UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     o Yes           þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 281,024,719 shares outstanding as of May 7, 2008.

 

 

POPULAR, INC.
INDEX

		Page
Part I — Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of March 31, 2008, December 31, 2007 and March 31, 2007			4
Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2008 and 2007			5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2008 and 2007			6
Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2008 and 2007			7
Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2008 and 2007			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			98
Item 4. Controls and Procedures			103
Part II — Other Information
Item 1. Legal Proceedings			103
Item 1A. Risk Factors			103
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			103
Item 6. Exhibits			104
Signatures			105
EX-10.1 ASSET PURCHASE AGREEMENT
EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CFO
EX-32.2 SECTION 302, CERTIFICATION OF THE CEO

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.

(In thousands, except share information)		March 31, 2008				December 31, 2007				March 31, 2007
ASSETS
Cash and due from banks		$	782,498			$	818,825			$	753,550
Money market investments:
Federal funds sold			494,940				737,815				389,000
Securities purchased under agreements to resell			391,958				145,871				227,046
Time deposits with other banks			14,331				123,026				24,162
			901,229				1,006,712				640,208
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			3,146,549				4,249,295				3,729,502
Other investment securities available-for-sale			4,512,959				4,265,840				5,748,859
Investment securities held-to-maturity, at amortized cost (market value as of March 31, 2008 - $376,306; December 31, 2007 - $486,139; March 31, 2007 - $88,868)			374,903				484,466				87,483
Other investment securities, at lower of cost or realizable value (realizable value as of March 31, 2008 - $297,535; December 31, 2007 - $216,819; March 31, 2007 - $153,339)			252,157				216,584				152,951
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge			494,839				673,958				344,401
Other trading securities			67,018				93,997				303,749
Loans held-for-sale measured at lower of cost or market value			447,097				1,889,546				1,049,230
Loans measured at fair value pursuant to SFAS No. 159:
Loans measured at fair value pledged with creditors’ right to repledge			56,523				—				—
Other loans measured at fair value			870,297				—				—
Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge			—				149,610				563,871
Other loans			26,742,124				28,053,956				31,578,452
Less — Unearned income			184,815				182,110				310,936
Allowance for loan losses			579,379				548,832				541,748
			25,977,930				27,472,624				31,289,639
Premises and equipment, net			639,840				588,163				591,008
Other real estate			85,277				81,410				89,479
Accrued income receivable			215,454				216,114				284,791
Servicing assets (at fair value on March 31, 2008 - $183,756; December 31, 2007 $191,624; March 31, 2007 - $172,643)			188,558				196,645				176,994
Other assets			2,110,675				1,456,994				1,149,050
Goodwill			630,764				630,761				668,616
Other intangible assets			67,032				69,503				105,154
		$	41,821,599			$	44,411,437			$	47,164,664
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	4,253,885			$	4,510,789			$	4,177,446
Interest bearing			22,712,829				23,823,689				20,560,607
			26,966,714				28,334,478				24,738,053
Federal funds purchased and assets sold under agreements to repurchase			4,490,693				5,437,265				6,272,417
Other short-term borrowings			1,525,310				1,501,979				3,201,972
Notes payable at cost			4,190,169				4,621,352				8,368,825
Notes payable at fair value pursuant to SFAS No. 159			186,171				—				—
Other liabilities			990,713				934,372				846,979
			38,349,770				40,829,446				43,428,246
Commitments and contingencies (See Note 16)
Minority interest in consolidated subsidiaries			109				109				110
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; 294,182,809 shares issued (December 31, 2007 - 293,651,398; March 31, 2007 - 292,448,935) and 280,547,741 outstanding (December 31, 2007 - 280,029,215; March 31, 2007 - 279,073,657)			1,765,097				1,761,908				1,754,694
Surplus			570,548				568,184				530,073
Retained earnings			1,113,089				1,319,467				1,673,826
Accumulated other comprehensive income (loss), net of tax of $19,446 (December 31, 2007 - ($15,438); March 31, 2007 - ($74,005))			43,719				(46,812	)			(203,935	)
Treasury stock — at cost, 13,635,068 shares (December 31, 2007 - 13,622,183; March 31, 2007 - 13,375,278)			(207,608	)			(207,740	)			(205,225	)
			3,471,720				3,581,882				3,736,308
		$	41,821,599			$	44,411,437			$	47,164,664

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

POPULAR, INC.

		Quarter ended
		March 31,
(In thousands, except per share information)		2008				2007
INTEREST INCOME:
Loans		$	561,117			$	644,114
Money market investments			6,728				4,609
Investment securities			94,405				115,491
Trading account securities			18,693				9,381
			680,943				773,595
INTEREST EXPENSE:
Deposits			194,940				173,102
Short-term borrowings			65,145				124,809
Long-term debt			63,669				120,702
			323,754				418,613
Net interest income			357,189				354,982
Provision for loan losses			168,222				96,346
Net interest income after provision for loan losses			188,967				258,636
Service charges on deposit accounts			51,087				48,471
Other service fees (See Note 17)			105,467				87,849
Net gain on sale and valuation adjustments of investment securities			47,940				81,771
Trading account profit (loss)			4,464				(14,164	)
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159			(3,020	)			—
Gain on sale of loans and valuation adjustments on loans held-for-sale			68,745				3,434
Other operating income			33,292				44,815
			496,942				510,812
OPERATING EXPENSES:
Personnel costs:
Salaries			136,709				136,479
Pension, profit sharing and other benefits			38,470				41,896
			175,179				178,375
Net occupancy expenses			34,992				32,014
Equipment expenses			31,998				32,396
Other taxes			13,143				11,847
Professional fees			36,625				35,987
Communications			15,303				17,062
Business promotion			17,216				28,372
Printing and supplies			4,275				4,276
Other operating expenses			41,292				32,016
Amortization of intangibles			2,492				2,983
			372,515				375,328
Income before income tax			124,427				135,484
Income tax expense			21,137				16,837
NET INCOME		$	103,290			$	118,647
NET INCOME APPLICABLE TO COMMON STOCK		$	100,312			$	115,669
BASIC EARNINGS PER COMMON SHARE (“EPS”)		$	0.36			$	0.41
DILUTED EPS		$	0.36			$	0.41
DIVIDENDS DECLARED PER COMMON SHARE		$	0.16			$	0.16

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

POPULAR, INC.

		Quarter ended
		March 31,
(In thousands)		2008				2007
Preferred stock:
Balance at beginning and end of year		$	186,875			$	186,875
Common stock:
Balance at beginning of year			1,761,908				1,753,146
Common stock issued under the Dividend Reinvestment Plan			3,189				1,488
Stock options exercised			—				60
Balance at end of period			1,765,097				1,754,694
Surplus:
Balance at beginning of year			568,184				526,856
Common stock issued under the Dividend Reinvestment Plan			2,080				2,628
Stock options expense on unexercised options, net of forfeitures			284				440
Stock options exercised			—				149
Balance at end of period			570,548				530,073
Retained earnings:
Balance at beginning of year			1,319,467				1,594,144
Net income			103,290				118,647
Cumulative effect of accounting change-adoption of SFAS No. 159 in 2008 (2007-SFAS No. 156 and EITF 06-5)			(261,831	)			8,667
Cash dividends declared on common stock			(44,859	)			(44,654	)
Cash dividends declared on preferred stock			(2,978	)			(2,978	)
Balance at end of period			1,113,089				1,673,826
Accumulated other comprehensive income (loss):
Balance at beginning of year			(46,812	)			(233,728	)
Other comprehensive income, net of tax			90,531				29,793
Balance at end of period			43,719				(203,935	)
Treasury stock — at cost:
Balance at beginning of year			(207,740	)			(206,987	)
Purchase of common stock			(339	)			(10	)
Reissuance of common stock			471				1,772
Balance at end of period			(207,608	)			(205,225	)
Total stockholders’ equity		$	3,471,720			$	3,736,308

Disclosure of changes in number of shares:

		March 31,				December 31,				March 31,
		2008				2007				2007
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			293,651,398				292,190,924				292,190,924
Issued under the Dividend Reinvestment Plan			531,411				1,450,410				247,947
Stock options exercised			—				10,064				10,064
Balance at end of period			294,182,809				293,651,398				292,448,935
Treasury stock			(13,635,068	)			(13,622,183	)			(13,375,278	)
Common Stock — outstanding			280,547,741				280,029,215				279,073,657

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

POPULAR, INC.

		Quarter ended
		March 31,
(In thousands)		2008				2007
Net income		$	103,290			$	118,647
Other comprehensive income before tax:
Foreign currency translation adjustment			219				1,780
Adjustment of pension and postretirement benefit plans			(37	)			(519	)
Unrealized gains on securities available-for-sale arising during the period			127,490				39,483
Reclassification adjustment for losses (gains) included in net income			1,312				(82	)
Unrealized net losses on cash flows hedges			(5,070	)			(892	)
Reclassification adjustment for losses included in net income			1,501				161
			125,415				39,931
Income tax expense			(34,884	)			(10,138	)
Total other comprehensive income, net of tax			90,531				29,793
Comprehensive income		$	193,821			$	148,440

Tax Effects Allocated to Each Component of Other Comprehensive Income:

		Quarter ended
		March 31,
(In thousands)		2008				2007
Underfunding of pension and postretirement benefit plans			—			$	180
Unrealized gains on securities available-for-sale arising during the period			($35,263	)			(10,592	)
Reclassification adjustment for losses (gains) included in net income			(901	)			13
Unrealized net losses on cash flows hedges			1,869				317
Reclassification adjustment for losses included in net income			(589	)			(56	)
Income tax expense			($34,884	)			($10,138	)

Disclosure of accumulated other comprehensive income:

		March 31,				December 31,				March 31,
(In thousands)		2008				2007				2007
Foreign currency translation adjustment			($34,369	)			($34,588	)			($34,921	)
Underfunding of pension and postretirement benefit plans			(51,176	)			(51,139	)			(69,779	)
Tax effect			20,108				20,108				27,214
Net of tax amount			(31,068	)			(31,031	)			(42,565	)
Unrealized gains (losses) on securities available-for-sale			155,894				27,092				(172,842	)
Tax effect			(42,114	)			(5,950	)			46,567
Net of tax amount			113,780				21,142				(126,275	)
Unrealized losses on cash flows hedges			(7,184	)			(3,615	)			(641	)
Tax effect			2,560				1,280				224
Net of tax amount			(4,624	)			(2,335	)			(417	)
Cumulative effect of accounting change, net of tax			—				—				243
Accumulated other comprehensive income (loss), net of tax		$	43,719				($46,812	)			($203,935	)

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

POPULAR, INC.

		Quarter ended March 31,
(In thousands)		2008				2007
Cash flows from operating activities:
Net income		$	103,290			$	118,647
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of premises and equipment			18,711				19,994
Provision for loan losses			168,222				96,346
Amortization of intangibles			2,492				2,983
Amortization and fair value adjustments of servicing assets			15,404				10,229
Net gain on sale and valuation adjustments of investment securities			(47,940	)			(81,771	)
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159			3,020				—
Net gain on disposition of premises and equipment			(1,323	)			(3,677	)
Net gain on sale of loans and valuation adjustments on loans held-for-sale			(68,745	)			(3,434	)
Net amortization of premiums and accretion of discounts on investments			6,086				6,331
Net amortization of premiums and deferred loan origination fees and costs			13,190				23,930
Earnings from investments under the equity method			(4,194	)			(14,229	)
Stock options expense			284				490
Deferred income taxes			(34,815	)			(19,394	)
Net disbursements on loans held-for-sale			(716,848	)			(1,685,149	)
Acquisitions of loans held-for-sale			(76,474	)			(282,110	)
Proceeds from sale of loans held-for-sale			526,534				1,280,146
Net decrease in trading securities			134,437				346,150
Net increase in accrued income receivable			(10,906	)			(36,551	)
Net (increase) decrease in other assets			(84,473	)			35,955
Net decrease in interest payable			(21,075	)			(315	)
Net (decrease) increase in postretirement benefit obligation			(362	)			728
Net increase in other liabilities			34,975				1,208
Total adjustments			(143,800	)			(302,140	)
Net cash used in operating activities			(40,510	)			(183,493	)
Cash flows from investing activities:
Net decrease (increase) in money market investments			105,483				(272,064	)
Purchases of investment securities:
Available-for-sale			(120,932	)			(28,186	)
Held-to-maturity			(2,748,155	)			(5,670,466	)
Other			(88,720	)			(6,744	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			1,067,689				399,204
Held-to-maturity			2,859,246				5,674,358
Other			53,147				2,454
Proceeds from sale of investment securities available-for-sale			8,477				—
Proceeds from sale of other investment securities			49,252				246,352
Net (disbursements) repayments on loans			(253,856	)			50,493
Proceeds from sale of loans			1,585,375				962
Acquisition of loan portfolios			(1,394	)			(784	)
Assets acquired, net of cash			—				(1,823	)
Mortgage servicing rights purchased			(2,215	)			(795	)
Acquisition of premises and equipment			(81,111	)			(26,117	)
Proceeds from sale of premises and equipment			13,255				14,307
Proceeds from sale of foreclosed assets			29,086				41,835
Net cash provided by investing activities			2,474,627				422,986
Cash flows from financing activities:
Net (decrease) increase in deposits			(1,346,959	)			297,872
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase			(946,572	)			509,972
Net increase (decrease) in other short-term borrowings			23,331				(832,153	)
Payments of notes payable			(693,280	)			(416,272	)
Proceeds from issuance of notes payable			535,894				47,719
Dividends paid			(47,788	)			(47,591	)
Proceeds from issuance of common stock			5,269				4,362
Treasury stock acquired			(339	)			(10	)
Net cash used in financing activities			(2,470,444	)			(436,101	)
Net decrease in cash and due from banks			(36,327	)			(196,608	)
Cash and due from banks at beginning of period			818,825				950,158
Cash and due from banks at end of period		$	782,498			$	753,550

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

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of Operations and Basis of Presentation

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution 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 operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale origination / refinancing unit and carry a maturing loan portfolio. 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 24 to the consolidated financial statements presents further information about the Corporation’s business segments.

The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2008 presentation.

The statement of condition data as of December 31, 2007 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the statements presented as of March 31, 2008, December 31, 2007 and March 31, 2007 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, 2007, included in the Corporation’s 2007 Annual Report. The Corporation’s Form 10-K filed on February 29, 2008 incorporates by reference the 2007 Annual Report.

Note 2 — Recent Accounting Developments

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued financial staff position FSP FAS No. 157-2 which defers for one year the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The staff position also amends SFAS No. 157

to exclude SFAS No. 13 “Accounting for Leases” and its related interpretive accounting pronouncements that address leasing transactions. The Corporation adopted the provisions of SFAS No. 157 that were not deferred by FSP FAS No. 157-2, commencing in the first quarter of 2008. The provisions of SFAS No. 157 are to be applied prospectively. Refer to Note 12 to these consolidated financial statements for the disclosures required for the quarter ended March 31, 2008. The adoption of SFAS No. 157 in January 1, 2008 did not have an impact in beginning retained earnings.

SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115”

In February 2007, the FASB issued SFAS No. 159, which provided 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 beginning 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. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Corporation adopted the provisions of SFAS No. 159 in January 2008.

The Corporation elected the fair value option for approximately $1.2 billion of whole loans held-in-portfolio by PFH. Additionally, management adopted the fair value option for approximately $287 million of loans and $287 million of bond certificates associated with PFH’s on-balance sheet securitizations that were outstanding as of December 31, 2007. These loans serve as collateral for the bond certificates.

Refer to Note 11 to these consolidated financial statements for the impact of the initial adoption of SFAS No. 159 to beginning retained earnings as of January 1, 2008 and additional disclosures as of March 31, 2008.

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. The adoption of FSP FIN No. 39-1 in January 2008 did not have a material impact on the Corporation’s consolidated financial statements and disclosures. The Corporation’s policy is not to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement nor to offset the 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.

SFAS No. 141-R “Statement of Financial Accounting Standards No. 141(R), Business Combinations (a revision of SFAS No. 141)”

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this statement include the following: the acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and

the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Corporation will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented on the consolidated financial statements.

SFAS No. 160 “Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51”

In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity on the consolidated financial statements and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted. Management will be evaluating the effects, if any, that the adoption of this statement will have on its consolidated financial statements.

SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities”

In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. The standard will be effective for all of the Corporation’s interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how the Corporation accounts for these instruments. Management will be evaluating the enhanced disclosure requirements.

Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair Value through Earnings”

On November 5, 2007, the SEC issued Staff SAB 109, which requires that the fair value of a written loan commitment that is marked to market through earnings should include the future cash flows related to the loan’s servicing rights. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets). SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans that will be held-for-sale when funded that are marked to market as derivatives under SFAS No. 133 (derivative loan commitments); and (2) other written loan commitments that are accounted for at fair value through earnings under SFAS No. 159’s fair-value election.

SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the expected future cash flows related to the associated servicing of the loan to be recognized only after the servicing asset had been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB 109 will be applied prospectively to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The implementation of SAB 109 during the first quarter of 2008 did not have a material impact to the Corporation’s consolidated financial statements, including disclosures.

Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP FAS 140-3”)

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The objective of this FSP is to provide implementation guidance on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate de-linked transactions.

Current practice records the transfer as a sale and the repurchase agreement as a financing. The FSP requires the recognition of the transfer and the repurchase agreement as one linked transaction, unless all of the following criteria are met: (1) the initial transfer and the repurchase financing are not contractually contingent on one another; (2) the initial transferor has full recourse upon default, and the repurchase agreement’s price is fixed and not at fair value; (3) the financial asset is readily obtainable in the marketplace and the transfer and repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing is before the maturity of the financial asset. The scope of this FSP is limited to transfers and subsequent repurchase financings that are entered into contemporaneously or in contemplation of one another.

The FSP will be effective for the Corporation on January 1, 2009. Early adoption is prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.

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 $655 million as of March 31, 2008 (December 31, 2007 — $678 million; March 31, 2007 — $614 million). Cash and due from banks as well as other short-term, highly-liquid securities are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, the Corporation may be required to establish a special reserve account for the benefit of brokerage customers of its broker-dealer subsidiary, which may consist of securities segregated in the special reserve account. There were no reserve requirements as of March 31, 2008 (December 31, 2007 — securities with a market value of $273 thousand; March 31, 2007 — securities with a market value of $445 thousand). These securities were classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Regulatory Act, as of March 31, 2008, December 31, 2007, and March 31, 2007, 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, as of March 31, 2008, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2007 — $1.9 million; March 31, 2007 — $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.

As of March 31, 2008, the Corporation had restricted cash of $3.5 million (December 31, 2007 — $3.5 million) to support a letter of credit related to a service settlement agreement.

Note 4 — Pledged Assets

Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:

		March 31,				December 31,				March 31,
(In thousands)		2008				2007				2007
Investment securities available-for-sale, at fair value		$	2,808,803			$	2,944,643			$	2,825,470
Investment securities held-to-maturity, at amortized cost			—				339				502
Loans held-for-sale measured at lower of cost or market value			38,553				42,428				—
Loans measured at fair value pursuant to SFAS No. 159			193,781				—				—
Loans held-in-portfolio			7,586,260				8,489,814				9,548,747
		$	10,627,397			$	11,477,224			$	12,374,719

Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

Note 5 — Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2008, December 31, 2007 and March 31, 2007 were as follows:

		AS OF MARCH 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	463,769			$	18,219				—			$	481,988
Obligations of U.S. Government sponsored entities			4,582,861				154,438				—				4,737,299
Obligations of Puerto Rico, States and political subdivisions			102,378				728			$	1,894				101,212
Collateralized mortgage obligations			1,366,306				7,299				24,686				1,348,919
Mortgage-backed securities			956,964				8,000				6,390				958,574
Equity securities			28,550				884				704				28,730
Others			2,786				—				—				2,786
		$	7,503,614			$	189,568			$	33,674			$	7,659,508

		AS OF DECEMBER 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	476,104			$	3			$	5,011			$	471,096
Obligations of U.S. Government sponsored entities			5,450,028				52,971				5,885				5,497,114
Obligations of Puerto Rico, States and political subdivisions			103,206				470				2,184				101,492
Collateralized mortgage obligations			1,403,292				3,754				10,506				1,396,540
Mortgage-backed securities			1,017,302				4,690				11,864				1,010,128
Equity securities			33,299				690				36				33,953
Others			4,812				—				—				4,812
		$	8,488,043			$	62,578			$	35,486			$	8,515,135

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

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, as of March 31, 2008, December 31, 2007 and March 31, 2007.

		AS OF MARCH 31, 2008
		Less than 12 months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	20,343			$	22			$	20,321
Collateralized mortgage obligations			628,360				16,343				612,017
Mortgage-backed securities			144,912				1,803				143,109
Equity securities			13,654				704				12,950
		$	807,269			$	18,872			$	788,397

		12 months or more
		Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	49,662			$	1,872			$	47,790
Collateralized mortgage obligations			176,527				8,343				168,184
Mortgage-backed securities			319,054				4,587				314,467
		$	545,243			$	14,802			$	530,441

		Total
		Amortized				Gross Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	70,005			$	1,894			$	68,111
Collateralized mortgage obligations			804,887				24,686				780,201
Mortgage-backed securities			463,966				6,390				457,576
Equity securities			13,654				704				12,950
		$	1,352,512			$	33,674			$	1,318,838

		AS OF DECEMBER 31, 2007
		Less than 12 months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	67,107			$	185			$	66,922
Obligations of Puerto Rico, States and political subdivisions			2,600				2				2,598
Collateralized mortgage obligations			349,084				2,453				346,631
Mortgage-backed securities			99,328				667				98,661
Equity securities			28				10				18
		$	518,147			$	3,317			$	514,830

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	466,111			$	5,011			$	461,100
Obligations of U.S. Government sponsored entities			1,807,457				5,700				1,801,757
Obligations of Puerto Rico, States and political subdivisions			65,642				2,182				63,460
Collateralized mortgage obligations			430,034				8,053				421,981
Mortgage-backed securities			656,879				11,197				645,682
Equity securities			300				26				274
		$	3,426,423			$	32,169			$	3,394,254

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	466,111			$	5,011			$	461,100
Obligations of U.S. Government sponsored entities			1,874,564				5,885				1,868,679
Obligations of Puerto Rico, States and political subdivisions			68,242				2,184				66,058
Collateralized mortgage obligations			779,118				10,506				768,612
Mortgage-backed securities			756,207				11,864				744,343
Equity securities			328				36				292
		$	3,944,570			$	35,486			$	3,909,084

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

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

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

As of March 31, 2008, “Obligations of Puerto Rico, States and political subdivisions” include approximately $55 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”). The rating on these bonds by Moody’s Investors Service (“Moody’s”) is Ba1, one notch below investment grade, while Standard & Poor’s (“S&P”) rates them as investment grade. As of March 31, 2008, these Appropriation Bonds represented approximately $1.7 million in unrealized losses in the Corporation’s investment securities available-for-sale 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 as of March 31, 2008, except for the obligations of the Puerto Rico government described above, are primarily associated with 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 as of March 31, 2008 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 three months ended March 31, 2008, the Corporation recognized through earnings approximately $2.3 million in losses considered other-than-temporary on residual interests classified as available-for-sale. During the quarter ended March 31, 2007, the Corporation recognized through earnings approximately $29.3 million in losses in residual interests classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired.

The following table states the 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.

		March 31, 2008								December 31, 2007								March 31, 2007
(In thousands)		Amortized Cost				Market Value				Amortized Cost				Market Value				Amortized Cost				Market Value
FNMA		$	1,156,383			$	1,158,103			$	1,132,834			$	1,128,544			$	1,307,581			$	1,292,296
FHLB			4,725,045				4,875,028				5,649,729				5,693,170				6,015,720				5,902,317
Freddie Mac			794,885				790,067				918,976				913,609				1,073,605				1,063,275

Note 6 — Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of March 31, 2008, December 31, 2007 and March 31, 2007 were as follows:

		AS OF MARCH 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	288,601				—			$	8			$	288,593
Obligations of Puerto Rico, States and political subdivisions			74,918			$	1,369				53				76,234
Collateralized mortgage obligations			283				—				16				267
Others			11,101				114				3				11,212
		$	374,903			$	1,483			$	80			$	376,306

		AS OF DECEMBER 31, 2007
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	395,974			$	15			$	1,497			$	394,492
Obligations of Puerto Rico, States and political subdivisions			76,464				3,108				26				79,546
Collateralized mortgage obligations			310				—				17				293
Others			11,718				94				4				11,808
		$	484,466			$	3,217			$	1,544			$	486,139

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

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, as of March 31, 2008, December 31, 2007 and March 31, 2007:

		AS OF MARCH 31, 2008
		Less than 12 months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	38,601			$	8			$	38,593
Obligations of Puerto Rico, States and political subdivisions			10,555				53				10,502
Others			250				1				249
		$	49,406			$	62			$	49,344

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Collateralized mortgage obligations		$	283			$	16			$	267
Others			1,000				2				998
		$	1,283			$	18			$	1,265

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	38,601			$	8			$	38,593
Obligations of Puerto Rico, States and political subdivisions			10,555				53				10,502
Collateralized mortgage obligations			283				16				267
Others			1,250				3				1,247
		$	50,689			$	80			$	50,609

		AS OF DECEMBER 31, 2007
		Less than 12 months
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	196,129			$	1,497			$	194,632
Obligations of Puerto Rico, States and political subdivisions			1,883				26				1,857
Other			1,250				1				1,249
		$	199,262			$	1,524			$	197,738

		12 months or more
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Collateralized mortgage obligations		$	310			$	17			$	293
Others			1,250				3				1,247
		$	1,560			$	20			$	1,540

		Total
						Gross
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	196,129			$	1,497			$	194,632
Obligations of Puerto Rico, States and political subdivisions			1,883				26				1,857
Collateralized mortgage obligations			310				17				293
Others			2,500				4				2,496
		$	200,822			$	1,544			$	199,278

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

Management believes that the unrealized losses in the held-to-maturity portfolio as of March 31, 2008 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 – 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).

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.

Classes of mortgage servicing rights were determined based on the different markets or types of assets served. 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.

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.

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, contractural servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Refer to Note 8 to the consolidated financial statements for information on assumptions used in the valuation model of MSRs.

The changes in MSRs measured using the fair value method for the three months ended March 31, 2008 and March 31, 2007 were:

		Residential MSRs
(In thousands)		Banking subsidiaries				PFH				Total
Fair value at January 1, 2008		$	110,612			$	81,012			$	191,624
Purchases			2,215				—				2,215
Servicing from securitizations or asset transfers			4,720				—				4,720
Changes due to payments on loans (1)			(2,876	)			(7,277	)			(10,153	)
Changes in fair value due to changes in valuation model inputs or assumptions			847				(5,497	)			(4,650	)
Fair value as of March 31, 2008		$	115,518			$	68,238			$	183,756

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

Residential mortgage loans serviced for others were $20.4 billion as of March 31, 2008 (December 31, 2007 — $20.5 billion; March 31, 2007 — $14.8 billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, 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.

Servicing rights associated with Small Business Administration (“SBA”) commercial loans are the other class of servicing assets held by the Corporation. These SBA servicing rights are accounted under the amortization method. The changes in SBA servicing rights for the three months ended March 31, 2008 and March 31, 2007 were as follows:

(In thousands)		March 31, 2008				March 31, 2007
Balance at January 1,		$	5,021			$	4,860
Rights originated			382				3
Amortization			(601	)			(512	)
Balance at March 31,		$	4,802			$	4,351
Less: Valuation allowance			—				—
Balance at March 31, net of valuation allowance		$	4,802			$	4,351
Fair value at March 31,		$	6,945			$	7,107

SBA loans serviced for others were $537 million as of March 31, 2008 (December 31, 2007 — $527 million; March 31, 2007 — $453 million).

Note 8 – Retained Interests on Transfers of Mortgage Loans

Popular Financial Holdings

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

		March 31, 2008													December 31, 2007
						MSRs													MSRs
		Residual				Fixed-rate				ARM					Residual				Fixed-rate				ARM
(In thousands)		Interests				loans				loans					Interests				loans				loans
Carrying amount of retained interests		$	37,491			$	45,326			$	5,902				$	45,009			$	47,243			$	11,335
Fair value of retained interests		$	37,491			$	45,326			$	5,902				$	45,009			$	47,243			$	11,335
Weighted average life of collateral		8.5 years				5.4 years				3.4 years					7.6 years				4.3 years				2.6 years
		16.6% (Fixed- rate loans)													20.7% (Fixed- rate loans)
Weighted average prepayment speed (annual rate)		24.0% (ARM loans)					16.6	%			24.0	%			30.0% (ARM loans)					20.7	%			30.0	%
Impact on fair value of 10% adverse change		$	5,721			($	711	)		$	167				$	5,031			($	192	)		$	272
Impact on fair value of 20% adverse change		$	19,805			($	1,841	)		$	336				$	6,766			($	886	)		$	688
Weighted average discount rate (annual rate)			40.0	%			17.0	%			17.0	%				40.0	%			17.0	%			17.0	%
Impact on fair value of 10% adverse change		($	2,548	)		($	1,606	)		($	119	)			($	2,884	)		($	1,466	)		($	225	)
Impact on fair value of 20% adverse change		($	4,776	)		($	3,105	)		($	232	)			($	5,427	)		($	2,846	)		($	441	)
Cumulative credit losses		5.80% to 14.33%					—				—				3.35% to 11.03%					—				—
Impact on fair value of 10% adverse change		($	7,942	)			—				—				($	8,829	)			—				—
Impact on fair value of 20% adverse change		($	14,874	)			—				—				($	15,950	)			—				—