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

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States ("U.S.") mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico ("BPPR"), as well as mortgage banking, investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America ("BPNA"), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA, under the name Popular Community Bank, operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 31 to the consolidated financial statements presents information about the Corporation's business segments. The Corporation has a 48.5% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation's system infrastructures and transaction processing businesses.

OVERVIEW

The second quarter of 2012 marks the sixth consecutive profitable quarter for the Corporation. Net income amounted to $65.7 million for the quarter ended June 30, 2012, compared with net income of $110.7 million for the same quarter of the previous year. For the six months ended June 30, 2012, net income amounted to $114.1 million, compared with net income of $120.8 million for the same period in 2011.

Main events for the quarter ended June 30, 2012

• A tax benefit of $72.9 million was recognized in June 2012 resulting from the tax treatment of the loans acquired in the Westernbank FDIC-assisted transaction (the "Acquired Loans"). In June 2012, the Puerto Rico Department of the Treasury (the "P.R. Treasury") and the Corporation entered into a Closing Agreement (the "2012 Closing Agreement") to clarify that those Acquired Loans are capital assets and any gain resulting from such loans would be taxed at the capital gain tax rate of 15% instead of the ordinary income tax rate of 30%. Refer to the Income Taxes section of this MD&A and Note 29 to the consolidated financial statements for additional information on the tax benefit and the 2012 Closing Agreement.

• Negative valuation adjustments on commercial and construction loans held-for-sale of approximately $34.7 million were recorded by Banco Popular de Puerto Rico ("BPPR") during the second quarter of 2012. The quarterly valuation analyses of the outstanding commercial and construction loans held-for-sale of BPPR, which considered the impact of recent appraisals and market indicators, resulted in an unfavorable adjustment of $27.3 million. Also, there were $7.4 million in additional unfavorable valuation adjustments, mostly from the reclassification of certain loans from loans held-for-sale to other real estate.

• Prepayment expense of $25.0 million was recognized as a result of the cancellation by BPPR of $350 million in outstanding repurchase agreements with contractual maturities between March 2014 and May 2014 at an average cost of 4.36%. The Corporation expects to recover this cost within an approximate two-year period by replacing these repurchase agreements with short-term borrowings at lower current market rates.

• Receipt of a $131 million dividend from EVERTEC in early May 2012, which reduced the book value of the equity investment by the amount of the dividend to $62 million, also contributed to further boost the Corporation's liquidity position.

• The Corporation completed purchases of $273 million in mortgage loans at BPNA and $225 million in consumer loans at BPPR during the second quarter of 2012 as part of its strategy to continue to add high-quality assets to its loan portfolio.

• Credit metrics of the Corporation's non-covered loan portfolio continued improving during the second quarter of 2012. Non-performing loans, excluding covered loans, declined by $119 million to $1.6 billion as of June 30, 2012, down 7% from March 31, 2012 and 33% from its peak in the third quarter of 2010. The decrease was split between both the Puerto

• On May 29, 2012, the Corporation effected a 1-for-10 reverse split of its common stock. The reverse split is described further in Note 16 to the consolidated financial statements. All share and per share information has been adjusted to retroactively reflect the reverse stock split.

The discussion that follows provides highlights of the Corporation's results of operations for the quarter ended June 30, 2012, compared to the results of operations for the same quarter of the previous year. It also provides some highlights with respect to the Corporation's financial condition, credit quality, capital and liquidity.

Financial highlights for the quarter ended June 30, 2012

• Taxable equivalent net interest income was $341.2 million for the second quarter of 2012, down $33.3 million, or 9%, from the same quarter of the prior year. The 29-basis-point decrease in the net interest margin from 4.72% to 4.43% was mainly attributable to a lower average yield in earning assets by 62 basis points primarily in covered loans, non-covered commercial and mortgage loans, and investment securities; partially offset by a decrease in the cost of funds by 33 basis points, mainly from deposits. The repayment of the FDIC note during 2011 also contributed with the decrease in interest expense during the second quarter of 2012. The higher taxable equivalent adjustment in the second quarter of 2011 was attributable to the income tax benefit from exempt investments for the first six months of 2011 recorded in the second quarter of 2011, which had been previously unavailable to the Corporation during the first quarter of 2011. The event that drove the recording of the higher taxable equivalent adjustment in June 2011 is explained below in the tax benefit variance and in the Net Interest Income section of this MD&A. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs.

• Credit quality improvements provided noticeable results in both the Corporation's Puerto Rico and U.S. mainland operations. Most credit metrics, such as the level of net charge-offs and non-performing loans in most portfolios, reflected improved trends during the second quarter of the current year.

Provision for loan losses in the second quarter of 2012 decreased by $25.1 million, or 17%, compared with the second quarter of 2011, including both covered and non-covered loans held-in-portfolio. The provision for loan losses for non-covered loans for the second quarter of 2012 reflected lower net charge-offs by $35.4 million, including reductions in most non-covered loan portfolio categories. Also, there was a reduction in the allowance for loan losses, mainly from the commercial and consumer loan portfolios, as a result of continued improvement in credit trends. During the second quarter of 2012, the annualized net charge-offs to average non-covered loans held-in-portfolio ratio fell to 1.85% in Puerto Rico and to 2.15% in the U.S. mainland operations from 2.21% and 3.45%, respectively, during the quarter ended June 30, 2011. Net charge-offs for non-covered loans reached their lowest level since the first quarter of 2008.

In addition, the non-covered non-performing loan portfolio declined by $175 million to $1.6 billion, down 10% from December 31, 2011, mainly due to improvements in all loan categories. Non-covered non-performing loans held-in-portfolio declined by 33% from its peak in the third quarter of 2010 and stood at the lowest level since the first quarter of 2009. Inflows of commercial and construction non-performing loans held-in-portfolio fell 65% from their peak in the fourth quarter of 2010.

The improvements in credit quality led to a decrease in the allowance for loan losses to non-covered loans held-in-portfolio ratio from 3.35% at December 31, 2011 to 3.14% at June 30, 2012. The general and specific reserves related to non-covered loans amounted to $561 million and $88 million, respectively, at June 30, 2012, compared with $631 million and $59 million, respectively, at December 31, 2011. The decrease in the general reserve component was mainly driven by lower loss trends in the commercial and consumer loan portfolios, partially offset by higher general and specific reserves in the residential mortgage loan portfolio of the BPPR reportable segment mainly due to higher loss trends and loans restructured under the Corporation's loss mitigation program.

The provision for loan losses in the covered loan portfolio decreased by $11.1 million for the second quarter of 2012, compared with the same quarter of 2011. The decrease in the provision was mainly driven by loans accounted for under ASC 310-30, as certain loan pools, mainly commercial and construction, reflected higher increases in expected loss estimates for the quarter of June 30, 2011, when compared with the revisions in expected loss estimates for the same period in 2012. Net charge-offs on covered loans accounted for under ASC 310-30, which related principally to certain

construction and asset-based lending relationships, amounted to $28.8 million for the second quarter of 2012, prompted by credit losses in excess of those originally estimated at acquisition date. Net charge-offs on the covered loans accounted for under ASC 310-20 amounted to $29.7 million for the second quarter of 2012. These net charge-offs were mainly related to the discounted pay-offs from two particular relationships, for which impaired amounts were reserved in prior periods and did not impact the provision for loan losses during the current quarter.

The increase in loss estimates on the covered loans is offset by the 80% loss share agreements. Despite these specific pools that reflect higher loan losses than originally expected, overall expected losses on the covered loan portfolio continue to be lower than originally estimated. Lower expected losses will overtime result in higher interest income as the increase in expected cash flows than originally estimated is accreted into interest income over the life of the loans.

• Non-interest income amounted to $93.7 million for the quarter ended June 30, 2012, compared with $124.2 million for the same quarter in the previous year. The unfavorable variance in FDIC loss share income of $36.1 million was mostly related to the negative amortization of the loss share asset mainly due to a reduction in expected losses. Refer to Table 5 for a description and amounts of the items that compose the FDIC loss share income (expense) caption. In addition, there were higher unfavorable valuation adjustments on loans held-for-sale by $15.1 million mainly in BPPR resulting from the impact of recent appraisals and market indicators, partially offset by higher gains on sale of loans, net of trading account losses, by $4.3 million primarily due to securitization transactions by the mortgage banking business. These unfavorable variances were partially offset by higher other services by $3.7 million and higher other operating income by $10.2 million. The increase in other service fees was related to lower unfavorable fair value adjustments on mortgage servicing rights, higher credit card fees and increased commission income received from the sale of investment products, partially offset by lower debit card fees. Refer to the Non-Interest Income section of this MD&A for additional information on the main variances that affected the non-interest income categories.

• Total operating expenses increased by $46.1 million for the second quarter of 2012, when compared with the same quarter of the previous year, principally due to the prepayment expense of $25.0 million recognized during the second quarter of 2012 as a result of the cancellation of certain borrowings, as previously explained. In addition, there were higher loan collection expenses from the lending business and the management of other real estate properties, personnel costs, business promotion and other operating expenses. Refer to the Operating Expenses section in this MD&A for additional explanations on the factors that influenced the variances in the different operating expense categories.

• Tax benefit of $77.9 million for the quarter ended June 30, 2012, compared with a tax benefit of $38.1 million for the same period of the previous year. As indicated previously, the results for the second quarter of 2012 reflect a tax benefit of $72.9 million related to the tax treatment of the Acquired Loans.

The income tax benefit for the quarter ended June 30, 2011 was also impacted by a special tax transaction. On June 30, 2011, the P.R. Treasury and the Corporation agreed that for tax purposes the deductions related to certain charge-offs recorded on the financial statements of the Corporation during the years 2009 and 2010 would be deferred until 2013 through 2016. Because of this 2011 Closing Agreement, the results for the second quarter of 2011 reflect an income tax benefit of $53.6 million related to the recovery of certain tax benefits not previously recorded during years 2009 and 2010, and an income tax benefit of $11.9 million related to the tax benefits of the exempt income for the six months ended June 30, 2011.

• Total assets amounted to $36.6 billion at June 30, 2012, compared with $37.3 billion at December 31, 2011. Total loans held-in-portfolio declined by $269 million from the end of 2011, consisting principally of a decline of $332 million in the covered loan portfolio, $371 million in non-covered commercial loans held-in-portfolio and $139 million in the legacy loans at BPNA. These decreases were offset by increases of $382 million and $192 million in the non-covered mortgage and consumer loan portfolios mainly due to the previously mentioned loan purchases during the second quarter of 2012.

• Deposits amounted to $27.4 billion at June 30, 2012, compared with $27.9 billion at December 31, 2011. The decrease in time deposits from December 31, 2011 to June 30, 2012 of $1.1 billion was principally in brokered certificates of deposit and non-brokered certificates of deposit of the BPPR operations, mainly retail certificates of deposit, driven in part by the continuous efforts to reduce cost of deposits in the Corporation's banking operations. These decreases were partially offset by increases in savings, NOW, money market and demand deposits by $0.6 billion.

• The Corporation's borrowings amounted to $3.6 billion at June 30, 2012, compared with $4.3 billion at December 31, 2011. The reduction in borrowings was driven by a decrease in assets sold under agreements to repurchase of $0.7 million, principally due to the previously mentioned early extinguishment of debt and to certain other repurchase agreements maturing during the second quarter of 2012.

Table 1 provides selected financial data and performance indicators for the quarters and six months ended June 30, 2012 and 2011.

The Corporation continues executing its strategy to achieve various objectives, including (1) reducing credit costs, (2) growing its net interest margin,
(3) building its high-quality asset portfolio to maintain strong revenues,
(4) optimizing operating expenses and (5) continuing to improve the results of its U.S. community banking business. The Corporation continues exploring opportunities to further reduce its cost base by streamlining the origination processes, lowering branch-network expenses and tackling inefficiencies in identified areas. However, management's focus on accelerating the resolution of non-performing loans has increased the costs associated with these efforts-legal fees, appraisals, collections, valuation adjustments, among others. Meaningful reductions in these expenses will only be achieved through sustained improvement in non-performing asset levels.

Although the economic situation in the Corporation's markets has stabilized or improved, as evidenced by recent economic indicators and the Corporation's credit trends, the Corporation's lending areas both in Puerto Rico and the U.S. mainland continue to experience weak loan demand. The combination of weak loan demand and higher costs related to collection efforts are challenges faced by the Corporation.

As a result of weak loan demand in both the Puerto Rico. and U.S. mainland operations, the Corporation will continue to seek acquisitions of moderate-risk assets with good returns to supplement internal originations.

As a financial services company, the Corporation's earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.

The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.

The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation's business contained in Item 1 of the Corporation's 2011 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation's control that, in addition to the other information in this Form 10-Q, readers should consider.

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

Table 1-Financial Highlights




Financial Condition Highlights                                                                       Average for the six months
                                                        December 31,
(In thousands)                       June 30, 2012          2011           Variance            2012             2011           Variance
Money market investments            $       949,828     $   1,376,174     $  (426,346 )    $  1,104,135     $  1,159,477     $    (55,342 )
Investment and trading securities         5,793,199         5,751,417          41,782         5,685,903        6,383,995         (698,092 )
Loans                                    25,046,676        25,314,392        (267,716 )      24,849,365       25,887,785       (1,038,420 )
Earning assets                           31,789,703        32,441,983        (652,280 )      31,639,403       33,431,257       (1,791,854 )
Total assets                             36,612,179        37,348,432        (736,253 )      36,386,372       38,775,414       (2,389,042 )
Deposits*                                27,414,780        27,942,127        (527,347 )      27,218,046       27,462,905         (244,859 )
Borrowings                                3,620,419         4,293,669        (673,250 )       4,264,640        6,615,143       (2,350,503 )
Stockholders' equity                      4,021,237         3,918,753         102,484         3,780,014        3,655,074          124,940

* Average deposits exclude average derivatives.

Operating Highlights                                   Second Quarter                               Six months ended June 30,
(In thousands, except per share
information)                               2012             2011           Variance           2012             2011          Variance
Net interest income                     $   341,200      $   374,542      $   (33,342 )    $   678,782      $   717,901     $   (39,119 )
Provision for loan losses-non-covered
loans                                        81,743           95,712          (13,969 )        164,257          155,474           8,783
Provision for loan losses-covered
loans                                        37,456           48,605          (11,149 )         55,665           64,162          (8,497 )
Non-interest income                          93,724          124,160          (30,436 )        217,632          288,528         (70,896 )
Operating expenses                          327,879          281,800           46,079          624,046          556,849          67,197

(Loss) income before income tax             (12,154 )         72,585          (84,739 )         52,446          229,944        (177,498 )
Income tax (benefit) expense                (77,893 )        (38,100 )        (39,793 )        (61,701 )        109,127        (170,828 )

Net income                              $    65,739      $   110,685      $   (44,946 )    $   114,147      $   120,817     $    (6,670 )

Net income applicable to common stock   $    64,809      $   109,754      $   (44,945 )    $   112,286      $   118,956     $    (6,670 )

Net income per common share-basic and
diluted                                 $      0.63      $      1.07      $     (0.44 )    $      1.10      $      1.16     $     (0.06 )

                                                  Second Quarter            Six months ended June 30,
Selected Statistical Information                 2012         2011            2012                2011
Common Stock Data
Market price
High                                           $  21.20      $ 32.40      $       23.00         $  35.33
Low                                               13.58        26.30              13.58            26.30
End                                               16.61        27.60              16.61            27.60
Book value per common share at period end         38.62        38.22              38.62            38.22

Profitability Ratios
Return on assets                                  0.73  %      1.14  %            0.63  %          0.63  %
Return on common equity                            6.94        12.02               6.05             6.66
Net interest spread (taxable equivalent)           4.17         4.49               4.15             4.20
Net interest margin (taxable equivalent)           4.43         4.72               4.41             4.45

Capitalization Ratios
Average equity to average assets                 10.51  %      9.57  %           10.39  %          9.43  %
Tier I capital to risk-weighted assets            16.31        15.21              16.31            15.21
Total capital to risk-weighted assets             17.59        16.49              17.59            16.49
Leverage ratio                                    11.09        10.16              11.09            10.16

CRITICAL ACCOUNTING POLICIES / ESTIMATES

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

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation's Audit Committee. The Corporation has identified as critical accounting policies those related to:
(i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.'s 2011 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report"). Also, refer to Note 2 to the consolidated financial statements included in the 2011 Annual Report for a summary of the Corporation's significant accounting policies.

Allowance for Loan Losses

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

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

• Historical net loss rates (including losses from impaired loans) by loan type and by legal entity adjusted for recent net charge-off trends and environmental factors. The base net loss rates are based on the moving average of annualized net charge-offs computed over a 36-month historical loss window for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios.

• Net charge-off trend factors are applied to adjust the base loss rates based on recent loss trends. The Corporation applies a trend factor when base losses are below recent loss trends. Currently, the trend factor is based on the last 12 months of losses for the commercial, construction and legacy loan portfolios and 6 months of losses for the consumer and mortgage loan portfolios. The trend factor accounts for inherent imprecision and the "lagging perspective" in base loss rates. The trend factor replaces the base-loss period when it is higher than base loss up to a determined cap.

• Environmental factors, which include credit and macroeconomic indicators . . .