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EX-3.1 - EX-3.1 - POPULAR INCg20716exv3w1.htm
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EX-31.1 - EX-31.1 - POPULAR INCg20716exv31w1.htm
EX-32.2 - EX-32.2 - POPULAR INCg20716exv32w2.htm
EX-12.1 - EX-12.1 - POPULAR INCg20716exv12w1.htm
EX-31.2 - EX-31.2 - POPULAR INCg20716exv31w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2009
Commission File Number: 000-34084
POPULAR, INC.
(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0667416
     
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer Identification Number)
     
Popular Center Building    
209 Muñoz Rivera Avenue, Hato Rey    
San Juan, Puerto Rico   00918
     
(Address of principal executive offices)   (Zip code)
(787) 765-9800
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     þ Yes           o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     o Yes           o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Small reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     o Yes           þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $0.01 par value 639,540,105 shares outstanding as of November 5, 2009.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page
Part I — Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    8  
 
       
    9  
 
       
    11  
 
       
    97  
 
       
    148  
 
       
    154  
 
       
       
 
       
    154  
 
       
    155  
 
       
    165  
 
       
    165  
 
       
    166  
 EX-3.1
 EX-12.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2


Table of Contents

Forward-Looking Information
The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.’s (the ”Corporation”) financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.
Various factors, some of which are beyond Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:
    the rate of growth in the economy and employment levels, as well as general business and economic conditions;
    changes in interest rates, as well as the magnitude of such changes;
    the fiscal and monetary policies of the federal government and its agencies;
    changes in federal bank regulatory and supervisory policies, including required levels of capital;
    the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;
    the performance of the stock and bond markets;
    competition in the financial services industry;
    possible legislative, tax or regulatory changes; and
    difficulties in combining the operations of acquired entities.
Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.
Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.
All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

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ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
                         
    September 30,   December 31,   September 30,
(In thousands, except share information)   2009   2008   2008
 
ASSETS
                       
Cash and due from banks
  $ 606,861     $ 784,987     $ 1,183,997  
 
Money market investments:
                       
Federal funds sold
    140,635       214,990       173,330  
Securities purchased under agreements to resell
    325,178       304,228       121,613  
Time deposits with other banks
    633,010       275,436       14,554  
 
 
    1,098,823       794,654       309,497  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    2,432,720       3,031,137       3,256,348  
Other investment securities available-for-sale
    4,560,571       4,893,350       4,312,394  
Investment securities held-to-maturity, at amortized cost (fair value as of September 30, 2009 - $210,913; December 31, 2008 - $290,134; September 30, 2008 - $716,430)
    212,950       294,747       719,832  
Other investment securities, at lower of cost or realizable value (realizable value as of September 30, 2009 - $176,286; December 31, 2008 - $255,830; September 30, 2008 - $273,836)
    174,943       217,667       229,158  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    386,478       562,795       390,181  
Other trading securities
    59,890       83,108       54,217  
Loans held-for-sale measured at lower of cost or fair value
    75,447       536,058       245,134  
 
Loans held-in-portfolio
    24,512,966       25,857,237       26,519,805  
Less — Unearned income
    116,897       124,364       183,770  
         Allowance for loan losses
    1,207,401       882,807       726,480  
 
 
    23,188,668       24,850,066       25,609,555  
 
Premises and equipment, net
    589,592       620,807       620,469  
Other real estate
    129,485       89,721       72,605  
Accrued income receivable
    131,745       156,227       197,549  
Servicing assets (at fair value on September 30, 2009 - $180,335; December 31, 2008 - $176,034; September 30, 2008 - $127,827)
    183,376       180,306       132,484  
Other assets (See Note 9)
    1,153,680       1,115,597       1,412,219  
Goodwill
    606,508       605,792       608,172  
Other intangible assets
    46,067       53,163       67,662  
Assets from discontinued operations (See Note 3)
          12,587       968,669  
 
 
  $ 35,637,804     $ 38,882,769     $ 40,390,142  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,281,817     $ 4,293,553     $ 4,065,720  
Interest bearing
    22,101,081       23,256,652       23,845,677  
 
 
    26,382,898       27,550,205       27,911,397  
Federal funds purchased and assets sold under agreements to repurchase
    2,807,891       3,551,608       3,730,039  
Other short-term borrowings
    3,077       4,934       507,011  
Notes payable
    2,649,821       3,386,763       4,242,487  
Other liabilities
    1,051,661       1,096,338       811,362  
Liabilities from discontinued operations (See Note 3)
          24,557       180,373  
 
 
    32,895,348       35,614,405       37,382,669  
 
Commitments and contingencies (See Note 19)
                       
 
Stockholders’ equity:
                       
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding as of September 30, 2009 (December 31, 2008 - 24,410,000; September 30, 2008 - 23,475,000) (aggregate liquidation preference value September 30, 2009 - $50,160; December 31, 2008 - $1,521,875; September 30, 2008 - $586,875)(See Notes 15 and 17)
    50,160       1,483,525       586,875  
Common stock, $0.01 par value as of September 30, 2009 ($6.00 as of December 31, 2008 and September 30, 2008); 700,000,000 shares authorized as of September 30, 2009 (470,000,000 as of December 31, 2008 and September 30, 2008); 639,544,895 shares issued (December 31, 2008 - 295,632,080; September 30, 2008 - 295,335,063) and 639,541,515 outstanding (December 31, 2008 - 282,004,713; September 30, 2008 - 281,708,260)
    6,395       1,773,792       1,772,010  
Surplus
    2,794,660       621,879       564,021  
(Accumulated deficit) retained earnings
    (69,525 )     (374,488 )     384,062  
Accumulated other comprehensive loss, net of tax of ($57,302) (December 31, 2008 - ($24,771); September 30, 2008 - ($22,374))
    (39,223 )     (28,829 )     (91,983 )
Treasury stock — at cost, 3,380 shares as of September 30, 2009 (December 31, 2008 - 13,627,367 shares; September 30, 2008 - 13,626,803 shares)
    (11 )     (207,515 )     (207,512 )
 
 
    2,742,456       3,268,364       3,007,473  
 
 
  $ 35,637,804     $ 38,882,769     $ 40,390,142  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                 
            Quarter ended             Nine months ended  
           September 30,            September 30,  
(In thousands, except per share information)   2009     2008     2009     2008  
 
INTEREST INCOME:
                               
Loans
  $ 371,366     $ 457,905     $ 1,155,378     $ 1,421,937  
Money market investments
    1,510       3,447       7,024       13,651  
Investment securities
    74,360       84,790       223,661       261,649  
Trading account securities
    7,227       9,339       28,638       35,344  
 
 
    454,463       555,481       1,414,701       1,732,581  
 
INTEREST EXPENSE:
                               
Deposits
    118,941       165,611       395,432       528,596  
Short-term borrowings
    16,142       37,233       53,476       137,824  
Long-term debt
    42,991       28,355       133,858       75,823  
 
 
    178,074       231,199       582,766       742,243  
 
Net interest income
    276,389       324,282       831,935       990,338  
Provision for loan losses
    331,063       252,160       1,053,036       602,561  
 
Net interest income after provision for loan losses
    (54,674 )     72,122       (221,101 )     387,777  
Service charges on deposit accounts
    54,208       52,433       161,412       155,319  
Other service fees (See Note 20)
    97,614       95,302       298,584       306,649  
Net (loss) gain on sale and valuation adjustments of investment securities
    (9,059 )     (9,132 )     220,792       69,430  
Trading account profit
    7,579       6,669       31,241       38,547  
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale
    (8,728 )     6,522       (35,994 )     25,696  
Other operating income
    18,430       36,134       44,579       92,836  
 
 
    105,370       260,050       499,513       1,076,254  
 
OPERATING EXPENSES:
                               
Personnel costs:
                               
Salaries
    102,822       118,948       315,224       360,963  
Pension and other benefits
    27,725       29,282       96,820       98,552  
 
 
    130,547       148,230       412,044       459,515  
Net occupancy expenses
    28,269       26,510       80,734       81,218  
Equipment expenses
    24,983       26,305       76,289       84,312  
Other taxes
    13,109       13,301       39,369       39,905  
Professional fees
    28,694       31,780       80,643       88,964  
Communications
    11,902       12,574       36,115       38,137  
Business promotion
    8,905       16,216       26,761       51,064  
Printing and supplies
    2,857       3,269       8,664       10,763  
FDIC deposit insurance
    16,506       4,625       61,954       9,237  
Gain on early extinguishment of debt
    (79,304 )           (79,304 )      
Other operating expenses
    31,753       36,139       104,955       104,485  
Amortization of intangibles
    2,379       3,966       7,218       8,948  
 
 
    220,600       322,915       855,442       976,548  
 
(Loss) income from continuing operations before income tax
    (115,230 )     (62,865 )     (355,929 )     99,706  
Income tax expense (benefit)
    6,331       148,308       (15,209 )     152,467  
 
Loss from continuing operations
    (121,561 )     (211,173 )     (340,720 )     (52,761 )
Loss from discontinued operations, net of income tax
    (3,427 )     (457,370 )     (19,972 )     (488,242 )
 
NET LOSS
  $ (124,988 )   $ (668,543 )   $ (360,692 )   $ (541,003 )
 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK (See Note 18)
  $ 595,614     $ (679,772 )   $ 310,604     $ (561,213 )
 
EARNINGS (LOSSES) PER COMMON SHARE — BASIC AND DILUTED: (See Note 18)
                               
Earnings (losses) from continuing operations
  $ 1.41     $ (0.79 )   $ 1.00     $ (0.27 )
Losses from discontinued operations
    (0.01 )     (1.63 )     (0.06 )     (1.73 )
 
Net earnings (losses) per common share
  $ 1.40     $ (2.42 )   $ 0.94     $ (2.00 )
 
DIVIDENDS DECLARED PER COMMON SHARE
        $ 0.08     $ 0.02     $ 0.40  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Nine months ended September 30,
(In thousands)   2009   2008
 
Preferred stock:
               
Balance at beginning of year
  $ 1,483,525     $ 186,875  
Issuance of preferred stock
          400,000  
Exchange of Series A and B preferred stock
    (536,715 )      
Exchange of Series C preferred stock
    (901,165 )      
Accretion of Series C preferred stock discount
    4,515        
 
Balance at end of period
    50,160       586,875  
 
Common stock:
               
Balance at beginning of year
    1,773,792       1,761,908  
Common stock issued in exchange of Series A and B preferred stock
    1,717        
Common stock issued in connection with early extinguishment of debt (exchange of trust preferred securities for common stock)
    1,858        
Common stock issued under the Dividend Reinvestment Plan
          10,102  
Treasury stock retired
    (81,583 )      
Change in par value (from $6.00 to $0.01)
    (1,689,389 )      
 
Balance at end of period
    6,395       1,772,010  
 
Surplus:
               
Balance at beginning of year
    621,879       568,184  
Common stock issued in exchange of Series A and B preferred stock
    291,974        
Common stock issued in connection with early extinguishment of debt (exchange of trust preferred securities for common stock)
    315,794        
Issuance costs related to exchange of Series A and B preferred stock and trust preferred securities
    (11,618 )      
Issuance costs of Series A and B preferred stock
    12,636        
Common stock issued under the Dividend Reinvestment Plan
          5,072  
Issuance cost of preferred stock
          (10,065 )
Stock options expense on unexercised options, net of forfeitures
    162       830  
Treasury stock retired
    (125,556 )      
Change in par value (from $6.00 to $0.01)
    1,689,389        
 
Balance at end of period
    2,794,660       564,021  
 
(Accumulated deficit) retained earnings:
               
Balance at beginning of year
    (374,488 )     1,319,467  
Net loss
    (360,692 )     (541,003 )
Excess of carrying amount of Series A and B preferred stock exchanged over fair value of new shares of common stock
    230,388        
Excess of carrying amount of Series C preferred stock exchanged over fair value of new trust preferred securities
    485,280        
Cumulative effect of accounting change — adoption of fair value option
          (261,831 )
Cash dividends declared on common stock
    (5,641 )     (112,361 )
Cash dividends declared on preferred stock
    (39,857 )     (20,210 )
Accretion of preferred stock discount — 2008 Series C preferred stock
    (4,515 )      
 
Balance at end of period
    (69,525 )     384,062  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (28,829 )     (46,812 )
Other comprehensive loss, net of tax
    (10,394 )     (45,171 )
 
Balance at end of period
    (39,223 )     (91,983 )
 

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Table of Contents

                 
    Nine months ended September 30,
(In thousands)   2009   2008
 
Treasury stock — at cost:
               
Balance at beginning of year
    (207,515 )     (207,740 )
Purchase of common stock
    (13 )     (358 )
Reissuance of common stock
    378       586  
Treasury stock retired
    207,139        
 
Balance at end of period
    (11 )     (207,512 )
 
Total stockholders’ equity
  $ 2,742,456     $ 3,007,473  
 
Disclosure of changes in number of shares:
                         
    September 30,   December 31,   September 30,
    2009   2008   2008
 
Preferred Stock:
                       
Balance at beginning of year
    24,410,000       7,475,000       7,475,000  
Shares issued — (2008 Series B)
          16,000,000       16,000,000  
Shares issued — (2008 Series C)
          935,000        
Preferred stock — Series A and B exchanged for common stock
    (21,468,609 )            
Preferred stock — Series C exchanged for trust preferred securities
    (935,000 )            
 
Balance at end of period
    2,006,391       24,410,000       23,475,000  
 
Common Stock — Issued:
                       
Balance at beginning of year
    295,632,080       293,651,398       293,651,398  
Issued under the Dividend Reinvestment Plan
          1,980,682       1,683,665  
Treasury stock retired
    (13,597,261 )            
Shares issued in exchange of Series A and B preferred stock and early extinguishment of debt (exchange of trust preferred securities for common stock)
    357,510,076              
 
Balance at end of period
    639,544,895       295,632,080       295,335,063  
 
Treasury stock
    (3,380 )     (13,627,367 )     (13,626,803 )
 
Common Stock — outstanding
    639,541,515       282,004,713       281,708,260  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

7


Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands)   2009   2008   2009   2008
 
Net loss
  $ (124,988 )   $ (668,543 )   $ (360,692 )   $ (541,003 )
 
Other comprehensive income (loss) before tax:
                               
Foreign currency translation adjustment
    (1,360 )     (1,690 )     (2,117 )     (2,882 )
Adjustment of pension and postretirement benefit plans
    3,128       (36 )     66,223       (110 )
Unrealized holding gains (losses) on securities available-for-sale arising during the period
    82,934       (13,611 )     63,535       (36,048 )
Reclassification adjustment for losses (gains) included in net (loss) income
    3,688       11,704       (173,868 )     (14,669 )
Unrealized net (losses) gains on cash flow hedges
    (995 )     947       (2,618 )     (1,160 )
Reclassification adjustment for losses included in net (loss) income
    37       1,169       5,920       2,762  
 
 
    87,432       (1,517 )     (42,925 )     (52,107 )
Income tax (expense) benefit
    (9,955 )     (18 )     32,531       6,936  
 
Total other comprehensive income (loss), net of tax
    77,477       (1,535 )     (10,394 )     (45,171 )
 
Comprehensive loss, net of tax
  $ (47,511 )   $ (670,078 )   $ (371,086 )   $ (586,174 )
 
Tax Effects Allocated to Each Component of Other Comprehensive (Loss) Income:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands)   2009   2008   2009   2008
 
Underfunding of pension and postretirement benefit plans
  $ (1,272 )         $ (24,055 )      
Unrealized holding gains (losses) on securities available-for-sale arising during the period
    (9,137 )   $ 1,694       (5,844 )   $ 5,374  
Reclassification adjustment for losses (gains) included in net (loss) income
    81       (959 )     62,790       2,165  
Unrealized net (losses) gains on cash flows hedges
    388       (297 )     1,021       478  
Reclassification adjustment for losses included in net (loss) income
    (15 )     (456 )     (1,381 )     (1,081 )
 
Income tax (expense) benefit
  $ (9,955 )   $ (18 )   $ 32,531     $ 6,936  
 
Disclosure of accumulated other comprehensive loss:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Foreign currency translation adjustment
  $ (41,185 )   $ (39,068 )   $ (37,470 )
 
Underfunding of pension and postretirement benefit plans
    (193,986 )     (260,209 )     (51,249 )
Tax effect
    75,586       99,641       20,108  
 
Net of tax amount
    (118,400 )     (160,568 )     (31,141 )
 
Unrealized gains (losses) on securities available-for-sale
    139,641       249,974       (23,625 )
Tax effect
    (18,672 )     (75,618 )     1,589  
 
Net of tax amount
    120,969       174,356       (22,036 )
 
Unrealized losses on cash flows hedges
    (995 )     (4,297 )     (2,013 )
Tax effect
    388       748       677  
 
Net of tax amount
    (607 )     (3,549 )     (1,336 )
 
 
                       
Accumulated other comprehensive loss, net of tax
  $ (39,223 )   $ (28,829 )   $ (91,983 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Nine months ended September 30,
(In thousands)   2009   2008
 
Cash flows from operating activities:
               
Net loss
  $ (360,692 )   $ (541,003 )
 
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    49,033       55,233  
Provision for loan losses
    1,053,036       621,552  
Amortization of intangibles
    7,218       8,948  
Amortization and fair value adjustments of servicing assets
    17,598       53,679  
Amortization of discount on junior subordinated debentures
    1,948        
Net gain on sale and valuation adjustments of investment securities
    (220,792 )     (64,010 )
(Gains) losses from changes in fair value related to instruments measured at fair value pursuant to the fair value option
    (1,674 )     179,482  
Net loss (gain) on disposition of premises and equipment
    1,696       (23,643 )
Net loss on sale of loans and valuation adjustments on loans held-for-sale
    41,202       54,527  
Gain on early extinguishment of debt
    (79,304 )      
Net amortization of premiums and accretion of discounts on investments
    13,169       16,034  
Net amortization of premiums and deferred loan origination fees and costs
    35,496       40,650  
Fair value adjustment of other assets held-for-sale
          103,702  
Earnings from investments under the equity method
    (14,307 )     (6,899 )
Stock options expense
    162       830  
Deferred income taxes, net of valuation
    (76,444 )     72,261  
Net disbursements on loans held-for-sale
    (919,719 )     (2,000,449 )
Acquisitions of loans held-for-sale
    (280,243 )     (268,718 )
Proceeds from sale of loans held-for-sale
    65,258       1,289,738  
Net decrease in trading securities
    1,302,093       1,604,345  
Net decrease in accrued income receivable
    24,935       8,194  
Net decrease (increase) in other assets
    26,935       (245,990 )
Net decrease in interest payable
    (57,763 )     (49,180 )
Net increase in postretirement benefit obligation
    3,652       1,810  
Net increase (decrease) in other liabilities
    65,431       (35,120 )
 
Total adjustments
    1,058,616       1,416,976  
 
Net cash provided by operating activities
    697,924       875,973  
 
Cash flows from investing activities:
               
Net (increase) decrease in money market investments
    (304,169 )     697,215  
Purchases of investment securities:
               
Available-for-sale
    (4,105,915 )     (3,875,390 )
Held-to-maturity
    (54,562 )     (4,958,286 )
Other
    (36,601 )     (166,641 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    1,261,801       2,377,740  
Held-to-maturity
    136,535       4,724,818  
Other
    62,480       154,067  
Proceeds from sale of investment securities available-for-sale
    3,825,502       2,444,509  
Proceeds from sale of other investment securities
    52,294       49,341  
Net repayments (disbursements) on loans
    666,618       (976,109 )
Proceeds from sale of loans
    325,414       1,984,860  
Acquisition of loan portfolios
    (37,965 )     (4,505 )
Mortgage servicing rights purchased
    (1,029 )     (3,628 )
Acquisition of premises and equipment
    (55,625 )     (112,196 )
Proceeds from sale of premises and equipment
    36,105       49,366  
Proceeds from sale of foreclosed assets
    107,720       87,280  
 
Net cash provided by investing activities
    1,878,603       2,472,441  
 

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    Nine months ended September 30,
(In thousands)   2009   2008
 
Cash flows from financing activities:
               
Net decrease in deposits
    (1,167,108 )     (400,901 )
Net decrease in federal funds purchased and assets sold under agreements to repurchase
    (743,717 )     (1,707,225 )
Net decrease in other short-term borrowings
    (1,857 )     (994,969 )
Payments of notes payable
    (807,002 )     (1,312,938 )
Proceeds from issuance of notes payable
    61,100       1,182,917  
Dividends paid
    (71,438 )     (154,877 )
Proceeds from issuance of common stock
          15,174  
Proceeds from issuance of preferred stock
          389,935  
Issuance costs and fees paid on exchange of preferred stock and trust preferred securities
    (24,618 )      
Treasury stock acquired
    (13 )     (358 )
 
Net cash used in financing activities
    (2,754,653 )     (2,983,242 )
 
Net (decrease) increase in cash and due from banks
    (178,126 )     365,172  
Cash and due from banks at beginning of period
    784,987       818,825  
 
Cash and due from banks at end of period
  $ 606,861     $ 1,183,997  
 
Note: The Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 include the cash flows from operating, investing and financing activities associated with discontinued operations.
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of Operations and Basis of Presentation
Note 2 — Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards
Note 3 — Discontinued Operations
Note 4 — Restrictions on Cash and Due from Banks and Certain Securities
Note 5 — Pledged Assets
Note 6 — Investment Securities Available-For-Sale
Note 7 — Investment Securities Held-to-Maturity
Note 8 — Mortgage Servicing Rights
Note 9 — Other Assets
Note 10 — Derivative Instruments and Hedging
Note 11 — Goodwill and Other Intangible Assets
Note 12 — Fair Value Measurement
Note 13 — Fair Value of Financial Instruments
Note 14 — Borrowings
Note 15 — Exchange Offers
Note 16 — Trust Preferred Securities
Note 17 — Stockholders’ Equity
Note 18 — Earnings (Losses) per Common Share
Note 19 — Commitments, Contingencies and Guarantees
Note 20 — Other Service Fees
Note 21 — Pension and Postretirement Benefits
Note 22 — Restructuring Plans
Note 23 — Income Taxes
Note 24 — Stock-Based Compensation
Note 25 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
Note 26 — Segment Reporting
Note 27 — Subsequent Event
Note 28 — Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities

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Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of Operations and Basis of Presentation
Popular, Inc. (the “Corporation” or “Popular”) 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 offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA is a community bank providing a broad range of financial services and products 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. The Corporation, through its subsidiary EVERTEC, provides transaction processing services throughout the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 26 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.
The statement of condition data as of December 31, 2008 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the statements presented as of September 30, 2009, December 31, 2008 and September 30, 2008 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2008, included in the Corporation’s 2008 Annual Report. The Corporation’s Form 10-K filed on March 2, 2009 incorporates by reference the 2008 Annual Report.
Note 2 — Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting Standards
The FASB Accounting Standards Codification (“ASC”)
Effective July 1, 2009, the ASC became the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the Financial Accounting Standards Board (“FASB”) to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants. The ASC superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC is non-authoritative. The Corporation’s policies were not affected by the conversion to ASC. However, references to specific accounting guidance in the notes of the Corporation’s financial statements have been changed to the appropriate section of the ASC.

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Business Combinations (ASC Topic 805) (formerly SFAS No. 141-R)
In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The Corporation is required to apply this guidance to all business combinations completed on or after January 1, 2009. For business combinations in which the acquisition date was before the effective date, these provisions will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. This guidance on business combinations has not had a material effect on the consolidated financial statements of the Corporation as of September 30, 2009.
Noncontrolling Interests in Consolidated Financial Statements (ASC Subtopic 810-10) (formerly SFAS No. 160)
In December 2007, the FASB issued guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires entities to classify noncontrolling interests as a component of stockholders’ equity on the consolidated financial statements and requires subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, it requires entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance was adopted by the Corporation on January 1, 2009. The adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities (ASC Subtopic 815-10) (formerly SFAS No. 161)
In March 2008, the FASB issued an amendment for disclosures about derivative instruments and hedging activities. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how the Corporation accounts for these instruments. The standard was adopted by the Corporation in the first quarter of 2009. Refer to Note 10 to the consolidated financial statements.
Subsequent Events (ASC Subtopic 855-10) (formerly SFAS No. 165)
In May 2009, the FASB issued guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. In connection with this Quarterly Report on Form 10-Q, the Corporation evaluated subsequent events through November 9, 2009. Refer to Note 27 for related disclosures.
Transfers of Financial Assets, SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS No. 166”) (This statement has not yet been incorporated into the ASC)
In June 2009, the FASB issued SFAS No. 166, a revision of SFAS No. 140, which requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity” (“QSPEs”), changes the requirements for derecognizing financial assets, and requires additional disclosures. It also requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated in accordance with SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. Management is currently evaluating the requirements of this pronouncement and has not yet determined the impact, if any, which the adoption of this standard will have on the Corporation’s consolidated financial statements.

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Variable Interest Entities, SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”) (This statement has not yet been incorporated into the ASC)
SFAS No. 167, issued in June 2009, amends the consolidating guidance applicable to variable interest entities and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The amendments to the consolidated guidance affect all entities currently within the scope of FIN 46(R), as well as qualifying special-purpose entities (“QSPEs”) that are currently excluded from the scope of FIN 46(R). SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 will be effective as of the beginning of the first fiscal year that begins after November 15, 2009. Management is currently evaluating the requirements of this pronouncement and has not yet determined the impact, if any, which the adoption of this standard will have on the Corporation’s consolidated financial statements.
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (ASC Subtopic 860-10) (formerly FASB Staff Position FAS 140-3)
The FASB provided guidance in February 2008 on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate de-linked transactions. The guidance requires the recognition of the transfer and the repurchase agreement as one linked transaction, unless all of the following criteria are met: (1) the initial transfer and the repurchase financing are not contractually contingent on one another; (2) the initial transferor has full recourse upon default, and the repurchase agreement’s price is fixed and not at fair value; (3) the financial asset is readily obtainable in the marketplace and the transfer and repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing is before the maturity of the financial asset. The scope of this accounting guidance is limited to transfers and subsequent repurchase financings that are entered into contemporaneously or in contemplation of one another. The Corporation adopted the statement on January 1, 2009. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements for 2009.
Determination of the Useful Life of Intangible Assets (ASC Subtopic 350-30) (formerly FASB Staff Position FAS 142-3)
In April 2008, the FASB amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. In developing these assumptions, an entity should consider its own historical experience in renewing or extending similar arrangements adjusted for entity specific factors or, in the absence of that experience, the assumptions that market participants would use about renewals or extensions adjusted for the entity specific factors. This guidance shall be applied prospectively to intangible assets acquired after the effective date of January 1, 2009. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.
Equity Method Investment Accounting Considerations (ASC Subtopic 323-10) (formerly EITF 08-6)
This guidance clarifies the accounting for certain transactions and impairment considerations involving equity method investments. It applies to all investments accounted for under the equity method and provides guidance on the following: (1) how the initial carrying value of an equity method investment should be determined; (2) how an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed; (3) how an equity method investee’s issuance of shares should be accounted for; and (4) how to account for a change in an investment from the equity method to the cost method. The adoption of this guidance in January 2009 did not have a material impact on the Corporation’s consolidated financial statements.

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Employers’ Disclosures about Postretirement Benefit Plan Assets (ASC Subtopic 715-20) (formerly FASB Staff Position FAS 132(R)-1)
This guidance requires additional disclosures in the financial statements of employers who are subject to the disclosure requirements of postretirement benefit plan assets as follows: (a) the investment allocation decision making process, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the fair value of each major category of plan assets, disclosed separately for pension plans and other postretirement benefit plans; (c) the inputs and valuation techniques used to measure the fair value of plan assets, including the level within the fair value hierarchy in which the fair value measurements in their entirety fall; and (d) significant concentrations of risk within plan assets. Additional detailed information is required for each category above. Upon initial application, the provisions of this guidance are not required for earlier periods that are presented for comparative purposes. The Corporation will apply the new disclosure requirements commencing with the annual financial statements for the year ended December 31, 2009. This guidance impacts disclosures only and will not have an effect on the Corporation’s consolidated statements of condition or results of operations.
Recognition and Presentation of Other-Than-Temporary Impairments (ASC Subtopic 320-10) (formerly FASB Staff Position FAS 115-2 and FAS 124-2)
In April 2009, the FASB issued this guidance which is intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary impairment event. It specifically amends the other-than-temporary impairment guidance for debt securities. The new guidance improves the presentation and disclosure of other-than-temporary impairment on investment securities and changes the calculation of the other-than-temporary impairment recognized in earnings in the financial statements. However, it does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.
For debt securities, an entity is required to assess 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 must be 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 accounting guidance changed the presentation and amount of the other-than-temporary impairment recognized in the statement of operations. In these instances, 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. Previously, in all cases, if an impairment was determined to be other-than-temporary, an impairment loss was recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date of the reporting period for which the assessment was made.
This guidance was effective and is to be applied prospectively for financial statements issued for interim and annual reporting periods ending after June 15, 2009. At adoption an entity was required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive loss if the entity did not intend to sell the security and it was not more likely than not that the entity would be required to sell the security before the anticipated recovery of its amortized cost basis.
The Corporation adopted this guidance for interim and annual reporting periods commencing with the quarter ended June 30, 2009. The adoption of this new accounting guidance in the second quarter of 2009 did not result in a cumulative-effect adjustment as of the beginning of the period of adoption (April 1, 2009) since there were no previously recognized other-than-temporary impairments related to outstanding debt securities. Refer to Notes 6 and 7 for disclosures as of September 30, 2009.

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Interim Disclosures about Fair Value of Financial Instruments (ASC Subtopic 825-10) (formerly FASB Staff Position FAS 107-1 and APB 28-1)
In April 2009, the FASB required providing disclosures on a quarterly basis about the fair value of financial instruments that are not currently reflected on the statement of condition at fair value. Originally the fair value for these assets and liabilities was only required for year-end disclosures. The Corporation adopted this guidance effective with the financial statement disclosures for the quarter ended June 30, 2009. This guidance only impacts disclosure requirements and therefore did not have an impact on the Corporation’s financial condition or results of operations. Refer to Note 13 to the consolidated financial statements for required disclosures.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly (ASC Subtopic 820-10) (formerly FASB Staff Position FAS 157-4)
This guidance, issued in April 2009, provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate that a transaction is not orderly. This guidance reaffirms the need to use judgment to ascertain if an active market has become inactive and in determining fair values when markets have become inactive. Additionally, it also emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.
FASB Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (ASC Topic 820)—Measuring Liabilities at Fair Value
FASB Accounting Standards Update 2009-05, issued on August 2009, includes amendments to ASC Subtopic 820-10, Fair Value Measurements and Disclosures, for the fair value measurement of liabilities and provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: a valuation technique that uses (a) the quoted price of the identical liability when traded as an asset, (b) quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique that is consistent with the principles of ASC Topic 820. Examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into an identical liability. The adoption of this guidance was effective upon issuance and did not have a material impact on the Corporation’s consolidated financial statements.
Note 3 — Discontinued Operations
As disclosed in the 2008 Annual Report, the Corporation discontinued the operations of Popular Financial Holdings (“PFH”) in 2008 by selling substantially all assets and closing service branches and other units.
For financial reporting purposes, the results of the discontinued operations of PFH are presented as “Assets / Liabilities from discontinued operations” in the consolidated statements of condition as of December 31, 2008 and September 30, 2008 and as “Loss from discontinued operations, net of tax” in the consolidated statements of operations for all periods presented.
Total assets of the PFH discontinued operations amounted to $13 million as of December 31, 2008 and $969 million as of September 30, 2008. Total assets of the PFH discontinued operations as of September 30, 2008 principally consisted of $626 million in loans, of which $584 million were accounted at fair value pursuant to the fair value option, $37 million in mortgage servicing rights, $280 million in servicing advances and related assets, and $26 million in residual interests and other assets. As disclosed in the 2008 Annual Report, the Corporation substantially sold these loan portfolios in late 2008. As of September 30, 2008, all loans and borrowings recognized at fair value pursuant to the fair value option pertained to the discontinued operations of PFH.

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The following table provides financial information for the discontinued operations for the quarter and nine months ended September 30, 2009 and 2008.
                                 
    Quarter ended   Nine months ended
 
    September 30,   September 30,   September 30,   September 30,
($ in millions)   2009   2008   2009   2008
 
Net interest income
        $ 1.6     $ 0.9     $ 30.7  
Provision for loan losses
          10.5             19.0  
Non-interest income (loss)
  $ 0.5       (256.4 )     (3.2 )     (255.4 )
Operating expenses
    3.8       126.3       10.9       193.0  
Loss on disposition
          (53.5 )           (53.5 )
 
Pre-tax loss from discontinued operations
  $ (3.3 )   $ (445.1 )   $ (13.2 )   $ (490.2 )
Income tax expense (benefit)
    0.1       12.2       6.8       (2.0 )
 
Loss from discontinued operations, net of tax
  $ (3.4 )   $ (457.3 )   $ (20.0 )   $ (488.2 )
 
Non-interest loss for the nine months ended September 30, 2009 represented primarily increases in indemnities and representation and warranty reserves associated to former sales agreements. The operating expenses related principally to personnel costs for employees under transition, attorneys’ fees and collection services.
The net loss for the discontinued operations reported for the third quarter of 2008 included write-downs of assets held-for-sale to fair value, losses on the sale of loans, restructuring charges and the recording of a valuation allowance on deferred tax assets of $171.2 million.
Management implemented a series of actions in 2008 that led to the discontinuance of the PFH operations. These actions included two major restructuring plans, which are described in the 2008 Annual Report. These are the “PFH Discontinuance Restructuring Plan” and the “PFH Branch Network Restructuring Plan”. The PFH Discontinuance Restructuring Plan commenced in the second half of 2008 and included the elimination of substantially all employment positions and termination of contracts with the objective of discontinuing PFH’s operations. The PFH Branch Network Restructuring Plan resulted in the sale of a substantial portion of PFH’s loan portfolio in the first quarter of 2008 and the closure of Equity One’s consumer service branches, which represented, at the time, the only significant channel for PFH to continue originating loans.
PFH continues to employ 9 full-time equivalent employees (“FTEs”) that are primarily retained for a transition period. Additional costs could be incurred during 2009 associated to leased premises that are still occupied and the lease contract has not been terminated. These costs are not expected to be significant to the Corporation’s results of operations.
PFH Discontinuance Restructuring Plan
During the quarter and nine months ended September 30, 2009, the PFH Discontinuance Restructuring Plan resulted in charges, on a pre-tax basis, broken down as follows:
                 
    Quarter ended     Nine months ended  
(In thousands)   September 30, 2009     September 30, 2009  
 
Personnel costs
        $ 981 (a)
Professional fees
  $ 100       100  
Other operating expenses
    200       200  
 
Total restructuring costs
  $ 300     $ 1,281  
 
(a)   Severance, retention bonuses and other benefits

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As of September 30, 2009, the PFH Discontinuance Restructuring Plan has resulted in combined charges for 2008 and 2009, broken down as follows:
                         
    Impairments on   Restructuring    
(In thousands)   long-lived assets   costs   Total
 
Year ended December 31, 2008
  $ 3,916     $ 4,124     $ 8,040  
Quarter ended:
                       
March 31, 2009
          895       895  
June 30, 2009
          86       86  
September 30, 2009
          300       300  
 
Total
  $ 3,916     $ 5,405     $ 9,321  
 
The PFH Discontinuance Restructuring Plan charges are included in the line item “Loss from discontinued operations, net of tax” in the consolidated statements of operations.
The following table presents the activity in the accrued balances for the PFH Discontinuance Restructuring Plan during 2009.
         
(In thousands)   Restructuring Costs
 
Balance as of January 1, 2009
  $ 3,428  
Charges during the quarter ended March 31, 2009
    895  
Cash payments
    (1,711 )
 
Balance as of March 31, 2009
  $ 2,612  
Charges during the quarter ended June 30, 2009
    86  
Cash payments
    (1,235 )
 
Balance as of June 30, 2009
  $ 1,463  
Charges during the quarter ended September 30, 2009
    300  
Cash payments
    (514 )
 
Balance as of September 30, 2009
  $ 1,249  
 
The reserve balance as of September 30, 2009 is mostly related to severance costs, which are expected to be paid substantially in the fourth quarter of 2009.
Note 4 — 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 or other banks. Those required average reserve balances were $705 million as of September 30, 2009 (December 31, 2008 — $684 million; September 30, 2008 — $630 million). Cash and due from banks as well as other short-term, highly-liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, the Corporation may be required to establish a special reserve account for the benefit of brokerage customers of its broker-dealer subsidiary, which may consist of securities segregated in the special reserve account. There were no reserve requirements as of September 30, 2009. As of September 30, 2008 and December 31, 2008 the Corporation had securities with a market value of $0.3 million. These securities were classified in the consolidated statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Regulatory Act, as of September 30, 2009, December 31, 2008, and September 30, 2008, the Corporation maintained separately for its two international banking entities (“IBEs”), $0.6 million in time deposits, equally divided for the two IBEs, which were considered restricted assets.
As part of a line of credit facility with a financial institution, as of September 30, 2009, December 31, 2008 and September 30, 2008, the Corporation maintained restricted cash of $2 million as collateral for the line of credit. The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

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As of September 30, 2009, the Corporation maintained restricted cash of $3 million to support a letter of credit. The cash is being held in an interest-bearing money market account.
As of September 30, 2009, the Corporation had restricted cash of $2 million (December 31, 2008 and September 30, 2008 — $3 million) to support a letter of credit related to a service settlement agreement until June 2010.
As of September 30, 2009, the Corporation had $10 million in cash equivalents restricted as to usage for the potential payment of obligations contained in a loan sales agreement. This restriction expired on November 3, 2009.
Note 5 — Pledged Assets
Certain securities and loans were pledged principally 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:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Investment securities available-for-sale, at fair value
  $ 2,183,586     $ 2,470,591     $ 2,647,930  
Investment securities held-to-maturity, at amortized cost
    25,769       100,000        
Loans held-for-sale measured at lower of cost or fair value
    2,636       35,764       36,218  
Loans held-in-portfolio
    8,406,876       8,101,999       7,686,937  
 
 
  $ 10,618,867     $ 10,708,354     $ 10,371,085  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

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Note 6 — Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of September 30, 2009, December 31, 2008 and September 30, 2008 were as follows:
                                         
    AS OF SEPTEMBER 30, 2009
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
U.S. Treasury securities
                                       
After 5 to 10 years
  $ 29,528     $ 1,608           $ 31,136       3.80 %
 
Obligations of U.S. Government sponsored entities
                                       
Within 1 year
    184,261       4,176             188,437       3.81  
After 1 to 5 years
    1,377,705       71,690             1,449,395       3.73  
After 5 to 10 years
    27,812       952             28,764       5.01  
After 10 years
    26,882       800             27,682       5.68  
 
 
    1,616,660       77,618             1,694,278       3.79  
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    5                   5       3.88  
After 1 to 5 years
    12,375       10     $ 108       12,277       3.40  
After 5 to 10 years
    50,969       292       2,264       48,997       5.08  
After 10 years
    27,905             201       27,704       5.26  
 
 
    91,254       302       2,573       88,983       4.91  
 
Collateralized mortgage obligations — federal agencies
                                       
Within 1 year
    154       1             155       4.08  
After 1 to 5 years
    3,578       109             3,687       4.43  
After 5 to 10 years
    138,044       2,578       408       140,214       2.94  
After 10 years
    1,438,743       26,787       11,623       1,453,907       2.98  
 
 
    1,580,519       29,475       12,031       1,597,963       2.98  
 
Collateralized mortgage obligations — private label
                                       
Within 1 year
    106                   106       3.39  
After 5 to 10 years
    23,481       14       580       22,915       2.10  
After 10 years
    115,763             11,988       103,775       2.65  
 
 
    139,350       14       12,568       126,796       2.56  
 
Mortgage-backed securities
                                       
Within 1 year
    9,072       118       21       9,169       3.07  
After 1 to 5 years
    62,462       1,431             63,893       3.92  
After 5 to 10 years
    178,392       9,283             187,675       4.86  
After 10 years
    3,136,807       47,982       231       3,184,558       4.48  
 
 
    3,386,733       58,814       252       3,445,295       4.49  
 
Equity securities
    9,606       171       937       8,840       3.39  
 
 
  $ 6,853,650     $ 168,002     $ 28,361     $ 6,993,291       3.94 %
 

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    AS OF DECEMBER 31, 2008
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
U.S. Treasury securities
                                       
After 5 to 10 years
  $ 456,551     $ 45,567           $ 502,118       3.83 %
 
Obligations of U.S. Government sponsored entities
                                       
Within 1 year
    123,315       2,855             126,170       4.46  
After 1 to 5 years
    4,361,775       262,184             4,623,959       4.07  
After 5 to 10 years
    27,811       1,097             28,908       4.96  
After 10 years
    26,877       1,094             27,971       5.68  
 
 
    4,539,778       267,230             4,807,008       4.09  
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    4,500       66             4,566       6.10  
After 1 to 5 years
    2,259       4     $ 6       2,257       4.95  
After 5 to 10 years
    67,975       232       3,269       64,938       4.77  
After 10 years
    29,423       46       240       29,229       5.20  
 
 
    104,157       348       3,515       100,990       4.95  
 
Collateralized mortgage obligations — federal agencies
                                       
Within 1 year
    179                   179       5.36  
After 1 to 5 years
    6,837       52       12       6,877       5.20  
After 5 to 10 years
    156,240       784       994       156,030       3.38  
After 10 years
    1,363,705       9,090       28,913       1,343,882       3.11  
 
 
    1,526,961       9,926       29,919       1,506,968       3.15  
 
Collateralized mortgage obligations — private label
                                       
Within 1 year
    443             3       440       4.96  
After 5 to 10 years
    30,914             2,909       28,005       2.30  
After 10 years
    158,667             38,364       120,303       3.52  
 
 
    190,024             41,276       148,748       3.32  
 
Mortgage-backed securities
                                       
Within 1 year
    18,673       46       8       18,711       3.94  
After 1 to 5 years
    67,570       237       150       67,657       3.86  
After 5 to 10 years
    116,059       3,456       226       119,289       4.85  
After 10 years
    635,159       11,127       3,438       642,848       5.47  
 
 
    837,461       14,866       3,822       848,505       5.22  
 
Equity securities
    19,581       61       9,492       10,150       5.01  
 
 
  $ 7,674,513     $ 337,998     $ 88,024     $ 7,924,487       4.01 %
 

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    AS OF SEPTEMBER 30, 2008
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
U.S. Treasury securities
                                       
After 5 to 10 years
  $ 458,990     $ 5,219           $ 464,209       3.83 %
 
Obligations of U.S. Government sponsored entities
                                       
Within 1 year
    125,799       984     $ 29       126,754       4.32  
After 1 to 5 years
    4,385,519       27,221       9,641       4,403,099       4.07  
After 5 to 10 years
    27,811       128             27,939       4.96  
After 10 years
    26,875       172             27,047       5.68  
 
 
    4,566,004       28,505       9,670       4,584,839       4.10  
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    4,500       79             4,579       6.10  
After 1 to 5 years
    2,259       10       3       2,266       4.95  
After 5 to 10 years
    67,004       56       2,519       64,541       4.78  
After 10 years
    30,464       20       169       30,315       5.16  
 
 
    104,227       165       2,691       101,701       4.95  
 
Collateralized mortgage obligations — federal agencies
                                       
Within 1 year
    654       2             656       5.15  
After 1 to 5 years
    4,351       6       12       4,345       5.43  
After 5 to 10 years
    157,176       245       1,577       155,844       4.20  
After 10 years
    1,221,661       1,978       23,249       1,200,390       4.10  
 
 
    1,383,842       2,231       24,838       1,361,235       4.12  
 
Collateralized mortgage obligations — private label
                                       
After 1 to 5 years
    553       1             554       4.96  
After 5 to 10 years
    24,255             1,103       23,152       3.87  
After 10 years
    179,599       49       11,746       167,902       4.34  
 
 
    204,407       50       12,849       191,608       4.29  
 
Mortgage-backed securities
                                       
Within 1 year
    5,518       58             5,576       3.90  
After 1 to 5 years
    89,306       425       244       89,487       3.90  
After 5 to 10 years
    73,110       660       876       72,894       4.80  
After 10 years
    687,443       4,082       8,964       682,561       5.40  
 
 
    855,377       5,225       10,084       850,518       5.18  
 
Equity securities
    19,520       102       4,990       14,632       4.86  
 
 
  $ 7,592,367     $ 41,497     $ 65,122     $ 7,568,742       4.23 %
 

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The following tables shows the Corporation’s amortized cost, gross unrealized losses and market value 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 as of September 30 2009, December 31, 2008 and September 30, 2008.
                         
    AS OF SEPTEMBER 30, 2009
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 26,465     $ 166     $ 26,299  
Collateralized mortgage obligations — federal agencies
    141,190       3,902       137,288  
Collateralized mortgage obligations — private label
    4,266       331       3,935  
Mortgage-backed securities
    51,719       71       51,648  
Equity securities
    3,328       579       2,749  
 
 
  $ 226,968     $ 5,049     $ 221,919  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 60,530     $ 2,407     $ 58,123  
Collateralized mortgage obligations — federal agencies
    494,781       8,129       486,652  
Collateralized mortgage obligations — private label
    126,872       12,237       114,635  
Mortgage-backed securities
    12,130       181       11,949  
Equity securities
    4,197       358       3,839  
 
 
  $ 698,510     $ 23,312     $ 675,198  
 
                         
            Total    
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 86,995     $ 2,573     $ 84,422  
Collateralized mortgage obligations — federal agencies
    635,971       12,031       623,940  
Collateralized mortgage obligations — private label
    131,138       12,568       118,570  
Mortgage-backed securities
    63,849       252       63,597  
Equity securities
    7,525       937       6,588  
 
 
  $ 925,478     $ 28,361     $ 897,117  
 

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    AS OF DECEMBER 31, 2008
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 34,795     $ 303     $ 34,492  
Collateralized mortgage obligations — federal agencies
    485,140       13,274       471,866  
Collateralized mortgage obligations — private label
    59,643       15,315       44,328  
Mortgage-backed securities
    109,298       676       108,622  
Equity securities
    19,541       9,480       10,061  
 
 
  $ 708,417     $ 39,048     $ 669,369  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 44,011     $ 3,212     $ 40,799  
Collateralized mortgage obligations — federal agencies
    423,137       16,645       406,492  
Collateralized mortgage obligations — private label
    130,065       25,961       104,104  
Mortgage-backed securities
    206,472       3,146       203,326  
Equity securities
    29       12       17  
 
 
  $ 803,714     $ 48,976     $ 754,738  
 
                         
            Total    
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 78,806     $ 3,515     $ 75,291  
Collateralized mortgage obligations — federal agencies
    908,277       29,919       878,358  
Collateralized mortgage obligations — private label
    189,708       41,276       148,432  
Mortgage-backed securities
    315,770       3,822       311,948  
Equity securities
    19,570       9,492       10,078  
 
 
  $ 1,512,131     $ 88,024     $ 1,424,107  
 

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    AS OF SEPTEMBER 30, 2008
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 1,853,632     $ 9,670     $ 1,843,962  
Obligations of Puerto Rico, States and political subdivisions
    50,204       453       49,751  
Collateralized mortgage obligations — federal agencies
    801,134       7,170       793,964  
Collateralized mortgage obligations — private label
    95,459       6,849       88,610  
Mortgage-backed securities
    257,872       2,388       255,484  
Equity securities
    13,880       4,980       8,900  
 
 
  $ 3,072,181     $ 31,510     $ 3,040,671  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 44,011     $ 2,238     $ 41,773  
Collateralized mortgage obligations — federal agencies
    315,629       17,668       297,961  
Collateralized mortgage obligations — private label
    99,184       6,000       93,184  
Mortgage-backed securities
    270,609       7,696       262,913  
Equity securities
    29       10       19  
 
 
  $ 729,462     $ 33,612     $ 695,850  
 
                         
            Total    
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 1,853,632     $ 9,670     $ 1,843,962  
Obligations of Puerto Rico, States and political subdivisions
    94,215       2,691       91,524  
Collateralized mortgage obligations — federal agencies
    1,116,763       24,838       1,091,925  
Collateralized mortgage obligations — private label
    194,643       12,849       181,794  
Mortgage-backed securities
    528,481       10,084       518,397  
Equity securities
    13,909       4,990       8,919  
 
 
  $ 3,801,643     $ 65,122     $ 3,736,521  
 
Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than- temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the security or whether it is more likely than not that the Corporation would be required to sell the security before a forecasted recovery occurs.
As of September 30, 2009, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no material individual debt security was other-than-temporarily impaired as of such date. As of September 30, 2009, 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

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sell the investment securities prior to recovery of their amortized cost basis. Also, management evaluated the Corporation’s portfolio of equity securities as of September 30, 2009. During the quarter and nine months ended September 30, 2009, the Corporation recorded $3.6 million and $10.2 million, respectively, in losses on certain equity securities considered other-than-temporarily impaired. Management has the intent and ability to hold the investments in equity securities that are at a loss position as of September 30, 2009 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 “Obligations of Puerto Rico, States and political subdivisions” are primarily associated to approximately $54 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”). Of this total, $43 million are rated Ba1, one notch below investment grade, by Moody’s Investors Service (“Moody’s”), while Standard & Poor’s (“S&P”) rates them as investment grade. During early June, S&P Rating Services affirmed its BBB- rating on the Commonwealth of Puerto Rico general obligations and appropriation debt outstanding, which indicates S&P’s opinion that Puerto Rico’s appropriation credit profile is not speculative grade. The outlook indicated by S&P is stable. These securities will continue to be monitored as part of management’s ongoing OTTI assessments. Management expects to receive cash flows sufficient to recover the entire amortized cost basis of the securities.
The unrealized losses reported for “Collateralized mortgage obligations — federal agencies” are principally associated to CMOs that were issued by U.S. government-sponsored entities and agencies, primarily Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), institutions which the government has affirmed its commitment to support, and Government National Mortgage Association (“GNMA”), which has the full faith and credit of the U.S. Government. These collateralized mortgage obligations are rated AAA by the major rating agencies and are backed by residential mortgages. The unrealized losses in this portfolio were primarily attributable to changes in interest rates and levels of market liquidity relative to when the investment securities were purchased and not due to credit quality of the securities.
The unrealized losses associated with private-label collateralized mortgage obligations are primarily related to securities backed by residential mortgages. In addition to verifying the credit ratings for the private label CMOs, management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in the securities. As of September 30, 2009, there were no “sub-prime” or “Alt-A” securities in the Corporation’s private-label CMO portfolios. For private-label CMOs with unrealized losses as of September 30, 2009, 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 as of September 30, 2009, thus management expects to recover the amortized cost basis of the securities.
All of the Corporation’s securities classified as mortgage-backed securities were issued by U.S. government-sponsored entities and agencies, primarily GNMA and FNMA, thus as previously expressed, have the guarantee or support of the U.S. government. These mortgage-backed securities are rated AAA by the major rating agencies and are backed by residential mortgages. Most of the mortgage-backed securities securities held as of September 30, 2009 with unrealized losses had been purchased at a premium during 2009 and although their fair values have declined, they continue to exceed the par value of the securities. The unrealized losses in this portfolio were generally attributable to changes in interest rates relative to when the investment securities were purchased and not due to credit quality of the securities.

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Proceeds from the sale of investment securities available-for-sale during the nine months ended September 30, 2009 were $3.8 billion compared to $2.4 billion for the nine months ended September 30, 2008. Gross realized gains and losses on the sale of securities available-for-sale for the quarter and nine months ended September 30, 2009 and 2008 were as follows:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands)   2009   2008   2009   2008
 
Gross realized gains
  $ 324     $ 7     $ 184,704     $ 29,357  
Gross realized losses
    (126 )           (361 )     (119 )
 
Total net gross realized gains
  $ 198     $ 7     $ 184,343     $ 29,238  
 
The following table states the names of issuers and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
                                                 
    September 30, 2009   December 31, 2008   September 30, 2008
 
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,067,001     $ 1,089,443     $ 1,198,645     $ 1,197,648     $ 1,129,613     $ 1,120,659  
FHLB
    1,395,778       1,469,493       4,389,271       4,651,249       4,936,497       4,953,787  
Freddie Mac
    997,716       1,012,276       884,414       875,493       828,800       815,104  
 

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Note 7 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of September 30, 2009, December 31, 2008 and September 30, 2008 were as follows:
                                         
    AS OF SEPTEMBER 30, 2009
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
U.S. Treasury securities
                                       
Within 1 year
  $ 25,769           $ 6     $ 25,763       0.11 %
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    7,015     $ 7             7,022       4.30  
After 1 to 5 years
    109,415       2,349       47       111,717       5.51  
After 5 to 10 years
    17,107       52       878       16,281       5.79  
After 10 years
    48,600             3,502       45,098       4.12  
 
 
    182,137       2,408       4,427       180,118       5.12  
 
Collateralized mortgage obligations — private label
                                       
After 10 years
    222             12       210       5.45  
 
Others
                                       
Within 1 year
    3,572                   3,572       3.11  
After 1 to 5 years
    1,250                   1,250       1.66  
 
 
    4,822                   4,822       2.73  
 
 
  $ 212,950     $ 2,408     $ 4,445     $ 210,913       4.46 %
 
                                         
    AS OF DECEMBER 31, 2008
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
Obligations of U.S. Government sponsored entities
                                       
Within 1 year
  $ 1,499     $ 1           $ 1,500       1.00 %
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    106,910       8             106,918       2.82  
After 1 to 5 years
    108,860       351     $ 367       108,844       5.50  
After 5 to 10 years
    16,170       500       116       16,554       5.75  
After 10 years
    52,730       115       5,141       47,704       5.56  
 
 
    284,670       974       5,624       280,020       4.52  
 
Collateralized mortgage obligations — private label
                                       
After 10 years
    244             13       231       5.45  
 
Others
                                       
Within 1 year
    6,584       49             6,633       6.04  
After 1 to 5 years
    1,750                   1,750       3.90  
 
 
    8,334       49             8,383       5.59  
 
 
  $ 294,747     $ 1,024     $ 5,637     $ 290,134       4.53 %
 

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    AS OF SEPTEMBER 30, 2008
            Gross   Gross           Weighted
    Amortized   Unrealized   Unrealized   Market   Average
(In thousands)   Cost   Gains   Losses   Value   Yield
 
Obligations of U.S. Government sponsored entities
                                       
Within 1 year
  $ 526,486     $ 11           $ 526,497       2.07 %
 
Obligations of Puerto Rico, States and political subdivisions
                                       
Within 1 year
    101,910       13             101,923       5.44  
After 1 to 5 years
    13,860       151     $ 21       13,990       4.93  
After 5 to 10 years
    16,171       7       587       15,591       5.75  
After 10 years
    52,730             3,010       49,720       5.04  
 
 
    184,671       171       3,618       181,224       5.31  
 
Collateralized mortgage obligations — private label
                                       
After 10 years
    251             14       237       5.45  
 
Others
                                       
Within 1 year
    6,674       50       1       6,723       6.49  
After 1 to 5 years
    1,750             1       1,749       4.12  
 
 
    8,424       50       2       8,472       6.00  
 
 
  $ 719,832     $ 232     $ 3,634     $ 716,430       2.95 %
 
The following table shows the Corporation’s amortized cost, gross unrealized losses and market value 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 as of September 30, 2009, December 31, 2008 and September 30, 2008:
                         
    AS OF SEPTEMBER 30, 2009
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 25,769     $ 6     $ 25,763  
Obligations of Puerto Rico, States and political subdivisions
    46,985       3,990       42,995  
 
 
  $ 72,754     $ 3,996     $ 68,758  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 19,930     $ 437     $ 19,493  
Collateralized mortgage obligations — private label
    222       12       210  
Others
    250             250  
 
 
  $ 20,402     $ 449     $ 19,953  
 
                         
    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 25,769     $ 6     $ 25,763  
Obligations of Puerto Rico, States and political subdivisions
    66,915       4,427       62,488  
Collateralized mortgage obligations — private label
    222       12       210  
Others
    250             250  
 
 
  $ 93,156     $ 4,445     $ 88,711  
 

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    AS OF DECEMBER 31, 2008
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 135,650     $ 5,452     $ 130,198  
Others
    250             250  
 
 
  $ 135,900     $ 5,452     $ 130,448  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 9,535     $ 172     $ 9,363  
Collateralized mortgage obligations — private label
    244       13       231  
Others
    250             250  
 
 
  $ 10,029     $ 185     $ 9,844  
 
                         
    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 145,185     $ 5,624     $ 139,561  
Collateralized mortgage obligations — private label
    244       13       231  
Others
    500             500  
 
 
  $ 145,929     $ 5,637     $ 140,292  
 

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    AS OF SEPTEMBER 30, 2008
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 48,644     $ 3,618     $ 45,026  
 
 
  $ 48,644     $ 3,618     $ 45,026  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Collateralized mortgage obligations — private label
  $ 251     $ 14     $ 237  
Others
    1,000       2       998  
 
 
  $ 1,251     $ 16     $ 1,235  
 
                         
    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 48,644     $ 3,618     $ 45,026  
Collateralized mortgage obligations — private label
    251       14       237  
Others
    1,000       2       998  
 
 
  $ 49,895     $ 3,634     $ 46,261  
 
As indicated in Note 6 to these consolidated financial statements, management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis.
The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity as of September 30, 2009 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. The Corporation performs periodic credit quality reviews on these issuers. The decline in fair value as of September 30, 2009 was attributable to changes in interest rates and not credit quality, thus no other-than-temporary decline in value was necessary to be recorded in these held-to-maturity securities as of September 30, 2009. As of September 30, 2009, the Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that the Corporation will have to sell these investment securities prior to recovery of their amortized cost basis.
Note 8 — Mortgage Servicing Rights
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. Prior to November 2008, PFH also held servicing rights to residential mortgage loan portfolios. The MSRs were segregated between loans serviced by the Corporation’s banking subsidiaries and by PFH. PFH no longer services third-party loans due to the discontinuance of the business. The PFH servicing rights were sold in the fourth quarter

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of 2008. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served.
The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior.
The following tables present the changes in MSRs measured using the fair value method for the nine months ended September 30, 2009 and September 30, 2008.
         
    Residential MSRs
 
(In thousands)   Banking subsidiaries
 
Fair value at January 1, 2009
  $ 176,034  
Purchases
    1,029  
Servicing from securitizations or asset transfers
    19,640  
Changes due to payments on loans (1)
    (10,750 )
Changes in fair value due to changes in valuation model inputs or assumptions
    (5,618 )
 
Fair value as of September 30, 2009
  $ 180,335  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
                         
    Residential MSRs    
 
(In thousands)   Banking subsidiaries   PFH (2)   Total
 
Fair value at January 1, 2008
  $ 110,612     $ 81,012     $ 191,624  
Purchases
    3,628             3,628  
Servicing from securitizations or asset transfers
    22,033             22,033  
Changes due to payments on loans (1)
    (8,136 )     (20,298 )     (28,434 )
Changes in fair value due to changes in valuation model inputs or assumptions
    (310 )     (23,304 )     (23,614 )
 
Fair value as of September 30, 2008
  $ 127,827     $ 37,410     $ 165,237  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
(2)   MSRs for PFH are included as part of “Assets from discontinued operations” in the consolidated statement of condition as of September 30, 2008.
 
Residential mortgage loans serviced for others were $17.7 billion as of September 30, 2009 (December 31, 2008 — $17.6 billion; September 30, 2008 — $20.0 billion, including $7.5 billion related to the PFH discontinued operations).
Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the Corporation’s continuing operations for the quarter and nine months ended September 30, 2009 amounted to $11.7 million and $34.7 million, respectively, and $7.9 million and $22.3 million, respectively, for the quarter and nine months ended September 30, 2008. The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. As of September 30, 2009, those weighted average mortgage servicing fees were 0.26% (September 30, 2008 — 0.25%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.
The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.
Banking subsidiaries
The Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans and under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the banking subsidiaries have fixed rates.

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During the nine months period ended September 30, 2009, the Corporation retained servicing rights on guaranteed mortgage securitizations (FNMA and GNMA) and whole loan sales involving approximately $1.2 billion in principal balance outstanding. Gains of approximately $32.8 million were realized on these transactions during the nine months period ended September 30, 2009.
Key economic assumptions used in measuring the servicing rights retained at the date of the residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during the quarter ended September 30, 2009 and year ended December 31, 2008 were as follows:
                 
    September 30, 2009   December 31, 2008
 
Prepayment speed
    7.0 %     11.6 %
Weighted average life
  14.3 years   8.6 years
Discount rate (annual rate)
    11.3 %     11.3 %
 
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 as of September 30, 2009 and December 31, 2008 were as follows:
                 
    Originated MSRs
 
(In thousands)   September 30, 2009   December 31, 2008
 
Fair value of retained interests
  $ 100,734     $ 104,614  
Weighted average life
  9.1 years     10.2 years  
Weighted average prepayment speed (annual rate)
    11.0 %     9.9 %
Impact on fair value of 10% adverse change
  $ (3,235 )   $ (4,734 )
Impact on fair value of 20% adverse change
  $ (7,439 )   $ (8,033 )
Weighted average discount rate (annual rate)
    12.39 %     11.46 %
Impact on fair value of 10% adverse change
  $ (2,707 )   $ (3,769 )
Impact on fair value of 20% adverse change
  $ (6,385 )   $ (6,142 )
 
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 as of period end were as follows:
                 
    Purchased MSRs
 
(In thousands)   September 30, 2009   December 31, 2008
 
Fair value of retained interests
  $ 79,601     $ 71,420  
Weighted average life of collateral
  9.6 years     7.0 years  
Weighted average prepayment speed (annual rate)
    10.4 %     14.4 %
Impact on fair value of 10% adverse change
  $ (3,153 )   $ (3,880 )
Impact on fair value of 20% adverse change
  $ (6,310 )   $ (7,096 )
Weighted average discount rate (annual rate)
    11.0 %     10.6 %
Impact on fair value of 10% adverse change
  $ (2,662 )   $ (2,277 )
Impact on fair value of 20% adverse change
  $ (5,343 )   $ (4,054 )
 
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.

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As of September 30, 2009, the Corporation serviced $4.5 billion (December 31, 2008 — $4.9 billion; September 30, 2008 — $3.8 billion) in residential mortgage loans with credit recourse to the Corporation.
Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase, at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans. As of September 30, 2009, the Corporation had recorded $112 million in mortgage loans on its financial statements related to this buy-back option program (December 31, 2008 — $61 million; September 30, 2008 — $47 million).
Note 9 — Other Assets
The caption of other assets in the consolidated statements of condition consists of the following major categories:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Net deferred tax assets (net of valuation allowance)
  $ 380,596     $ 357,507     $ 663,260  
Bank-owned life insurance program
    230,579       224,634       222,298  
Prepaid expenses
    144,949       136,236       153,698  
Investments under the equity method
    97,817       92,412       117,766  
Derivative assets
    81,249       109,656       50,335  
Trade receivables from brokers and counterparties
    8,275       1,686       17,100  
Others
    210,215       193,466       187,762  
 
Total
  $ 1,153,680     $ 1,115,597     $ 1,412,219  
 
Note: Other assets from discontinued operations as of December 31, 2008 and September 30, 2008 are presented as part of “Assets from discontinued operations” in the consolidated statements of condition. Refer to Note 3 to the consolidated financial statements for further information on the discontinued operations.
 
Note 10 — Derivative Instruments and Hedging
Refer to Note 33 to the consolidated financial statements included in the 2008 Annual Report for a complete description of the Corporation’s derivative activities.
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 characteristics of certain balance sheet assets and liabilities so that the net interest 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, to take proprietary positions and as a 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 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. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management.
By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the 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. The derivative assets include a $5.4 million negative adjustment as a result of the credit risk of the counterparty as of September 30, 2009. In the other hand, when the fair

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value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, the fair value of derivative liabilities incorporates nonperformance risk or the risk that the obligation will not be fulfilled. The derivative liabilities include a $0.9 million positive adjustment related to the incorporation of the Corporation’s own credit risk as of September 30, 2009.
Certain of the Corporation’s derivative instruments include financial covenants tied to the corresponding banking subsidiary 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 as of September 30, 2009 was $79 million. Based on the contractual obligations established on these derivative instruments, the Corporation has fully collateralized these positions by pledging collateral of $93 million as of September 30, 2009.
Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding as of September 30, 2009 and December 31, 2008 were as follows:
                                         
As of September 30, 2009
 
            Derivative Assets   Derivative Liabilities
 
            Statement of           Statement of    
    Notional   Condition   Fair   Condition    
(In thousands)   Amount   Classification   Value   Classification   Fair Value
 
Derivatives designated as hedging instruments:
                                       
Forward commitments
  $ 104,200     Other Assets   $ 1     Other Liabilities   $ 996  
 
Total derivatives designated as hedging instruments
  $ 104,200             $ 1             $ 996  
 
Derivatives not designated as hedging instruments:
                                       
Forward contracts
  $ 142,270     Trading Account Securities   $ 25     Other Liabilities   $ 1,716  
Interest rate swaps associated with:
                                       
- swaps with corporate clients
    1,015,007     Other Assets     75,528     Other Liabilities     85  
- swaps offsetting position of corporate clients’ swaps
    1,015,007     Other Assets     85     Other Liabilities     80,387  
Foreign currency and exchange rate commitments with clients
    150                 Other Liabilities     14  
Foreign currency and exchange rate commitments with counterparty
    149     Other Assets     15              
Interest rate caps and floors
    139,914     Other Assets     265              
Interest rate caps and floors for the benefit of corporate clients
    139,914                 Other Liabilities     265  
Indexed options on deposits
    105,850     Other Assets     5,355              
Bifurcated embedded options
    84,989                 Interest bearing Deposits     5,618  
 
Total derivatives not designated as hedging instruments
  $ 2,643,250             $ 81,273             $ 88,085  
 
Total derivative assets and liabilities
  $ 2,747,450             $ 81,274             $ 89,081  
 

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As of December 31, 2008
 
            Derivative Assets   Derivative Liabilities
 
            Statement of           Statement of    
    Notional   Condition           Condition    
(In thousands)   Amount   Classification   Fair Value   Classification   Fair Value
 
Derivatives designated as hedging instruments:
                                       
Forward commitments
  $ 112,500     Other Assets   $ 6     Other Liabilities   $ 2,255  
Interest rate swaps
    200,000                 Other Liabilities     2,380  
 
Total derivatives designated as hedging instruments
  $ 312,500             $ 6             $ 4,635  
 
Derivatives not designated as hedging instruments:
                                       
Forward contracts
  $ 272,301     Trading Account
Securities
  $ 38     Other Liabilities   $ 4,733  
Interest rate swaps associated with:
                                       
- swaps with corporate clients
    1,038,908     Other Assets     100,668              
- swaps offsetting position of corporate clients’ swaps
    1,038,908                 Other Liabilities     98,437  
Foreign currency and exchange rate commitments with clients
    377     Other Assets     18     Other Liabilities     15  
Foreign currency and exchange rate commitments with counterparty
    373     Other Assets     16     Other Liabilities     16  
Interest rate caps
    128,284     Other Assets     89              
Interest rate caps for the benefit of corporate clients
    128,284                 Other Liabilities     89  
Indexed options on deposits
    208,557     Other Assets     8,821              
Bifurcated embedded options
    178,608                 Interest Bearing Deposits     8,584  
 
Total derivatives not designated as hedging instruments
  $ 2,994,600             $ 109,650             $ 111,874  
 
Total derivative assets and liabilities
  $ 3,307,100             $ 109,656             $ 116,509  
 
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 82 days.

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For cash flow hedges, gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income (loss) to current period earnings are included in the line item which the hedged item is recorded and in the same period in which the forecasted transaction affects earnings, as presented in the table below:
                                         
Quarter ended September 30, 2009
 
                            Classification of    
                            Gain (Loss)   Amount of Gain
                            Recognized in   (Loss) Recognized
    Amount of   Classification in the           Income on   in Income on
    Gain (Loss)   Statement of   Amount of Gain   Derivatives   Derivatives
    Recognized in   Operations of the   (Loss)   (Ineffective Portion   (Ineffective Portion
    OCI on   Gain (Loss)   Reclassified from   and Amount   and Amount
    Derivatives   Reclassified from   AOCI into   Excluded from   Excluded from
    (Effective   AOCI into Income   Income (Effective   Effectiveness   Effectiveness
(In thousands)   Portion)   (Effective Portion)   Portion)   Testing)   Testing)
 
Forward commitments
  $ (995 )   Trading account profit   $ (37 )            
 
Total cash flow hedges
  $ (995 )           $ (37 )            
 
OCI — “Other Comprehensive Income”
 
AOCI — “Accumulated Other Comprehensive Income”
                                         
Nine months ended September 30, 2009
 
                            Classification of    
                            Gain (Loss)   Amount of Gain
                            Recognized in   (Loss) Recognized
    Amount of   Classification in the           Income on   in Income on
    Gain (Loss)   Statement of   Amount of Gain   Derivatives   Derivatives
    Recognized in   Operations of the   (Loss)   (Ineffective Portion   (Ineffective Portion
    OCI on   Gain (Loss)   Reclassified from   and Amount   and Amount
    Derivatives   Reclassified from   AOCI into   Excluded from   Excluded from
    (Effective   AOCI into Income   Income (Effective   Effectiveness   Effectiveness
(In thousands)   Portion)   (Effective Portion)   Portion)   Testing)   Testing)
 
Forward commitments
  $ (2,618 )   Trading account profit   $ (3,540 )            
Interest rate swaps
        Interest expense     (2,380 )            
 
Total cash flow hedges
  $ (2,618 )           $ (5,920 )            
 
OCI — “Other Comprehensive Income”
 
AOCI — “Accumulated Other Comprehensive Income”
Non-Hedging Activities
For the quarter and nine months ended September 30, 2009, the Corporation recognized a loss of $6.6 million and $20.7 million, respectively, related to its non-hedging derivatives, as detailed in the table below.
                         
            Amount of Gain (Loss) Recognized in
            Income on Derivatives
    Classification of Gain   Quarter ended    
    (Loss) Recognized in   September 30,   Nine months ended
(In thousands)   Income on Derivatives   2009   September 30, 2009
 
Forward contracts
  Trading account profit   $ (5,142 )   $ (11,990 )
Interest rate swap contracts
  Other operating income     (1,565 )     (7,089 )
Credit derivatives
  Other operating income           (2,599 )
Foreign currency and exchange rate commitments
  Interest expense     (1 )     (3 )
Foreign currency and exchange rate commitments
  Other operating income     6       25  
Indexed options
  Interest expense     1,415       669  
Bifurcated embedded options
  Interest expense     (1,327 )     248  
 
Total
          $ (6,614 )   $ (20,739 )
 

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Forward Contracts
The Corporation has forward contracts to sell mortgage-backed securities with terms lasting less than a month, which are accounted for as trading derivatives. Changes in their fair value are recognized in trading gains and losses.
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 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 conditions with credit limit approvals and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in income in the period of change.
Interest Rate Caps
The Corporation enters into interest rate caps 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.
Note 11 — Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2009 and 2008, allocated by reportable segments, were as follows (refer to Note 26 for the definition of the Corporation’s reportable segments):
                                         
2009
 
                    Purchase            
    Balance as of   Goodwill   accounting           Balance as of
(In thousands)   January 1, 2009   acquired   adjustments   Other   September 30, 2009
 
Banco Popular de Puerto Rico:
                                       
Commercial Banking
  $ 31,729                       $ 31,729  
Consumer and Retail Banking
    117,000                         117,000  
Other Financial Services
    8,330           $ (34 )           8,296  
Banco Popular North America:
                                       
Banco Popular North America
    404,237                         404,237  
E-LOAN
                             
EVERTEC
    44,496             750             45,246  
 
Total Popular, Inc.
  $ 605,792           $ 716           $ 606,508  
 
                                         
2008
 
                    Purchase            
    Balance as of   Goodwill   accounting           Balance as of
(In thousands)   January 1, 2008   acquired   adjustments   Other   September 30, 2008
 
Banco Popular de Puerto Rico:
                                       
Commercial Banking
  $ 35,371           $ (3,631 )         $ 31,740  
Consumer and Retail Banking
    136,407             (17,796 )           118,611  
Other Financial Services
    8,621     $ 153       3     $ 12       8,789  
Banco Popular North America:
                                       
Banco Popular North America
    404,237                         404,237  
E-LOAN
                             
EVERTEC
    46,125       1,000       85       (2,415 )     44,795  
 
Total Popular, Inc.
  $ 630,761     $ 1,153     $ (21,339 )   $ (2,403 )   $ 608,172  
 
Purchase accounting adjustments consist 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 purchase accounting adjustments in the EVERTEC reportable segment for the nine months ended September 30, 2009 are related to contingency payments.

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As of September 30, 2009, the Corporation had $6 million of identifiable intangibles other than goodwill, with indefinite useful lives (December 31, 2008 — $6 million; September 30, 2008 — $17 million).
The following table reflects the components of other intangible assets subject to amortization:
                                                 
    September 30, 2009   December 31, 2008   September 30, 2008
 
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 65,379     $ 29,276     $ 65,379     $ 24,130     $ 71,238     $ 28,446  
 
Other customer relationships
    8,816       5,478       8,839       4,585       12,898       7,105  
 
Other intangibles
    2,787       2,509       3,037       1,725       7,534       5,663  
 
 
Total
  $ 76,982     $ 37,263     $ 77,255     $ 30,440     $ 91,670     $ 41,214  
 
During the quarter ended September 30, 2009, the Corporation recognized $2.4 million in amortization related to other intangible assets with definite useful lives (September 30, 2008 - $4.0 million). During the nine months ended September 30, 2009, the Corporation recognized $7.2 million in amortization related to other intangible assets with definite useful lives (September 30, 2008 — $8.9 million).
The following table presents the estimated aggregate annual amortization of the intangible assets with definite useful lives for each of the following fiscal years:
         
(In thousands)        
 
Remaining 2009
  $ 2,264  
Year 2010
    7,671  
Year 2011
    6,982  
Year 2012
    5,967  
Year 2013
    5,784  
Year 2014
    5,146  
 
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.
The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2009 using July 31, 2009 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which basically are the legal entities that compose 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 accordance with accounting standards, the impairment evaluation is performed using a two-step process. Step 1 of the goodwill evaluation process is to determine if potential impairment exists in any of the Corporation’s reporting units, and is performed by comparing the fair value of the reporting units with their carrying amount, including goodwill. The Step 2 is necessary only if the reporting unit fails Step 1. Step 2 measures the amount of any impairment loss. The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, an entity shall allocate the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets, such as unrecognized core deposits and tradename intangible assets) as if the reporting unit had been acquired in a business

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combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. 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 the impairment test date. If the implied fair value of goodwill calculated in Step 2 is less than the carrying amount of goodwill for the reporting unit, an impairment is indicated and the carrying value of goodwill is written down to the calculated value.
In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well 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.
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 valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“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 11.24% to 17.78% for the 2009 analysis. The Ibbottson Build-Up Model builds up a cost of equity starting with the rate of return of a “riskless” asset (10 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.
Step 1 of the goodwill impairment test performed during 2009 showed that the carrying amount of BPNA exceeded its fair value, and thus, Step 2 of the goodwill impairment test was performed for that reporting unit. Based on the results of Step 2, management concluded that there was no goodwill impairment to be recognized for BPNA. 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 going concern entity. The goodwill impairment assessment performed for BPNA considered BPNA’s financial condition as of September 30, 2009 and BPNA’s financial projections. The current negative performance of the reporting unit is principally related to deteriorated credit quality in its loan portfolio, which agrees with the results of the Step 2 analysis. BPNA’s provision for loan losses amounted to $456.3 million for the nine months ended September 30, 2009, which represented 111% of BPNA’s net loss of $412.4 million for the period.

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The assessments concluded that there is no goodwill impairment at BPNA primarily as a result of a significant discount that resulted from the valuation of the loan portfolios. The fair value determined for BPNA’s loan portfolio in the 2009 annual test represented a discount of 21.7%, which compares to the 41.6% as of December 31, 2008. 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 and deteriorated credit quality of the consumer and mortgage loan portfolios of BPNA.
For BPNA, the only subsidiary that failed Step 1, the Corporation determined the fair value of Step 1 utilizing a market value approach 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”. Additionally, the Corporation determined the reporting unit fair value using a DCF analysis based on BPNA’s financial projections, but assigned no weight to it given the current market approaches provide a more reasonable measure of fair value considering the reporting unit’s financial performance and current market conditions. 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 exceeded the goodwill carrying value of $404 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. 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 required to record a goodwill impairment charge. The Corporation engaged a third-party valuator to assist 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 valuation date. Management discussed the methodologies, assumptions and results supporting the relevant values for conclusions and determined they were reasonable.
Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of Popular, Inc. concluding that the fair value results determined for the reporting units in the July 31, 2009 assessment were reasonable.
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 is recorded.
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. The economic situation in the United States and Puerto Rico, including deterioration in the housing market and credit market, has continued to negatively impact the financial results of the Corporation during 2009. Accordingly, management is continuing to closely monitor the fair value of the reporting units.
Note 12 — Fair Value Measurement
ASC 820-10 “Fair Value Measurement and Disclosures” (formerly SFAS No. 157) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
    Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.
    Level 2— Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for

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      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 price or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently.
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.
The Corporation adopted the provisions of ASC 820-10 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis on January 1, 2009.

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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 as of September 30, 2009, December 31, 2008 and September 30, 2008:
                                 
    As of September 30, 2009
 
                            Balance as of
                            September 30,
(In millions)   Level 1   Level 2   Level 3   2009
 
Assets
                               
 
Continuing Operations
                               
 
Investment securities available-for-sale:
                               
 
U.S. Treasury securities
        $ 31           $ 31  
Obligations of U.S. Government sponsored entities
          1,694             1,694  
Obligations of Puerto Rico, States and political subdivisions
          89             89  
Collateralized mortgage obligations — federal agencies
          1,598             1,598  
Collateralized mortgage obligations — private Label
          127             127  
Mortgage-backed securities
          3,411     $ 34       3,445  
Equity securities
  $ 4       5             9  
 
Total investment securities available-for-sale
  $ 4     $ 6,955     $ 34     $ 6,993  
 
Trading account securities, excluding derivatives:
                               
Obligations of Puerto Rico, States and political subdivisions
        $ 3           $ 3  
Collateralized mortgage obligations
          1     $ 4       5  
Residential mortgage-backed securities — federal agencies
          180       233       413  
Other
          22       4       26  
 
Total trading account securities
        $ 206     $ 241     $ 447  
 
Mortgage servicing rights
              $ 180     $ 180  
Derivatives (Refer to Note 10)
        $ 81             81  
 
Total
  $ 4     $ 7,242     $ 455     $ 7,701  
 
 
                               
Liabilities
                               
 
Continuing Operations
                               
Derivatives (Refer to Note 10)
        $ (89 )         $ (89 )
 
Total
        $ (89 )         $ (89 )
 

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    As of December 31, 2008
 
                            Balance as of
                            December 31,
(In millions)   Level 1   Level 2   Level 3   2008
 
Assets
                               
 
Continuing Operations
                               
 
Investment securities available-for-sale:
                               
 
U.S. Treasury securities
        $ 502           $ 502  
Obligations of U.S. Government sponsored entities
          4,807             4,807  
Obligations of Puerto Rico, States and political subdivisions
          101             101  
Collateralized mortgage obligations — federal agencies
          1,507             1,507  
Collateralized mortgage obligations — private label
          149             149  
Mortgage-backed securities
          812     $ 37       849  
Equity securities
  $ 5       5             10  
 
Total investment securities available-for-sale
  $ 5     $ 7,883     $ 37     $ 7,925  
 
Trading account securities, excluding derivatives:
                               
U.S. Treasury securities and obligations of U.S. Government sponsored entities
        $ 3           $ 3  
Obligations of Puerto Rico, States and political subdivisions
          28             28  
Collateralized mortgage obligations
          2     $ 3       5  
Residential mortgage-backed securities — federal agencies
          296       292       588  
Commercial paper
          5             5  
Other
          12       5       17  
 
Total trading account securities
        $ 346     $ 300     $ 646  
 
Mortgage servicing rights
              $ 176     $ 176  
Derivatives (Refer to Note 10)
        $ 110             110  
 
Discontinued Operations
                               
 
Loans measured at fair value pursuant to fair value option
              $ 5     $ 5  
 
Total
  $ 5     $ 8,339     $ 518     $ 8,862  
 
 
                               
Liabilities
                               
 
Continuing Operations
                               
Derivatives (Refer to Note 10)
        $ (117 )         $ (117 )
 
Total
        $ (117 )         $ (117 )
 

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    As of September 30, 2008
 
                            Balance as of
                            September 30,
(In millions)   Level 1   Level 2   Level 3   2008
 
Assets
                               
 
Continuing Operations
                               
 
Investment securities available-for-sale:
                               
 
U.S. Treasury securities
        $ 464           $ 464  
Obligations of U.S. Government sponsored entities
          4,585             4,585  
Obligations of Puerto Rico, States and political subdivisions
          102             102  
Collateralized mortgage obligations — federal agencies
          1,361             1,361  
Collateralized mortgage obligations — private label
          191     $ 1       192  
Mortgage-backed securities
          814       36       850  
Equity securities
  $ 10       5             15  
 
Total investment securities available-for-sale
  $ 10     $ 7,522     $ 37     $ 7,569  
 
Trading account securities, excluding derivatives:
                               
U.S. Treasury securities and obligations of U.S. Government sponsored entities
        $ 3           $ 3  
Obligations of Puerto Rico, States and political subdivisions
          13             13  
Collateralized mortgage obligations
          2     $ 3       5  
Residential mortgage-backed securities — federal agencies
          174       229       403  
Other
          15       5       20  
 
Total trading account securities
        $ 207     $ 237     $ 444  
 
Mortgage servicing rights
              $ 128     $ 128  
Derivatives (Refer to Note 10)
        $ 51             51  
 
Discontinued Operations
                               
 
Residual interests — trading
              $ 4     $ 4  
Mortgage servicing rights
                37       37  
Loans measured at fair value pursuant to fair value option
                584       584  
 
Total
  $ 10     $ 7,780     $ 1,027     $ 8,817  
 
 
                               
Liabilities
                               
 
Continuing Operations
                               
Derivatives (Refer to Note 10)
        $ (52 )         $ (52 )
 
Discontinued Operations
                               
Notes payable measured at fair value pursuant to fair value option
              $ (166 )     (166 )
Derivatives
          (2 )           (2 )
 
Total
        $ (54 )   $ (166 )   $ (220 )
 

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The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2009 and 2008:
                                                         
    Quarter ended September 30, 2009
 
                                                    Changes in
                                                    unrealized
                                                    gains (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
            Gains   included in   in accrued   paydowns   Balance as   liabilities still
    Balance   (losses)   other   interest   and   of   held as of
    as of June   included in   comprehensive   receivable   maturities   September   September 30,
(In millions)   30, 2009   earnings   income   / payable   (net)   30, 2009   2009
 
Assets
                                                       
 
Continuing Operations
                                                       
Investment securities available-for-sale:
                                                       
Mortgage-backed securities
  $ 35                       $ (1 )   $ 34        
 
Total investment securities available-for-sale
  $ 35                       $ (1 )   $ 34        
 
Trading account securities:
                                                       
Collateralized mortgage obligations
  $ 5                       $ (1 )   $ 4        
Residential mortgage-backed securities-federal agencies
    284     $ 1                   (52 )     233     $ 1 (a)
Other
    5       (1 )                       4       (a)
 
Total trading account securities
  $ 294                       $ (53 )   $ 241     $ 1  
 
Mortgage servicing rights
  $ 181     $ (7 )               $ 6     $ 180     $ (4 )(b)
 
Discontinued Operations
                                                       
Loans measured at fair value pursuant to fair value option
  $ 1                       $ (1 )            
 
Total
  $ 511     $ (7 )               $ (49 )   $ 455     $ (3 )
 
a)   Gains (losses) are included in “Trading account profit” in the statement of operations
 
b)   Gains (losses) are included in “Other service fees” in the statement of operations

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    Nine months ended September 30, 2009
 
                                                    Changes in
                                                    unrealized
                                                    gains (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
    Balance   Gains   included in   in accrued   paydowns   Balance as   liabilities still
    as of   (losses)   other   interest   and   of   held as of
    January 1,   included in   comprehensive   receivable   maturities   September   September 30,
(In millions)   2009   Earnings   Income   / payable   (net)   30, 2009   2009
 
Assets
                                                       
 
Continuing Operations
                                                       
Investment securities available-for-sale:
                                                       
Mortgage-backed securities
  $ 37                       $ (3 )   $ 34        
 
Total investment securities available-for-sale
  $ 37                       $ (3 )   $ 34        
 
Trading account securities:
                                                       
Collateralized mortgage obligations
  $ 3                       $ 1     $ 4        
Residential mortgage-backed securities-federal agencies
    292     $ 2                   (61 )     233     $ 5 (a)
Other
    5       (1 )                       4       (a)
 
Total trading account securities
  $ 300     $ 1                 $ (60 )   $ 241     $ 5  
 
Mortgage servicing rights
  $ 176     $ (16 )               $ 20     $ 180     $ (6 )(c)
 
Discontinued Operations
                                                       
Loans measured at fair value pursuant to fair value option
  $ 5     $ 1                 $ (6 )           (b)
 
Total
  $ 518     $ (14 )               $ (49 )   $ 455     $ (1 )
 
a)   Gains (losses) are included in “Trading account profit” in the statement of operations
 
b)   Gains (losses) are included in “Loss from discontinued operations, net of tax” in the statement of operations
 
c)   Gains (losses) are included in “Other service fees” in the statement of operations

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    Quarter ended September 30, 2008
 
                                                    Changes in
                                                    unrealized
                                                    gains (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
            Gains   included in   in accrued   paydowns   Balance as   liabilities still
    Balance   (losses)   other   interest   and   of   held as of
    as of June   included in   comprehensive   receivable   maturities   September   September 30,
(In millions)   30, 2008   Earnings   Income   / payable   (net)   30, 2008   2008
 
Assets
                                                       
 
Continuing Operations
                                                       
Investment securities available-for-sale:
                                                       
Mortgage-backed securities
  $ 38                       $ (1 )   $ 37        
 
Total investment securities available-for-sale
  $ 38                       $ (1 )   $ 37        
 
Trading account securities:
                                                       
Collateralized mortgage obligations
  $ 3                             $ 3        
Residential mortgage-backed securities-federal agencies
    301     $ 1                 $ (73 )     229     $ (1 )(a)
Other
    6                         (1 )     5        
 
Total trading account securities
  $ 310     $ 1                 $ (74 )   $ 237     $ (1 )
 
Mortgage servicing rights
  $ 130     $ (10 )               $ 8     $ 128     $ (7 )(c)
 
Discontinued Operations
                                                       
Residual interests-available-for-sale
  $ 3     $ (3 )                                
Residual interests - trading
    35       (29 )               $ (2 )   $ 4     $ (32 )(b)
Mortgage servicing rights
    56       (19 )                       37       (12 )(b)
Loans measured at fair value pursuant to fair value option
    845       (137 )         $ (1 )     (123 )     584       (111 )(b)
 
Total
  $ 1,417     $ (197 )         $ (1 )   $ (192 )   $ 1,027     $ (163 )
 
Liabilities
                                                       
 
Discontinued Operations
                                                       
Notes payable measured at fair value pursuant to fair value option
  $ (174 )   $ (3 )               $ 11     $ (166 )   $ (3 )(b)
 
Total
  $ (174 )   $ (3 )               $ 11     $ (166 )   $ (3 )
 
a)   Gains (losses) are included in “Trading account profit” in the statement of operations
 
b)   Gains (losses) are included in “Loss from discontinued operations, net of tax” in the statement of operations
 
c)   Gains (losses) are included in “Other service fees” in the statement of operations

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    Nine months ended September 30, 2008
 
                                                    Changes in
                                                    unrealized
                                                    gains (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
    Balance   Gains   included in   in accrued   paydowns   Balance as   liabilities still
    as of   (losses)   other   interest   and   of   held as of
    January 1,   included in   comprehensive   receivable   maturities   September   September 30,
(In millions)   2008   earnings   income   / payable   (net)   30, 2008   2008
 
Assets
                                                       
 
Continuing Operations
                                                       
Investment securities available-for-sale:
                                                       
Mortgage-backed securities
  $ 39                       $ (2 )   $ 37        
 
Total investment securities available-for-sale
  $ 39                       $ (2 )   $ 37        
 
Trading account securities:
                                                       
Collateralized mortgage obligations
  $ 3                             $ 3        
Residential mortgage- backed securities- federal agencies
    227     $ 4                 $ (2 )     229     $ 2 (a)
Other
    3                         2       5        
 
Total trading account securities
  $ 233     $ 4                       $ 237     $ 2  
 
Mortgage servicing rights
  $ 111     $ (9 )               $ 26     $ 128     $ (1 )(c)
 
Discontinued Operations
                                                       
Residual interests — available-for-sale
  $ 4     $ (4 )                              
Residual interests — trading
    40       (32 )               $ (4 )   $ 4     $ (43 )(b)
Mortgage servicing rights
    81       (44 )                       37       (23 )(b)
Loans measured at fair value pursuant to fair value option
    987       (170 )         $ (3 )     (230 )     584       (96 )(b)
 
Total
  $ 1,495     $ (255 )         $ (3 )   $ (210 )   $ 1,027     $ (161 )
 
Liabilities
                                                       
 
Discontinued Operations
                                                       
Notes payable measured at fair value pursuant to fair value option
  $ (201 )   $ (9 )               $ 44     $ (166 )   $ (9 )(b)
 
Total
  $ (201 )   $ (9 )               $ 44     $ (166 )   $ (9 )
 
a)   Gains (losses) are included in “Trading account profit” in the statement of operations
 
b)   Gains (losses) are included in “Loss from discontinued operations, net of tax” in the statement of operations
 
c)   Gains (losses) are included in “Other service fees” in the statement of operations
 
There were no transfers in and / or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarters and nine months ended September 30, 2009 and 2008.

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Gains and losses (realized and unrealized) included in earnings for the quarters and nine months ended September 30, 2009 and 2008 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:
                                 
    Quarter ended September 30, 2009   Nine months ended September 30, 2009
 
            Change in           Change in
            unrealized gains           unrealized gains
            (losses) relating to           (losses) relating to
    Total gains (losses)   assets / liabilities   Total gains (losses)   assets / liabilities
    included in   still held at   included in   still held at
(In millions)   earnings   reporting date   earnings   reporting date
 
Continuing Operations
                               
Other service fees
  $ (7 )   $ (4 )   $ (16 )   $ (6 )
Trading account profit
          1       1       5  
Discontinued Operations
                               
Loss from discontinued operations, net of tax
              $ 1        
 
Total
  $ (7 )   $ (3 )   $ (14 )   $ (1 )
 
                                 
    Quarter ended September 30, 2008   Nine months ended September 30, 2008
 
            Change in           Change in
            unrealized gains           unrealized gains
            (losses) relating to           (losses) relating to
    Total gains (losses)   assets / liabilities   Total gains (losses)   assets / liabilities
    included in   still held at   included in   still held at
(In millions)   earnings   reporting date   earnings   reporting date
 
Continuing Operations
                               
Other service fees
  $ (10 )   $ (7 )   $ (9 )   $ (1 )
Trading account profit
    1       (1 )     4       2  
Discontinued Operations
                               
Loss from discontinued operations, net of tax
    (191 )     (158 )     (259 )     (171 )
 
Total
  $ (200 )   $ (166 )   $ (264 )   $ (170 )
 
Additionally, the Corporation may be required to measure certain assets at fair value in periods subsequent to initial recognition on a nonrecurring basis in accordance with generally accepted accounting principles. The adjustments to fair value usually result from the application of lower of cost or market accounting, identification of impaired loans requiring specific reserves under ASC 310-10-35 “Accounting by Creditors for Impairment of a Loan” (formerly SFAS No. 114), or write-downs of individual assets. The following tables present financial and non-financial assets that were subject to a fair value measurement on a nonrecurring basis during the nine months ended September 30, 2009 and 2008 and year ended December 31, 2008, and which were still included in the consolidated statement of condition as of such dates. The amounts disclosed represent the aggregate of the fair value measurements of those assets as of the end of the reporting period.
                                 
Carrying value as of September 30, 2009
 
    Quoted prices in            
    active markets   Significant other   Significant    
    for identical   observable   unobservable    
    assets   inputs   inputs   Total
(In millions)   Level 1   Level 2   Level 3        
 
Assets
                               
 
Continuing Operations
                               
Loans (1)
              $ 743     $ 743  
Other real estate owned (2)
                27       27  
Other foreclosed assets (2)
                6       6  
 
Total
              $ 776      $ 776   
 
(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 310-10-35.
 
(2)   Represents the fair value of foreclosed real estate and other collateral owned that were measured at fair value.

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Carrying value as of December 31, 2008
 
    Quoted prices in            
    active markets   Significant other   Significant    
    for identical   observable   unobservable    
    assets   inputs   inputs   Total
(In millions)   Level 1   Level 2   Level 3        
 
Assets
                               
 
Continuing Operations
                               
Loans (1)
              $ 523     $ 523  
Loans held-for-sale (2)
                364       364  
Discontinued Operations
                               
Loans held-for-sale (2)
                2       2  
 
Total
              $ 889     $ 889  
 
(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 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.
                                 
Carrying value as of September 30, 2008
 
    Quoted prices in            
    active markets   Significant other   Significant    
    for identical   observable   unobservable    
    assets   inputs   inputs   Total
(In millions)   Level 1   Level 2   Level 3        
 
Assets
                               
 
Continuing Operations
                               
Loans (1)
              $ 474     $ 474  
Discontinued Operations
                               
Loans held-for-sale (2)
                42       42  
Securitization advances
                280       280  
 
Total
              $ 796     $ 796  
 
(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 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.
 
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 non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments presented in these note disclosures do not represent management’s estimate of the underlying value of the Corporation.
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. The fair value of U.S. agency securities is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2.
    Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as MSRB, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2.

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    Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally-prepared pricing matrix with quoted prices from local broker dealers. These particular MBS are classified as Level 3.
    Collateralized mortgage obligations: Agency and private collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These investment securities are classified as Level 2.
    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 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, the corporate securities and mutual funds are classified as Level 2. The important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently or are in distress are classified as Level 3.
Derivatives
Interest rate swaps, interest rate caps and index 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 exchange-traded, such as futures and options, or 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.
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayments assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3.
Loans held-in-portfolio considered impaired under ASC 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 310-10-35. Currently, the associated loans considered impaired are classified as Level 3.
Loans measured at fair value pursuant to lower of cost or fair value adjustments
Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on bids received from potential buyers, secondary market prices, and discounting cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3.
Other real estate owned and other foreclosed assets
Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

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Note 13 — 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.
Derivatives are considered financial instruments and their carrying value equals fair value. For disclosures about the fair value of derivative instruments refer to Note 10 to the consolidated financial statements.
For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions.
The fair values reflected herein have been determined based on the prevailing interest rate environment as of September 30, 2009 and December 31, 2008, respectively. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The methods and assumptions used to estimate the fair values of significant financial instruments as of September 30, 2009 and December 31, 2008 are described in the paragraphs below.
Short-term financial assets and liabilities have relatively short maturities, or no defined maturities, and little or no credit risk. The carrying amounts reported in the consolidated statements of condition approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Included in this category are: cash and due from banks, federal funds sold and securities purchased under agreements to resell, time deposits with other banks, bankers acceptances, federal funds purchased and assets sold under agreements to repurchase, and short-term borrowings. 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 statement of condition, are financial instruments that regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to-market for accounting purposes. These instruments are detailed in the consolidated statements of condition and in Notes 6 and 7.
The estimated fair value for loans held-for-sale is based on secondary market prices. 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, the 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.

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The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW, and money market accounts is, for purposes of this disclosure, equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using interest rates being offered on certificates with similar maturities. The value of these deposits in a transaction between willing parties is in part dependent of the buyer’s ability to reduce the servicing cost and the attrition that sometimes occurs. Therefore, the amount a buyer would be willing to pay for these deposits could vary significantly from the presented fair value.
Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments as of September 30, 2009 and December 31, 2008.
As part of the fair value estimation procedures of certain liabilities, including repurchase agreements (regular and structured) and FHLB advances, the Corporation considered, where applicable, the collaterization levels as part of its evaluation of non-performance risk. Also, for certificates of deposit, the non-performance risk is determine using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution.
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 is based on fees currently charged on similar agreements.
Carrying or notional amounts, as applicable, and estimated fair values for financial instruments were:
                                 
    September 30, 2009   December 31, 2008
 
    Carrying   Fair   Carrying   Fair
(In thousands)   amount   value   amount   value
 
Financial Assets:
                               
Cash and money market investments
  $ 1,705,684     $ 1,705,684     $ 1,579,641     $ 1,579,641  
Trading securities
    446,368       446,368       645,903       645,903  
Investment securities available-for-sale
    6,993,291       6,993,291       7,924,487       7,924,487  
Investment securities held-to-maturity
    212,950       210,913       294,747       290,134  
Other investment securities
    174,943       176,286       217,667       255,830  
Loans held-for-sale
    75,447       78,600       536,058       541,576  
Loans held-in-portfolio, net
    23,188,668       20,014,249       24,850,066       17,383,956  
 
                               
Financial liabilities:
                               
Deposits
  $ 26,382,898     $ 26,533,222     $ 27,550,205     $ 27,793,826  
Federal funds purchased
                144,471       144,471  
Assets sold under agreements to repurchase
    2,807,891       2,952,494       3,407,137       3,592,236  
Short-term borrowings
    3,077       3,077       4,934       4,934  
Notes payable
    2,649,821       2,466,172       3,386,763       3,257,491  
 
                                 
    Notional   Fair   Notional   Fair
(In thousands)   amount   Value   Amount   Value
 
Commitments to extend credit
  6,951,406     561     $ 7,116,977     $ 943  
Letters of credit
    180,400       1,672       199,795       3,938  

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Note 14 — Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Federal funds purchased
        $ 144,471     $ 139,951  
Assets sold under agreements to repurchase
  $ 2,807,891       3,407,137       3,590,088  
 
 
  $ 2,807,891     $ 3,551,608     $ 3,730,039  
 
Other short-term borrowings consisted of:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Advances with the FHLB paying interest at maturity at fixed rates ranging from 2.62% to 3.08%
              $ 115,000  
Advances under credit facilities with other institutions at a fixed rate of 3.25%
                10,000  
Unsecured borrowings with private investors paying interest at a fixed rate of 0.45%
  $ 1,750     $ 3,548        
Term notes purchased paying interest at maturity at fixed rates ranging from 2.20% to 3.40%
                37,232  
Term funds purchased paying interest at fixed rates ranging from 2.53% to 2.75%
                343,000  
Other
    1,327       1,386       1,779  
 
 
  $ 3,077     $ 4,934     $ 507,011  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2008, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable consisted of:
                         
    September 30,   December 31,   September 30,
(In thousands)   2009   2008   2008
 
Advances with the FHLB:
                       
–with maturities ranging from 2010 through 2015 paying interest at monthly fixed rates ranging from 1.48% to 5.06% (September 30, 2008 - 2.67% to 6.98%)
  $ 1,105,429     $ 1,050,741     $ 1,241,717  
–maturing in 2010 paying interest quarterly at a fixed rate of 5.10%
    20,000       20,000        
 
                       
Advances under revolving lines of credit with maturities ranging from 2008 to 2009 paying interest quarterly at floating rates ranging from 0.20% to 0.27% over the 3- month LIBOR rate
                85,000  
 
                       
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%
    3,100       3,100       3,100  
 
                       
Term notes with maturities ranging from 2009 to 2013 paying interest semiannually at fixed rates ranging from 5.20% to 9.75% (September 30, 2008 - 3.88% to 7.00%)
    383,289       995,027       1,579,509  
 
                       
Term notes with maturities ranging from 2009 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate
    2,111       3,777       4,642  
 
                       
Term notes maturing in 2011 paying interest quarterly at a floating rate of 6.00% to 7.5% (September 30, 2008 - 0.40% to 3.25%) over the 3-month LIBOR rate
    250,000       435,543       449,880  
 
                       
Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Notes 15 and 16)
    439,800       849,672       849,672  
 
                       
Junior subordinated deferrable interest debentures ($936,000 less discount of $517,167) with no stated maturity and a fixed interest rate of 5.00% until, but excluding December 5, 2013 and 9.00% thereafter (Refer to Notes 15 and 16)
    418,833              
 
                       
Other
    27,259       28,903       28,967  
 
 
  $ 2,649,821     $ 3,386,763     $ 4,242,487  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2008, for rates and maturity information corresponding to the borrowings outstanding as of such date. Key index rates as of September 30, 2009 and September 30, 2008, respectively, were as follows: 3-month LIBOR rate = 0.29% and 4.05%; 10-year U.S. Treasury note = 3.31% and 3.83%.
 
As of September 30, 2009, the holders of $25 million of certain of the Corporation’s fixed-rate term notes and $75 million of the Corporation’s floating rate term notes have the right to require the Corporation to purchase the notes on each quarterly interest payment date beginning in March 2010. These notes were issued by the Corporation in 2008 and mature in 2011, subject to the right of investors to require their earlier repurchase by the Corporation. Effective on September 30, 2009, the holders of an additional $175 million of the Corporation’s floating rate term notes agreed with the Corporation to relinquish and waive the right to require the Corporation to repurchase the notes. These notes, prior to the modification, had similar rights to the notes described above. The Corporation agreed to pay the holders of these notes additional interest on the principal amount of the notes at the rate of 1.50% per annum commencing on October 1, 2009.
Included in the table above is $350 million in term notes with interest that adjusts in the event of senior debt rating downgrades. As a result of rating downgrades by the major rating agencies in January 2009, April 2009 and June 2009, the cost of the senior debt increased prospectively by an additional 275 basis points during 2009. The senior debt consists of term notes of $75 million with a fixed rate of 9.75% as of September 30, 2009, $25 million with a fixed rate of 9.41% as of September 30, 2009 and $250 million in term notes with a floating rate of 6.00% over the 3-month LIBOR as of September 30, 2009. These term notes mature in 2011.

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The maturities of borrowings as of September 30, 2009 were as follows:
                                 
    Repurchase   Short-term        
(In thousands)   agreements   borrowings   Notes payable   Total
 
Year
                               
2009
  $ 1,295,464     $ 3,077     $ 1,216     $ 1,299,757  
2010
    350,238             386,481       736,719  
2011
    50,000             697,213       747,213  
2012
    75,000             531,747       606,747  
2013
    49,000             133,273       182,273  
2014
    350,000             10,824       360,824  
Later years
    638,189             470,234       1,108,423  
No stated maturity
                418,833       418,833  
 
Total
  $ 2,807,891     $ 3,077     $ 2,649,821     $ 5,460,789  
 
Note 15 — Exchange Offers
In June 2009, the Corporation commenced an offer to issue shares of its common stock in exchange for its Series A preferred stock and Series B preferred stock and for trust preferred securities (also referred as capital securities). On August 25, 2009, the Corporation completed the settlement of the exchange offer and issued over 357 million new shares of common stock.
Exchange of preferred stock for common stock
The exchange by holders of shares of the Series A and B non-cumulative preferred stock for shares of common stock resulted in the extinguishment of such shares of preferred stock and an issuance of shares of common stock.
In accordance with the terms of the exchange offer, the Corporation used a relevant price of $2.50 per share of its common stock and an exchange ratio of 80% of the preferred stock liquidation value to determine the number of shares of its common stock issued in exchange for the tendered shares of Series A and B preferred stock. The fair value of the common stock was $1.71 per share, which was the price as of August 20, 2009, the expiration date of the exchange offer. The carrying (liquidation) value of each share of Series A and B preferred stock exchanged was reduced and common stock and surplus increased in the amount of the fair value of the common stock issued. The Corporation recorded the par amount of the shares issued as common stock ($0.01 per common share). The excess of the common stock fair value over the par amount was recorded in surplus. The excess of the carrying amount of the shares of preferred stock over the fair value of the shares of common stock was recorded as a reduction to accumulated deficit and an increase in earnings per common share computations.
The results of the exchange offer with respect to the Series A and B preferred stock were as follows:
                                                 
                                    Aggregate    
            Shares of                   liquidation    
    Per security   preferred stock           Shares of   preference    
    liquidation   outstanding   Shares of   preferred stock   amount after   Shares of
Title of   preference   prior to   preferred stock   outstanding after   exchange   common stock
Securities   Amount   exchange   exchanged   exchange   (In thousands)   issued
 
6.375% Non-cumulative monthly income preferred stock, 2003 Series A
  $ 25       7,475,000       6,589,274       885,726     $ 22,143       52,714,192  
8.25% Non-cumulative monthly income preferred stock, Series B
  $ 25       16,000,000       14,879,335       1,120,665     $ 28,017       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

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as part of earnings applicable to common stockholders in the earnings (losses) per common share (“EPS”) computations. Refer to Note 18 to the consolidated financial statements for a reconciliation of EPS.
Common stock issued in connection with early extinguishment of debt (exchange of trust preferred securities for common stock)
Also, during the third quarter of 2009, the Corporation exchanged trust preferred securities (also referred to as capital securities) issued by different trusts for shares of common stock of the Corporation. See table below for a list of such securities and trusts. 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 in the past. 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 million on the extinguishment of the applicable junior subordinated debentures that was included in the consolidated statement of operations for the third quarter of 2009. This transaction was accounted as an early extinguishment of debt.
In accordance with the terms of the exchange offer, the Corporation used a relevant price of $2.50 per share of its common stock and the exchange ratios referred to in the table below to determine the number of shares of its common stock issued in exchange for the validly tendered trust preferred securities. The fair value of the common stock was $1.71 per share, which was the price as of August 20, 2009, the expiration date of the exchange offer. The carrying value of the junior subordinated debentures was reduced and common stock and surplus increased in the amount of the fair value of the common stock issued. The Corporation recorded the par amount of the shares issued as common stock ($0.01 per common share). The excess of the common stock fair value over the par amount was recorded in surplus. The excess of the carrying amount of the junior subordinated debentures retired over the fair value of the common stock issued was recorded as a gain on early extinguishment of debt in the consolidated statement of operations for the quarter ended September 30, 2009.

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The results of the exchange offer with respect to the trust preferred securities were as follows:
                                                         
                                                    Aggregate
                                                    liquidation
                                            Aggregate   preference
                                            liquidation   amount of
                                            preference   junior
    Liquidation   Trust   Trust preferred   Trust           amount of   subordinated
    preference   preferred   securities   preferred   Trust preferred   trust preferred   debentures
    amount per   security   outstanding   securities   securities   securities after   after
Title of   trust preferred   exchange   prior to   exchanged for   outstanding   exchange   exchange
Securities   security   value   exchange   common stock   after exchange   (In thousands)   (In thousands)
 
8.327% Trust Preferred Securities (issued by BanPonce Trust I)
  $ 1,000     $1,150 or 115%     144,000       91,135       52,865     $ 52,865     $ 54,502  
6.70% Cumulative Monthly Income Trust Preferred Securities (issued by Popular Capital Trust I)
  $ 25     $30 or 120%     12,000,000       4,757,480       7,242,520     $ 181,063     $ 186,664  
6.564% Trust Preferred Securities (issued by Popular North America Capital Trust I)
  $ 1,000     $1,150 or 115%     250,000       158,349       91,651     $ 91,651     $ 94,486  
6.125% Cumulative Monthly Income Trust Preferred Securities (issued by Popular Capital Trust II)
  $ 25     $30 or 120%     5,200,000       1,159,080       4,040,920     $ 101,023     $ 104,148  
 
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 costs, and including the aforementioned gain on the early extinguishment of debt.
Exchange of preferred stock held by the U.S. Treasury for trust preferred securities
Also, on August 21, 2009, Popular, Inc. and Popular Capital Trust III entered into an exchange agreement with the United States Department of the Treasury (“U.S. Treasury”) pursuant to which the U.S. Treasury agreed with Popular that the U.S. Treasury would exchange all 935,000 shares of Popular’s outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000 liquidation preference per share (the “Series C Preferred Stock”), owned by the U.S Treasury for 935,000 newly issued trust preferred securities, $1,000 liquidation amount per capital security. The trust preferred securities were issued to the U.S. Treasury on August 24, 2009. 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 liquidation amount of its fixed rate common securities, to purchase $936 million aggregate principal amount of the junior subordinated debentures issued by the Corporation.

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The trust preferred securities issued to the U.S. Treasury have a distribution rate of 5% until, but excluding December 5, 2013 and 9% thereafter (which is the same as the dividend rate on the Series C Preferred Stock). The common securities of the trust, in the amount of $1 million, are held by Popular.
The sole asset and only source of funds to make payments on the trust preferred securities and the common securities of the trust is $936 million of Popular’s Fixed Rate Perpetual Junior Subordinated Debentures, Series A, issued by Popular to the trust. These debentures have an interest rate of 5% until, but excluding December 5, 2013 and 9% thereafter. 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.
Under the guarantee agreement dated as of August 24, 2009, Popular irrevocably and unconditionally agrees to pay in full to the holders of the trust preferred securities the guarantee payments, as and when due. The Corporation’s obligation to make the guaranteed payment may be satisfied by direct payment of the required amounts to the holders of the trust preferred securities or by causing the issuer trust to pay such amounts to the holders. The obligations of the Corporation under the guarantee agreement constitute unsecured obligations and rank subordinate and junior in right of payment to all senior debt. The obligations of 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, among others stated in the guarantee agreement. Under the guarantee agreement, the Corporation has 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.
Under the exchange agreement, Popular’s agreement that, without the consent of the U.S. Treasury, it would not increase its dividend rate per share of common stock above that in effect as of October 14, 2008 or repurchase shares of its common stock until, in each case, the earlier of December 5, 2011 or such time as all of the new trust preferred securities have been redeemed or transferred by the U.S. Treasury, remains in effect.
The warrant to purchase 20,932,836 shares of Popular’s common stock at an exercise price of $6.70 per share that was initially issued to the U.S Treasury in connection with the issuance of the Series C preferred stock on December 5, 2008 remains outstanding without amendment.
The trust preferred securities issued to the U.S. Treasury continue to qualify as Tier 1 regulatory capital as of September 30, 2009. The trust preferred securities are subject to the 25% limitation on Tier 1 capital.
Popular paid an exchange fee of $13 million to the U.S. Treasury in connection with the exchange of outstanding shares of Series C preferred stock for the new trust preferred securities. This exchange fee will be amortized through interest expense using the interest yield method over the estimated life of the junior subordinated debentures.
This transaction with the U.S. Treasury was accounted for as an extinguishment of previously issued Series C preferred stock. The accounting impact of this transaction included (1) recognition of junior subordinated debentures 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 consideration exchanged (the trust preferred securities); (3) the reversal of any unamortized discount outstanding on the Series C preferred stock and (4) issuance costs. The reduction in total stockholders’ equity related to U.S. Treasury exchange transaction 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 $519 million discount on the junior subordinated debentures described in item (2) above. This discount as well as the debt issue costs will be amortized through interest expense using the interest yield method over the estimated life of the junior subordinated debentures.
This particular exchange resulted in a favorable impact to accumulated deficit of $485.3 million, which is also considered as part of earnings applicable to common stockholders in the earnings (losses) per common share (“EPS”) computations. Refer to Note 18 to the consolidated financial statements for a reconciliation of EPS.
The fair value of the trust preferred securities (junior subordinated debentures for purposes of the Corporation’s financial statements) at the date of the exchange agreement was determined internally using a discounted cash flow

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model. The main considerations were (1) quarterly interest payment of 5% until, but excluding December 5, 2013 and 9% thereafter; (2) assumed maturity date of 30 years, and (3) assumed discount rate of 16%. The assumed discount rate used for estimating the fair value was estimated by obtaining the yields at which comparably-rated issuers were trading in the market and considering the amount of trust preferred securities issued to the U.S. Treasury and the credit rating of the Corporation.
Note 16 — Trust Preferred Securities
As of September 30, 2009 and 2008, the Corporation had established four trusts (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) for the purpose of issuing trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The amounts outstanding in each of the four trusts as of September 30, 2009 were impacted by the exchange offers described in Note 15 to these consolidated financial statements.
Also, as described in Note 15, in August 2009, the Corporation established the Popular Capital Trust III for the purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury for trust preferred securities issued by this trust. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation.
Refer to Note 15 to the consolidated financial statements for further information on the impact of the Exchange Offer on the trust preferred securities.
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.
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
Financial data pertaining to the trusts as of September 30, 2009 was as follows:
                                         
(In thousands)
                    Popular North        
    BanPonce   Popular Capital   America Capital   Popular Capital   Popular Capital
Issuer   Trust I   Trust I   Trust I   Trust II   Trust III
 
Capital securities
  $ 52,865     $ 181,063     $ 91,651     $ 101,023         $935,000
 
                                  5.000% until, but excluding
 
                                  December 5, 2013 and
Distribution rate
    8.327 %     6.700 %     6.564 %     6.125 %   9.000% thereafter
 
                                       
Common securities
  $ 1,637     $ 5,601     $ 2,835     $ 3,125         $1,000
Junior subordinated
  $ 54,502     $ 186,664     $ 94,486     $ 104,148     $936,000 aggregate
debentures aggregate liquidation amount
                                  liquidation preference amount (carrying value of $418,833, net
 
                                  of discount of $517,167)
 
                                       
Stated maturity date
    February 2027       November 2033       September 2034       December 2034     No stated maturity
 
                                       
Reference notes
    (a),(c),(f),(g)       (b),(d),(f)       (a),(c),(f)       (b),(d),(f)         (b),(d),(h)

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Financial data pertaining to the trusts as of December 31, 2008 and September 30, 2008 were as follows:
                                         
(In thousands)  
                    Popular North              
    BanPonce     Popular Capital     America Capital     Popular Capital     Popular Capital  
Issuer   Trust I     Trust I     Trust I     Trust II     Trust III  
 
Capital securities
  $ 144,000     $ 300,000     $ 250,000     $ 130,000        
Distribution rate
    8.327 %     6.700 %     6.564 %     6.125 %      
Common securities
  $ 4,640     $ 9,279     $ 7,732     $ 4,021        
Junior subordinated debentures aggregate liquidation amount
  $ 148,640     $ 309,279     $ 257,732     $ 134,021        
Stated maturity date
  February 2027     November 2033     September 2034     December 2034        
Reference notes
    (a),(c),(e),(f),(g)     (b),(d),(f)     (a),(c),(f)     (b),(d),(f)      
   
 
(a)   Statutory business trust that is wholly-owned by Popular North America (“PNA”) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   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.
 
(d)   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.
 
(e)   The original issuance was for $150 million. The Corporation had reacquired $6 million of the 8.327% capital securities.
 
(f)   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.
 
(g)   Same as (f) above, except that the investment company event does not apply for early redemption.
 
(h)   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.
 
Note 17 — Stockholders’ Equity
On May 1, 2009, the stockholders of the Corporation approved an amendment to the Corporation’s Certificate of Incorporation to increase the number of authorized shares of common stock from 470,000,000 shares to 700,000,000 shares. The stockholders also approved a decrease in the par value of the common stock of the Corporation from $6 per share to $0.01 per share. The decrease in the par value of the Corporation’s common stock had no effect on the total dollar value of the Corporation’s stockholders’ equity. During the quarter ended June 30, 2009, the Corporation transferred an amount equal to the product of the number of shares issued and outstanding and $5.99 (the difference between the old and new par values), from the common stock account to surplus (additional paid-in capital).
On February 19, 2009, the Board of Directors of the 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 depicted in the accompanying Consolidated Statement of Changes in Stockholders’ Equity.
The Corporation’s authorized preferred stock 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 preferred stock outstanding as of September 30, 2009 consisted of:

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    885,726 shares of 6.375% non-cumulative monthly income preferred stock, 2003 Series A, no par value, liquidation preference value of $25 per share. Cash dividends declared and paid on the 2003 Series A preferred stock amounted to $6.0 million for the nine months September 30, 2009 (2008 — $8.9 million). The Corporation did not pay dividends on the Series A preferred stock during the third quarter of 2009 (2008 — $3.0 million).
 
    1,120,665 shares of 8.25% non-cumulative monthly income preferred stock, 2008 Series B, no par value, liquidation preference value of $25 per share. Cash dividends declared and paid on the 2008 Series B preferred stock amounted $16.5 million for the nine months ended September 30, 2009 (2008 — $11.3 million). The Corporation did not pay dividends on the Series B preferred stock during the third quarter of 2009 (2008 — $8.3 million).
During the third quarter of 2009, the Corporation issued 357,510,076 new shares of common stock in exchange of its Series A and Series B preferred stock and trust preferred securities, which resulted in an increase in common stockholders’ equity of $923.0 million. This increase included newly issued common stock and surplus of $612.4 million and a favorable impact to accumulated deficit of $310.6 million, including $80.3 million in gains on the extinguishment of junior subordinated debentures that relate to the trust preferred securities. Refer to Notes 15 and 16 for information on the exchange offers.
As of December 31, 2008, the Corporation had outstanding 935,000 shares of its fixed rate cumulative perpetual preferred stock, Series C, $1,000 liquidation preference per share issued to the U.S. Department of Treasury (“U.S. Treasury”) in December 2008. Refer to Note 15 to the consolidated financial statements for information on the exchange agreement dated August 21, 2009 related to these shares of preferred stock. In December 2008, the Corporation also issued to the U.S. Treasury a warrant to purchase 20,932,836 shares of Popular’s common stock at an exercise price of $6.70 per share, which continues outstanding in full and without amendment as of September 30, 2009. The Corporation paid cash dividends on the Series C preferred stock during the nine months ended September 30, 2009 amounting to $20.8 million. No dividends on the Series C preferred stock were paid in the third quarter of 2009.
Refer to the 2008 Annual Report for details on the terms of each class of preferred stock.
During the quarter ended September 30, 2009, no cash dividends per share were paid to shareholders of the Corporation’s common stock (September 30, 2008 — $0.16 per common share or $45.0 million). During the nine months ended September 30, 2009, cash dividends of $0.10 per common share outstanding amounting to $28.2 million were paid to shareholders of the Corporation’s common stock (September 30, 2008 — $0.48 per common share or $134.7 million).
In June 2009, the Corporation announced the suspension of dividends on the Corporation’s common stock and Series A and B preferred stock.
The dividends paid to holders of the Corporation’s preferred stock must be declared by the Corporation’s Board of Directors. On a regular basis, the Board reviews various factors when considering the payment of dividends on the Corporation’s outstanding preferred stock, including its capital levels, recent and projected financial results and liquidity. The Board is not obligated to declare dividends and dividends do not accumulate in the event they are not paid.
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. All series of preferred stock are pari passu. Dividends on each series of preferred stock are payable if declared. The Corporation’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common 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, legal availability of funds, recent and projected financial results, capital levels and liquidity of the Corporation, general business conditions and other factors deemed relevant by the Corporation’s Board of Directors.

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The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $392 million as of September 30, 2009 (December 31, 2008 — $392 million; September 30, 2008 — $374 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters and nine months ended September 30, 2009 and 2008.
Note 18 — Earnings (Losses) per Common Share
The computation of earnings (losses) per common share (“EPS”) follows:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands, except share information)   2009   2008   2009   2008
 
Net loss from continuing operations
  $ (121,561 )   $ (211,173 )   $ (340,720 )   $ (52,761 )
Net loss from discontinued operations
    (3,427 )     (457,370 )     (19,972 )     (488,242 )
Preferred stock dividends (1)
    5,974       (11,229 )     (39,857 )     (20,210 )
Preferred stock discount accretion
    (1,040 )           (4,515 )      
Favorable impact from exchange of shares of Series A and B preferred stock for common stock, net of issuance costs (Refer to Note 15)
    230,388             230,388        
Favorable impact from exchange of Series C preferred stock to trust preferred securities (Refer to Note 15)
    485,280             485,280        
 
 
                               
Net income (loss) applicable to common stock
  $ 595,614     $ (679,772 )   $ 310,604     $ (561,213 )
 
 
                               
Average common shares outstanding
    425,672,578       281,489,469       330,325,348       280,841,638  
Average potential common shares
                       
 
Average common shares outstanding — assuming dilution
    425,672,578       281,489,469       330,325,348       280,841,638  
 
 
                               
Basic and diluted EPS from continuing operations
  $ 1.41     $ (0.79 )   $ 1.00     $ (0.27 )
Basic and diluted EPS from discontinued operations
    (0.01 )     (1.63 )     (0.06 )     (1.73 )
 
Basic and diluted EPS
  $ 1.40     $ (2.42 )   $ 0.94     $ (2.00 )
 
 
(1)   Amount presented for the quarter ended September 30, 2009 represents the reversal of dividends on Series C preferred stock considered accrued as of June 30, 2009 for EPS purposes only. These cumulative dividends were not paid as dividends to the Series C preferred stockholders given the terms of the exchange agreement to trust preferred securities, which was effected in August 2009. The exchange agreement is discussed in Note 15 to the consolidated financial statements.
 
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants and stock options 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 share. For the quarter and nine-month period ended September 30, 2009, there were 2,674,505 and 2,770,846 weighted average antidilutive stock options outstanding, respectively (September 30, 2008 — 3,012,350 and 3,049,600). Additionally, the Corporation has outstanding a warrant to purchase 20,932,836 shares of common stock, which have an antidilutive effect as of September 30, 2009.
Note 19 — Commitments, Contingencies and Guarantees
Commercial letters of credit and stand-by letters of credit amounted to $18 million and $162 million, respectively, as

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of September 30, 2009 (December 31, 2008 — $19 million and $181 million; September 30, 2008 — $28 million and $175 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
As of September 30, 2009, the Corporation recorded a liability of $0.6 million (December 31, 2008 - $0.7 million and September 30, 2008 — $0.6 million), which represents the fair value of the obligations undertaken in issuing the guarantees under stand-by 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 liability was included as part of “other liabilities” in the consolidated statements of condition. The contract amounts in stand-by letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s stand-by 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 and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
The Corporation securitizes mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, full or lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. Also, from time to time, the Corporation may sell loans subject to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties. Generally, the Corporation retains the right to service the loans when securitized or sold with credit recourse.
As of September 30, 2009, the Corporation serviced $4.5 billion (December 31, 2008 — $4.9 billion and September 30, 2008 — $3.8 billion) in residential mortgage loans with credit recourse or other servicer-provided credit enhancement. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to reimburse the third party investor for loss or repurchase the loan. The maximum potential amount of future payments that the Corporation would be required to make under the agreement in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced. In the event of nonperformance, the Corporation has rights to the underlying collateral securing the mortgage loan. Historically, the losses associated with these guarantees have not been significant. As of September 30, 2009, the Corporation had reserves of approximately $16 million (December 31, 2008 - $14 million and September 30, 2008 — $8 million) to cover the estimated credit loss exposure. As of September 30, 2009, the Corporation also serviced $13.2 billion (December 31, 2008 — $12.7 billion and September 30, 2008 — $16.2 billion) in mortgage loans without recourse or other servicer-provided credit enhancement. Although the Corporation may, from time to time, be required to make advances to maintain a regular flow of scheduled interest and principal payments to investors, including special purpose entities, this does not represent an insurance against losses. These loans serviced are mostly insured by FHA, VA, and others.
As disclosed in the 2008 Annual Report, during 2008, the Corporation provided indemnifications for the breach of certain representations or warranties in connection with certain sales of assets by the discontinued operations of PFH. Generally, the primary indemnifications included:
  Indemnification for breaches of certain key representations and warranties, including corporate authority, due organization, required consents, no liens or encumbrances, compliance with laws as to origination and servicing, no litigation relating to violation of consumer lending laws, and absence of fraud.
  Indemnification for breaches of all other representations including general litigation, general compliance with laws, ownership of all relevant licenses and permits, compliance with the seller’s obligations under the pooling and servicing agreements, lawful assignment of contracts, valid security interest, good title and all files and documents are true and complete in all material respects, among others.
Certain of the representations and warranties covered under these indemnifications 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

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price. In the event of a breach of a representation, the Corporation may be required to repurchase the loan. The indemnifications outstanding as of September 30, 2009 do not require the repurchase of loans under credit recourse obligations. As of September 30, 2009, the Corporation has an indemnification reserve in other liabilities of approximately $19 million for potential future claims under the indemnity clauses (December 31, 2008 — $16 million). If there is a breach of a representation or warranty, the Corporation may be required to repurchase the loan. Popular, Inc. Holding Company and Popular North America have agreed to guarantee certain obligations of PFH with respect to the indemnification obligations. In addition, the Corporation agreed to restrict $10 million in cash or cash equivalents for a period of one year, which expired in November 3, 2009.
The Corporation has also established reserves for representations and warranties on sold loans by its subsidiary E-LOAN (“the Company”). As such, although the risk of loss or default is generally assumed by the investors, the Company is required to make certain representations relating to borrower creditworthiness, loan documentation and collateral. To the extent that the Company does not comply with such representations, it may be required to repurchase loans or indemnify investors for any related losses or borrower defaults. In connection with a majority of its loan sale agreements, E-LOAN is also responsible for ensuring that the borrower makes a minimum number of payments on each loan, or the Company may be required to refund the premium paid to it by the loan purchaser. These reserves, which are included as part of other liabilities in the consolidated statement of condition, amounted to $21 million as of September 30, 2009.
During the nine months ended September 30, 2009, the Corporation sold a lease financing portfolio of approximately $0.3 billion. In conjunction with this sale, the Corporation recognized an indemnification reserve of approximately $11 million as of September 30, 2009 to provide for any losses on the breach of certain representations and warranties included in the sale agreement. This reserve is included as part of other liabilities in the consolidated statement of condition.
Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $698 million as of September 30, 2009 (December 31, 2008 — $1.7 billion and September 30, 2008 — $2.3 billion). In addition, as of September 30, 2009, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4 billion of capital securities (trust preferred securities) (December 31, 2008 and September 30, 2008 — $824 million) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 16 to the consolidated financial statements for further information.
Legal Proceedings
The Corporation is a defendant in a number of legal proceedings arising in the ordinary course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters, except for the matters described below which are in very early stages and management cannot currently predict their outcome, will not have a material adverse effect on the Corporation’s business, results of operations, financial condition and liquidity.
Between May 14, 2009 and November 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. Two of the class actions (Hoff v. Popular, Inc., et al. and Otero v. Popular, Inc., et al.) have now been consolidated. On October 19, 2009, the plaintiffs in the Hoff case filed an amended complaint which includes as defendants the underwriters in the offering of the Series B Preferred Stock in May 2008. The consolidated action purports to be on behalf of purchasers of our securities between January 23, 2008 and February 19, 2009 and alleges 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 us not false and misleading. The consolidated action also alleges 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 us not false and misleading in connection with the offering of the Series B Preferred Stock in May 2008. The consolidated securities class action complaint seeks class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. The Corporation and the individual defendants expect to move to dismiss the consolidated securities class action complaint. The remaining class actions (Walsh v. Popular, Inc. et al.; Montanez v. Popular, Inc., et al.; and Dougan v. Popular, Inc., et al.) purport to be on behalf of employees participating in the Popular, Inc. U.S.A. 401(k)

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Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment Plan between January 23, 2008 and the dates of the complaints to recover losses pursuant to Sections 409, 502(a)(2) and 502(a)(3) of the Employee Retirement Income Security Act (ERISA) against the Corporation, certain directors, officers and members of plan committees, each of whom is alleged to be a plan fiduciary. The complaints allege that the defendants breached their alleged fiduciary obligations by, among other things, failing to eliminate Popular stock as an investment alternative in the plans. The complaints seek to recover alleged losses to the plans and equitable relief, including injunctive relief and a constructive trust, along with costs and attorneys fees. These ERISA actions have now been consolidated. Pursuant to a stipulation among the parties, plaintiffs are due to file a consolidated complaint on November 30, 2009. The derivative claims (Garcia v. Carrión, et al. and Diaz v. Carrión, et al.) are brought purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers and directors and allege breaches of fiduciary duty, waste of assets and abuse of control in connection with our issuance of allegedly false and misleading financial statements and financial reports and the offering of the Series B Preferred Stock. The derivative complaints seek a judgment that the action is a proper derivative action, an award of damages and restitution, and costs and disbursements, including reasonable attorneys’ fees, costs and expenses. On October 9, 2009, the Court coordinated the Garcia action with the consolidated securities class action for purposes of discovery. On October 15, 2009, the Corporation and the individual defendants moved to dismiss the Garcia complaint for failure to make a demand on the Board of Directors prior to initiating litigation. Pursuant to a stipulation among the parties, plaintiffs are due to file an amended complaint on November 20, 2009. The Diaz case, filed in local court, has been removed to the U.S. District Court for the District of Puerto Rico. On October 13, 2009, the Corporation and the individual defendants moved to consolidate the Garcia and Diaz 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.
At this early stage, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss. It is possible that the ultimate resolution of these matters, if unfavorable, may be material to our results of operations.
Note 20 — Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the following major categories that exceed one percent of the aggregate of total interest income plus non-interest income for the quarters and nine-months ended:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands)   2009   2008   2009   2008
 
Debit card fees
  $ 26,986     $ 28,170     $ 80,867     $ 79,880  
Credit card fees and discounts
    23,497       27,138       70,951       81,664  
Processing fees
    13,638       13,044       40,773       38,587  
Insurance fees
    11,463       12,378       36,014       38,254  
Sale and administration of investment products
    8,181       6,890       25,204       25,966  
Other fees
    13,849       7,682       44,775       42,298  
 
Total
  $ 97,614     $ 95,302     $ 298,584     $ 306,649  
 

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Note 21 — Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary benefit pension plans for regular employees of certain of its subsidiaries.
In February 2009, BPPR’s non-contributory defined pension and benefit restoration plans (“the Plans”) were frozen with regards to all future benefit accruals after April 30, 2009. This action was taken by the Corporation to generate significant cost savings in light of the severe economic downturn and decline in the Corporation’s financial performance; this measure will be reviewed periodically as economic conditions and the Corporation’s financial situation improve. The pension obligation and the assets were remeasured as of February 28, 2009. The impact of the plans’ curtailment was included in the first quarter of 2009 as disclosed in the table below.
The components of net periodic pension cost for the quarters and nine months ended September 30, 2009 and 2008 were as follows:
                                                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Nine months ended   Quarters ended   Nine months ended
    September 30,   September 30,   September 30,   September 30,
(In thousands)   2009   2008   2009   2008   2009   2008   2009   2008
 
Service cost
        $ 2,315     $ 3,330     $ 6,945           $ 182     $ 341     $ 546  
Interest cost
  $ 8,041       8,611       24,630       25,833     $ 391       461       1,225       1,383  
Expected return on plan assets
    (6,221 )     (10,169 )     (19,320 )     (30,507 )     (307 )     (420 )     (932 )     (1,260 )
Amortization of prior service cost
          67       44       201             (13 )     (8 )     (39 )
Amortization of net loss
    3,203             10,590             185       172       683       515  
 
Net periodic cost
  $ 5,023     $ 824     $ 19,274     $ 2,472     $ 269     $ 382     $ 1,309     $ 1,145  
One-time settlement gain
                                  (24 )           (24 )
Curtailment gain
                820                         (341 )      
 
Total cost
  $ 5,023     $ 824     $ 20,094     $ 2,472     $ 269     $ 358     $ 968     $ 1,121  
 
The Plans experienced a steep decline in the fair value of plan assets for the year ended December 31, 2008, which resulted in a significant increase in the actuarial loss component of accumulated other comprehensive income as of December 31, 2008. The increase in net periodic pension cost, shown above, for the nine months ended September 30, 2009 versus the same period in 2008 was primarily due to the amortization of actuarial loss into pension expense and a lower expected return on plan assets.
For the nine months ended September 30, 2009, contributions made to the pension and restoration plans amounted to approximately $11.0 million. The total contributions expected to be paid during the year 2009 for the pension and restoration plans amount to approximately $14.4 million.
The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and nine months ended September 30, 2009 and 2008 were as follows:
                                 
    Quarters ended   Nine months ended
    September 30,   September 30,
(In thousands)   2009   2008   2009   2008
 
Service cost
  $ 549     $ 485     $ 1,647     $ 1,455  
Interest cost
    2,026       1,967       6,078       5,901  
Amortization of prior service cost
    (261 )     (262 )     (784 )     (786 )
 
Total net periodic cost
  $ 2,314     $ 2,190     $ 6,941     $ 6,570  
 
For the nine months ended September 30, 2009, contributions made to the postretirement benefit plan amounted to approximately $3.4 million. The total contributions expected to be paid during the year 2009 for the postretirement benefit plan amount to approximately $5.0 million.

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Note 22 — Restructuring Plans
As indicated in the 2008 Annual Report, on October 17, 2008, the Board of Directors of Popular, Inc. approved two restructuring plans for the BPNA reportable segment. The objective of the restructuring plans is to improve profitability in the short-term, increase liquidity and lower credit costs and, over time, achieve a greater integration with corporate functions in Puerto Rico.
BPNA Restructuring Plan
The restructuring plan for BPNA’s banking operations (the “BPNA Restructuring Plan”) contemplates the following measures: closing, consolidating or selling approximately 40 underperforming branches in all existing markets; the shutting down, sale or downsizing of lending businesses that do not generate deposits or fee income; and the reduction of general expenses associated with functions supporting the aforementioned branch and balance sheet initiatives. The Corporation expects to complete the BPNA Restructuring Plan by the end of 2009. The following table details the expenses recognized during the quarter and nine months ended September 30, 2009 that were associated with this particular restructuring plan.
                 
    Quarter ended     Nine months ended  
(In thousands)   September 30, 2009     September 30, 2009  
 
Personnel costs
  $ 1,054 (a)   $ 5,332 (a)
Net occupancy expenses
    47       120  
Other operating expenses
          453 (b)
 
Total restructuring costs
  $ 1,101     $ 5,905  
 
 
(a)   Severance, retention bonuses and other benefits
 
(b)   Impairment on long-lived assets
 
As of September 30, 2009, the BPNA Restructuring Plan has resulted in combined charges for 2008 and 2009, broken down as follows:
                         
    Impairments on        
(In thousands)   long-lived assets   Restructuring costs   Total
 
Year ended December 31, 2008
  $ 5,481     $ 14,195     $ 19,676  
Quarter ended:
                       
March 31, 2009
    453       2,920       3,373  
June 30, 2009
          1,431       1,431  
September 30, 2009
          1,101       1,101  
 
Total
  $ 5,934     $ 19,647     $ 25,581  
 
The following table presents the activity during 2009 in the reserve for restructuring costs associated with the BPNA Restructuring Plan.
         
(In thousands)   Restructuring Costs
 
Balance as of January 1, 2009
  $ 10,852  
Charges during the quarter ended March 31, 2009
    3,373  
Cash payments
    (4,585 )
 
Balance at March 31, 2009
  $ 9,640  
Charges during the quarter ended June 30, 2009
    1,431  
Cash payments
    (3,262 )
 
Balance at June 30, 2009
  $ 7,809  
Charges during the quarter ended September 30, 2009
    1,101  
Cash payments
    (1,170 )
 
Balance as of September 30, 2009
  $ 7,740  
 
The reserve balances as of September 30, 2009 were mostly related to lease terminations.
Additional restructuring costs expected to be incurred associated with this restructuring plan are estimated at $3.3 million and are mostly associated with lease terminations.

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E-LOAN 2008 Restructuring Plan
The E-LOAN 2008 Restructuring Plan involved E-LOAN ceasing to operate as a direct lender, an event that occurred in late 2008. E-LOAN continues to market deposit accounts under its name for the benefit of BPNA. As part of the 2008 plan, all operational and support functions were transferred to BPNA and EVERTEC. The 2008 E-LOAN Restructuring Plan is substantially complete as of September 30, 2009 since all operational and support functions were transferred to BPNA and EVERTEC and loan servicing was transferred to a third-party provider. As of September 30, 2009, E-LOAN’s workforce totaled 8 FTEs.
The following table details the expenses recognized during the quarter and nine months ended September 30, 2009 that were associated with the E-LOAN 2008 Restructuring Plan.
                 
    Quarter ended     Nine months ended  
(In thousands)   September 30, 2009     September 30, 2009  
 
Personnel costs
  $ 243 (a)   $ 2,946 (a)
 
Total restructuring costs
  $ 243     $ 2,946  
 
 
(a)   Severance, retention bonuses and other benefits
 
As of September 30, 2009, the E-LOAN 2008 Restructuring Plan has resulted in combined charges for 2008 and 2009, broken down as follows:
                         
    Impairments on        
(In thousands)   long-lived assets   Restructuring costs   Total
 
Year ended December 31, 2008
  $ 18,867     $ 3,131     $ 21,998  
Quarter ended
                       
March 31, 2009
          1,818       1,818  
June 30, 2009
          885       885  
September 30, 2009
          243       243  
 
Total
  $ 18,867     $ 6,077     $ 24,944  
 
The following table presents the activity in the reserve for restructuring costs associated with the E-LOAN 2008 Restructuring Plan for the nine months ended September 30, 2009.
         
    Restructuring  
(In thousands)   Costs  
 
Balance as of January 1, 2009
  $ 3,015  
Charges during the quarter ended March 31, 2009
    1,818  
Cash payments
    (1,528 )
 
Balance at March 31, 2009
  $ 3,305  
Charges during the quarter ended June 30, 2009
    885  
Cash payments
    (1,708 )
 
Balance at June 30, 2009
  $ 2,482  
Charges during the quarter ended September 30, 2009
    243  
Cash payments
    (1,667 )
 
Balance as of September 30, 2009
  $ 1,058  
 
The reserve balance as of September 30, 2009 was mostly associated with personnel costs.
Additional restructuring costs expected to be incurred associated with this restructuring plan are estimated at $0.2 million.
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment.

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Note 23 — Income Taxes
The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
                 
(In millions)   2009   2008
 
Balance as of January 1
  $ 45.2     $ 22.2  
Additions for tax positions — January through March
    1.7       1.4  
Reductions as a result of settlements — January through March
    (0.6 )      
 
Balance as of March 31
  $ 46.3     $ 23.6  
Additions for tax positions — April through June
    2.2       4.4  
 
Balance as of June 30
  $ 48.5     $ 28.0  
Additions for tax positions-July through September
    1.5       1.1  
Reductions as a result of lapse of the applicable statute of limitation
    (2.5 )      
 
Balance as of September 30
  $ 47.5     $ 29.1  
 
As of September 30, 2009, the related accrued interest approximated $6.3 million (September 30, 2008 — $4.1 million). Management determined that as of September 30, 2009 and 2008 there was no need to accrue for the payment of penalties.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation’s effective tax rate, was approximately $45.7 million as of September 30, 2009 (September 30, 2008 — $27.8 million).
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of September 30, 2009, the following years remain subject to examination in the U.S. Federal jurisdiction — 2007 and thereafter; and in the Puerto Rico jurisdiction — 2005 and thereafter. The U.S. Internal Revenue Service (“IRS”) commenced an examination of the Corporation’s U.S. operations tax return for 2007 which is still in process. Although the outcomes of the tax audits are uncertain, the Corporation believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

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The following table presents the components of the Corporation’s deferred tax assets and liabilities.
                 
    September 30,   December 31,
(In thousands)   2009   2008
 
Deferred tax assets:
               
Tax credits available for carryforward and other credits available
  $ 10,346     $ 74,676  
Net operating losses carryforward available
    805,878       670,326  
Deferred compensation
    1,797       2,628  
Postretirement and pension benefits
    126,450       149,027  
Deferred loan origination fees
    8,886       8,603  
Allowance for loan losses
    511,624       368,690  
Deferred gains
    14,315       18,307  
Intercompany deferred gains
    7,016       11,263  
SFAS. No 159 - Fair value option
          13,132  
Other temporary differences
    36,320       35,323  
 
Total gross deferred tax assets
    1,522,632       1,351,975  
 
 
               
Deferred tax liabilities:
               
Differences between assigned values and the tax basis of the assets and liabilities recognized in purchase business combinations
    24,619       21,017  
Deferred loan origination costs
    10,235       11,228  
Accelerated depreciation
    7,991       9,348