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 March 31, 2007

POPULAR, INC.

(Exact name of registrant as specified in its charter)

Puerto Rico		66-0667416
(State or other jurisdiction of		(IRS Employer Identification Number)
incorporation or organization)
Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

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 $6.00 par value 279,360,885 shares outstanding as of May 7, 2007.

 

 

POPULAR, INC.
INDEX

		Page
Part I — Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of March 31, 2007, December 31, 2006 and March 31, 2006			4
Unaudited Consolidated Statements of Income for the quarters ended March 31, 2007 and 2006			5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2007 and 2006			6
Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2007 and 2006			7
Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2007 and 2006			8
Notes to Unaudited Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			54
Item 3. Quantitative and Qualitative Disclosures about Market Risk			82
Item 4. Controls and Procedures			85
Part II – Other Information
Item 1. Legal Proceedings			85
Item 1A. Risk Factors			86
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			87
Item 6. Exhibits			87
Signatures			88
EX-10.1 AMENDMENT TO 2005 AMENDED AND RESTATED INCENTIVE AWARD AGREEMENT
EX-12.1 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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 the Corporation’s 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 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. Factors that might cause such a difference include, but are not limited to: the rate of growth in the economy, 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; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets; 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.

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 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.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)

		March 31,				December 31,				March 31,
(In thousands, except share information)		2007				2006				2006
ASSETS
Cash and due from banks		$	753,550			$	950,158			$	860,606
Money market investments:
Federal funds sold			389,000				84,350				488,200
Securities purchased under agreements to resell			227,046				202,181				491,710
Time deposits with other banks			24,162				15,177				10,005
			640,208				301,708				989,915
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			3,729,502				3,743,924				5,934,017
Other investment securities available-for-sale			5,748,859				6,106,938				5,576,651
Investment securities held-to-maturity, at amortized cost (market value at March 31, 2007 - $88,868; December 31, 2006 - $92,764; March 31, 2006 – $345,217)			87,483				91,340				344,385
Other investment securities, at lower of cost or realizable value (realizable value at March 31, 2007 - $153,339; December 31, 2006 - $412,593; March 31, 2006 – $415,131)			152,951				297,394				304,609
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge			344,401				193,619				365,096
Other trading securities			303,749				188,706				144,516
Loans held-for-sale, at lower of cost or market value			1,049,230				719,922				535,719
Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge			563,871				306,320				21,210
Other loans held-in-portfolio			31,578,452				32,019,044				31,174,832
Less – Unearned income			310,936				308,347				301,376
Allowance for loan losses			541,748				522,232				468,321
			31,289,639				31,494,785				30,426,345
Premises and equipment, net			591,008				595,140				600,792
Other real estate			89,479				84,816				82,352
Accrued income receivable			284,791				248,240				274,620
Other assets			1,326,044				1,611,890				1,388,662
Goodwill			668,616				667,853				655,743
Other intangible assets			105,154				107,554				107,675
		$	47,164,664			$	47,403,987			$	48,591,703
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	4,177,446			$	4,222,133			$	4,453,965
Interest bearing			20,560,607				20,216,198				18,957,847
			24,738,053				24,438,331				23,411,812
Federal funds purchased and assets sold under agreements to repurchase			6,272,417				5,762,445				8,315,380
Other short-term borrowings			3,201,972				4,034,125				2,645,521
Notes payable			8,368,825				8,737,246				9,933,218
Other liabilities			846,979				811,424				798,102
			43,428,246				43,783,571				45,104,033
Commitments and contingencies (See Note 12)
Minority interest in consolidated subsidiaries			110				110				113
Stockholders’ equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented			186,875				186,875				186,875
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 292,448,935 shares issued (December 31, 2006 – 292,190,924; March 31, 2006 – 291,497,120) and 279,073,657 outstanding (December 31, 2006 – 278,741,547; March 31, 2006 – 278,072,323)			1,754,694				1,753,146				1,748,983
Surplus			530,073				526,856				486,863
Retained earnings			1,673,826				1,594,144				1,526,634
Accumulated other comprehensive loss, net of tax of ($74,005) (December 31, 2006 – ($84,143); March 31, 2006 – ($82,657))			(203,935	)			(233,728	)			(255,265	)
Treasury stock – at cost, 13,375,278 shares (December 31, 2006 – 13,449,377; March 31, 2006 – 13,424,797)			(205,225	)			(206,987	)			(206,533	)
			3,736,308				3,620,306				3,487,557
		$	47,164,664			$	47,403,987			$	48,591,703

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands, except per share information)		2007				2006
INTEREST INCOME:
Loans		$	644,114			$	591,835
Money market investments			4,609				7,982
Investment securities			115,491				133,533
Trading account securities			9,381				8,860
			773,595				742,210
INTEREST EXPENSE:
Deposits			173,102				124,411
Short-term borrowings			124,809				124,803
Long-term debt			120,702				133,232
			418,613				382,446
Net interest income			354,982				359,764
Provision for loan losses			96,346				48,947
Net interest income after provision for loan losses			258,636				310,817
Service charges on deposit accounts			48,471				47,469
Other service fees (See Note 13)			87,849				80,346
Net gain on sale and valuation adjustments of investment securities			81,771				12,340
Trading account (loss) profit			(14,164	)			11,475
Gain on sale of loans and valuation adjustments on loans held-for-sale			3,434				47,261
Other operating income			44,815				29,942
			510,812				539,650
OPERATING EXPENSES:
Personnel costs:
Salaries			136,479				135,532
Pension, profit sharing and other benefits			41,896				42,520
			178,375				178,052
Net occupancy expenses			32,014				28,638
Equipment expenses			32,396				33,197
Other taxes			11,847				10,241
Professional fees			35,987				37,078
Communications			17,062				17,300
Business promotion			28,372				32,823
Printing and supplies			4,276				4,632
Other operating expenses			32,016				28,831
Impact of change in fiscal period of certain subsidiaries			—				9,741
Amortization of intangibles			2,983				2,721
			375,328				383,254
Income before income tax			135,484				156,396
Income tax			16,837				37,893
NET INCOME		$	118,647			$	118,503
NET INCOME APPLICABLE TO COMMON STOCK		$	115,669			$	115,525
BASIC EARNINGS PER COMMON SHARE (EPS)		$	0.41			$	0.42
DILUTED EPS		$	0.41			$	0.42
DIVIDENDS DECLARED PER COMMON SHARE		$	0.16			$	0.16

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands)		2007				2006
Preferred stock:
Balance at beginning and end of year		$	186,875			$	186,875
Common stock:
Balance at beginning of year			1,753,146				1,736,443
Common stock issued under the Dividend Reinvestment Plan			1,488				1,184
Issuance of common stock			—				11,312
Stock options exercised			60				44
Balance at end of period			1,754,694				1,748,983
Surplus:
Balance at beginning of year			526,856				452,398
Common stock issued under the Dividend Reinvestment Plan			2,628				2,789
Issuance of common stock			—				28,281
Issuance cost of common stock			—				1,527
Stock options expense on unexercised options, net of forfeitures			440				768
Stock options exercised			149				100
Transfer from retained earnings			—				1,000
Balance at end of period			530,073				486,863
Retained earnings:
Balance at beginning of year			1,594,144				1,456,612
Net income			118,647				118,503
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)			8,667				—
Cash dividends declared on common stock			(44,654	)			(44,503	)
Cash dividends declared on preferred stock			(2,978	)			(2,978	)
Transfer to surplus			—				(1,000	)
Balance at end of period			1,673,826				1,526,634
Accumulated other comprehensive loss:
Balance at beginning of year			(233,728	)			(176,000	)
Other comprehensive income (loss), net of tax			29,793				(79,265	)
Balance at end of period			(203,935	)			(255,265	)
Treasury stock – at cost:
Balance at beginning of year			(206,987	)			(207,081	)
Purchase of common stock			(10	)			—
Reissuance of common stock			1,772				548
Balance at end of period			(205,225	)			(206,533	)
Total stockholders’ equity		$	3,736,308			$	3,487,557

Disclosure of changes in number of shares:

		March 31, 2007				December 31, 2006				March 31, 2006
Preferred Stock:
Balance at beginning and end of period			7,475,000				7,475,000				7,475,000
Common Stock – Issued:
Balance at beginning of year			292,190,924				289,407,190				289,407,190
Issued under the dividend reinvestment plan			247,947				858,905				197,196
Issuance of common stock			—				1,885,380				1,885,380
Stock options exercised			10,064				39,449				7,354
Balance at end of period			292,448,935				292,190,924				291,497,120
Treasury stock			(13,375,278	)			(13,449,377	)			(13,424,797	)
Common Stock – outstanding			279,073,657				278,741,547				278,072,323

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands)		2007				2006
Net income		$	118,647			$	118,503
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment			1,780				(686	)
Adjustment of pension and postretirement benefit plans			(519	)		—
Unrealized holding gains (losses) on securities available-for-sale arising during the period			39,520				(91,965	)
Reclassification adjustment for gains included in net income			(119	)			(12,340	)
Net (loss) gain on cash flow hedges			(892	)			1,200
Reclassification adjustment for losses included in net income			161				161
			39,931				(103,630	)
Income tax (expense) benefit			(10,138	)			24,365
Total other comprehensive income (loss), net of tax			29,793				(79,265	)
Comprehensive income		$	148,440			$	39,238

Disclosure of accumulated other comprehensive loss:

		March 31,				December 31,				March 31,
(In thousands)		2007				2006				2006
Foreign currency translation adjustment		$	(34,921	)		$	(36,701	)		$	(37,001	)
Minimum pension liability adjustment			—				(3,893	)			(2,354	)
Tax effect			—				1,518				918
Adoption of SFAS No. 158			—				3,893				—
Tax effect			—				(1,518	)			—
Net of tax amount			—				—				(1,436	)
Underfunding of pension and postretirement benefit plans			(69,779	)			(69,260	)			—
Tax effect			27,214				27,034				—
Net of tax amount			(42,565	)			(42,226	)			—
Unrealized losses on securities available-for-sale			(172,842	)			(212,243	)			(299,995	)
Tax effect			46,567				57,146				82,162
Net of tax amount			(126,275	)			(155,097	)			(217,833	)
Unrealized (losses) gains on cash flows hedges			(641	)			90				1,185
Tax effect			224				(37	)			(423	)
Net of tax amount			(417	)			53				762
Cumulative effect of accounting change, net of tax			243				243				243
Accumulated other comprehensive loss, net of tax		$	(203,935	)		$	(233,728	)		$	(255,265	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Quarter ended
		March 31,
(In thousands)		2007				2006
Cash flows from operating activities:
Net income		$	118,647			$	118,503
Less: Impact of change in fiscal period of certain subsidiaries, net of tax			—				(6,129	)
Net income before change in fiscal period			118,647				124,632
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment			19,994				21,437
Provision for loan losses			96,346				48,947
Amortization of intangibles			2,983				2,721
Amortization and fair value adjustment of servicing assets			10,229				13,501
Net gain on sale and valuation adjustment of investment securities			(81,771	)			(12,340	)
Net gain on disposition of premises and equipment			(3,677	)			(1,512	)
Net gain on sale of loans and valuation adjustments on loans held-for-sale			(3,434	)			(47,261	)
Net amortization of premiums and accretion of discounts on investments			6,331				7,012
Net amortization of premiums and deferred loan origination fees and costs			23,930				31,887
Earnings from investments under the equity method			(14,229	)			(4,261	)
Stock options expense			490				800
Deferred income taxes			(19,394	)			(5,411	)
Net disbursements on loans held-for-sale			(1,685,149	)			(1,923,081	)
Acquisitions of loans held-for-sale			(282,110	)			(447,046	)
Proceeds from sale of loans held-for-sale			1,280,146				2,166,951
Net decrease in trading securities			346,150				835,124
Net increase in accrued income receivable			(36,551	)			(30,589	)
Net decrease (increase) in other assets			35,160				(18,428	)
Net (decrease) increase in interest payable			(315	)			23,849
Net increase in postretirement benefit obligation			728				1,585
Net increase in other liabilities			1,208				3,286
Total adjustments			(302,935	)			667,171
Net cash (used in) provided by operating activities			(184,288	)			791,803
Cash flows from investing activities:
Net increase in money market investments			(272,064	)			(240,350	)
Purchases of investment securities:
Available-for-sale			(28,186	)			(175,975	)
Held-to-maturity			(5,670,466	)			(7,747,198	)
Other			(6,744	)			(10,580	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			399,204				247,055
Held-to-maturity			5,674,358				7,556,192
Other			2,454				25,074
Proceeds from sale of investment securities available-for-sale			—				43,894
Proceeds from sale of other investment securities			246,352				—
Net repayments on loans			50,493				201,051
Proceeds from sale of loans			962				73,038
Acquisition of loan portfolios			(784	)			(141,658	)
Assets acquired, net of cash			(1,823	)			(218	)
Acquisition of premises and equipment			(26,117	)			(38,799	)
Proceeds from sale of premises and equipment			14,307				14,452
Proceeds from sale of foreclosed assets			41,835				33,516
Net cash provided by (used in) investing activities			423,781				(160,506	)
Cash flows from financing activities:
Net increase in deposits			297,872				769,477
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase			509,972				(500,232	)
Net decrease in other short-term borrowings			(832,153	)			(161,597	)
Payments of notes payable			(416,272	)			(900,117	)
Proceeds from issuance of notes payable			47,719				106,252
Dividends paid			(47,591	)			(45,768	)
Proceeds from issuance of common stock			4,362				42,983
Treasury stock acquired			(10	)			—
Net cash used in financing activities			(436,101	)			(689,002	)
Cash effect of change in fiscal period of certain subsidiaries			—				11,914
Net decrease in cash and due from banks			(196,608	)			(45,791	)
Cash and due from banks at beginning of period			950,158				906,397
Cash and due from banks at end of period		$	753,550			$	860,606

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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 is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution based 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, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in California, Texas, Illinois, New York, New Jersey and Florida. Popular Financial Holdings (“PFH”) offers mortgage and personal loans, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. The Corporation also owns a financial transaction processing operation, EVERTEC, which strives to use its expertise in technology and electronic banking as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 21 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. The Corporation also consolidates the variable interest entities for which it is the primary beneficiary and therefore will absorb the majority of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. 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. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2007 presentation.

The statement of condition data as of December 31, 2006 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of March 31, 2007, December 31, 2006 and March 31, 2006 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, 2006, included in the Corporation’s 2006 Annual Report. The Corporation’s Form 10-K filed on March 1, 2007 incorporates by reference the 2006 Annual Report.

Note 2 – Recent Accounting Developments

SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits companies to elect, on a transaction-by-transaction basis, to apply a fair value measurement to hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation under SFAS No. 133. The statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in the first quarter of 2007 did not have a material impact on the Corporation’s consolidated financial statements.

SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”

SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation adopted SFAS No. 156 in January 2007. The Corporation elected the fair value measurement for mortgage servicing rights (“MSRs”). Servicing rights associated with Small Business Administration (“SBA”) commercial loans will continue to be accounted at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs was included as a cumulative effect of a change in accounting principle directly in stockholders’ equity and resulted in a net increase in stockholders’ equity of approximately $9.6 million, net of deferred taxes. Refer to Note 7 to the consolidated financial statements for required SFAS No. 156 disclosures.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (FIN 48)

In 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to income taxes. The accounting provisions of FIN 48 were effective for the Corporation beginning in the first quarter of 2007. Based on management’s assessment, there was no impact on retained earnings as of January 1, 2007 due to the initial application of the provisions of FIN 48. Also, as a result of the implementation, the Corporation did not recognize any change in the liability for unrecognized tax benefits. Refer to Note 14 to the consolidated financial statements for further information on FIN 48 disclosures.

EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-03)

EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Corporation’s accounting policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. The corresponding amounts recognized in the consolidated financial statements are not significant.

EITF Issue No. 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5)

EITF 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis. At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable in cash to the policyholder should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $0.9 million cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and

reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation will adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its consolidated financial statements and disclosures.

SFAS No. 159 “Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities”

In February 2007, the FASB issued SFAS No. 159 which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this recently issued accounting standard may have on its consolidated financial statements.

Note 3 — Restrictions on cash and due from banks and highly liquid 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 with a correspondent bank. Those required average reserve balances were $614 million at March 31, 2007 (December 31, 2006 — $621 million; March 31, 2006 — $607 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, at March 31, 2007, the Corporation had securities with a market value of $445 thousand (December 31, 2006 — $445 thousand; March 31, 2006 — $446 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Law, at March 31, 2007, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets (December 31, 2006 — $600 thousand; March 31, 2006 — $600 thousand).

The Corporation had restricted securities available-for-sale with a market value of $1.3 million at March 31, 2007 (December 31, 2006 — $1.2 million; March 31, 2006 — $1.3 million) to comply with certain requirements of the Insurance Code of Puerto Rico.

As part of a line of credit facility with a financial institution, at March 31, 2007, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2006 — $1.9 million; March 31, 2006 — $1.9 million). 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.

Note 4 – Pledged Assets

Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, borrowings and other available credit facilities. 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:

		March 31,				December 31,				March 31,
(In thousands)		2007				2006				2006
Investment securities available-for-sale		$	2,825,470			$	2,645,272			$	2,648,586
Investment securities held-to-maturity			502				658				810
Loans held-for-sale			—				332,058				28,398
Loans held-in-portfolio			9,548,747				10,260,198				11,667,733
		$	12,374,719			$	13,238,186			$	14,345,527

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.

Note 5 — 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 March 31, 2007, December 31, 2006 and March 31, 2006 were as follows:

		AS OF MARCH 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	502,445				—			$	27,102			$	475,343
Obligations of U.S. Government sponsored entities			6,322,704			$	392				115,897				6,207,199
Obligations of Puerto Rico, States and political subdivisions			117,895				282				3,116				115,061
Collateralized mortgage obligations			1,597,684				5,378				13,055				1,590,007
Mortgage-backed securities			1,021,608				1,770				22,739				1,000,639
Equity securities			70,109				4,197				3,399				70,907
Others			18,515				690				—				19,205
		$	9,650,960			$	12,709			$	185,308			$	9,478,361

		AS OF DECEMBER 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	504,653				—			$	29,818			$	474,835
Obligations of U.S. Government sponsored entities			6,603,252			$	57				147,524				6,455,785
Obligations of Puerto Rico, States and political subdivisions			118,214				265				3,537				114,942
Collateralized mortgage obligations			1,657,613				4,904				17,191				1,645,326
Mortgage-backed securities			1,061,850				1,458				26,492				1,036,816
Equity securities			70,954				6,692				3,901				73,745
Others			46,326				3,087				—				49,413
		$	10,062,862			$	16,463			$	228,463			$	9,850,862

		AS OF MARCH 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	526,258				—			$	39,042			$	487,216
Obligations of U.S. Government sponsored entities			7,814,649				—				222,747				7,591,902
Obligations of Puerto Rico, States and political subdivisions			108,047			$	499				1,892				106,654
Collateralized mortgage obligations			1,868,088				6,944				19,374				1,855,658
Mortgage-backed securities			1,350,993				4,510				36,249				1,319,254
Equity securities			59,511				7,030				199				66,342
Others			82,874				1,109				341				83,642
		$	11,810,420			$	20,092			$	319,844			$	11,510,668

The following table shows the Corporation’s 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, at March 31, 2007, December 31, 2006 and March 31, 2006:

		AS OF MARCH 31, 2007
		Less than 12 Months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	320,519			$	6,849			$	313,670
Obligations of Puerto Rico, States and political subdivisions			19,329				293				19,036
Collateralized mortgage obligations			333,165				2,187				330,978
Mortgage-backed securities			15,728				184				15,544
Equity securities			22,639				3,372				19,267
		$	711,380			$	12,885			$	698,495

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	502,445			$	27,102			$	475,343
Obligations of U.S. Government sponsored entities			5,847,813				109,048				5,738,765
Obligations of Puerto Rico, States and political subdivisions			58,452				2,823				55,629
Collateralized mortgage obligations			570,196				10,868				559,328
Mortgage-backed securities			912,630				22,555				890,075
Equity securities			300				27				273
		$	7,891,836			$	172,423			$	7,719,413

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	502,445			$	27,102			$	475,343
Obligations of U.S. Government sponsored entities			6,168,332				115,897				6,052,435
Obligations of Puerto Rico, States and political subdivisions			77,781				3,116				74,665
Collateralized mortgage obligations			903,361				13,055				890,306
Mortgage-backed securities			928,358				22,739				905,619
Equity securities			22,939				3,399				19,540
		$	8,603,216			$	185,308			$	8,417,908

		AS OF DECEMBER 31, 2006
		Less than 12 Months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	19,421			$	134			$	19,287
Obligations of U.S. Government sponsored entities			425,076				4,345				420,731
Obligations of Puerto Rico, States and political subdivisions			21,426				259				21,167
Collateralized mortgage obligations			501,705				4,299				497,406
Mortgage-backed securities			28,958				484				28,474
Equity securities			11,180				3,699				7,481
		$	1,007,766			$	13,220			$	994,546

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	485,232			$	29,684			$	455,548
Obligations of U.S. Government sponsored entities			6,097,274				143,179				5,954,095
Obligations of Puerto Rico, States and political subdivisions			55,238				3,278				51,960
Collateralized mortgage obligations			564,217				12,892				551,325
Mortgage-backed securities			954,293				26,008				928,285
Equity securities			300				202				98
		$	8,156,554			$	215,243			$	7,941,311

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	504,653			$	29,818			$	474,835
Obligations of U.S. Government sponsored entities			6,522,350				147,524				6,374,826
Obligations of Puerto Rico, States and political subdivisions			76,664				3,537				73,127
Collateralized mortgage obligations			1,065,922				17,191				1,048,731
Mortgage-backed securities			983,251				26,492				956,759
Equity securities			11,480				3,901				7,579
		$	9,164,320			$	228,463			$	8,935,857

		AS OF MARCH 31, 2006
		Less than 12 Months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	29,259			$	323			$	28,936
Obligations of U.S. Government sponsored entities			4,249,522				118,785				4,130,737
Obligations of Puerto Rico, States and political subdivisions			15,572				77				15,495
Collateralized mortgage obligations			651,405				7,333				644,072
Mortgage-backed securities			266,027				4,734				261,293
Equity securities			35				1				34
Others			14,104				341				13,763
		$	5,225,924			$	131,594			$	5,094,330

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	496,999			$	38,719			$	458,280
Obligations of U.S. Government sponsored entities			3,565,127				103,962				3,461,165
Obligations of Puerto Rico, States and political subdivisions			66,501				1,815				64,686
Collateralized mortgage obligations			367,529				12,041				355,488
Mortgage-backed securities			887,313				31,515				855,798
Equity securities			300				198				102
		$	5,383,769			$	188,250			$	5,195,519

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	526,258			$	39,042			$	487,216
Obligations of U.S. Government sponsored entities			7,814,649				222,747				7,591,902
Obligations of Puerto Rico, States and political subdivisions			82,073				1,892				80,181
Collateralized mortgage obligations			1,018,934				19,374				999,560
Mortgage-backed securities			1,153,340				36,249				1,117,091
Equity securities			335				199				136
Others			14,104				341				13,763
		$	10,609,693			$	319,844			$	10,289,849

At March 31, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $58 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) the rating on which was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, or one notch below investment grade. Standard & Poor’s (S&P), another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of March 31, 2007, these Appropriation Bonds represented approximately $2.5 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-

than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized loss positions of available-for-sale securities at March 31, 2007, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at March 31, 2007 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the quarter ended March 31, 2007, the Corporation recognized through earnings approximately $29.3 million in losses in interest-only securities classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired.

The following table states the name 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), when 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.

		March 31, 2007								December 31, 2006								March 31, 2006
(In thousands)		Amortized Cost				Market Value				Amortized Cost				Market Value				Amortized Cost				Market Value
FNMA		$	1,307,581			$	1,292,296			$	1,539,651			$	1,517,525			$	1,715,490			$	1,691,774
FHLB			6,015,720				5,902,317				6,230,841				6,086,885				7,652,208				7,435,051
Freddie Mac			1,073,605				1,063,275				1,149,185				1,134,853				1,291,314				1,271,426

Note 6 — 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 March 31, 2007, December 31, 2006 and March 31, 2006 were as follows:

		AS OF MARCH 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	70,862			$	1,493			$	145			$	72,210
Collateralized mortgage obligations			368				—				20				348
Others			16,253				68				11				16,310
		$	87,483			$	1,561			$	176			$	88,868

		AS OF DECEMBER 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	3,017				—				—			$	3,017
Obligations of Puerto Rico, States and political subdivisions			72,152			$	1,559			$	161				73,550
Collateralized mortgage obligations			381				—				21				360
Others			15,790				60				13				15,837
		$	91,340			$	1,619			$	195			$	92,764

		AS OF MARCH 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	238,520			$	57			$	2			$	238,575
Obligations of Puerto Rico, States and political subdivisions			73,045				925				216				73,754
Collateralized mortgage obligations			456				—				25				431
Others			32,364				108				15				32,457
		$	344,385			$	1,090			$	258			$	345,217

The following table shows the Corporation’s gross unrealized losses and fair 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, at March 31, 2007, December 31, 2006 and March 31, 2006:

		AS OF MARCH 31, 2007
		12 months or more and Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	25,272			$	145			$	25,127
Collateralized mortgage obligations			368				20				348
Others			1,250				11				1,239
		$	26,890			$	176			$	26,714

		AS OF DECEMBER 31, 2006
		12 months or more and Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	26,623			$	161			$	26,462
Collateralized mortgage obligations			381				21				360
Others			1,250				13				1,237
		$	28,254			$	195			$	28,059

		AS OF MARCH 31, 2006
		Less than 12 months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	13,577			$	2			$	13,575
Obligations of Puerto Rico, States and political subdivisions			11,255				102				11,153
Others			1,250				15				1,235
		$	26,082			$	119			$	25,963

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	22,389			$	114			$	22,275
Collateralized mortgage obligations			456				25				431
Others			250				—				250
		$	23,095			$	139			$	22,956

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	13,577			$	2			$	13,575
Obligations of Puerto Rico, States and political subdivisions			33,644				216				33,428
Collateralized mortgage obligations			456				25				431
Others			1,500				15				1,485
		$	49,177			$	258			$	48,919

Management believes that the unrealized losses in the held-to-maturity portfolio at March 31, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.

Note 7 – Mortgage Servicing Rights

The Corporation recognizes as assets the rights to service loans for others whether these are purchased or the servicing rights result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights for on-balance sheet securitization transactions.

Effective January 1, 2007, under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage loans as a class of servicing rights and elected to apply fair value accounting to these mortgage servicing rights (“MSRs”). These MSRs are segregated between loans serviced by PFH and by the Corporation’s banking subsidiaries. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served (i.e. PFH — primarily subprime mortgage loans vs. banking subsidiaries – primarily conforming loans). Servicing rights associated with Small Business Administration (“SBA”) commercial loans, the other class of servicing assets held by the Corporation, will continue to be accounted at the lower of cost or market method.

Classes of servicing rights were determined based on market inputs used in estimating the fair value of the servicing assets in the different markets or types of assets served. Although the Corporation currently does not hedge the risk of changes in the fair value of MSRs, it may do so in the future as part of the Corporation’s risk management practices. Management also considered trends in the markets and elections by other major participants in the industries served in determining the accounting methodology to be followed for the different types of servicing rights.

Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting from asset transfers are capitalized and carried at fair value. Prior to the adoption of SFAS No. 156, the Corporation capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the relative fair value of the servicing right and the residential mortgage loan at the time of sale. Prior to SFAS No. 156, both purchased MSRs and MSRs from asset transfers were accounted at quarter-end at the lower of cost or market value.

Effective January 1, 2007, upon the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation recorded a cumulative effect adjustment to increase the 2007 beginning balance of retained earnings in stockholders’ equity. The table below reconciles the balance of MSRs as of December 31, 2006 and January 1, 2007.

		Banking subsidiaries				PFH				Total
(In thousands)		Residential MSRs				Residential MSRs
Balance at December 31, 2006		$	77,801			$	82,338			$	160,139
Remeasurement upon adoption of SFAS No. 156 (a)			13,630				1,700				15,330
Balance at January 1, 2007		$	91,431			$	84,038			$	175,469

(a)		The remeasurement effect, net of deferred taxes, amounted to $9.6 million on a consolidated basis.

At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs, which is benchmarked against third party opinions of value. The discounted cash flow model incorporates assumptions that market participants 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. The Corporation uses assumptions in the model that it believes are comparable to those used by brokers or other service providers. Refer to Note 8 – Retained Interests on Mortgage Loan Sales / Securitizations for information on assumptions used in the valuation model of MSRs as of March 31, 2007.

The change in MSRs measured using the fair value method for the quarter ended March 31, 2007 was:

		Banking
		subsidiaries				PFH				Total
(In thousands)		Residential MSRs				Residential MSRs
Fair value at January 1, 2007		$	91,431			$	84,038			$	175,469
Purchases			795				—				795
Servicing from securitizations or asset transfers			6,054				—				6,054
Changes due to payments on loans (1)			(2,120	)			(8,412	)			(10,532	)
Changes in fair value due to changes in valuation model inputs or assumptions			2,261				(1,404	)			857
Fair value at March 31, 2007		$	98,421			$	74,222			$	172,643

(1)		Represents changes due to collection / realization of expected cash flows over time.

The changes in amortized MSRs for the quarter ended March 31, 2006 were:

(In thousands)		Residential MSRs
Balance at December 31, 2005		$	137,701
Rights originated			31,407
Rights purchased			8,272
Amortization			(16,759	)
Balance at March 31, 2006		$	160,621
Less: Valuation allowance			446
Balance at March 31, 2006, net of valuation allowance		$	160,175
Fair value at March 31, 2006		$	182,288

Residential mortgage loans serviced for others were $14.8 billion at March 31, 2007 (December 31, 2006 — $13.3 billion; March 31, 2006 — $11.5 billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statement of income, include the changes from period to period in 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, representing changes due to collection / realization of expected cash flows. Prior to the adoption of SFAS No. 156, the Corporation carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net mortgage servicing fees.

Note 8 – Retained Interests on Sales of Mortgage Loans

Popular Financial Holdings

The Corporation, through its consumer lending subsidiary PFH, has retained mortgage servicing rights and interest-only securities (“IOs” or “residual interests”) on securitizations of subprime mortgage loans.

IOs retained as part of off-balance sheet securitizations of subprime mortgage loans prior to 2006 are classified as investment securities available-for-sale and are presented at fair value in the unaudited consolidated statements of condition. PFH’s IOs classified as available-for-sale as of March 31, 2007 amounted to $19 million. In the quarter ended March 31, 2007, the Corporation recognized other-than-temporary impairment losses of $29.3 million on these IOs.

Commencing in January 2006, the IOs derived from newly-issued PFH’s off-balance sheet securitizations are accounted as trading securities. As such, any valuation adjustment related to these particular IOs is being recorded as part of trading account profit (loss) in the consolidated statements of income. IOs accounted for as trading securities from PFH’s securitizations approximated $14 million at March 31, 2007. In the first quarter of 2007, the Corporation recognized trading losses of $23.5 million on these IOs.

Key economic assumptions used to estimate the fair value of IOs and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:

		March 31, 2007													December 31, 2006
						MSRs													MSRs
						Fixed-rate				ARM									Fixed-rate
(In thousands)		IOs				loans				loans					IOs				loans				ARM loans
Carrying amount of retained interests		$	32,870			$	32,983			$	26,830				$	85,965			$	38,017			$	29,838
Fair value of retained interests		$	32,870			$	32,983			$	26,830				$	85,965			$	37,815			$	32,212
Weighted average life of collateral (in years)		2.7 years				3.1 years				2.0 years					3.2 years				3.1 years				2.1 years
Weighted average prepayment speed (annual rate)			28% (Fixed-rate loans)												28% (Fixed-rate loans)
			35% (ARM loans)				28	%			35	%			35% (ARM loans)					28	%			35	%
Impact on fair value of 10% increase in prepayment rate		($	1,425	)		$	312			($	147	)			($	5,543	)		$	210			($	149	)
Impact on fair value of 20% increase in prepayment rate		($	2,234	)		$	457			($	192	)			($	9,284	)		$	234			($	200	)
Weighted average discount rate (annual rate)			25	%			17	%			17	%				17	%			16	%			16	%
Impact on fair value of 10% adverse change		($	1,915	)		($	795	)		($	537	)			($	4,172	)		($	901	)		($	542	)
Impact on fair value of 20% adverse change		($	3,718	)		($	1,555	)			($1,012	)			($	8,081	)		($	1,761	)		($	1,060	)
Expected credit losses (annual rate)		3.17% to 6.46%					—				—				1.28% to 3.19%					—				—
Impact on fair value of 10% adverse change		($	6,539	)			—				—				($	4,792	)			—				—
Impact on fair value of 20% adverse change		($	12,307	)			—				—				($	9,558	)			—				—