Business combination

6 Months Ended

Jun. 30, 2011

Business combination

Note 3 – Business combination

Westernbank FDIC-assisted transaction

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

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

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

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

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

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

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

[b] Amounts are presented as previously reported.

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

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

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

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

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

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

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