Edgar Filing: POPULAR INC

POPULAR, INC.

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, 2007

Commission File Number: 000-13818

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 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 280,286,329 shares outstanding as of October 31, 2007.

POPULAR, INC.
INDEX


	Page
Part I – Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition as of September 30, 2007, December 31, 2006 and September 30, 2006		4

Unaudited Consolidated Statements of Income for the quarters and nine months ended September 30, 2007 and 2006		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2007 and 2006		6

Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2007 and 2006		7

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 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		61

Item 3. Quantitative and Qualitative Disclosures about Market Risk		108

Item 4. Controls and Procedures		113

Part II – Other Information

Item 1. Legal Proceedings		113

Item 1A. Risk Factors		113

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		116

Item 6. Exhibits		117

Signatures		118
EX-3.1 BYLAWS
EX-12.1 COMPUTATION OF RATIO OF EARNINGS
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 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. 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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)


	September 30,			December 31,			September 30,
(In thousands, except share information)	2007			2006			2006

ASSETS
Cash and due from banks	$	709,056		$	950,158		$	736,669

Money market investments:
Federal funds sold		430,000			84,350			323,980
Securities purchased under agreements to resell		180,394			202,181			211,439
Time deposits with other banks		24,703			15,177			9,830

		635,097			301,708			545,249

Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		4,742,127			3,743,924			4,463,023
Other investment securities available-for-sale		4,136,368			6,106,938			5,695,302
Investment securities held-to-maturity, at amortized cost (market value at September 30, 2007 - $280,072; December 31, 2006 - $92,764; September 30, 2006 – $358,849)		279,267			91,340			357,430
Other investment securities, at lower of cost or realizable value (realizable value at September 30, 2007 - $179,598; December 31, 2006 - $412,593; September 30, 2006 - $407,849)		179,376			297,394			297,472
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		569,357			193,619			211,942
Other trading securities		92,801			188,706			239,720
Loans held-for-sale, at lower of cost or market value		423,303			719,922			447,314

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		160,923			306,320			51,260
Other loans held-in-portfolio		33,067,301			32,019,044			31,563,499
Less – Unearned income		330,723			308,347			305,114
Allowance for loan losses		600,273			522,232			487,339

		32,297,228			31,494,785			30,822,306

Premises and equipment, net		580,768			595,140			588,282
Other real estate		133,508			84,816			83,636
Accrued income receivable		290,916			248,240			288,342
Other assets		1,441,681			1,611,890			1,374,900
Goodwill		668,807			667,853			678,666
Other intangible assets		100,471			107,554			104,497

	$	47,280,131		$	47,403,987		$	46,934,750

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	3,975,383		$	4,222,133		$	3,822,584
Interest bearing		22,626,132			20,216,198			19,314,861

		26,601,515			24,438,331			23,137,445
Federal funds purchased and assets sold under agreements to repurchase		6,287,303			5,762,445			7,045,466
Other short-term borrowings		1,414,897			4,034,125			2,709,511
Notes payable		8,314,791			8,737,246			9,681,897
Other liabilities		857,795			811,424			724,296

		43,476,301			43,783,571			43,298,615

Commitments and contingencies (See Note 12)

Minority interest in consolidated subsidiaries		109			110			111

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; 292,993,474 shares issued (December 31, 2006 – 292,190,924; September 30, 2006 – 291,977,949) and 279,597,529 outstanding (December 31, 2006 – 278,741,547; September 30, 2006 – 278,553,152)		1,757,961			1,753,146			1,751,868
Surplus		536,129			526,856			494,398
Retained earnings		1,689,384			1,594,144			1,611,103
Accumulated other comprehensive loss, net of tax of ($56,551) (December 31, 2006 – ($84,143); September 30, 2006 – ($61,834))		(161,061	)		(233,728	)		(201,687	)
Treasury stock – at cost, 13,395,945 shares (December 31, 2006 – 13,449,377; September 30, 2006 – 13,424,797)		(205,567	)		(206,987	)		(206,533	)

		3,803,721			3,620,306			3,636,024

	$	47,280,131		$	47,403,987		$	46,934,750

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Quarter ended					Nine months ended
	September 30,					September 30,
(In thousands, except per share information)	2007			2006		2007			2006

INTEREST INCOME:
Loans	$	662,973		$	637,246	$	1,963,572		$	1,842,873
Money market investments		6,807			7,038		17,168			22,926
Investment securities		109,793			129,323		338,347			396,130
Trading account securities		10,653			7,724		29,645			23,649

		790,226			781,331		2,348,732			2,285,578

INTEREST EXPENSE:
Deposits		196,825			151,008		552,657			411,380
Short-term borrowings		113,832			141,727		358,107			393,604
Long-term debt		119,453			146,558		351,453			413,013

		430,110			439,293		1,262,217			1,217,997

Net interest income		360,116			342,038		1,086,515			1,067,581
Provision for loan losses		148,093			63,445		359,606			179,488

Net interest income after provision for loan losses		212,023			278,593		726,909			888,093
Service charges on deposit accounts		49,704			47,484		146,567			142,277
Other service fees (See Note 13)		93,364			79,637		270,803			240,000
Net (loss) gain on sale and valuation adjustments of investment securities		(3,089	)		7,123		79,857			5,039
Trading account (loss) profit		(2,867	)		10,019		(6,654	)		23,324
Gain on sale of loans and valuation adjustments on loans held-for-sale		5,991			20,113		37,719			96,428
Other operating income		23,902			26,973		94,264			97,100

		379,028			469,942		1,349,465			1,492,261

OPERATING EXPENSES:
Personnel costs:
Salaries		120,810			130,613		384,239			392,845
Pension, profit sharing and other benefits		31,430			34,083		110,664			116,386

		152,240			164,696		494,903			509,231
Net occupancy expenses		29,436			31,573		87,951			88,840
Equipment expenses		30,688			34,346		95,329			101,516
Other taxes		13,227			11,770		36,909			32,940
Professional fees		37,103			29,618		111,732			105,184
Communications		16,846			17,343		50,881			51,936
Business promotion		28,560			33,855		87,301			98,669
Printing and supplies		4,131			4,408		12,956			13,331
Other operating expenses		32,508			28,706		97,362			85,609
Impact of change in fiscal period of certain subsidiaries		—			—		—			9,741
Amortization of intangibles		2,234			3,608		8,030			9,160

		346,973			359,923		1,083,354			1,106,157

Income before income tax		32,055			110,019		266,111			386,104
Income tax		(3,948	)		27,859		36,511			88,060

NET INCOME	$	36,003		$	82,160	$	229,600		$	298,044

NET INCOME APPLICABLE TO COMMON STOCK	$	33,024		$	79,181	$	220,665		$	289,109

BASIC EARNINGS PER COMMON SHARE (“EPS”)	$	0.12		$	0.28	$	0.79		$	1.04

DILUTED EPS	$	0.12		$	0.28	$	0.79		$	1.04

DIVIDENDS DECLARED PER COMMON SHARE	$	0.16		$	0.16	$	0.48		$	0.48

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Nine months ended
	September 30,
(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		4,755			3,919
Issuance of common stock		—			11,312
Stock options exercised		60			194

Balance at end of period		1,757,961			1,751,868

Surplus:
Balance at beginning of year		526,856			452,398
Common stock issued under the Dividend Reinvestment Plan		7,835			8,634
Issuance of common stock		—			28,281
Issuance cost of common stock		—			1,462
Stock options expense on unexercised options, net of forfeitures		1,289			2,160
Stock options exercised		149			463
Transfer from retained earnings		—			1,000

Balance at end of period		536,129			494,398

Retained earnings:
Balance at beginning of year		1,594,144			1,456,612
Net income		229,600			298,044
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)		8,667			—
Cash dividends declared on common stock		(134,092	)		(133,618	)
Cash dividends declared on preferred stock		(8,935	)		(8,935	)
Transfer to surplus		—			(1,000	)

Balance at end of period		1,689,384			1,611,103

Accumulated other comprehensive loss:
Balance at beginning of year		(233,728	)		(176,000	)
Other comprehensive income (loss), net of tax		72,667			(25,687	)

Balance at end of period		(161,061	)		(201,687	)

Treasury stock – at cost:
Balance at beginning of year		(206,987	)		(207,081	)
Purchase of common stock		(352	)		—
Reissuance of common stock		1,772			548

Balance at end of period		(205,567	)		(206,533	)

Total stockholders’ equity	$	3,803,721		$	3,636,024

Disclosure of changes in number of shares:


	September 30,			December 31,			September 30,
	2007			2006			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		792,486			858,905			653,142
Issuance of common stock		—			1,885,380			1,885,380
Stock options exercised		10,064			39,449			32,237

Balance at end of period		292,993,474			292,190,924			291,977,949

Treasury stock		(13,395,945	)		(13,449,377	)		(13,424,797	)

Common Stock – outstanding		279,597,529			278,741,547			278,553,152

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands)	2007			2006			2007			2006

Net income	$	36,003		$	82,160		$	229,600		$	298,044

Other comprehensive income (loss), before tax:
Foreign currency translation adjustment		(966	)		(150	)		2,014			(467	)
Adjustment of pension and postretirement benefit plans		—			—			(519	)		—
Unrealized gains (losses) on securities available-for-sale arising during the period		156,462			192,674			100,493			(23,150	)
Reclassification adjustment for losses (gains) included in net income		3			(7,123	)		(80	)		(5,039	)
Unrealized net losses on cash flows hedges		(2,065	)		(4,992	)		(1,117	)		(1,082	)
Reclassification adjustment for (gains) losses included in net income		(164	)		1,126			(289	)		509
Cumulative effect of accounting change		—			—			(243	)		—

		153,270			181,535			100,259			(29,229	)
Income tax (expense) benefit		(39,514	)		(48,433	)		(27,592	)		3,542

Total other comprehensive income (loss), net of tax		113,756			133,102			72,667			(25,687	)

Comprehensive income	$	149,759		$	215,262		$	302,267		$	272,357

Tax Effects Allocated to Each Component of Other Comprehensive Income:


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands)	2007			2006			2007			2006

Underfunding of pension and postretirement benefit plans		—			—		$	180			—
Unrealized gains (losses) on securities available-for-sale arising during the period		($40,302	)		($49,801	)		(28,280	)	$	3,348
Reclassification adjustment for losses (gains) included in net income		(1	)		3			13			(3	)
Unrealized net losses on cash flows hedges		723			1,807			371			425
Reclassification adjustment for (gains) losses included in net income		66			(442	)		124			(228	)

Income tax (expense) benefit		($39,514	)		($48,433	)		($27,592	)	$	3,542

Disclosure of accumulated other comprehensive loss:


	September 30,			December 31,			September 30,
(In thousands)	2007			2006			2006

Foreign currency translation adjustment		($34,687	)		($36,701	)		($36,782	)

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		(111,830	)		(212,243	)		(223,879	)
Tax effect		28,879			57,146			60,642

Net of tax amount		(82,951	)		(155,097	)		(163,237	)

Unrealized (losses) gains on cash flows hedges		(1,316	)		90			(749	)
Tax effect		458			(37	)		274

Net of tax amount		(858	)		53			(475	)

Cumulative effect of accounting change, net of tax		—			243			243

Accumulated other comprehensive loss, net of tax		($161,061	)		($233,728	)		($201,687	)

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
(In thousands)	2007			2006

Cash flows from operating activities:
Net income	$	229,600		$	298,044
Less: Impact of change in fiscal period of certain subsidiaries, net of tax		—			(6,129	)

Net income before change in fiscal period		229,600			304,173

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		59,558			63,805
Provision for loan losses		359,606			179,488
Amortization of intangibles		8,030			9,160
Amortization and fair value adjustments of servicing assets		34,941			43,309
Net gain on sale and valuation adjustments of investment securities		(79,857	)		(5,039	)
Net gain on disposition of premises and equipment		(5,293	)		(7,177	)
Net gain on sale of loans and valuation adjustments on loans held-for-sale		(37,719	)		(96,428	)
Net amortization of premiums and accretion of discounts on investments		15,801			19,060
Net amortization of premiums and deferred loan origination fees and costs		70,645			99,065
Earnings from investments under the equity method		(19,514	)		(9,081	)
Stock options expense		1,339			2,308
Deferred income taxes		(94,581	)		(19,630	)
Net disbursements on loans held-for-sale		(4,007,301	)		(4,963,647	)
Acquisitions of loans held-for-sale		(474,269	)		(1,188,844	)
Proceeds from sale of loans held-for-sale		3,475,817			5,559,968
Net decrease in trading securities		1,003,078			1,195,639
Net increase in accrued income receivable		(42,675	)		(44,311	)
Net decrease in other assets		30,507			67,881
Net increase in interest payable		4,586			41,257
Net increase in postretirement benefit obligation		2,407			3,028
Net increase (decrease) in other liabilities		18,645			(88,160	)

Total adjustments		323,751			861,651

Net cash provided by operating activities		553,351			1,165,824

Cash flows from investing activities:
Net (increase) decrease in money market investments		(266,954	)		204,322
Purchases of investment securities:
Available-for-sale		(67,920	)		(243,481	)
Held-to-maturity		(17,026,831	)		(20,847,771	)
Other		(47,786	)		(50,980	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,066,304			1,560,612
Held-to-maturity		16,844,551			20,644,100
Other		17,071			72,611
Proceeds from sale of investment securities available-for-sale		37,352			198,191
Proceeds from sale of other investment securities		246,352			—
Net disbursements on loans		(1,137,982	)		(877,628	)
Proceeds from sale of loans		16,367			759,518
Acquisition of loan portfolios		(22,312	)		(291,330	)
Assets acquired, net of cash		(2,378	)		(2,752	)
Mortgage servicing rights purchased		(25,596	)		(18,723	)
Acquisition of premises and equipment		(69,607	)		(85,415	)
Proceeds from sale of premises and equipment		29,501			39,031
Proceeds from sale of foreclosed assets		113,776			99,928

Net cash (used in) provided by investing activities		(296,092	)		1,160,233

Cash flows from financing activities:
Net increase in deposits		2,150,668			494,091
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase		524,858			(1,770,146	)
Net decrease in other short-term borrowings		(2,619,228	)		(97,642	)
Payments of notes payable		(1,245,332	)		(1,822,303	)
Proceeds from issuance of notes payable		821,087			777,171
Dividends paid		(142,898	)		(140,765	)
Proceeds from issuance of common stock		12,836			51,895
Treasury stock acquired		(352	)		—

Net cash used in financing activities		(498,361	)		(2,507,699	)

Cash effect of change in fiscal period of certain subsidiaries		—			11,914

Net decrease in cash and due from banks		(241,102	)		(169,728	)
Cash and due from banks at beginning of period		950,158			906,397

Cash and due from banks at end of period	$	709,056		$	736,669

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 based in Puerto Rico with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution 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 New York, California, Illinois, New Jersey, Florida and Texas, while E-LOAN provides online consumer direct lending for obtaining mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in technology 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 September 30, 2007, December 31, 2006 and September 30, 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.

SUBSEQUENT EVENTS

Sale of BPNA’s Retail Bank Branches in Houston

On October 22, 2007, the Corporation announced the signing of a definitive agreement to sell the six Houston retail bank branches of BPNA to Prosperity Bank. Prosperity Bank has agreed to pay a premium of 10.10% for approximately $140 million in deposits, as well as purchase certain loans and other assets attributable to the branches. Prosperity Bank also agreed to retain all branch-based employees of BPNA’s Houston locations as part of the transaction. BPNA will continue to operate its mortgage business based in Houston as well as its franchise and small business lending activities in Texas. BPNA will also continue to maintain a retail branch in Arlington, Texas. The agreement was approved by the Boards of Directors of both banks and is expected to close during the fourth quarter of 2007. The transaction is subject to certain customary closing conditions, including receipt of regulatory approvals.

E-LOAN Restructuring Plan

On November 5, 2007, the Board of Directors of Popular adopted a Restructuring Plan for its internet financial services subsidiary E-LOAN (the “E-LOAN’s Restructuring Plan”).

Considering the losses in the operation of E-LOAN, market conditions and other factors, the Board of Directors approved a substantial reduction of marketing and personnel costs at E-LOAN. This change will include concentrating marketing investment toward the internet and the origination of first mortgage loans that are actually being sold to Government Sponsored Entities (GSEs). The E-LOAN Restructuring Plan continues to promote the expansion of the Internet deposit gathering initiative with BPNA.

The cost-control plan initiative at the E-LOAN subsidiary will result in the elimination of approximately 513 positions out of a total of 771 and will be substantially accomplished in the fourth quarter of 2007. As a result of the E-LOAN Restructuring Plan, operating expenses are expected to be reduced by approximately $79 million for 2008. E-LOAN’s estimated net losses for the year ended December 31, 2008 are expected to decline by $28 million, resulting principally from the reduction in operating expenses, partially offset by the related tax impact and by lower volume of loan originations in certain business channels that are impacted by this plan.

It is expected that this Plan will result in estimated restructuring charges as follows:


(In millions)	Fourth Quarter 2007
Severance	$	4.4
Stay and retention bonuses		0.2
Lease terminations		4.2

Total restructuring charges		8.8
Impairment of long-lived assets		12.3
Impairment charges on definite-life intangible assets		3.1

Total estimated charges	$	24.2

These estimates are preliminary as management continues to work on the E-LOAN Restructuring Plan. Further, the Corporation is currently evaluating whether this change in E-LOAN’s business model could result in impairment in the value of its recorded goodwill and trademark. As of September 30, 2007, E-LOAN’s accounting records reflect $164 million in goodwill and $64 million in trademark. The impairment valuation analysis is to be completed in the fourth quarter of 2007. Any impairment charge will not impact the regulatory capital ratios of the Corporation or its liquidity since it would be a non-cash transaction.

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. This 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 2007 did not have a material impact on the Corporation’s consolidated financial statements during the nine months ended September 30, 2007.

SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement 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 for at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs during the first quarter of 2007 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 No. 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 the impact of FIN 48.

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 adopted the EITF 06-03 guidance in the first quarter of 2007. The Corporation’s accounting policy is to account on a net basis for the 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 for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their 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 on 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 election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between the carrying amount and the fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. 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. 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 Instrument.” 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 accounting standard may have on its consolidated financial statements and disclosures.

FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”

In April 2007, the FASB issued Staff Position FSP FIN No. 39-1 which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as

the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 is not expected to have a material impact on the Corporation’s consolidated financial statements and disclosures.

SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”

The Statement of Position (“SOP”) 07-01 issued in June 2007 provides guidance for determining whether an entity is within the scope of the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies (“the AICPA Guide”). Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the AICPA Guide. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007. On October 17, 2007, the FASB agreed to propose an indefinite delay of the effective dates of SOP 07-01 and, for entities that meet the definition of an “investment company” in SOP 07-01, of FSP FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies”. The proposed delays, which will be exposed for comment for 30 days, will enable the FASB to add a project to its technical agenda to address the implementation issues that have arisen and possibly revise SOP 07-01. Until that occurs, affected entities should continue to follow existing guidance. Nevertheless, management is evaluating the impact, if any, that the adoption of SOP 07-01 may have on its consolidated financial statements and disclosures.

FSP FIN No. 46(R) – 7 “Application of FASB Interpretation No. 46(R) to Investment Companies”

In May 2007, the FASB issued Staff Position FSP FIN No. 46 (R) – 7 , which amends the scope of the exception to FIN No. 46 (R) to indicate that investments accounted for at fair value in accordance with the specialized accounting guidance in the AICPA Guide, are not subject to consolidation under FIN No. 46 (R). This interpretation is effective for fiscal years beginning on or after December 15, 2007. Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements and disclosures. Also, management is considering the guidance of SOP 07-01 which was previously described that considers an indefinite delay on its implementation until further notification by the FASB.

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 approximately $588 million at September 30, 2007 (December 31, 2006 — $621 million; September 30, 2006 — $591 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 September 30, 2007, the Corporation had securities with a market value of $397 thousand (December 31, 2006 - $445 thousand; September 30, 2006 — $445 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 September 30, 2007, December 31, 2006, and September 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand 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, at September 30, 2007, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2006 — $1.9 million; September 30, 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:


	September 30,		December 31,		September 30,
(In thousands)	2007		2006		2006

Investment securities available-for-sale	$	3,222,644	$	2,645,272	$	2,882,589
Investment securities held-to-maturity		340		658		659
Loans held-for-sale		41,266		332,058		20,838
Loans held-in-portfolio		11,482,585		10,260,198		10,642,884

	$	14,746,835	$	13,238,186	$	13,546,970

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 September 30, 2007, December 31, 2006 and September 30, 2006 were as follows:


	AS OF SEPTEMBER 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	497,893	$	41	$	22,114	$	475,820
Obligations of U.S. Government sponsored entities		5,871,339		2,628		55,613		5,818,354
Obligations of Puerto Rico, States and political subdivisions		109,289		420		2,871		106,838
Collateralized mortgage obligations		1,479,951		3,216		13,798		1,469,369
Mortgage-backed securities		969,023		3,190		22,738		949,475
Equity securities		46,100		1,780		6,598		41,282
Others		16,730		627		—		17,357

	$	8,990,325	$	11,902	$	123,732	$	8,878,495


	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 SEPTEMBER 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	521,885		—	$	28,418	$	493,467
Obligations of U.S. Government sponsored entities		6,776,956	$	178		154,923		6,622,211
Obligations of Puerto Rico, States and political subdivisions		119,999		308		3,927		116,380
Collateralized mortgage obligations		1,725,068		5,031		17,198		1,712,901
Mortgage-backed securities		1,099,321		1,412		29,535		1,071,198
Equity securities		70,987		4,938		3,109		72,816
Others		67,745		2,289		682		69,352

	$	10,381,961	$	14,156	$	237,792	$	10,158,325

The table below 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 September 30, 2007, December 31, 2006 and September 30, 2006.


	AS OF SEPTEMBER 30, 2007
	Less than 12 Months
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	106,914	$	3,960	$	102,954
Obligations of Puerto Rico, States and political subdivisions		22,680		411		22,269
Collateralized mortgage obligations		283,814		1,869		281,945
Mortgage-backed securities		22,328		399		21,929
Equity securities		22,638		6,572		16,066

	$	458,374	$	13,211	$	445,163


	12 months or more
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	478,436	$	22,114	$	456,322
Obligations of U.S. Government sponsored entities		5,212,523		51,653		5,160,870
Obligations of Puerto Rico, States and political subdivisions		50,235		2,460		47,775
Collateralized mortgage obligations		576,852		11,929		564,923
Mortgage-backed securities		818,782		22,339		796,443
Equity securities		300		26		274

	$	7,137,128	$	110,521	$	7,026,607


	Total
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	478,436	$	22,114	$	456,322
Obligations of U.S. Government sponsored entities		5,319,437		55,613		5,263,824
Obligations of Puerto Rico, States and political subdivisions		72,915		2,871		70,044
Collateralized mortgage obligations		860,666		13,798		846,868
Mortgage-backed securities		841,110		22,738		818,372
Equity securities		22,938		6,598		16,340

	$	7,595,502	$	123,732	$	7,471,770


	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 SEPTEMBER 30, 2006
	Less than 12 Months
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	19,410	$	91	$	19,319
Obligations of U.S. Government sponsored entities		443,593		4,348		439,245
Obligations of Puerto Rico, States and political subdivisions		26,398		375		26,023
Collateralized mortgage obligations		507,121		4,037		503,084
Mortgage-backed securities		165,200		2,363		162,837
Equity securities		46,811		2,811		44,000
Others		10,360		682		9,678

	$	1,218,893	$	14,707	$	1,204,186


	12 months or more
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	502,475	$	28,327	$	474,148
Obligations of U.S. Government sponsored entities		6,254,447		150,575		6,103,872
Obligations of Puerto Rico, States and political subdivisions		53,305		3,552		49,753
Collateralized mortgage obligations		576,660		13,161		563,499
Mortgage-backed securities		858,717		27,172		831,545
Equity securities		300		298		2

	$	8,245,904	$	223,085	$	8,022,819


	Total
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	521,885	$	28,418	$	493,467
Obligations of U.S. Government sponsored entities		6,698,040		154,923		6,543,117
Obligations of Puerto Rico, States and political subdivisions		79,703		3,927		75,776
Collateralized mortgage obligations		1,083,781		17,198		1,066,583
Mortgage-backed securities		1,023,917		29,535		994,382
Equity securities		47,111		3,109		44,002
Others		10,360		682		9,678

	$	9,464,797	$	237,792	$	9,227,005

At September 30, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $55 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, 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 September 30, 2007, these Appropriation Bonds represented approximately $2.2 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 September 30, 2007, except for the obligations of the Puerto Rico government described above are primarily associated with U.S. government sponsored entities, and to a lesser extent, U.S. Treasury obligations and 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 September 30, 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 nine months ended September 30, 2007, the Corporation recognized through earnings approximately $32.7 million in losses on residual interests classified as available-for-sale ($2.0 million for the third quarter of 2007) and $7.6 million in losses on equity securities that management considered to be other-than-temporarily impaired. The equity securities that generated this other-than-temporary impairment in the first quarter of 2007 were sold in the second quarter of 2007.

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), 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.


	September 30, 2007				December 31, 2006				September 30, 2006
(In thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

FNMA	$	1,184,225	$	1,169,857	$	1,539,651	$	1,517,525	$	1,594,165	$	1,570,842
FHLB		5,841,614		5,788,544		6,230,841		6,086,885		6,621,836		6,470,786
Freddie Mac		954,598		944,533		1,149,185		1,134,853		1,195,093		1,178,715

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 September 30, 2007, December 31, 2006 and September 30, 2006 were as follows:


	AS OF SEPTEMBER 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	196,190		—	$	71	$	196,119
Obligations of Puerto Rico, States and political subdivisions		71,465	$	1,400		148		72,717
Collateralized mortgage obligations		331		—		18		313
Others		11,281		—		358		10,923

	$	279,267	$	1,400	$	595	$	280,072


	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 SEPTEMBER 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	269,683		—	$	34	$	269,649
Obligations of Puerto Rico, States and political subdivisions		72,154	$	1,605		158		73,601
Collateralized mortgage obligations		409		—		22		387
Others		15,184		43		15		15,212

	$	357,430	$	1,648	$	229	$	358,849

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 September 30, 2007, December 31, 2006 and September 30, 2006:


	AS OF SEPTEMBER 30, 2007
	Less than 12 months
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	196,190	$	71	$	196,119
Obligations of Puerto Rico, States and political subdivisions		1,545		24		1,521
Others		6,225		354		5,871

	$	203,960	$	449	$	203,511


	12 months or more
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	23,460	$	124	$	23,336
Collateralized mortgage obligations		331		18		313
Others		1,250		4		1,246

	$	25,041	$	146	$	24,895


	Total
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	196,190	$	71	$	196,119
Obligations of Puerto Rico, States and political subdivisions		25,005		148		24,857
Collateralized mortgage obligations		331		18		313
Others		7,475		358		7,117

	$	229,001	$	595	$	228,406


	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 SEPTEMBER 30, 2006
	Less than 12 months
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	269,683	$	34	$	269,649
Obligations of Puerto Rico, States and political subdivisions		2,110		3		2,107

	$	271,793	$	37	$	271,756


	12 months or more
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	2,534	$	155	$	2,379
Collateralized mortgage obligations		409		22		387
Others		1,250		15		1,235

	$	4,193	$	192	$	4,001


	Total
			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	269,683	$	34	$	269,649
Obligations of Puerto Rico, States and political subdivisions		4,644		158		4,486
Collateralized mortgage obligations		409		22		387
Others		1,250		15		1,235

	$	275,986	$	229	$	275,757

Management believes that the unrealized losses in the held-to-maturity portfolio at September 30, 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 rights are purchased or result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights in connection with on-balance sheet mortgage loan securitizations.

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 for at the lower of cost or market method.

Classes of servicing rights were determined based on the different markets or types of assets served. 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 for 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 MSRs by $15.3 million, which resulted in a $9.6 million, net of tax, increase in the retained earnings account of 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 fair value. 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. 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 Sales of Mortgage Loans for information on assumptions used in the valuation model of MSRs as of September 30, 2007.

The change in MSRs measured using the fair value method for the nine months ended September 30, 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		3,345			22,251			25,596
Servicing from securitizations or asset transfers		17,682			8,040			25,722
Changes due to payments on loans (1)		(6,821	)		(29,285	)		(36,106	)
Changes in fair value due to changes in valuation model inputs or assumptions		4,276			(1,636	)		2,640
Other changes		—			(66	)		(66	)

Fair value at September 30, 2007	$	109,913		$	83,342		$	193,255


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

The changes in amortized MSRs for the nine months ended September 30, 2006 were:


(In thousands)	Residential MSRs

Balance at January 1, 2006	$	137,701
Rights originated		58,497
Rights purchased		18,723
Amortization		(46,842	)

Balance at September 30, 2006		168,079
Less: Valuation allowance		316

Balance at September 30, 2006, net of valuation allowance	$	167,763

Fair value at September 30, 2006	$	185,923

Residential mortgage loans serviced for others were $18.1 billion at September 30, 2007 (December 31, 2006 — $13.3 billion; September 30, 2006 — $13.0 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 residual interests in connection with securitizations of subprime mortgage loans.

The Corporation accounts for the residual interests derived from PFH’s off-balance sheet securitizations that took place prior to 2006 as investment securities available-for-sale. Under SFAS No. 140, interest-only strips, retained interests in securitizations or other financial assets that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its investment shall be subsequently measured like investments in debt securities classified as available-for-sale or trading under SFAS No. 115. In 2006, as permitted by SFAS No. 115, management determined, on a prospective basis, to begin classifying PFH’s new residual interests as trading securities and as such, account for any changes in fair value through earnings (recorded as part of trading account profit (loss) in the consolidated statements of income).

PFH’s residual interests classified as available-for-sale as of September 30, 2007 amounted to $17 million. In the quarter and nine-month periods ended September 30, 2007, the Corporation recognized other-than-temporary impairment losses of $2.0 million and $32.7 million, respectively, on these residual interests.

Residual interests accounted for as trading securities from PFH’s securitizations approximated $5 million at

September 30, 2007. For the third quarter and nine-month periods ended September 30, 2007, the Corporation recognized trading losses of $12.1 million and $36.4 million, respectively, on these residual interests.

During 2007, the Corporation conducted one off-balance sheet asset securitization that involved the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred these assets and their titles to a different trust, thus isolating those loans from the Corporation’s assets. Approximately, $461 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH as part of this transaction, with a gain on sale of approximately $13.5 million.

Key economic assumptions used in measuring the retained interests at the date of this off-balance sheet securitization were:


				MSRs
				Fixed-
				rate			ARM
	Residual Interests			loans			Loans

	28% (Fixed-rate loans)
Average prepayment speed	35% (ARM loans)				28	%		35	%
Weighted average life of collateral (in years)	4.2 years			4.8 years			2.2 years
Cumulative credit losses	4.75% (Fixed-rate loans)				—			—
	8.40% (ARM loans)				—			—
Discount rate (annual rate)		25	%		17	%		17	%

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


	September 30, 2007									December 31, 2006
				MSRs									MSRs
	Residual			Fixed-rate			ARM			Residual			Fixed-rate
(In thousands)	Interests			loans			loans			Interests			loans			ARM loans

Carrying amount of retained interests	$	22,469		$	32,069		$	21,343		$	85,965		$	38,017		$	29,838
Fair value of retained interests	$	22,469		$	32,069		$	21,343		$	85,965		$	37,815		$	32,212
Weighted average life of collateral (in years)	3.0 years			3.8 years			2.0 years			3.2 years			3.1 years			2.1 years
Weighted average prepayment speed (annual rate)	23% (Fixed-rate loans)									28% (Fixed-rate loans)
	35% (ARM loans)				23	%		35	%	35% (ARM loans)				28	%		35	%
Impact on fair value of 10% increase in prepayment rate	($	563	)	($	316	)	($	268	)	($	5,543	)	$	210		($	149	)
Impact on fair value of 20% increase in prepayment rate	($	1,489	)	($	372	)	($	493	)	($	9,284	)	$	234		($	200	)
Weighted average discount rate (annual rate)		30	%		17	%		17	%		17	%		16	%		16	%
Impact on fair value of 10% adverse change	($	2,132	)	($	913	)	($	408	)	($	4,172	)	($	901	)	($	542	)
Impact on fair value of 20% adverse change	($	4,056	)	($	1,777	)	($	800	)	($	8,081	)	($	1,761	)	($	1,060	)
Cumulative credit losses	3.17% to 8.50%				—			—		1.28% to 3.19%				—			—
Impact on fair value of 10% adverse change	($	10,268	)		—			—		($	4,792	)		—			—
Impact on fair value of 20% adverse change	($	18,327	)		—			—		($	9,558	)		—			—

PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced loans; as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.

The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation.

Banking subsidiaries

The Corporation’s banking subsidiaries also retain servicing responsibilities in connection with the sale of mortgage loans to third parties. Also, servicing responsibilities are retained under securitization arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the Corporation’s banking subsidiaries, in which the Corporation retains a servicing right, have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.

Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the quarter ended September 30, 2007 were:


	MSRs

Prepayment speed		8.8	%
Weighted average life (in years)		11.3	years
Discount rate (annual rate)		10.7	%

Key economic assumptions used to estimate the fair value of MSRs derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


	September 30, 2007			December 31, 2006

(In thousands)	MSRs			MSRs

Fair value of retained interests	$	86,550		$	73,332
Weighted average life (in years)		12.4	years		9.2	years
Weighted average prepayment speed (annual rate)		8.1	%		14.0	%
Impact on fair value of 10% adverse change	($	2,536	)	($	1,868	)
Impact on fair value of 20% adverse change	($	4,544	)	($	4,151	)
Weighted average discount rate (annual rate)		10.7	%		10.3	%
Impact on fair value of 10% adverse change	($	3,513	)	($	2,142	)
Impact on fair value of 20% adverse change	($	6,394	)	($	4,200	)

The amounts of MSRs presented in the table above exclude purchased MSRs.

The sensitivity analyses presented above for residual interests and MSRs 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.

Note 9 – Derivative Instruments and Hedging Activities

Refer to Note 28 to the consolidated financial statements included in the 2006 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the third quarter of 2007:

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges outstanding as of September 30, 2007 and December 31, 2006 were as follows:


	As of September 30, 2007

(In thousands)	Notional amount		Derivative assets		Derivative liabilities		Equity OCI			Ineffectiveness

Asset Hedges
Forward commitments	$	155,000	$	181	$	105	$	46			—


Liability Hedges
Interest rate swaps	$	390,000	$	439	$	1,665	($	797	)		—


	As of December 31, 2006

(In thousands)	Notional amount		Derivative assets		Derivative liabilities		Equity OCI		Ineffectiveness

Asset Hedges
Forward commitments	$	190,000	$	175	$	2	$	106		—


Liability Hedges
Interest rate swaps	$	390,000	$	887	$	523	$	237		—

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts 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 used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at September 30, 2007 have a maximum remaining maturity of 78 days.

The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 1.5 years.

Non-Hedging Activities

Financial instruments designated as non-hedging derivatives outstanding at September 30, 2007 and December 31, 2006 were as follows:


September 30, 2007
			Fair Values
(In thousands)	Notional amount		Derivative assets		Derivative liabilities

Forward contracts	$	730,700	$	424	$	1,801
Call options and put options		38,000		41		85
Interest rate swaps associated with:
- short-term borrowings		400,000		392		—
- bond certificates offered in an on-balance sheet securitization		406,347		—		2,924
- financing of auto loans held-in-portfolio		344,066		—		1,485
- swaps with corporate clients		583,744		—		5,039
- swaps offsetting position of corporate client swaps		583,744		5,039		—
Credit default swap		33,463		—		—
Interest rate caps		836,883		1,260		—
Interest rate caps for benefit of corporate clients		50,000		—		45
Indexed options on deposits		211,267		50,200		—
Indexed options on S&P Notes		31,152		7,439		—
Bifurcated embedded options		222,732		—		56,124
Mortgage rate lock commitments		177,791		—		266

Total	$	4,649,889	$	64,795	$	67,769


As of December 31, 2006
			Fair Values
(In thousands)	Notional amount		Derivative assets		Derivative liabilities

Forward contracts	$	400,572	$	1,277	$	125
Call options and put options		37,500		83		46
Interest rate swaps associated with:
- short-term borrowings		400,000		2,153		—
- bond certificates offered in an on-balance sheet securitization		516,495		90		1,168
- financing of auto loans held-in-portfolio		470,146		728		—
- auto loans approvals locked interest rates		17,442		22		—
- swaps with corporate clients		410,533		—		2,146
- swaps offsetting position of corporate client swaps		410,533		2,146		—
- investment securities		89,385		—		1,645
- mortgage loan portfolio prior to securitization		75,000		302		—
Credit default swap		33,463		—		—
Foreign currency and exchange rate commitments w/ clients		103		—		2
Foreign currency and exchange rate commitments w/ counterparty		103		2		—
Interest rate caps		889,417		4,099		—
Interest rate caps for benefit of corporate clients		50,000		—		90
Indexed options on deposits		204,946		38,323		—
Indexed options on S&P Notes		31,152		5,648		—
Bifurcated embedded options		229,455		—		43,844
Mortgage rate lock commitments		215,676		13		635

Total	$	4,481,921	$	54,886	$	49,701

Interest Rates Swaps

The Corporation has an interest rate swap outstanding to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized losses of $3.8 million for the third quarter and $1.8 million for the nine months ended September 30, 2007 due to changes in its fair value. During the quarter and nine-month periods ended September 30, 2006, the Corporation recognized losses of $2.4 million.

The Corporation has interest rate swaps to economically hedge the cost of short-term debt. For the third quarter of 2007, the Corporation recognized a loss of $1.6 million, and for the nine months ended September 30, 2007, recognized losses of $1.8 million due to changes in their fair value, which were included as part of short-term interest expense. During the third quarter and nine months ended September 30, 2006, the Corporation recognized losses of $3.4 million and $2.0 million, respectively, associated with changes in the fair value of these interest rate swaps.

Additionally, the Corporation entered into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with auto loans held-in-portfolio. Losses of $3.0 million and $2.2 million for the quarter and nine months ended September 30, 2007, respectively, were recognized as part of long-term interest expense related to these swaps. During the quarter and nine-month periods ended September 30, 2006, the Corporation recognized losses of $3.5 million and $572 thousand, respectively, associated with changes in the fair value of these swaps.

Interest Rate Caps

During the quarter ended June 30, 2007, the Corporation entered into a $100 million interest rate cap to mitigate its exposure to rising interest rates on short-term borrowings.

The Corporation has interest rate caps in conjunction with a series of mortgage loan securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income. Losses of $1.2 million and $2.6 million for the quarter and nine months ended September 30, 2007, respectively, were recognized as part of long-term interest expense related to these interest rate cap contracts. For the quarter and nine months ended September 30, 2006, losses on these contracts amounted to $3.5 million and $6.6 million, respectively.

Forward Contracts

The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter and nine months ended September 30, 2007, losses of $3.7 million and $2.1 million, respectively, were recognized due to changes in fair value of these forward sales commitments. During the third quarter and nine months ended September 30, 2006, the Corporation recognized losses of $1.9 million and $112 thousand, respectively, related to these forward contracts.

Mortgage Rate Lock Commitments

The Corporation has mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed for a specified period of time. These contracts are recognized at fair value with changes directly reported in income as part of gain on sale of loans. For the quarter and nine months ended September 30, 2007, gains of $1.9 million and $356 thousand, respectively, were recognized due to changes in fair value of these commitments. During the third quarter and nine months ended September 30, 2006, the Corporation recognized gains of $464 thousand and losses of $10 thousand, respectively, related to these commitments.

Credit Default Swap

The Corporation’s credit default swap guarantees a “third-party” performance under an interest rate swap with the counterparty. The interest rate swap was in the money in favor of the “third-party”. The credit default swap matures in April 2008. The credit default swap is marked-to-market through earnings. Its fair value has historically been zero because of the credit standing of the “third-party”.

Note 10 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 and 2006, allocated by reportable segment, were as follows (refer to Note 21 for the definition of the Corporation’s reportable segments):


2007

	Balance at		Goodwill					Balance at
(In thousands)	January 1, 2007		acquired		Other			September 30, 2007

Banco Popular de Puerto Rico:
Commercial Banking	$	14,674		—		—		$	14,674
Consumer and Retail Banking		34,999		—		—			34,999
Other Financial Services		4,391		—		—			4,391
Popular North America:
Banco Popular North America		568,647		—		—			568,647
Popular Financial Holdings		—		—		—			—
EVERTEC		45,142	$	1,137		($183	)		46,096

Total Popular, Inc.	$	667,853	$	1,137		($183	)	$	668,807


2006

					Purchase
	Balance at		Goodwill		accounting					Balance at
(In thousands)	January 1, 2006		acquired		adjustments		Other			September 30, 2006

Banco Popular de Puerto Rico:
Commercial Banking	$	14,674		—		—		—		$	14,674
Consumer and Retail Banking		34,999		—		—		—			34,999
Other Financial Services		4,110		—		—		—			4,110
Popular North America:
Banco Popular North America		542,834		—	$	23,378		($210	)		566,002
Popular Financial Holdings		14,236		—		3		—			14,239
EVERTEC		43,131	$	1,511		—		—			44,642

Total Popular, Inc.	$	653,984	$	1,511	$	23,381		($210	)	$	678,666

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 during the first nine months of 2006 at the PNA reportable segment were mostly related to the E-LOAN acquisition.

The Corporation performed the annual impairment test required by SFAS No. 142, “Goodwill and Other Intangible Assets.” This test did not result in impairment of the Corporation’s recorded goodwill.

At September 30, 2007 and December 31, 2006, other than goodwill, the Corporation had $65 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (September 30, 2006 — $59 million).

The following table reflects the components of other intangible assets subject to amortization:


	September 30, 2007				December 31, 2006				September 30, 2006

	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposits	$	46,302	$	22,836	$	76,708	$	48,367	$	76,956	$	46,688

Other customer relationships		11,925		3,609		11,156		2,171		10,028		1,703

Other intangibles		9,170		5,092		9,099		3,426		10,808		4,003


Total	$	67,397	$	31,537	$	96,963	$	53,964	$	97,792	$	52,394

Certain core deposits intangibles with a gross amount of $30.4 million became fully amortized during 2007 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.

During the quarter and nine months ended September 30, 2007, the Corporation recognized $2.2 million and $8.0 million, respectively, in amortization expense related to other intangible assets with definite lives (September 30, 2006 — $3.6 million and $9.2 million, respectively).

The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:


	(In thousands)
2007	$	10,259
2008		8,454
2009		6,632
2010		5,674
2011		4,016

No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.

Note 11 – 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)	2007		2006		2006

Federal funds purchased	$	690,332	$	1,276,818	$	2,056,610
Assets sold under agreements to repurchase		5,596,971		4,485,627		4,988,856

	$	6,287,303	$	5,762,445	$	7,045,466

Other short-term borrowings consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2007		2006		2006

Advances with FHLB paying interest at:
-fixed rates ranging from 5.14% to 5.17% (September 30, 2006 – 5.40% to 5.42%)	$	172,000	$	230,000	$	230,000
-floating rate with a spread over the fed funds rate (Fed funds rate at September 30, 2006 was 5.38%)		—		—		55,000

Advances under credit facilities with other institutions at:
-fixed rates ranging from 5.25% to 5.96% (September 30, 2006 – 5.38% to 5.52%)		210,000		386,000		23,385
-floating rates ranging from 0.45% to 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%)		—		481,062		112,915
-a floating rate of 0.20% over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2006 – 5.37%)		—		10,000		10,000

Commercial paper at rates ranging from 5.05% to 5.92% (September 30, 2006 – 4.85% to 5.33%)		249,041		193,383		97,172

Term funds purchased at:
-fixed rates ranging from 5.13% to 5.82% (September 30, 2006 – 5.28% to 5.39%)		749,000		2,140,900		1,487,162
-a floating rate of 0.08% over the fed funds rate (Fed funds rate at September 30, 2006 was 5.38%)		—		500,000		600,000

Others		34,856		92,780		93,877

	$	1,414,897	$	4,034,125	$	2,709,511

Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

Notes payable consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2007		2006		2006

Advances with FHLB:
-with maturities ranging from 2007 through 2018 paying interest at fixed rates ranging from 2.51% to 6.98% (September 30, 2006 – 2.44% to 6.98%)	$	738,099	$	289,881	$	414,403
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)		250,000		250,000		250,000
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02% (1-month LIBOR rate at September 30, 2006 – 5.32%)		—		5,000		5,000
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04% (3-month LIBOR rate at September 30, 2006 was 5.37%)		—		6,000		6,000

Advances under revolving lines of credit maturing in 2008 paying interest monthly at a floating rate of 0.75% (September 30, 2006 – 0.90%) over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)		317,926		426,687		388,432

Advances under revolving lines of credit with maturities ranging from 2007 to 2009 paying interest quarterly at a floating rate of 0.20% to 0.35% over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2007 was 5.23%)		154,999		69,994		—

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 2008 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate (10-year U.S. Treasury note rate at September 30, 2007 was 4.59%; September 30, 2006 – 4.63%)		7,502		10,428		11,029

Term notes with maturities ranging from 2007 to 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% (September 30, 2006 – 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2007 was 5.23%, September 30, 2006 – 5.37%)		349,610		349,295		469,182

Term notes with maturities ranging from 2007 through 2011 paying interest semiannually at fixed rates ranging from 3.60% to 5.65% (September 30, 2006 – 3.25% to 6.39%)		2,014,323		2,014,928		2,713,078

Secured borrowings with maturities ranging from 2007 to 2012 paying interest monthly at fixed rates ranging from 4.00% to 7.12% (September 30, 2006 – 3.05% to 7.12%)		2,381,081		2,695,916		2,914,523

Secured borrowings with maturities ranging from 2007 to 2012 paying interest monthly ranging from 0.06% to 3.51% (September 30, 2006 – 0.05% to 4.75%) over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)		1,189,286		1,708,650		1,623,142

Notes linked to the S&P 500 Index maturing in 2008		37,876		36,112		34,136

Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 17)		849,672		849,672		849,672

Other		21,317		21,583		200

	$	8,314,791	$	8,737,246	$	9,681,897

Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

Note 12 – Commitments and Contingencies

Commercial letters of credit and stand-by letters of credit amounted to $18 million and $196 million, respectively, at September 30, 2007 (December 31, 2006 — $21 million and $181 million; September 30, 2006 — $21 million and $169 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.

At September 30, 2007, the Corporation recorded a liability of $721 thousand (December 31, 2006 - $658 thousand; September 30, 2006 — $574 thousand), 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 stand-by letters of credit were issued to guarantee the performance of various customers to third parties. 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.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which aggregated to $3.3 billion at September 30, 2007 (December 31, 2006 — $3.3 billion and September 30, 2006 — $3.9 billion). In addition, at September 30, 2007, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2006 and September 30, 2006 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R.

The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.

Note 13 – Other Service Fees

The caption of other service fees in the consolidated statements of income consists of the following major categories:


	Quarter ended					Nine months ended
	September 30,					September 30,
(In thousands)	2007		2006			2007		2006

Credit card fees and discounts	$	25,975	$	22,035		$	74,498	$	66,979
Debit card fees		16,228		15,345			49,184		45,349
Insurance fees		15,024		13,327			42,693		39,879
Processing fees		11,674		11,164			35,463		32,382
Sale and administration of investment products		8,043		7,345			22,614		21,451
Mortgage servicing fees, net of amortization and fair value adjustments		7,400		(1,756	)		18,269		(2,423	)
Other		9,020		12,177			28,082		36,383

Total	$	93,364	$	79,637		$	270,803	$	240,000

Note 14 – Income Taxes

As indicated in Note 2, the Corporation adopted FIN 48 effective January 1, 2007. The initial adoption of FIN 48 had no impact on the Corporation’s financial statements since management determined that there was no need to recognize changes in the liability for unrecognized tax benefits.

The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:


(In millions)

Balance as of January 1, 2007	$	20.4
Additions for tax positions Jan – March 2007		1.7

Balance as of March 31, 2007	$	22.1
Additions for tax positions April – June 2007		2.3

Balance as of June 30, 2007	$	24.4
Additions for tax positions July – Sept 2007		2.9

Balance as of September 30, 2007	$	27.3

As of September 30, 2007, the related accrued interest approximated $3.2 million. Management has determined that as of September 30, 2007 there is no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating expenses in the consolidated statements of income.

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 $26 million as of September 30, 2007.

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, 2007, the following years remain subject to examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto Rico – 2003 through 2006. The U.S. Internal Revenue Service (“IRS”) commenced an examination of the Corporation’s U.S. operations tax return for 2005 that is anticipated to be finished by the end of 2007. As of September 30, 2007, the IRS has not proposed any adjustment as a result of the audit. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Note 15 – Stock-Based Compensation

The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. Nevertheless, all outstanding award grants under the Stock Option Plan continue to remain in effect at September 30, 2007 under the original terms of the Stock Option Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all

options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

The following table presents information on stock options outstanding as of September 30, 2007:


(Not in thousands)

					Weighted Average
			Weighted Average		Remaining Life of		Options		Weighted Average
Exercise Price	Options		Exercise Price of		Options Outstanding		Exercisable		Exercise Price of
Range per Share	Outstanding		Options Outstanding		(in years)		(fully vested)		Options Exercisable

$14.39 - $18.50		1,513,582	$	15.81		4.98		1,382,319	$	15.72
$19.25 - $27.20		1,586,035	$	25.27		6.75		1,012,839	$	25.02

$14.39 - $27.20		3,099,617	$	20.65		5.89		2,395,158	$	19.65

The aggregate intrinsic value of options outstanding as of September 30, 2007 was $8.7 million. There was no intrinsic value of options exercisable as of September 30, 2007.

The following table summarizes the stock option activity and related information:


	Options			Weighted-Average
(Not in thousands)	Outstanding			Exercise Price

Outstanding at January 1, 2006		3,223,703		$	20.63
Granted		—			—
Exercised		(39,449	)		15.78
Forfeited		(37,818	)		23.75
Expired		(1,637	)		24.05

Outstanding at December 31, 2006		3,144,799		$	20.65
Granted		—			—
Exercised		(10,064	)		15.83
Forfeited		(19,063	)		25.50
Expired		(16,055	)		19.14

Outstanding at September 30, 2007		3,099,617		$	20.65

The stock options exercisable at September 30, 2007 totaled 2,395,158 (September 30, 2006 – 1,953,606). There were no stock options exercised during the quarter ended September 30, 2007. For the nine months ended September 30, 2007, the cash received from stock options exercised amounted to $159 thousand. The total intrinsic value of options exercised during the quarter ended September 30, 2006 was $60 thousand. The total intrinsic value of options exercised during the nine-month period ended September 30, 2007 was $28 thousand (September 30, 2006 — $127 thousand).

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2006 or the nine months ended September 30, 2007.

The Corporation recognized $432 thousand of stock option expense, with a tax benefit of $165 thousand, for the quarter ended September 30, 2007 (September 30, 2006 — $724 thousand, with a tax benefit of $293 thousand). For the nine months ended September 30, 2007, the Corporation recognized $1.3 million of stock option expense, with a tax benefit of $515 thousand (September 30, 2006 - $2.3 million, with a tax benefit of $899 thousand). The total unrecognized compensation cost at September 30, 2007 related to non-vested stock option awards was $2.1 million and is expected to be recognized over a weighted-average period of 1.3 years.

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term

Performance Unit Awards, Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.

Under the Incentive Plan, the Corporation has issued only restricted shares, which become vested based on the employees’ continued service with Popular. The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.

Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under a long-term incentive plan. The performance shares award consists of the opportunity to receive shares of Popular, Inc.’s common stock provided the Corporation achieves certain performance goals during a 3-year performance cycle. The compensation cost associated with the performance shares will be recorded ratably over a three-year performance period. The performance shares will be granted at the end of the three-year period and will be vested at grant date. As of September 30, 2007, no shares have been granted under this plan.

The following table summarizes the restricted stock activity under the Incentive Plan and related information to members of management:



	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested at January 1, 2006		172,622		$	27.65
Granted		444,036			20.54
Vested		—			—
Forfeited		(5,188	)		19.95

Non-vested at December 31, 2006		611,470		$	22.55
Granted		—			—
Vested		(69,471	)		20.56
Forfeited		(3,781	)		19.95

Non-vested at September 30, 2007		538,218		$	22.83

During the quarters ended September 30, 2007 and 2006, no shares of restricted stock were awarded to management under the Incentive Plan. During the nine-month period ended September 30, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (September 30, 2006 – 444,036).

During the quarter ended September 30, 2007, the Corporation recognized $33 thousand of restricted stock expense related to management incentive awards, with a tax benefit of $14 thousand (September 30, 2006 – ($433) thousand, with a tax impact of $160 thousand). For the nine-month period ended September 30, 2007, the Corporation recognized $1.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $718 thousand (September 30, 2006 — $1.7 million, with a tax benefit of $663 thousand). The fair market value of the restricted stock vested was $1.2 million. The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at September 30, 2007 was $4.5 million and is expected to be recognized over a weighted-average period of 2.7 years. During the nine-month period ended September 30, 2007, there was a vesting of restricted stock that triggered a shortfall of $194 thousand, which was recorded as an additional income tax expense.

The following table summarizes the restricted stock under Incentive Award and related information to members of the Board of Directors:


	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested at January 1, 2006		46,948		$	23.61
Granted		32,267			19.82
Vested		(2,601	)		23.54
Forfeited		—			—

Non-vested at December 31, 2006		76,614		$	22.02
Granted		32,381			16.96
Vested		(22,486	)		22.03
Forfeited		—			—

Non-vested at September 30, 2007		86,509		$	20.12

During the quarter ended September 30, 2007, the Corporation granted 3,018 (September 30, 2006 – 1,038) shares of restricted stock to members of the Board of Directors of Popular, Inc. During this period, the Corporation recognized $115 thousand of restricted stock expense related to these restricted stock grants, with a tax benefit of $45 thousand (September 30, 2006 — $150 thousand, with a tax benefit of $59 thousand). For the nine-month period ended September 30, 2007, the Corporation granted 32,381 (September 30, 2006 – 30,897) shares of restricted stock to members of the Board of Directors of Popular, Inc. The fair market value of the restricted stock vested was $394 thousand. During this period, the Corporation recognized $423 thousand of restricted stock expense related to these restricted stock grants, with a tax benefit of $165 thousand (September 30, 2006 — $430 thousand, with a tax benefit of $168 thousand).

Note 16 – Pension and Postretirement Benefits

The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.

The components of net periodic pension cost for the quarters and nine months ended September 30, 2007 and 2006 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)	2007			2006			2007			2006			2007			2006			2007			2006

Service cost	$	2,639		$	3,135		$	8,384		$	9,405		$	221		$	262		$	678		$	786
Interest cost		7,958			7,641			23,890			22,923			419			400			1,258			1,200
Expected return on plan assets		(10,532	)		(10,009	)		(31,589	)		(29,918	)		(369	)		(264	)		(1,105	)		(792	)
Amortization of prior service cost		52			44			156			132			(13	)		(13	)		(39	)		(39	)
Amortization of net loss		—			488			—			1,464			248			276			743			828

Net periodic cost	$	117		$	1,299		$	841		$	4,006		$	506		$	661		$	1,535		$	1,983
Curtailment gain		—			—			(246	)		—			—			—			(258	)		—

Total cost	$	117		$	1,299		$	595		$	4,006		$	506		$	661		$	1,277		$	1,983

During the first quarter of 2007, the Corporation adopted an amendment to freeze the benefits for all employees under the U.S. Retirement and Restoration plans. These plans were remeasured at January 31, 2007 to account for the freeze. The discount rate of the U.S. Retirement plan was changed to 4.5% to reflect the expected plan termination. The remeasurement and curtailment effects were considered for these plans in the first quarter of 2007 and are included as part of the year-to-date disclosures.

For the nine months ended September 30, 2007, contributions made to the pension and restoration plans approximated $1.9 million. The total contributions expected to be paid during 2007 for the pension and restoration plans approximate $2.2 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, 2007 and 2006 were as follows:


	Quarters ended						Nine months ended
	September 30,						September 30,
(In thousands)	2007			2006			2007			2006

Service cost	$	578		$	696		$	1,734		$	2,095
Interest cost		1,889			1,927			5,667			5,781
Amortization of prior service cost		(261	)		(262	)		(784	)		(786	)
Amortization of net loss		—			240			—			720

Total net periodic cost	$	2,206		$	2,601		$	6,617		$	7,810

For the nine months ended September 30, 2007, contributions made to the postretirement benefit plan approximated $4.9 million. The total contributions expected to be paid during 2007 for the postretirement benefit plan approximate $6.4 million.

Note 17 – Trust Preferred Securities

At September 30, 2007 and 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “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 sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46(R).

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 follows:

(In thousands, including reference notes)


							Popular North
	BanPonce			Popular Capital			America Capital			Popular Capital
Issuer	Trust I			Trust I			Trust I			Trust II

Issuance date	February 1997			October 2003			September 2004			November 2004
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 $150,000. In 2003, the Corporation reacquired $6,000 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. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46(R).

(g)		Same as (f) above, except that the investment company event does not apply for early redemption.

The capital securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.

Under the Federal Reserve Board’s risk-based capital guidelines, the capital securities are included as part of the Corporation’s Tier I capital.

Note 18 — Stockholders’ Equity

During the fourth quarter of 2005, existing shareholders of record of the Corporation’s common stock at November 7, 2005 fully subscribed to an offering of 10,500,000 newly issued shares of Popular, Inc.’s common stock at a price of $21.00 per share under a subscription rights offering. This offering resulted in approximately $216 million in additional capital, of which approximately $175 million impacted stockholders’ equity at December 31, 2005 and the remainder impacted the Corporation’s financial condition in the first quarter of 2006. As of December 31, 2005, this subscription rights offering resulted in 8,614,620 newly issued shares of common stock; the remaining 1,885,380 were issued during the first quarter of 2006.

The Corporation has a dividend reinvestment and stock purchase plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments at prevailing market prices.

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 only outstanding class of preferred stock is its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are perpetual, nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter.

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 $346 million at September 30, 2007 (December 31, 2006 — $346 million; September 30, 2006 — $317 million). During the nine months ended September 30, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the nine months ended September 30, 2007.

Note 19 — Earnings per Common Share

The computation of earnings per common share (“EPS”) follows:


	Quarter ended				Nine months ended
	September 30,				September 30,
(In thousands, except share information)	2007		2006		2007		2006

Net income	$	36,003	$	82,160	$	229,600	$	298,044
Less: Preferred stock dividends		2,979		2,979		8,935		8,935


Net income applicable to common stock	$	33,024	$	79,181	$	220,665	$	289,109


Average common shares outstanding		279,625,715		278,602,482		279,355,496		278,349,354
Average potential common shares		—		210,465		78,016		255,751

Average common shares outstanding – assuming dilution		279,625,715		278,812,947		279,433,512		278,605,105


Basic and diluted EPS	$	0.12	$	0.28	$	0.79	$	1.04

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. 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, 2007, there were 3,099,617 and 2,209,290 weighted average antidilutive stock options outstanding, respectively (September 30, 2006 – 1,895,081 and 1,897,983).

Note 20 — Supplemental Disclosure on the Consolidated Statements of Cash Flows

As mentioned in Note 1 of the Corporation’s 2006 Annual Report, as of the end of the first quarter of 2006, all subsidiaries of the Corporation had changed the reporting period to a December 31^st calendar period. The impact of this change corresponds to the financial results for the month of December 2005 for those subsidiaries which implemented the change in the first reporting period of 2006.

The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above.


	Nine months ended
(In thousands)	September 30, 2006

Net cash used in operating activities	($	80,906	)
Net cash used in investing activities		(104,732	)
Net cash provided by financing activities		197,552


Net increase in cash and due from banks	$	11,914

Loans receivable transferred to other real estate and other property for the nine months ended September 30, 2007 amounted to $134 million and $27 million, respectively (September 30, 2006 — $92 million and $24 million, respectively).

During the nine months ended September 30, 2006, $613 million in non-conforming loans classified as held-in-portfolio were pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $1 billion and $519 million in non-cash reclassifications of loans held-for-sale securitized

into trading securities for the nine months ended September 30, 2007 and 2006, respectively.

The Corporation recognized mortgage servicing rights of $26 million during the nine months ended September 30, 2007 as a result of the securitization and sale of mortgage loans with servicing retained (nine months ended September 30, 2006 — $58 million).

Note 21 — Segment Reporting

Commencing in the first quarter of 2007, the Corporation’s corporate structure consists of three reportable segments – Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a corporate group has been defined to support the reportable segments.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

As indicated in the 2006 Annual Report, in January 2007, the Corporation announced a restructuring and integration plan (the “Restructuring Plan”) for PFH’s businesses. The Restructuring Plan, which is being implemented throughout 2007, has the following four basic components:

	o		exiting the wholesale subprime mortgage origination business during the first quarter of 2007, which entailed shutting down the wholesale broker, retail and call center business divisions;

	o		consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA to reduce expenses;

	o		integrating PFH’s existing commercial lending businesses (mortgage warehouse, mixed use, and construction lending) into BPNA’s business lending groups; and

	o		focusing on the core Equity One network of 132 consumer finance branches in 15 states.

As part of the Restructuring Plan, the Corporation also executed an internal corporate reorganization of its U.S. subsidiaries. In January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH. E-LOAN continues to offer its broad range of products and conducts its direct activities through its online platform. Management will be leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.

This reorganization and the Restructuring Plan led management to redefine its business reportable segments. Commencing in 2007, the U.S. operations are defined as one reportable segment defined as “Popular North America”. This segment includes the operations of BPNA and PFH, including all of its wholly-owned subsidiaries.

The reportable segment disclosures for periods prior to 2007 were restated to reflect the new segmentation.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s net income and total assets as of September 30, 2007, additional disclosures are provided for the business areas included in this reportable segment, as described below:

	•		Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.

	•		Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of

Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

•

Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Popular North America:

Popular North America, which includes the Corporation’s U.S. operations, consists of:

	•		BPNA, including its subsidiaries E-LOAN, Popular Leasing, U.S.A. (name being changed to Popular Equipment Finance, Inc.) and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.

	•		PFH, which activities are described above.

All of Popular’s U.S. operations now report to the same president. The PNA segment is disaggregated for additional disclosures between BPNA and PFH. The results of E-LOAN are included as part of BPNA for the quarters ended September 30, 2007 and 2006. PNA Holding Company only is included as part of the Corporate group.

EVERTEC:

This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC USA, Inc. incorporated in the United States; and ATH Costa Rica, S.A., EVERTEC Centroamérica S.A. and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in CONTADO and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.

Corporate:

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations, are included as part of the processing segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, Communications and Planning. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the business circles.

The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment. The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

2007

For the quarter ended September 30, 2007


												Total
	Banco Popular de		Popular North						Intersegment			Reportable
(In thousands)	Puerto Rico		America			EVERTEC			Eliminations			Segments

Net interest income (expense)	$	241,725	$	122,467		($	74	)		—		$	364,118
Provision for loan losses		66,077		82,016			—			—			148,093
Non-interest income		116,522		25,948			59,585		($	34,840	)		167,215
Amortization of intangibles		190		1,810			234			—			2,234
Depreciation expense		10,290		4,678			4,035			(19	)		18,984
Other operating expenses		172,267		134,310			43,157			(34,696	)		315,038
Income tax		29,247		(29,700	)		3,987			(48	)		3,486


Net income (loss)	$	80,176	($	44,699	)	$	8,098		($	77	)	$	43,498


Segment Assets	$	26,137,863	$	21,153,471		$	224,834		($	508,032	)	$	47,008,136

For the quarter ended September 30, 2007


	Total Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (expense)	$	364,118	($	4,300	)	$	298		$	360,116
Provision for loan losses		148,093		—			—			148,093
Non-interest income		167,215		945			(1,155	)		167,005
Amortization of intangibles		2,234		—			—			2,234
Depreciation expense		18,984		601			—			19,585
Other operating expenses		315,038		11,670			(1,554	)		325,154
Income tax		3,486		(7,709	)		275			(3,948	)


Net income (loss)	$	43,498	($	7,917	)	$	422		$	36,003


Segment Assets	$	47,008,136	$	6,550,633		($	6,278,638	)	$	47,280,131

For the nine months ended September 30, 2007


												Total
	Banco Popular de		Popular North						Intersegment			Reportable
(In thousands)	Puerto Rico		America			EVERTEC			Eliminations			Segments

Net interest income (expense)	$	711,103	$	394,138		($	547	)		—		$	1,104,694
Provision for loan losses		176,557		183,042			—			—			359,599
Non-interest income		358,364		64,783			179,060		($	103,974	)		498,233
Amortization of intangibles		1,508		5,821			701			—			8,030
Depreciation expense		31,455		14,020			12,355			(55	)		57,775
Other operating expenses		525,259		427,777			131,782			(103,892	)		980,926
Income tax		87,629		(64,016	)		11,736			(10	)		35,339


Net income (loss)	$	247,059	($	107,723	)	$	21,939		($	17	)	$	161,258

For the nine months ended September 30, 2007


	Total Reportable								Total Popular,
(In thousands)	Segments		Corporate			Eliminations			Inc.

Net interest income (expense)	$	1,104,694	($	19,076	)	$	897		$	1,086,515
Provision for loan losses		359,599		7			—			359,606
Non-interest income		498,233		128,994			(4,671	)		622,556
Amortization of intangibles		8,030		—			—			8,030
Depreciation expense		57,775		1,783			—			59,558
Other operating expenses		980,926		39,831			(4,991	)		1,015,766
Income tax		35,339		677			495			36,511

Net income	$	161,258	$	67,620		$	722		$	229,600

2006

For the quarter ended September 30, 2006


											Total
	Banco Popular de		Popular North					Intersegment			Reportable
(In thousands)	Puerto Rico		America		EVERTEC			Eliminations			Segments

Net interest income (expense)	$	227,245	$	124,659	($	501	)		—		$	351,403
Provision for loan losses		31,930		31,515		—			—			63,445
Non-interest income		101,827		69,166		57,481		($	33,264	)		195,210
Amortization of intangibles		634		2,851		123			—			3,608
Depreciation expense		10,871		5,687		4,173			(18	)		20,713
Other operating expenses		169,356		149,275		40,793			(33,277	)		326,147
Income tax		28,342		2,663		4,168			12			35,185

Net income	$	87,939	$	1,834	$	7,723		$	19		$	97,515

Segment Assets	$	25,124,056	$	21,029,460	$	217,658		($	121,252	)	$	46,249,922

For the quarter ended September 30, 2006


	Total Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (expense)	$	351,403	($	9,664	)	$	299		$	342,038
Provision for loan losses		63,445		—			—			63,445
Non-interest income (loss)		195,210		(1,571	)		(2,290	)		191,349
Amortization of intangibles		3,608		—			—			3,608
Depreciation expense		20,713		586			—			21,299
Other operating expenses		326,147		11,481			(2,612	)		335,016
Income tax		35,185		(7,575	)		249			27,859

Net income (loss)	$	97,515	($	15,727	)	$	372		$	82,160

Segment Assets	$	46,249,922	$	6,579,170		($	5,894,342	)	$	46,934,750

For the nine months ended September 30, 2006


												Total
	Banco Popular de			Popular North					Intersegment			Reportable
(In thousands)	Puerto Rico			America		EVERTEC			Eliminations			Segments

Net interest income (expense)	$	682,046		$	416,321	($	1,568	)		—		$	1,096,799
Provision for loan losses		89,395			90,093		—			—			179,488
Non-interest income		318,551			189,874		169,523		($	103,731	)		574,217
Amortization of intangibles		1,900			6,915		345			—			9,160
Depreciation expense		32,915			16,812		12,411			(57	)		62,081
Other operating expenses		508,032			451,496		126,515			(103,772	)		982,271
Impact of change in fiscal period		(2,072	)		6,181		—			—			4,109
Income tax		92,066			14,397		10,441			38			116,942

Net income	$	278,361		$	20,301	$	18,243		$	60		$	316,965

For the nine months ended September 30, 2006


	Total Reportable								Total Popular,
(In thousands)	Segments		Corporate			Eliminations			Inc.

Net interest income (expense)	$	1,096,799	($	30,047	)	$	829		$	1,067,581
Provision for loan losses		179,488		—			—			179,488
Non-interest income		574,217		33,260			(3,309	)		604,168
Amortization of intangibles		9,160		—			—			9,160
Depreciation expense		62,081		1,724			—			63,805
Other operating expenses		982,271		44,229			(3,049	)		1,023,451
Impact of change in fiscal period		4,109		3,495			2,137			9,741
Income tax		116,942		(28,176	)		(706	)		88,060

Net income (loss)	$	316,965	($	18,059	)	($	862	)	$	298,044

During the nine months ended September 30, 2007, the holding companies realized net gains on sale and valuation adjustments of investment securities (before tax) of approximately $107.3 million, compared with $14.2 million for the nine months ended September 30, 2006. These net gains are included in “non-interest income” within the “Corporate” group.

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

2007

For the quarter ended September 30, 2007


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	95,607	$	143,108	$	2,842	$	168		$	241,725
Provision for loan losses		21,248		44,829		—		—			66,077
Non-interest income		22,200		70,807		23,633		(118	)		116,522
Amortization of intangibles		30		47		113		—			190
Depreciation expense		3,563		6,395		332		—			10,290
Other operating expenses		42,556		113,365		16,424		(78	)		172,267
Income tax		14,728		11,061		3,403		55			29,247


Net income	$	35,682	$	38,218	$	6,203	$	73		$	80,176


Segment Assets	$	11,729,908	$	18,651,108	$	508,838	($	4,751,991	)	$	26,137,863

For the nine months ended September 30, 2007


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	279,789	$	422,844	$	8,022	$	448		$	711,103
Provision for loan losses		57,070		119,487		—		—			176,557
Non-interest income		67,307		225,382		66,440		(765	)		358,364
Amortization of intangibles		470		705		333		—			1,508
Depreciation expense		10,941		19,609		905		—			31,455
Other operating expenses		130,909		345,292		49,315		(257	)		525,259
Income tax		42,128		37,783		7,731		(13	)		87,629

Net income	$	105,578	$	125,350	$	16,178	($	47	)	$	247,059

2006

For the quarter ended September 30, 2006


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	86,563	$	137,998	$	2,640	$	44		$	227,245
Provision for loan losses		9,007		22,923		—		—			31,930
Non-interest income		26,589		48,961		26,596		(319	)		101,827
Amortization of intangibles		220		335		79		—			634
Depreciation expense		3,599		6,967		305		—			10,871
Other operating expenses		43,105		109,965		16,421		(135	)		169,356
Income tax		17,944		5,733		4,685		(20	)		28,342


Net income	$	39,277	$	41,036	$	7,746	($	120	)	$	87,939


Segment Assets	$	10,821,963	$	17,798,620	$	564,088	($	4,060,615	)	$	25,124,056

For the nine months ended September 30, 2006


											Total Banco
	Commercial		Consumer and		Other Financial						Popular de
(In thousands)	Banking		Retail Banking		Services			Eliminations			Puerto Rico

Net interest income	$	252,786	$	421,234	$	7,695		$	331		$	682,046
Provision for loan losses		24,210		65,185		—			—			89,395
Non-interest income		73,100		178,143		69,237			(1,929	)		318,551
Amortization of intangibles		661		1,006		233			—			1,900
Depreciation expense		10,591		21,462		862			—			32,915
Other operating expenses		131,193		330,682		46,794			(637	)		508,032
Impact of change in fiscal period		—		—		(2,072	)		—			(2,072	)
Income tax		46,054		35,265		11,149			(402	)		92,066

Net income	$	113,177	$	145,777	$	19,966		($	559	)	$	278,361

Additional disclosures with respect to the Popular North America reportable segment are as follows:

2007

For the quarter ended September 30, 2007


				Popular
	Banco Popular			Financial						Total Popular
(In thousands)	North America			Holdings			Eliminations			North America

Net interest income	$	93,995		$	27,526		$	946		$	122,467
Provision for loan losses		20,263			61,753			—			82,016
Non-interest income (loss)		35,976			(9,202	)		(826	)		25,948
Amortization of intangibles		1,810			—			—			1,810
Depreciation expense		4,126			552			—			4,678
Other operating expenses		107,568			27,568			(826	)		134,310
Income tax		(2,696	)		(27,392	)		388			(29,700	)

Net loss	($	1,100	)	($	44,157	)	$	558		($	44,699	)

Segment Assets	$	13,818,525		$	7,569,419		($	234,473	)	$	21,153,471

For the nine months ended September 30, 2007


			Popular
	Banco Popular		Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	275,733	$	115,935		$	2,470		$	394,138
Provision for loan losses		42,913		140,129			—			183,042
Non-interest income (loss)		138,585		(59,805	)		(13,997	)		64,783
Amortization of intangibles		5,821		—			—			5,821
Depreciation expense		12,208		1,812			—			14,020
Other operating expenses		320,325		108,906			(1,454	)		427,777
Income tax		10,206		(70,100	)		(4,122	)		(64,016	)

Net income (loss)	$	22,845	($	124,617	)	($	5,951	)	($	107,723	)

2006

For the quarter ended September 30, 2006


			Popular
	Banco Popular		Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	89,774	$	34,885			—		$	124,659
Provision for loan losses		11,997		19,518			—			31,515
Non-interest income		52,559		17,759		($	1,152	)		69,166
Amortization of intangibles		2,763		88			—			2,851
Depreciation expense		3,779		1,908			—			5,687
Other operating expenses		106,023		43,890			(638	)		149,275
Income tax		7,243		(4,400	)		(180	)		2,663

Net income (loss)	$	10,528	($	8,360	)	($	334	)	$	1,834

Segment Assets	$	13,176,616	$	8,293,978		($	441,134	)	$	21,029,460

For the nine months ended September 30, 2006


			Popular
	Banco Popular		Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	284,882	$	131,439			—		$	416,321
Provision for loan losses		35,442		54,651			—			90,093
Non-interest income		158,007		33,780		($	1,913	)		189,874
Amortization of intangibles		6,648		267			—			6,915
Depreciation expense		11,896		4,916			—			16,812
Other operating expenses		318,029		134,246			(779	)		451,496
Impact of change in fiscal period		—		6,181			—			6,181
Income tax		26,943		(12,149	)		(397	)		14,397

Net income (loss)	$	43,931	($	22,893	)	($	737	)	$	20,301

A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:


INTERSEGMENT REVENUES*	Quarter ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
(In thousands)	2007			2006			2007			2006

Banco Popular de Puerto Rico:
Commercial Banking	$	459		($	271	)	$	401		($	886	)
Consumer and Retail Banking		997			(689	)		819			(2,040	)
Other Financial Services		(83	)		(86	)		(314	)		(241	)
Popular North America:
Banco Popular North America		(1,481	)		922			(1,309	)		2,814
EVERTEC		(34,732	)		(33,140	)		(103,571	)		(103,378	)

Total	($	34,840	)	($	33,264	)	($	103,974	)	($	103,731	)


*		For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to processing / information technology services.

A breakdown of revenues and selected balance sheet information by geographical area follows:


Geographic Information	Quarter ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
(In thousands)	2007		2006		2007		2006

Revenues**
Puerto Rico	$	362,805	$	336,086	$	1,203,601	$	1,044,293
United States		142,342		178,218		439,825		570,111
Other		21,974		19,083		65,645		57,345

Total consolidated revenues	$	527,121	$	533,387	$	1,709,071	$	1,671,749


**		Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain on sale of loans and valuation adjustments on loans held-for-sale, and other operating income.


	September 30,		December 31,		September 30,
(In thousands)	2007		2006		2006

Selected Balance Sheet Information:
Puerto Rico
Total assets	$	25,154,194	$	24,621,684	$	24,559,859
Loans		15,433,933		14,735,092		14,275,223
Deposits		14,790,442		13,504,860		13,091,696
Mainland United States
Total assets	$	20,892,802	$	21,570,276	$	21,200,909
Loans		17,194,818		17,363,382		16,870,565
Deposits		10,535,551		9,735,264		8,880,915
Other
Total assets	$	1,233,135	$	1,212,027	$	1,173,982
Loans		692,053		638,465		611,171
Deposits *		1,275,522		1,198,207		1,164,834


*		Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

Note 22 – Restructuring Costs

During the third quarter and nine months ended September 30, 2007, the Corporation recorded pre-tax restructuring costs in the Popular North America segment related to the Restructuring Plan as follows:


	Quarter ended			Nine months ended
(In thousands)	September 30, 2007			September 30, 2007

Personnel costs		—		$	8,124	(a)
Net occupancy expenses		—			4,413	(b)
Equipment expenses	($	20	)		261
Professional fees		—			1,762	(c)
Communications		—			67
Other operating expenses		—			269

Total	($	20	)	$	14,896


(a)		Severance, stay bonuses, related taxes, and other employee benefits

(b)		Lease terminations

(c)		Outplacement and professional service contract terminations

Of the above restructuring costs, approximately $4.2 million were recognized as a liability as of September 30, 2007.

During the fourth quarter of 2006, and as a result of the Restructuring Plan, the Corporation recognized impairment charges on long-lived assets of $7.2 million, mainly associated with software and leasehold improvements, and in goodwill of $14.2 million.

As of September 30, 2007, the Restructuring Plan has resulted in estimated combined charges of $36.4 million, broken down as follows:


	Impairments
	on goodwill
	and long-lived		Restructuring
(In thousands)	assets		costs			Total

Quarter ended:
December 31, 2006	$	21,471		—		$	21,471
March 31, 2007		—	$	15,135			15,135
June 30, 2007		—		(219	)		(219	)
September 30, 2007		—		(20	)		(20	)

Total	$	21,471	$	14,896		$	36,367

The Corporation does not expect to incur additional significant restructuring costs in the remaining quarters of 2007. Settlement amounts in lease terminations may differ and are subject to the outcome of negotiations.

Note 23 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of September 30, 2007, December 31, 2006 and September 30, 2006, and the results of their operations and cash flows for the periods ended September 30, 2007 and 2006.

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC Centroamérica S.A., T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.

PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:

	•		PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;

	•		Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc. (formerly Popular Leasing, U.S.A.), Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN, Inc.;

	•		Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and

	•		EVERTEC USA, Inc.

PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the Securities and Exchange Commission.

PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.

The principal source of income for PIHC consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of

dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At September 30, 2007, BPPR could have declared a dividend of approximately $219 million without the approval of the Federal Reserve Board (December 31, 2006 — $208 million; September 30, 2006 — $211 million) and BPNA could have declared a dividend of $194 million (December 31, 2006- $246 million; September 30, 2006 — $213 million). However, the Corporation has never received any dividend payments from its U.S. subsidiaries. Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2006 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS

Cash and due from banks	$	890		$	1,079		$	15,567		$	829,306		($	137,786	)	$	709,056
Money market investments		71,000			300			195			1,261,971			(698,369	)		635,097
Investment securities available-for-sale, at fair value					38,578						8,839,932			(15	)		8,878,495
Investment securities held-to-maturity, at amortized cost		626,189			1,250						81,828			(430,000	)		279,267
Other investment securities, at lower of cost or realizable value		14,425			1			12,392			152,558						179,376
Trading account securities, at fair value											663,283			(1,125	)		662,158
Investment in subsidiaries		3,218,956			1,009,325			1,959,999			684,853			(6,873,133	)
Loans held-for-sale, at lower of cost or market value											423,303						423,303

Loans held-in-portfolio		378,107			21,550			3,084,479			37,447,521			(7,703,433	)		33,228,224
Less – Unearned income											330,723						330,723
Allowance for loan losses		60									600,213						600,273

		378,047			21,550			3,084,479			36,516,585			(7,703,433	)		32,297,228

Premises and equipment, net		24,359						132			556,390			(113	)		580,768
Other real estate											133,508						133,508
Accrued income receivable		742			54			14,274			306,563			(30,717	)		290,916
Other assets		42,374			60,592			59,188			1,361,010			(81,483	)		1,441,681
Goodwill											668,807						668,807
Other intangible assets		554									99,917						100,471

	$	4,377,536		$	1,132,729		$	5,146,226		$	52,579,814		($	15,956,174	)	$	47,280,131


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,113,111		($	137,728	)	$	3,975,383
Interest bearing											23,123,566			(497,434	)		22,626,132

											27,236,677			(635,162	)		26,601,515
Federal funds purchased and assets sold under agreements to repurchase							$	265,332			6,211,672			(189,701	)		6,287,303
Other short-term borrowings	$	25,000						849,716			2,531,236			(1,991,055	)		1,414,897
Notes payable		486,494						2,920,305			10,584,543			(5,676,551	)		8,314,791
Subordinated notes											430,000			(430,000	)
Other liabilities		62,321		$	80			119,174			800,501			(124,281	)		857,795

		573,815			80			4,154,527			47,794,629			(9,046,750	)		43,476,301

Minority interest in consolidated subsidiaries											109						109

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,757,961			3,961			2			70,421			(74,384	)		1,757,961
Surplus		531,128			851,193			734,964			3,156,701			(4,737,857	)		536,129
Retained earnings		1,694,385			330,750			269,284			1,687,153			(2,292,188	)		1,689,384
Accumulated other comprehensive loss, net of tax		(161,061	)		(53,255	)		(12,551	)		(128,535	)		194,341			(161,061	)
Treasury stock, at cost		(205,567	)								(664	)		664			(205,567	)

		3,803,721			1,132,649			991,699			4,785,076			(6,909,424	)		3,803,721

	$	4,377,536		$	1,132,729		$	5,146,226		$	52,579,814		($	15,956,174	)	$	47,280,131

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks	$	2		$	157		$	322		$	1,015,470		($	65,793	)		$	950,158
Money market investments		8,700			1,075			2,553			508,424			(219,044	)			301,708
Investment securities available-for-sale, at fair value					71,262						9,782,815			(3,215	)			9,850,862
Investment securities held-to-maturity, at amortized cost		430,000			2,157						89,183			(430,000	)			91,340
Other investment securities, at lower of cost or realizable value		143,469			5,001			26,152			122,772							297,394
Trading account securities, at fair value											382,325							382,325
Investment in subsidiaries		3,177,371			1,135,808			2,062,710			816,684			(7,192,573	)
Loans held-for-sale, at lower of cost or market value											719,922							719,922

Loans held-in-portfolio		467,649						2,958,559			35,467,096			(6,567,940	)			32,325,364
Less — Unearned income											308,347							308,347
Allowance for loan losses		40									522,192							522,232

		467,609						2,958,559			34,636,557			(6,567,940	)			31,494,785

Premises and equipment, net		25,628						134			569,545			(167	)			595,140
Other real estate											84,816							84,816
Accrued income receivable		1,058			12			11,581			264,089			(28,500	)			248,240
Other assets		60,430			42,883			28,125			1,528,398			(47,946	)			1,611,890
Goodwill											667,853							667,853
Other intangible assets		554									107,000							107,554

	$	4,314,821		$	1,258,355		$	5,090,136		$	51,295,853		($	14,555,178	)		$	47,403,987


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,287,868		($	65,735	)		$	4,222,133
Interest bearing											20,283,441			(67,243	)			20,216,198

											24,571,309			(132,978	)			24,438,331
Federal funds purchased and assets sold under agreements to repurchase							$	159,829			5,739,416			(136,800	)			5,762,445
Other short-term borrowings	$	150,787						894,959			5,297,595			(2,309,216	)			4,034,125
Notes payable		484,406						2,835,595			9,651,217			(4,233,972	)			8,737,246
Subordinated notes											430,000			(430,000	)
Other liabilities		59,322		$	60			78,988			758,613			(85,559	)			811,424

		694,515			60			3,969,371			46,448,150			(7,328,525	)			43,783,571

Minority interest in consolidated subsidiaries											110							110

Stockholders’ equity:
Preferred stock		186,875																186,875
Common stock		1,753,146			3,961			2			70,421			(74,384	)			1,753,146
Surplus		521,855			851,193			734,964			3,182,285			(4,763,441	)			526,856
Retained earnings		1,599,145			458,922			406,811			1,804,476			(2,675,210	)			1,594,144
Accumulated other comprehensive loss, net of tax		(233,728	)		(55,781	)		(21,012	)		(207,443	)		284,236				(233,728	)
Treasury stock, at cost		(206,987	)								(2,146	)		2,146				(206,987	)

		3,620,306			1,258,295			1,120,765			4,847,593			(7,226,653	)			3,620,306

	$	4,314,821		$	1,258,355		$	5,090,136		$	51,295,853		($	14,555,178	)		$	47,403,987

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks	$	769		$	204		$	15,019		$	777,966		($	57,289	)	$	736,669
Money market investments		60,000			300			242			678,444			(193,737	)		545,249
Investment securities available-for-sale, at fair value		8,536			70,500			9,677			10,069,659			(47	)		10,158,325
Investment securities held-to-maturity, at amortized cost		699,683			2,160						85,587			(430,000	)		357,430
Other investment securities, at lower of cost or realizable value		143,782			5,001			18,671			130,018						297,472
Trading account securities, at fair value											451,684			(22	)		451,662
Investment in subsidiaries		3,198,490			1,158,368			2,077,657			803,046			(7,237,561	)
Loans held-for-sale, at lower of cost or market value											447,314						447,314

Loans held-in-portfolio		27,032						2,819,009			34,601,455			(5,832,737	)		31,614,759
Less – Unearned income											305,114						305,114
Allowance for loan losses		40									487,299						487,339

		26,992						2,819,009			33,809,042			(5,832,737	)		30,822,306

Premises and equipment, net		26,217						135			562,117			(187	)		588,282
Other real estate											83,636						83,636
Accrued income receivable		359			43			11,243			301,402			(24,705	)		288,342
Other assets		61,963			41,661			44,255			1,236,372			(9,351	)		1,374,900
Goodwill											678,666						678,666
Other intangible assets		554									103,943						104,497

	$	4,227,345		$	1,278,237		$	4,995,908		$	50,218,896		($	13,785,636	)	$	46,934,750


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	3,879,816		($	57,232	)	$	3,822,584
Interest bearing											19,408,598			(93,737	)		19,314,861

											23,288,414			(150,969	)		23,137,445
Federal funds purchased and assets sold under agreements to repurchase							$	73,000			7,058,466			(86,000	)		7,045,466
Other short-term borrowings				$	300			130,556			3,711,662			(1,133,007	)		2,709,511
Notes payable	$	532,428						3,533,639			10,286,509			(4,670,679	)		9,681,897
Subordinated notes											430,000			(430,000	)
Other liabilities		58,894			58			114,508			594,723			(43,887	)		724,296

		591,322			358			3,851,703			45,369,774			(6,514,542	)		43,298,615

Minority interest in consolidated subsidiaries											111						111

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,751,868			3,961			2			70,421			(74,384	)		1,751,868
Surplus		489,397			851,193			734,964			3,103,198			(4,684,354	)		494,398
Retained earnings		1,616,104			481,905			432,772			1,852,429			(2,772,107	)		1,611,103
Accumulated other comprehensive loss, net of tax		(201,688	)		(59,180	)		(23,533	)		(175,251	)		257,965			(201,687	)
Treasury stock, at cost		(206,533	)								(1,786	)		1,786			(206,533	)

		3,636,023			1,277,879			1,144,205			4,849,011			(7,271,094	)		3,636,024

	$	4,227,345		$	1,278,237		$	4,995,908		$	50,218,896			($13,785,636	)	$	46,934,750

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	4,800		$	31		$	40,827		$	713,782		($	96,467	)	$	662,973
Money market investments		176			244			3			9,719			(3,335	)		6,807
Investment securities		10,092			307			223			106,508			(7,337	)		109,793
Trading account securities											10,653						10,653

		15,068			582			41,053			840,662			(107,139	)		790,226

INTEREST EXPENSE:
Deposits											199,409			(2,584	)		196,825
Short-term borrowings		382						14,635			129,035			(30,220	)		113,832
Long-term debt		8,368						38,071			150,661			(77,647	)		119,453

		8,750						52,706			479,105			(110,451	)		430,110

Net interest income (expense)		6,318			582			(11,653	)		361,557			3,312			360,116
Provision for loan losses											148,093						148,093

Net interest income (expense) after provision for loan losses		6,318			582			(11,653	)		213,464			3,312			212,023
Service charges on deposit accounts											49,704						49,704
Other service fees											121,030			(27,666	)		93,364
Net (loss) gain on sale and valuation adjustments of investment securities		(1,025	)		258						(2,322	)					(3,089	)
Trading account loss											(2,827	)		(40	)		(2,867	)
Gain on sale of loans and valuation adjustments on loans held-for-sale											5,987			4			5,991
Other operating income (loss)		67			2,296			(94	)		31,374			(9,741	)		23,902

		5,360			3,136			(11,747	)		416,410			(34,131	)		379,028

OPERATING EXPENSES:
Personnel costs:
Salaries		3,882			99						117,687			(858	)		120,810
Pension, profit sharing and other benefits		978			15						30,681			(244	)		31,430

		4,860			114						148,368			(1,102	)		152,240
Net occupancy expenses		541			7			1			28,887						29,436
Equipment expenses		387									30,349			(48	)		30,688
Other taxes		438									12,789						13,227
Professional fees		2,717			(2	)		(14	)		69,693			(35,291	)		37,103
Communications		116									16,772			(42	)		16,846
Business promotion		989									27,667			(96	)		28,560
Printing and supplies		15						1			4,115						4,131
Other operating expenses		(11,547	)		(100	)		95			44,708			(648	)		32,508
Amortization of intangibles											2,234						2,234

		(1,484	)		19			83			385,582			(37,227	)		346,973

Income (loss) before income tax and equity in earnings of subsidiaries		6,844			3,117			(11,830	)		30,828			3,096			32,055
Income tax		1,755						(4,140	)		(2,672	)		1,109			(3,948	)

Income (loss) before equity in earnings of subsidiaries		5,089			3,117			(7,690	)		33,500			1,987			36,003
Equity in earnings of subsidiaries		30,914			(52,915	)		(46,191	)		(51,726	)		119,918

NET INCOME (LOSS)	$	36,003		($	49,798	)	($	53,881	)	($	18,226	)	$	121,905		$	36,003

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other		Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries		Entries			Consolidated

INTEREST INCOME:
Loans	$	694					$	37,876		$	671,409	($	72,733	)	$	637,246
Money market investments		200		$	12			2			9,234		(2,410	)		7,038
Investment securities		11,318			366			517			124,119		(6,997	)		129,323
Trading account securities											7,724					7,724

		12,212			378			38,395			812,486		(82,140	)		781,331

INTEREST EXPENSE:
Deposits											152,164		(1,156	)		151,008
Short-term borrowings		71			396			3,776			152,553		(15,069	)		141,727
Long-term debt		9,134						47,722			157,288		(67,586	)		146,558

		9,205			396			51,498			462,005		(83,811	)		439,293

Net interest income (expense)		3,007			(18	)		(13,103	)		350,481		1,671			342,038
Provision for loan losses											63,445					63,445

Net interest income (expense) after provision for loan losses		3,007			(18	)		(13,103	)		287,036		1,671			278,593
Service charges on deposit accounts											47,484					47,484
Other service fees											106,498		(26,861	)		79,637
Net (loss) gain on sale and valuation adjustments of investment securities		(143	)		106						846		6,314			7,123
Trading account profit											5,221		4,798			10,019
Gain on sale of loans											16,421		3,692			20,113
Other operating income (loss)		696			1,676			(3,090	)		38,318		(10,627	)		26,973

		3,560			1,764			(16,193	)		501,824		(21,013	)		469,942

OPERATING EXPENSES:
Personnel costs:
Salaries		4,165			95						127,252		(899	)		130,613
Pension, profit sharing and other benefits		1,129			15						33,178		(239	)		34,083

		5,294			110						160,430		(1,138	)		164,696
Net occupancy expenses		594			4			1			30,974					31,573
Equipment expenses		420			3			3			33,946		(26	)		34,346
Other taxes		353									11,417					11,770
Professional fees		2,028			11			56			62,044		(34,521	)		29,618
Communications		152									17,221		(30	)		17,343
Business promotion		800									33,694		(639	)		33,855
Printing and supplies		26						1			4,381					4,408
Other operating expenses		(9,309	)		(100	)		109			38,391		(385	)		28,706
Amortization of intangibles											3,608					3,608

		358			28			170			396,106		(36,739	)		359,923

Income (loss) before income tax and equity in earnings of subsidiaries		3,202			1,736			(16,363	)		105,718		15,726			110,019
Income tax		(938	)					(1,855	)		26,845		3,807			27,859

Income (loss) before equity in earnings of subsidiaries		4,140			1,736			(14,508	)		78,873		11,919			82,160
Equity in earnings of subsidiaries		78,020			(13,525	)		337			1,523		(66,355	)

NET INCOME (LOSS)	$	82,160		($	11,789	)	($	14,171	)	$	80,396	($	54,436	)	$	82,160

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	14,339		$	31		$	117,001		$	2,097,088		($	264,887	)	$	1,963,572
Money market investments		1,116			359			13			23,128			(7,448	)		17,168
Investment securities		27,456			1,503			670			330,457			(21,739	)		338,347
Trading account securities											29,645						29,645

		42,911			1,893			117,684			2,480,318			(294,074	)		2,348,732

INTEREST EXPENSE:
Deposits											557,184			(4,527	)		552,657
Short-term borrowings		2,348						43,521			402,175			(89,937	)		358,107
Long-term debt		25,100						111,956			423,348			(208,951	)		351,453

		27,448						155,477			1,382,707			(303,415	)		1,262,217

Net interest income (expense)		15,463			1,893			(37,793	)		1,097,611			9,341			1,086,515
Provision for loan losses		7									359,599						359,606

Net interest income (expense) after provision for loan losses		15,456			1,893			(37,793	)		738,012			9,341			726,909
Service charges on deposit accounts											146,567						146,567
Other service fees											354,484			(83,681	)		270,803
Net gain (loss) on sale and valuation adjustments of investment securities		115,567			(8,249	)					(27,461	)					79,857
Trading account loss											(6,614	)		(40	)		(6,654	)
Gain on sale of loans and valuation adjustments on loans held-for-sale											50,254			(12,535	)		37,719
Other operating income (loss)		9,830			13,506			(723	)		100,073			(28,422	)		94,264

		140,853			7,150			(38,516	)		1,355,315			(115,337	)		1,349,465

OPERATING EXPENSES:
Personnel costs:
Salaries		15,500			293						370,402			(1,956	)		384,239
Pension, profit sharing and other benefits		4,295			52						106,881			(564	)		110,664

		19,795			345						477,283			(2,520	)		494,903
Net occupancy expenses		1,707			22			2			86,220						87,951
Equipment expenses		1,061						3			94,413			(148	)		95,329
Other taxes		1,148									35,761						36,909
Professional fees		8,495			17			107			209,030			(105,917	)		111,732
Communications		393									50,610			(122	)		50,881
Business promotion		2,152									85,853			(704	)		87,301
Printing and supplies		56						1			12,899						12,956
Other operating expenses		(36,499	)		(300	)		328			135,249			(1,416	)		97,362
Amortization of intangibles											8,030						8,030

		(1,692	)		84			441			1,195,348			(110,827	)		1,083,354

Income (loss) before income tax and equity in earnings of subsidiaries		142,545			7,066			(38,957	)		159,967			(4,510	)		266,111
Income tax		31,001						(13,635	)		21,445			(2,300	)		36,511

Income (loss) before equity in earnings of subsidiaries		111,544			7,066			(25,322	)		138,522			(2,210	)		229,600
Equity in earnings of subsidiaries		118,056			(135,832	)		(112,800	)		(140,641	)		271,217

NET INCOME (LOSS)	$	229,600		($	128,766	)	($	138,122	)	($	2,119	)	$	269,007		$	229,600

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	6,118					$	111,043		$	1,934,965		($	209,253	)	$	1,842,873
Money market investments		1,722		$	131			439			29,389			(8,755	)		22,926
Investment securities		27,686			1,029			964			387,361			(20,910	)		396,130
Trading account securities											23,649						23,649

		35,526			1,160			112,446			2,375,364			(238,918	)		2,285,578

INTEREST EXPENSE:
Deposits											414,636			(3,256	)		411,380
Short-term borrowings		174			1,237			13,878			422,032			(43,717	)		393,604
Long-term debt		27,184						138,060			445,564			(197,795	)		413,013

		27,358			1,237			151,938			1,282,232			(244,768	)		1,217,997

Net interest income (expense)		8,168			(77	)		(39,492	)		1,093,132			5,850			1,067,581
Provision for loan losses											179,488						179,488

Net interest income (expense) after provision for loan losses		8,168			(77	)		(39,492	)		913,644			5,850			888,093
Service charges on deposit accounts											142,277						142,277
Other service fees											321,510			(81,510	)		240,000
Net gain (loss) on sale and valuation adjustments of investment securities		589			13,595						(15,869	)		6,724			5,039
Trading account profit											6,404			16,920			23,324
Gain on sale of loans											100,653			(4,225	)		96,428
Other operating income (loss)		15,169			5,177			(271	)		106,845			(29,820	)		97,100

		23,926			18,695			(39,763	)		1,575,464			(86,061	)		1,492,261

OPERATING EXPENSES:
Personnel costs:
Salaries		14,823			283						380,183			(2,444	)		392,845
Pension, profit sharing and other benefits		4,149			51						112,878			(692	)		116,386

		18,972			334						493,061			(3,136	)		509,231
Net occupancy expenses		1,723			11			1			87,105						88,840
Equipment expenses		1,221			6			10			100,336			(57	)		101,516
Other taxes		853									32,087						32,940
Professional fees		12,187			34			132			196,099			(103,268	)		105,184
Communications		471									51,531			(66	)		51,936
Business promotion		3,887									95,561			(779	)		98,669
Printing and supplies		62						1			13,268						13,331
Other operating expenses		(39,508	)		(299	)		327			126,182			(1,093	)		85,609
Impact of change in fiscal period at certain subsidiaries								3,495			4,109			2,137			9,741
Amortization of intangibles											9,160						9,160

		(132	)		86			3,966			1,208,499			(106,262	)		1,106,157

Income (loss) before income tax and equity in earnings of subsidiaries		24,058			18,609			(43,729	)		366,965			20,201			386,104
Income tax		1,778						(11,015	)		93,258			4,039			88,060

Income (loss) before equity in earnings of subsidiaries		22,280			18,609			(32,714	)		273,707			16,162			298,044
Equity in earnings of subsidiaries		275,764			(17,246	)		14,214			(9,110	)		(263,622	)

NET INCOME (LOSS)	$	298,044		$	1,363		($	18,500	)	$	264,597		($	247,460	)	$	298,044

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc.

Cash flows from operating activities:
Net income (loss)	$	229,600			($128,766	)		($138,122	)		($2,119	)	$	269,007		$	229,600

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(118,056	)		135,832			112,800			140,641			(271,217	)
Depreciation and amortization of premises and equipment		1,781						2			57,830			(55	)		59,558
Provision for loan losses		7									359,599						359,606
Amortization of intangibles											8,030						8,030
Amortization and fair value adjustment of servicing assets											34,941						34,941
Net (gain) loss on sale and valuation adjustment of investment securities		(115,567	)		8,249						27,461						(79,857	)
Net loss (gain) on disposition of premises and equipment		1									(5,294	)					(5,293	)
Net gain on sale of loans and valuation adjustments on loans held-for-sale											(50,254	)		12,535			(37,719	)
Net amortization of premiums and accretion of discounts on investments		(5,525	)		7						21,337			(18	)		15,801
Net amortization of premiums and deferred loan origination fees and costs											77,963			(7,318	)		70,645
(Earnings) losses from investments under the equity method		(4,580	)		(13,506	)		723			(927	)		(1,224	)		(19,514	)
Stock options expense		464									875						1,339
Deferred income taxes		1,451						(13,635	)		(111,812	)		29,415			(94,581	)
Net disbursements on loans held-for-sale											(4,007,301	)					(4,007,301	)
Acquisitions of loans held-for-sale											(474,269	)					(474,269	)
Proceeds from sale of loans held-for-sale											3,475,817						3,475,817
Net decrease in trading securities											1,001,953			1,125			1,003,078
Net decrease (increase) in accrued income receivable		316			(43	)		(2,693	)		(42,473	)		2,218			(42,675	)
Net decrease (increase) in other assets		23,128			2,699			(4,220	)		3,556			5,344			30,507
Net increase (decrease) in interest payable		375						6,436			(38	)		(2,187	)		4,586
Net increase in postretirement benefit obligation											2,407						2,407
Net increase in other liabilities		3,370			20			32,608			19,181			(36,534	)		18,645

Total adjustments		(212,835	)		133,258			132,021			539,223			(267,916	)		323,751

Net cash provided by (used in) operating activities		16,765			4,492			(6,101	)		537,104			1,091			553,351

Cash flows from investing activities:
Net (increase) decrease in money market investments		(62,300	)		775			2,357			(687,112	)		479,326			(266,954	)
Purchases of investment securities:
Available-for-sale		(6,808	)		(2	)					(793,475	)		732,365			(67,920	)
Held-to-maturity		(2,749,665	)								(14,277,166	)					(17,026,831	)
Other								(928	)		(46,858	)					(47,786	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											1,801,852			(735,548	)		1,066,304
Held-to-maturity		2,559,000			900						14,284,651						16,844,551
Other											17,071						17,071
Proceeds from sale of investment securities available-for-sale		5,783			16,605						14,964						37,352
Proceeds from sale of other investment securities		245,484			2			865			1						246,352
Net repayments (disbursements) on loans		89,556			(21,550	)		(125,919	)		(1,883,576	)		803,507			(1,137,982	)
Proceeds from sale of loans											16,367						16,367
Acquisition of loan portfolios											(22,312	)					(22,312	)
Capital contribution to subsidiary					(300	)					(1,141	)		1,441
Assets acquired, net of cash											(2,378	)					(2,378	)
Mortgage servicing rights purchased											(25,596	)					(25,596	)
Acquisition of premises and equipment		(513	)								(69,094	)					(69,607	)
Proceeds from sale of premises and equipment											29,501						29,501
Proceeds from sale of foreclosed assets											113,776						113,776
Dividends received from subsidiary		159,200												(159,200	)

Net cash provided by (used in) investing activities		239,737			(3,570	)		(123,625	)		(1,530,525	)		1,121,891			(296,092	)

Cash flows from financing activities:
Net increase in deposits											2,652,852			(502,184	)		2,150,668
Net increase in federal funds purchased and assets sold under agreements to repurchase								105,503			472,255			(52,900	)		524,858
Net decrease in other short-term borrowings		(125,787	)					(45,242	)		(2,766,359	)		318,160			(2,619,228	)
Payments of notes payable								(4,583	)		(2,369,207	)		1,128,458			(1,245,332	)
Proceeds from issuance of notes payable		298						89,293			2,975,764			(2,244,268	)		821,087
Dividends paid to parent company											(159,200	)		159,200
Dividends paid		(142,898	)														(142,898	)
Proceeds from issuance of common stock		12,836															12,836
Treasury stock acquired		(63	)								(289	)					(352	)


	Popular, Inc.			PIBI		PNA		All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.		Holding Co.		Subsidiaries			Entries			Popular, Inc.

Capital contribution from parent									1,441			(1,441	)

Net cash (used in) provided by financing activities		(255,614	)				144,971		807,257			(1,194,975	)		(498,361	)

Net increase (decrease) in cash and due from banks		888			922		15,245		(186,164	)		(71,993	)		(241,102	)
Cash and due from banks at beginning of period		2			157		322		1,015,470			(65,793	)		950,158

Cash and due from banks at end of period	$	890		$	1,079	$	15,567	$	829,306			($137,786	)	$	709,056

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc.

Cash flows from operating activities:
Net income (loss)	$	298,044		$	1,363			($18,500	)	$	264,597			($247,460	)	$	298,044
Less: Impact of change in fiscal period of certain subsidiaries, net of tax								(2,271	)		(2,638	)		(1,220	)		(6,129	)

Net income before impact of change in fiscal period		298,044			1,363			(16,229	)		267,235			(246,240	)		304,173

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(275,764	)		17,246			(14,214	)		9,110			263,622
Depreciation and amortization of premises and equipment		1,723						1			62,135			(54	)		63,805
Provision for loan losses											179,488						179,488
Amortization of intangibles											9,160						9,160
Amortization of servicing assets											43,333			(24	)		43,309
Net (gain) loss on sale and valuation adjustment of investment securities		(589	)		(13,595	)					15,870			(6,725	)		(5,039	)
Net gain on disposition of premises and equipment		4									(7,181	)					(7,177	)
Net gain on sale of loans											(100,653	)		4,225			(96,428	)
Net amortization of premiums and accretion of discounts on investments		(394	)		10			(118	)		19,752			(190	)		19,060
Net amortization of premiums and deferred loan origination fees and costs		(54	)								103,619			(4,500	)		99,065
Earnings from investments under the equity method		(1,924	)		(5,165	)					(894	)		(1,098	)		(9,081	)
Stock options expense		566									1,742						2,308
Deferred income taxes		(480	)					(11,015	)		(12,174	)		4,039			(19,630	)
Net disbursements on loans held-for-sale											(4,963,647	)					(4,963,647	)
Acquisitions of loans held-for-sale											(1,188,844	)					(1,188,844	)
Proceeds from sale of loans held-for-sale											5,559,968						5,559,968
Net decrease in trading securities											1,196,104			(465	)		1,195,639
Net decrease (increase) in accrued income receivable		172			(9	)		1,301			(48,925	)		3,150			(44,311	)
Net (increase) decrease in other assets		(12,190	)		4,644			4,338			68,882			2,207			67,881
Net increase (decrease) in interest payable		818			(23	)		27,452			16,173			(3,163	)		41,257
Net increase in postretirement benefit obligation											3,028						3,028
Net increase (decrease) in other liabilities		9,014			3			40,905			(138,083	)		1			(88,160	)

Total adjustments		(279,098	)		3,111			48,650			827,963			261,025			861,651

Net cash provided by operating activities		18,946			4,474			32,421			1,095,198			14,785			1,165,824

Cash flows from investing activities:

Net decrease (increase) in money market investments		170,000						(91	)		381,685			(347,272	)		204,322
Purchases of investment securities:
Available-for-sale					(21,189	)					(437,372	)		215,080			(243,481	)
Held-to-maturity		(269,683	)								(20,578,088	)					(20,847,771	)
Other								(5,529	)		(45,451	)					(50,980	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											1,777,303			(216,691	)		1,560,612
Held-to-maturity											20,644,100						20,644,100
Other		1,753									70,858						72,611
Proceeds from sale of investment securities available for sale		7,195			28,628						154,426			7,942			198,191
Net (disbursements) repayments on loans		(1,325	)					12,467			(1,066,200	)		177,430			(877,628	)
Proceeds from sale of loans