–
–
–
–
37,000

32,000

(644)
1,576

(1,357,080)
(36,445)
(172,775)

1,360,386
3,256
154,114

262,443
5,094
1,130,157
293,109
(1,131,388)
561,111
(855)
–
–
(1,732)
(49,449)

14,804
198,490

854,581

1,199,762
(247,393)
(284,322)
(2,666,477)
432,568
–
(20,000)
–
–
–
–

(1,585,862)

83,073
451,723

–
–
–

–
–
–

–
–
(220,707)
–
–
–
–
–
37,000
–
–

–
–

(151,455)

(19,819)
(24,060)
218,300
–
–
–
20,000
–
–
–
(37,000)

(1,357,080)
(74,538)
(172,775)

1,360,386
67,236
154,114

262,443
5,094
1,136,058
293,109
(1,131,388)
561,111
(855)
31,503
–
(1,732)
(50,043)

14,939
198,490

899,193

1,179,943
(271,453)
(68,022)
(2,769,477)
432,568
7,690
–
(3,723)
(483)
–
–

157,421

(1,492,957)

(4,020)
(3,182)

82,909
452,373

$

6,365

$

391

$

932

$

534,796

$

(7,202)

$

535,282

Condensed Consolidating Statement of Cash Flows

(In thousands)

Cash flows from operating activities:
Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Equity in undistributed losses of subsidiaries
Provision for loan losses
Amortization of intangibles
Depreciation and amortization of premises and equipment
Net accretion of discounts and amortization of premiums and deferred fees
Fair value adjustments of mortgage servicing rights
Fair value change in equity appreciation instrument
FDIC loss share expense
FDIC deposit insurance expense
Adjustments (expense) to indemnity reserves on loans sold
(Earnings) losses from investments under the equity method
Deferred income tax expense (benefit)
Loss (gain) on:

Disposition of premises and equipment
Early extinguishment of debt
Sale and valuation adjustment of investment securities
Sale of loans, including valuation adjustments on loans held for sale
Sale of processing and technology business, net of transaction costs

Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net disbursements on loans held-for-sale
Net (increase) decrease in:

Trading securities
Accrued income receivable
Other assets

Net increase (decrease) in:

Interest payable
Pension and other postretirement benefits obligations
Other liabilities

Total adjustments

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Net decrease (increase) in money market investments
Purchases of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from sale of investment securities:

Available for sale

Net (disbursements) repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Cash received related to business acquisitions
Net proceeds from sale of processing and technology business
Capital contribution to subsidiary
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of:

Premises and equipment
Foreclosed assets

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Net increase (decrease) in:

Deposits
Federal funds purchased and assets sold under agreements to repurchase
Other short–term borrowings

Payments of notes payable
Proceeds from issuance of notes payable
Proceeds from issuance of common stock
Net proceeds from issuance of depository shares
Dividends paid to parent company
Dividends paid
Treasury stock acquired
Capital contribution from parent

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period

Cash and due from banks at end of period

216

Year ended December 31, 2010

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries
and eliminations

Elimination
entries

Popular, Inc.
Consolidated

$137,401

$(352,645)

$(373,162)

$(275,303)

$1,001,110

$137,401

462,118
–
–
785
21,282
–
–
–
–
–
(3,402)
8,831

2
–
–
–
(616,186)
–
–
–

–
(1,390)
7,866

(528)
–
42,578

(78,044)

59,357

378,892
–
–
–
–
–
–
–
–
–
(21,807)
–

–
–
–
–
–
–
–
–

–
94
6,689

–
–
3,882

338,246
–
–
3
275
–
–
–
–
–
3,981
–

–
–
–
–
–
–
–
–

–
20
2,077

81
–
1,540

367,750

15,105

346,223

(26,939)

–
1,011,880
9,173
58,073
(275,786)
22,859
(42,555)
25,751
67,644
72,013
(2,354)
(23,392)

(1,814)
1,171
(3,992)
(15,874)
–
(307,629)
81,370
(735,095)

721,398
12,650
24,368

(29,201)
(11,060)
(64,861)

594,737

319,434

(1,179,256)
–
–
–
(650)
–
–
–
–
–
13,719
2,434

–
–
–
–
–
–
–
–

–
(59)
(44,559)

86
–
3,377

(1,204,908)

(203,798)

–
1,011,880
9,173
58,861
(254,879)
22,859
(42,555)
25,751
67,644
72,013
(9,863)
(12,127)

(1,812)
1,171
(3,992)
(15,874)
(616,186)
(307,629)
81,370
(735,095)

721,398
11,315
(3,559)

(29,562)
(11,060)
(13,484)

25,758

163,159

49

48,632

(23)

119,710

(48,627)

119,741

(35,000)
(52,796)
–

–
297,747
–

–
(366,450)
–
–
–
617,976
(1,345,000)
–
(890)

183
74

–
–
–

–
250
–

–
231
–
–
–
–
(745,000)
–
–

–
–

–
–
–

–
–
–

–
–
–
–
–
–
(745,000)
–
–

–
–

(746,192)
(44,392)
(64,591)

1,865,879
135,132
123,836

397,086
1,591,839
34,011
(256,406)
261,311
24,346
–
(1,041)
(65,965)

14,277
141,162

17,150
–
–

–
(245,000)
–

–
313,626
–
–
–
–
2,835,000
–
–

(764,042)
(97,188)
(64,591)

1,865,879
188,129
123,836

397,086
1,539,246
34,011
(256,406)
261,311
642,322
–
(1,041)
(66,855)

–
–

14,460
141,236

(884,107)

(695,887)

(745,023)

3,530,002

2,872,149

4,077,134

–
–
(24,225)
(250,000)
–
153
1,100,155
–
(310)
(559)
–

825,214

464
1,174

$1,638

–
–
–
–
–
–
–
(63,900)
–
–
745,000

681,100

318
300

$618

–
–
31,800
(4,000)
–
–
–
–
–
–
745,000

772,800

838
738

$1,576

(1,582,367)
(220,240)
636,696
(4,253,578)
110,870
–
–
(111,700)
–
–
1,345,000

(4,075,319)

(225,883)
677,606

$451,723

28,881
–
(287,375)
247,000
231
–
1,618
175,600
–
–
(2,835,000)

(1,553,486)
(220,240)
356,896
(4,260,578)
111,101
153
1,101,773
–
(310)
(559)
–

(2,669,045)

(4,465,250)

(694)
(2,488)

(224,957)
677,330

$(3,182)

$452,373

217 POPULAR, INC. 2011 ANNUAL REPORT

Condensed Consolidating Statement of Cash Flows

(In thousands)

Cash flows from operating activities:
Net loss

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Equity in undistributed losses of subsidiaries
Provision for loan losses
Amortization of intangibles
Depreciation and amortization of premises and equipment
Net accretion of discounts and amortization of premiums and deferred fees
Impairment losses long-lived assets
Fair value adjustments of mortgage servicing rights
FDIC deposit insurance expense
Adjustments (expense) to indemnity reserves on loans sold
(Earnings) losses from investments under the equity method
Earnings from changes in fair value related to instruments measured at fair value
Stock options expense
Deferred income tax benefit
Loss (gain) on:

Disposition of premises and equipment
Early extinguishment of debt
Sale and valuation adjustment of investment securities
Sale of loans, including valuation adjustments on loans held for sale
Sale of processing and technology business,

Acquisitions of loans held-for-sale
Proceeds from sale of loans held-for-sale
Net disbursements on loans held-for-sale
Net (increase) decrease in:

Trading securities
Accrued income receivable
Other assets

Net increase (decrease) in:

Interest payable
Pension and other postretirement benefits obligations
Other liabilities

Total adjustments

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Net decrease (increase) in money market investments
Purchases of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

Available-for-sale
Held-to-maturity
Other

Proceeds from sale of investment securities:

Available for sale
Other

Net repayments on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Net proceeds from sale of processing and
Capital contribution to subsidiary
Transfer of shares of a subsidiary
Mortgage servicing rights purchased
Acquisition of premises and equipment
Proceeds from sale of:

Premises and equipment
Foreclosed assets

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Net increase (decrease) in:

Deposits
Federal funds purchased and assets sold under agreements to repurchase
Other short-term borrowings

Payments of notes payable
Proceeds from issuance of notes payable
Dividends paid to parent company
Dividends paid
Issuance costs and fees paid on conversion of preferred stock and trust preferred securities
Treasury stock acquired
Capital contribution from parent

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period

Cash and due from banks at end of period

Year ended December 31, 2009

Popular, Inc.
Holding Co.

PIBI
Holding Co.

PNA
Holding Co.

All other
subsidiaries
and eliminations

Elimination
entries

Popular, Inc.
Consolidated

$(573,919)

$(744,628)

$(762,101)

$(545,481)

$2,052,210

$(573,919)

729,953
–
–
1,573
7,100
–
–
–
–
(692)
–
91
(1,850)

3,006
(26,439)
(3,008)
–

–
–
–

–
913
17,282

6,455
–
(1,797)

732,587

158,668

759,011
–
–
–
–
–
–
–
–
(16,558)
–
–
–

–
–
10,934
–

–
–
–

–
347
6,712

–
–
(77)

760,369

15,741

755,277
–
–
3
493
–
–
–
–
1,184
–
–
(2,601)

–
(51,898)
–
–

–
–
–

–
1,728
1,020

(11,605)
–
3,796

697,397

(64,704)

–
1,405,807
9,482
62,875
64,212
1,545
32,960
76,796
40,211
90
(1,674)
111
(100,308)

(3,418)
1,959
(229,530)
57

(354,472)
79,264
(1,129,554)

1,542,470
29,553
(271,464)

(44,485)
19,599
24,623

1,256,709

711,228

(2,244,241)
–
–
–
(271)
–
–
–
–
(1,719)
–
–
24,869

–
(1,922)
2,058
–

–
–
–

–
(1,940)
(13,306)

1,940
–
(9,708)

–
1,405,807
9,482
64,451
71,534
1,545
32,960
76,796
40,211
(17,695)
(1,674)
202
(79,890)

(412)
(78,300)
(219,546)
57

(354,472)
79,264
(1,129,554)

1,542,470
30,601
(259,756)

(47,695)
19,599
16,837

(2,244,240)

1,202,822

(192,030)

628,903

89,643

(15,530)

450,008

(208,181)

(524,083)

(208,143)

(249,603)
(51,539)
–

14,226
27,318
–

426,666
–
717,578
–
–

(940,000)
(42,971)
–
(310)

14,943
47

5,998

–
(44,471)
(18,544)
–
–
–
(71,438)
(29,024)
(17)
–

(163,494)

1,172
2

$1,174

–
–
–

–
–
–

–
–
–
–
–

(940,000)
–
–
–

–
–

–
–
–

–
–
–

–
–
12,800
–
–

(590,000)
42,971
–
–

–
–

(4,135,171)
(8,023)
(38,913)

1,617,381
114,248
75,101

3,590,131
52,294
1,065,164
328,170
(72,675)

–
–
(1,364)
(69,330)

25,300
149,900

191,484
–
–

(4,193,290)
(59,562)
(38,913)

–
–
–

(191,484)
–
(741,795)
–
–

2,470,000
–
–
–

–
–

1,631,607
141,566
75,101

3,825,313
52,294
1,053,747
328,170
(72,675)

–
–
(1,364)
(69,640)

40,243
149,947

(955,530)

(84,221)

2,484,032

1,204,122

2,654,401

–
–
–
–
–
–
–
–
–
940,000

940,000

211
89

$300

–
–
200
(798,880)
675
–
–
–
–
940,000

141,995

(6,930)
7,668

$738

(2,058,240)
(964,027)
(721,059)
(14,197)
60,000
(188,125)
–
–
–
590,000

(3,295,648)

(100,388)
777,994

$677,606

432,642
89,680
741,795
–
–
188,125
–
3,944
–
(2,470,000)

(1,625,598)
(918,818)
2,392
(813,077)
60,675
–
(71,438)
(25,080)
(17)
–

(1,013,814)

(3,390,961)

(1,722)
(766)

(107,657)
784,987

$(2,488)

$677,330

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P.O Box 362708

San Juan, Puerto Rico 00936-2708