EX-99.2 PART II, ITEM 8. FINANCIAL STATEMENTS

EXHIBIT 99.2

Part II, Item 8 Financial Statements and Supplementary Data

Management’s Report to
Stockholders

To Our Stockholders:

Management‘s Assessment of Internal Control Over Financial Reporting

The management of Popular, Inc. (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a — 15(f) and 15d — 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, and includes controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2006 based on the criteria referred to above.

The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers, LLP, has audited management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006 as stated in their report dated February 28, 2007.



Richard L. Carrión		Jorge A. Junquera
Chairman of the Board,		Senior Executive Vice President
President and Chief Executive Officer		and Chief Financial Officer

Report of Independent Registered
Public Accounting Firm

To the Board of Directors
and Stockholders of Popular, Inc.

We have completed integrated audits of Popular, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Corporation changed the manner in which it accounts for defined benefit pension and other postretirement pension plans in 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Assessment of Internal Control Over Financial Reporting, that the Corporation maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Corporation’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial

Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

/s/ PricewaterhouseCoopers LLP

San Juan, Puerto Rico
February 28, 2007, except with respect to our opinion
on the consolidated financial statements
insofar as it relates to the effects
of changes in segments discussed
in Notes 10 and 30, for which
the date is October 3, 2007.

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires December 1, 2007
Stamp 2214458 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.

Consolidated Statements of
Condition


	December 31,
(In thousands)	2006			2005

Assets
Cash and due from banks	$	950,158		$	906,397

Money market investments:
Federal funds sold		84,350			186,000
Securities purchased under agreements to resell		202,181			554,770
Time deposits with other banks		15,177			8,653

		301,708			749,423

Trading securities, at fair value:
Pledged securities with creditors’ right to repledge		193,619			343,659
Other trading securities		188,706			175,679
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		3,743,924			6,110,179
Other securities available-for-sale		6,106,938			5,606,407
Investment securities held-to-maturity, at amortized cost (market value 2006 - $92,764; 2005 - $156,068)		91,340			153,104
Other investment securities, at lower of cost or realizable value (fair value 2006 - $412,593; 2005 - $426,407)		297,394			319,103
Loans held-for-sale, at lower of cost or market value		719,922			699,181

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		306,320			208,774
Other loans held-in-portfolio		32,019,044			31,099,865
Less — Unearned income		308,347			297,613
Allowance for loan losses		522,232			461,707

		31,494,785			30,549,319

Premises and equipment, net		595,140			596,571
Other real estate		84,816			79,008
Accrued income receivable		248,240			245,646
Other assets		1,611,890			1,325,800
Goodwill		667,853			653,984
Other intangible assets		107,554			110,208

	$	47,403,987		$	48,623,668

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	4,222,133		$	3,958,392
Interest bearing		20,216,198			18,679,613

		24,438,331			22,638,005
Federal funds purchased and assets sold under agreements to repurchase		5,762,445			8,702,461
Other short-term borrowings		4,034,125			2,700,261
Notes payable		8,737,246			9,893,577
Other liabilities		811,424			1,240,002

		43,783,571			45,174,306

Commitments and contingencies (See Notes 24, 26, 28, 31, 32)

Minority interest in consolidated subsidiaries		110			115

Stockholders’ Equity:
Preferred stock $25 liquidation value; 30,000,000 shares authorized; 7,475,000 issued and outstanding in both periods presented		186,875			186,875
Common stock, $6 par value; 470,000,000 shares authorized in both periods presented; 292,190,924 shares issued (2005 - 289,407,190) and 278,741,547 shares outstanding (2005 - 275,955,391)		1,753,146			1,736,443
Surplus		526,856			452,398
Retained earnings		1,594,144			1,456,612
Treasury stock-at cost, 13,449,377 shares (2005 - 13,451,799)		(206,987	)		(207,081	)
Accumulated other comprehensive loss, net of tax of ($84,143) (2005 - ($58,292))		(233,728	)		(176,000	)

		3,620,306			3,449,247

	$	47,403,987		$	48,623,668

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

Consolidated Statements of Income


	Year ended December 31,
(In thousands, except per share information)	2006		2005		2004

Interest Income:
Loans	$	2,486,453	$	2,116,299	$	1,751,150
Money market investments		29,626		30,736		25,660
Investment securities		516,237		488,814		413,492
Trading securities		32,125		30,010		25,963

		3,064,441		2,665,859		2,216,265

Interest Expense:
Deposits		580,094		430,813		330,351
Short-term borrowings		518,960		349,203		165,425
Long-term debt		537,477		461,636		344,978

		1,636,531		1,241,652		840,754

Net interest income		1,427,910		1,424,207		1,375,511
Provision for loan losses		287,760		195,272		178,657

Net interest income after provision for loan losses		1,140,150		1,228,935		1,196,854
Service charges on deposit accounts		190,079		181,749		165,241
Other service fees		320,875		331,501		295,551
Net gain on sale and valuation adjustment of investment securities		4,359		52,113		15,254
Trading account profit (loss)		35,288		30,051		(159	)
Gain on sale of loans		117,421		83,297		44,168
Other operating income		141,463		106,564		88,716

		1,949,635		2,014,210		1,805,625

Operating Expenses:
Personnel costs:
Salaries		517,178		474,636		427,870
Pension, profit sharing and other benefits		151,493		148,053		143,148

		668,671		622,689		571,018
Net occupancy expenses		116,742		108,386		89,821
Equipment expenses		135,877		124,276		108,823
Other taxes		44,543		39,197		40,260
Professional fees		141,534		119,281		95,084
Communications		68,283		63,395		60,965
Business promotion		129,965		100,434		75,708
Printing and supplies		17,741		18,378		17,938
Impairment losses on long-lived assets		7,232		—		—
Other operating expenses		118,128		122,585		103,551
Impact of change in fiscal period at certain subsidiaries		9,741		—		—
Amortization of intangibles and goodwill impairment losses		26,616		9,579		7,844

		1,485,073		1,328,200		1,171,012

Income before income tax and cumulative effect of accounting change		464,562		686,010		634,613
Income tax		106,886		148,915		144,705

Income before cumulative effect of accounting change		357,676		537,095		489,908
Cumulative effect of accounting change, net of tax		—		3,607		—

Net Income	$	357,676	$	540,702	$	489,908

Net Income Applicable to Common Stock	$	345,763	$	528,789	$	477,995

Basic Earnings per Common Share (EPS) Before Cumulative Effect of Accounting Change	$	1.24	$	1.97	$	1.79

Diluted EPS Before Cumulative Effect of Accounting Change	$	1.24	$	1.96	$	1.79

Basic EPS After Cumulative Effect of Accounting Change	$	1.24	$	1.98	$	1.79

Diluted EPS After Cumulative Effect of Accounting Change	$	1.24	$	1.97	$	1.79

Dividends Declared per Common Share	$	0.64	$	0.64	$	0.62

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

Consolidated Statements of Cash
Flows


	Year ended December 31,
(In thousands)	2006			2005			2004

Cash Flows from Operating Activities:
Net income	$	357,676		$	540,702		$	489,908
Less: Cumulative effect of accounting change, net of tax		—			3,607			—
Less: Impact of change in fiscal period of certain subsidiaries, net of tax		(6,129	)		—			—

Net income before cumulative effect of accounting change and change in fiscal period		363,805			537,095			489,908

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		84,388			81,947			74,270
Provision for loan losses		287,760			195,272			178,657
Amortization of intangibles and goodwill impairment losses		26,616			9,579			7,844
Impairment losses on long-lived assets		7,232			—			—
Amortization of servicing assets		62,819			25,766			14,773
Net gain on sale and valuation adjustment of investment securities		(4,359	)		(52,113	)		(15,254	)
Net gain on disposition of premises and equipment		(25,929	)		(29,079	)		(15,804	)
Net gain on sale of loans		(117,421	)		(83,297	)		(44,168	)
Net amortization of premiums and accretion of discounts on investments		23,918			35,288			41,061
Net amortization of premiums and deferred loan origination fees and costs		130,091			127,235			118,087
Earnings from investments under the equity method		(12,270	)		(10,982	)		(8,271	)
Stock options expense		3,006			5,226			3,223
Net disbursements on loans held-for-sale		(6,580,246	)		(4,321,658	)		(686,230	)
Acquisitions of loans held-for-sale		(1,503,017	)		(733,536	)		(21,415	)
Proceeds from sale of loans held-for-sale		6,782,081			4,127,381			163,753
Net decrease (increase) in trading securities		1,368,975			1,160,980			(137,209	)
Net increase in accrued income receivable		(4,209	)		(30,808	)		(24,214	)
Net decrease (increase) in other assets		25,939			(177,918	)		(270,021	)
Net increase in interest payable		32,477			35,218			30,085
Deferred income taxes		(26,208	)		(3,679	)		(4,191	)
Net increase in postretirement benefit obligation		4,112			5,451			5,679
Net (decrease) increase in other liabilities		(83,544	)		20,431			100,638

Total adjustments		482,211			386,704			(488,707	)

Net cash provided by operating activities		846,016			923,799			1,201

Cash Flows from Investing Activities:
Net decrease (increase) in money market investments		381,421			160,061			(106,548	)
Purchases of investment securities:
Available-for-sale		(254,930	)		(4,243,162	)		(5,620,097	)
Held-to-maturity		(20,863,367	)		(33,579,802	)		(1,347,588	)
Other		(66,026	)		(77,716	)		(79,857	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,876,458			3,317,198			4,628,051
Held-to-maturity		20,925,847			33,787,268			1,085,175
Other		88,314			61,053			10,561
Proceeds from sales of investment securities available-for-sale		208,802			388,596			632,151
Net disbursements on loans		(1,587,326	)		(343,093	)		(1,282,802	)
Proceeds from sale of loans		938,862			297,805			555,071
Acquisition of loan portfolios		(448,708	)		(2,650,540	)		(3,672,093	)
Assets acquired, net of cash		(3,034	)		(411,782	)		(169,036	)
Acquisition of premises and equipment		(104,593	)		(159,166	)		(146,472	)
Proceeds from sale of premises and equipment		87,913			71,053			34,846
Proceeds from sale of foreclosed assets		138,703			117,159			126,953

Net cash provided by (used in) investing activities		1,318,336			(3,265,068	)		(5,351,685	)

Cash Flows from Financing Activities:
Net increase in deposits		1,789,662			1,371,668			1,330,903
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(3,053,167	)		2,227,888			577,612
Net increase (decrease) in other short-term borrowings		1,226,973			(766,277	)		1,103,515
Payments of notes payable		(3,469,429	)		(2,650,972	)		(2,463,462	)
Proceeds from issuance of notes payable		1,506,298			2,341,011			4,983,228
Dividends paid		(188,321	)		(182,751	)		(168,927	)
Proceeds from issuance of common stock		55,846			193,679			17,243
Treasury stock acquired		(367	)		(1,467	)		(1,259	)

Net cash (used in) provided by financing activities		(2,132,505	)		2,532,779			5,378,853

Cash effect of change in fiscal period and change in accounting principle		11,914			(1,572	)		-

Net increase in cash and due from banks		43,761			189,938			28,369
Cash and due from banks at beginning of period		906,397			716,459			688,090

Cash and due from banks at end of period	$	950,158		$	906,397		$	716,459

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

Consolidated Statements of Changes in Stockholders’ Equity


	Year ended December 31,
(In thousands except share information)	2006			2005			2004

Preferred Stock:
Balance at beginning and end of year	$	186,875		$	186,875		$	186,875

Common Stock:
Balance at beginning of year		1,736,443			1,680,096			837,566
Common stock issued under Dividend Reinvestment Plan		5,154			4,372			2,683
Issuance of common stock		11,312			51,688			—
Transfer from retained earnings resulting from stock split effected in the form of a dividend		—			—			839,266
Options exercised		237			287			581

Balance at end of year		1,753,146			1,736,443			1,680,096

Surplus:
Balance at beginning of year		452,398			278,840			314,638
Common stock issued under Dividend Reinvestment Plan		11,323			13,263			12,810
Issuance of common stock		28,281			129,219			—
Issuance cost of common stock		1,462			(5,636	)		—
Stock options expense on unexercised options, net of forfeitures		2,826			5,003			2,703
Options exercised		566			709			1,689
Transfer from (to) retained earnings		30,000			31,000			(53,000	)

Balance at end of year		526,856			452,398			278,840

Retained Earnings:
Balance at beginning of year		1,456,612			1,129,793			1,601,851
Net income		357,676			540,702			489,908
Cash dividends declared on common stock		(178,231	)		(170,970	)		(163,787	)
Cash dividends declared on preferred stock		(11,913	)		(11,913	)		(11,913	)
Transfer to common stock resulting from stock split		—			—			(839,266	)
Transfer (to) from surplus		(30,000	)		(31,000	)		53,000

Balance at end of year		1,594,144			1,456,612			1,129,793

Treasury Stock — At Cost:
Balance at beginning of year		(207,081	)		(206,437	)		(205,527	)
Purchase of common stock		(367	)		(1,467	)		(1,259	)
Reissuance of common stock		461			823			349

Balance at end of year		(206,987	)		(207,081	)		(206,437	)

Accumulated Other Comprehensive (Loss) Income:
Balance at beginning of year		(176,000	)		35,454			19,014
Other comprehensive (loss) income, net of tax		(17,877	)		(211,454	)		16,440
Adoption of SFAS No.158		(39,851	)		—			—

Balance at end of year		(233,728	)		(176,000	)		35,454

Total stockholders’ equity	$	3,620,306		$	3,449,247		$	3,104,621

Disclosure of changes in number of shares:


	Year ended December 31,
	2006			2005			2004

Preferred Stock:
Balance at beginning and end of year		7,475,000			7,475,000			7,475,000


Common Stock — Issued:
Balance at beginning of year		289,407,190			280,016,007			139,594,296
Issued under the Dividend Reinvestment Plan		858,905			728,705			447,138
Issuance of common stock		1,885,380			8,614,620			—
Stock split		—			—			139,877,770
Options exercised		39,449			47,858			96,803

Balance at end of year		292,190,924			289,407,190			280,016,007

Treasury stock		(13,449,377	)		(13,451,799	)		(13,433,904	)

Common Stock — Outstanding		278,741,547			275,955,391			266,582,103

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

Consolidated Statements of Comprehensive Income


	Year ended December 31,
(In thousands)	2006			2005			2004

Net income	$	357,676		$	540,702		$	489,908


Other comprehensive loss, before tax:
Foreign currency translation adjustment		(386	)		(785	)		(11,033	)
Minimum pension liability adjustment		(1,539	)		(2,354	)		—
Unrealized holding losses on securities available-for-sale arising during the period		(12,194	)		(222,604	)		40,985
Reclassification adjustment for gains included in net income		(4,359	)		(51,591	)		(12,738	)
Net loss on cash flow hedges		(1,573	)		(3,316	)		(4,604	)
Reclassification adjustment for losses included in net income		1,839			4,247			7,696
Cumulative effect of accounting change		—			(103	)		—
Reclassification adjustment for gains included in net income		—			(20	)		—

		(18,212	)		(276,526	)		20,306
Income tax benefit (expense)		335			65,072			(3,866	)
Total other comprehensive (loss) income, net of tax		(17,877	)		(211,454	)		16,440

Comprehensive income, net of tax	$	339,799		$	329,248		$	506,348

Disclosure of accumulated other comprehensive (loss) income:


	Year ended December 31,
(In thousands)	2006			2005			2004

Foreign currency translation adjustment		($36,701	)		($36,315	)		($35,530	)


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		—			—			—
Adoption of SFAS No.158		(69,260	)		—			—
Tax effect		27,034			—			—

Net of tax amount		(42,226	)		—			—


Unrealized (losses) gains on securities available-for-sale		(212,243	)		(195,690	)		78,505
Tax effect		57,146			57,297			(7,198	)

Net of tax amount		(155,097	)		(138,393	)		71,307


Unrealized gains (losses) on cash flow hedges		90			(176	)		(1,107	)
Tax effect		(37	)		77			418

Net of tax amount		53			(99	)		(689	)


Cumulative effect of accounting change, net of tax		243			243			366

Accumulated other comprehensive (loss) income		($233,728	)		($176,000	)	$	35,454

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

Notes to Consolidated Financial Statements


Note 1 -	Nature of operations and summary of significant accounting policies	10
Note 2 -	Restrictions on cash and due from banks and highly liquid securities	19
Note 3 -	Securities purchased under agreements to resell	20
Note 4 -	Investment securities available-for-sale	20
Note 5 -	Investment securities held-to-maturity	23
Note 6 -	Pledged assets	24
Note 7 -	Loans and allowance for loan losses	24
Note 8 -	Related party transactions	25
Note 9 -	Premises and equipment	26
Note 10 -	Goodwill and other intangible assets	26
Note 11 -	Deposits	27
Note 12 -	Federal funds purchased and assets sold under agreements to repurchase	28
Note 13 -	Other short-term borrowings	29
Note 14 -	Notes payable	30
Note 15 -	Unused lines of credit and other funding sources	30
Note 16 -	Trust preferred securities	31
Note 17 -	Earnings per common share	32
Note 18 -	Stockholders’ equity	32
Note 19 -	Regulatory capital requirements	33
Note 20 -	Servicing assets	34
Note 21 -	Retained interests on transfers of financial assets	35
Note 22 -	Employee benefits	37
Note 23 -	Stock-based compensation	42
Note 24 -	Rental expense and commitments	44
Note 25 -	Income tax	45
Note 26 -	Off-balance sheet activities and concentration of credit risk	46
Note 27 -	Disclosures about fair value of financial instruments	47
Note 28 -	Derivative instruments and hedging activities	48
Note 29 -	Supplemental disclosure on the consolidated statements of cash flows	52
Note 30 -	Segment reporting	52
Note 31 -	Contingent liabilities	55
Note 32 -	Guarantees	56
Note 33 -	Other service fees	56
Note 34 -	Subsequent events	57
Note 35 -	Popular, Inc. (Holding Company only) financial information	58
Note 36 -	Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities	59

Note 1 — Nature of Operations and Summary of Significant Accounting Policies:

The accounting and financial reporting policies of Popular, Inc. and its subsidiaries (the Corporation) conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. The following is a description of the most significant of these policies:

Nature of operations

The Corporation is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation 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 banking subsidiary, Banco Popular de Puerto Rico (BPPR), as well as auto and equipment leasing and financing, mortgage loans, consumer loans, investment banking and broker-dealer services, 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 through branches of Banco Popular North America (BPNA) in California, Texas, Illinois, New York, New Jersey and Florida. Popular Financial Holdings, Inc. (PFH) offers mortgage and personal loans, while E-LOAN, Inc. (E-LOAN) provides online consumer direct lending to obtain mortgage, auto loans and home equity lines of credit. The Corporation, through its financial transactions processing company, EVERTEC, Inc. (EVERTEC), continues to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion. Note 30 to the consolidated financial statements presents further information about the Corporation’s business segments.

Principles of consolidation

The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(R), “Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51” (“FIN No. 46(R)”), the Corporation also consolidates any variable interest entities (“VIEs”) for which it is the primary beneficiary and therefore will absorb the majority or the entity’s expected losses, receive a majority of the entity’s expected returns, or both. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of condition.

Unconsolidated investments, in which there is at least 20% ownership, are generally accounted for by the equity method, with earnings recorded in other operating income; those in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are received.

Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements in accordance with the provisions of FIN No. 46(R).

In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”), mainly to facilitate timely reporting. In 2005, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31st calendar period, primarily as part of a strategic plan to put in place an integrated corporate-wide financial system and to facilitate the consolidation process. The impact of this change in net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the quarter ended March 31, 2005, and corresponds to the financial results for the month of December 2004 of the non-banking subsidiaries which implemented the change in the first reporting period of 2005. In the first quarter of 2006, the Corporation completed the second phase of the two-year plan, and as such, the financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) were included in a separate line within operating expenses (before tax) in the consolidated statement of operations for the year ended December 31, 2006. The financial impact amounted to a loss of $9,741,000 (before tax). After tax, this change resulted in a net loss of $6,129,000. As of the end of the first quarter of 2006, all subsidiaries of the Corporation had aligned their year-end closings to December 31st, similar to the parent holding company. There are no unadjusted significant intervening events resulting from the difference in fiscal periods which management believes may materially affect the financial position or results of operations of the Corporation for the year ended December 31, 2006. Refer to Note 29 to the consolidated financial statements for a significant outstanding intercompany transaction that impacted the caption of other liabilities in the consolidated statement of condition at December 31, 2005.

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of

America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment securities

Investment securities are classified in four categories and accounted for as follows:

	•		Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held-to-maturity and reported at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred.

	•		Debt and equity securities classified as trading securities are reported at fair value, with unrealized gains and losses included in earnings.

	•		Debt and equity securities not classified as either securities held-to-maturity or trading securities, and which have a readily available fair value, are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income. The specific identification method is used to determine realized gains and losses on securities available-for-sale, which are included in net gain (loss) on sale and valuation adjustment of investment securities in the consolidated statements of income.

	•		Investments in equity or other securities that do not have readily available fair values are classified as other investment securities in the consolidated statements of condition. These securities are stated at the lower of cost or realizable value. The source of this value varies according to the nature of the investment, and is primarily obtained by the Corporation from valuation analyses prepared by third-parties or from information derived from financial statements available for the corresponding venture capital and mutual funds. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock, is included in this category. Their realizable value equals their cost.

The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on a method which approximates the interest method over the outstanding period of the related securities. The cost of securities sold is determined by specific identification. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale, held-to-maturity and other investment securities are determined using the specific identification method and are reported separately in the consolidated statements of income. Purchases and sales of securities are recognized on a trade-date basis.

Derivative financial instruments

The Corporation uses derivative financial instruments as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.

All derivatives are recognized on the statement of condition at fair value. When the Corporation enters into a derivative contract, the derivative instrument is designated as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded net of taxes in accumulated other comprehensive income and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts earnings. The ineffective portions of cash flow hedges are immediately recognized in current earnings. For free-standing derivative instruments, changes in the fair values are reported in current period earnings.

Prior to entering a hedge transaction, the Corporation formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in current period earnings.

Loans held-for-sale

Loans held-for-sale include residential mortgages, and to a lesser extent consumer and commercial loans. Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair value determined, generally in the aggregate, based on current

market prices for similar loans, outstanding investor commitments or discounted cash flow analyses using market assumptions. The cost basis also includes consideration of deferred origination fees and costs, which are recognized in earnings at the time of sale. The amount, by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income for the period in which the change occurs. At December 31, 2006 and 2005, the fair value of loans held-for-sale substantially exceeded their cost.

Loans

Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield.

Nonaccrual loans are those loans on which the accrual of interest is discontinued. When a loan is placed on nonaccrual status, any interest previously recognized and not collected is generally reversed from current earnings.

Recognition of interest income on commercial loans, construction loans, lease financing, conventional mortgage loans and closed-end consumer loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. Income is generally recognized on open-end (revolving credit) consumer loans until the loans are charged-off. Closed–end consumer loans and leases are charged-off when they are 120 days in arrears. In the case of the Corporation’s non-bank consumer and mortgage lending subsidiaries, however, closed-end consumer loans are charged-off when payments are 180 days delinquent. Open-end (revolving credit) consumer loans are charged-off when 180 days in arrears.

Lease financing

The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in SFAS No. 13, “Accounting for Leases,” as amended. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the loans as an adjustment to the interest yield.

Revenue for other leases is recognized as it becomes due under the terms of the agreement.

Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on such methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis. The Corporation considers a commercial loan to be impaired when the loan amounts to $250,000 or more and interest and / or principal is past due 90 days or more, or, when based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired commercial loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate; the observable market price of the loan; or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired commercial loans is part of the Corporation’s overall allowance for loan losses. Meanwhile, SFAS No. 5 provides for the recognition of a loss allowance for groups of homogeneous loans. Under SFAS No. 5, the allowance for loan losses calculation for the Corporation is based on historical net charge-off experience by loan type and legal entity.

Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is applied to principal.

Transfers and servicing of financial assets and extinguishment of liabilities

The transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of SFAS No. 125” sets forth the criteria that must be met for control over transferred assets to be considered to have

been surrendered, which includes, amongst others: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under SFAS No. 140, as sales, recognizing a deferred tax asset or liability on the transaction.

Where derecognition criteria are met and the transfer is accounted for as a sale, the Corporation recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Gains or losses on sale depend in part on the previous carrying amount of the loans involved in the transfer which is allocated between the loans sold and the retained interests, based on their relative fair value at the date of the sale.

The Corporation sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Corporation to repurchase individual delinquent loans that meet certain criteria. At the Corporation’s option, and without GNMA’s prior authorization, the Corporation may repurchase the delinquent loan for an amount equal to 100% of the remaining principal balance of the loan. Under SFAS No. 140, once the Corporation has the unconditional ability to repurchase the delinquent loan, the Corporation is deemed to have regained effective control over the loan and recognizes the loan on its balance sheet as well as an offsetting liability, regardless of the Corporation’s intent to repurchase the loan.

Servicing assets

Servicing assets represent the costs of acquiring the contractual right to service loans for others. Servicing assets are included as part of other assets in the consolidated statements of condition. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. The Corporation records mortgage servicing rights along with the corresponding loan discount on securitizations accounted for as secured borrowings.

The total cost of loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing assets), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. In addition, the Corporation assesses capitalized servicing assets for impairment based on the fair value of those assets.

To estimate the fair value of servicing assets, the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense, including discount rates, anticipated prepayment and credit loss rates. For purposes of evaluating and measuring impairment of capitalized servicing assets, the Corporation stratifies such assets based on predominant risk characteristics of underlying loans, such as loan type, investor type and term. The amount of impairment recognized, if any, is the amount by which the capitalized servicing assets per stratum exceed their estimated fair value. Temporary impairment is recognized through a valuation allowance with changes included in net income for the period in which the change occurs. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery in earnings. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized.

Servicing rights are also reviewed for other-than-temporary impairment. When the recoverability of an impaired servicing asset is determined to be remote, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the servicing rights, precluding subsequent recoveries.

Interest-only strips

The Corporation sells residential mortgage loans to qualifying special-purpose entities (QSPEs), which in turn issue asset-backed securities to investors. The Corporation retains an interest in the loans sold in the form of mortgage servicing rights and a residual or interest-only strip. The residual or interest-only strip represents the present value of future excess cash flows resulting from the difference between the interest received from the obligors on the loans and the interest paid to the investors on the asset-backed securities, net of credit losses, servicing fees and other expenses. The assets and liabilities of the QSPEs are not included in the Corporation’s consolidated statements of condition, except for the retained interests previously described. The interest-only strips related with securitizations performed prior to 2006 are classified as available-for-sale securities and are measured at fair value. The interest-only strips derived from securitizations performed in 2006 are accounted as trading securities and are also measured at fair

value. Fair value estimates of the interest-only securities are based on the present value of the expected cash flows of each residual interest. Factors considered in the valuation model for calculating the fair value of these subordinated interests include market discount rates, anticipated prepayment, delinquency and loss rates on the underlying assets. The interest-only strips are valued using forward yield curves for interest rate projections. The valuations are performed by a third-party with assumptions provided by the Corporation. The interest-only strips are subject to other-than-temporary impairment evaluations on a quarterly basis.

The Corporation recognizes the excess of cash flows related to the interest-only strips at the acquisition date over the initial investment (accretable yield) as interest income over the life of the residual using the effective yield method. The yield accreted becomes a component of the residuals basis. On a regular basis, estimated cash flows are updated based on revised fair value estimates of the residual, and as such accretable yields are recalculated to reflect the change in the underlying cash flow. Adjustments to the yield are accounted for prospectively as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the beneficial interest.

Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as realized or incurred, respectively.

The Corporation capitalizes interest cost incurred in the construction of significant real estate projects, which consist primarily of facilities for its own use or intended for lease. The amount of interest cost capitalized is to be an allocation of the interest cost incurred during the period required to substantially complete the asset. The interest rate for capitalization purposes is to be based on a weighted average rate on the Corporation’s outstanding borrowings, unless there is a specific new borrowing associated with the asset. Interest cost capitalized for the years ended December 31, 2004, 2005 and 2006 was not significant.

The Corporation has operating lease arrangements primarily associated with the rental of premises to support the branch network or for general office space. Certain of these arrangements are non-cancellable and provide for rent escalations and renewal options. Rent expense on non-cancelable operating leases with scheduled rent increases are recognized on a straight-line basis over the lease term.

Impairment on long-lived assets

The Corporation evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event of an asset retirement, the Corporation recognizes a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value of such liability can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

Other real estate

Other real estate, received in satisfaction of debt, is recorded at the lower of cost (carrying value of the loan) or the appraised value less estimated costs of disposal of the real estate acquired, by charging the allowance for loan losses. Subsequent to foreclosure, any losses in the carrying value arising from periodic reevaluations of the properties, and any gains or losses on the sale of these properties are credited or charged to expense in the period incurred and are included as a component of other operating expenses. The cost of maintaining and operating such properties is expensed as incurred.

Goodwill and other intangible assets

The Corporation accounts for goodwill and identifiable intangible assets under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not amortized, but is tested for impairment at least annually using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods: market price multiples of comparable companies and the dividend discount model, which is a specific approach of discounted cash flow analysis.

Other intangible assets deemed to have an indefinite life are not amortized, but are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset. In determining that an intangible asset has an

indefinite life, the Corporation considers expected cash inflows and legal, regulatory, contractual, competitive, economic and other factors, which could limit the intangible assets’s useful life.

Other identifiable intangible assets with a finite useful life, mainly core deposits, are amortized using various methods over the periods benefited, which range from 3 to 11 years. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

For further disclosures required by SFAS No. 142, refer to Note 10 to the consolidated financial statements.

Bank-Owned Life Insurance

Bank-owned life insurance represents life insurance on the lives of certain employees who have provided positive consent allowing the Corporation to be the beneficiary of the policy. Bank-owned life insurance policies are carried at their cash surrender value. The Corporation recognizes income from the periodic increases in the cash surrender value of the policy, as well as insurance proceeds received, which are recorded as other operating income, and are not subject to income taxes.

Assets sold/purchased under agreements to repurchase/resell

Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be subsequently reacquired or resold as specified in the respective agreements.

It is the Corporation’s policy to take possession of securities purchased under resell agreements. However, the counterparties to such agreements maintain effective control over such securities, and accordingly those are not reflected in the Corporation’s consolidated statements of condition. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral if deemed appropriate.

It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of condition.

Guarantees, including indirect guarantees of indebtedness of others

The Corporation, as a guarantor, recognizes at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Refer to Note 32 to the consolidated financial statements for further disclosures.

Treasury stock

Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the consolidated statements of condition. At the date of retirement or subsequent reissue, the treasury stock account is reduced by the cost of such stock. The difference between the consideration received upon issuance and the specific cost is charged or credited to surplus.

Income and expense recognition – Processing business

Revenue from information processing and other services is recognized at the time services are rendered. Rental and maintenance service revenue is recognized ratably over the corresponding contractual periods. Revenue from software and hardware sales and related costs is recognized at the time software and equipment is installed or delivered depending on the contractual terms. Revenue from contracts to create data processing centers and the related cost is recognized as project phases are completed and accepted. Operating expenses are recognized as incurred. Project expenses are deferred and recognized when the related income is earned. The Corporation applies Statement of Position (SOP) 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” as the guidance to determine what project expenses must be deferred until the related income is earned on certain long-term projects that involve the outsourcing of technological services.

Income Recognition – Insurance agency business

Commissions and fees are recognized when related policies are effective. Additional premiums and rate adjustments are recorded as they occur. Contingent commissions are recorded on the accrual basis when the amount to be received is notified by the insurance company. Commission income from advance business is deferred. An allowance is created for expected adjustments to commissions earned relating to policy cancellations.

Income Recognition – Investment banking revenues

Investment banking revenue is recorded as follows: underwriting fees at the time the underwriting is completed and income is reasonably determinable; corporate finance advisory fees as earned, according to the terms of the specific contracts and sales commissions on a trade-date basis.

Foreign exchange

Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive income (loss), except for highly inflationary environments in which the effects are included in other operating income.

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency.

The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency.

Since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. As of December 31, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 49.5%. The Corporation continues to remeasure the financial statements of those foreign entities until formal guidance is issued by the International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants concluding that the Dominican Republic would cease being regarded as highly inflationary.

During the year ended December 31, 2006, approximately $765,000 in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive (loss) income (2005 — $568,000; 2004 - $1,825,000). These net gains relate to improvement in the Dominican peso’s exchange rate to the U.S. dollar from $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, to $33.14 and $33.35 at the end of 2005 and 2006, respectively. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $31,787,000. Refer to the disclosure of accumulated comprehensive income included in the accompanying consolidated statements of comprehensive income (loss) for the outstanding balances of unfavorable foreign currency translation adjustments at December 31, 2006, 2005 and 2004.

Income taxes

The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.

Employees’ retirement and other postretirement benefit plans

Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year.

The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” . SFAS No. 158 requires, among other things, the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the statement of condition. The Corporation adopted SFAS No. 158 as of December 31, 2006. See Note 22 for disclosures on the impact of this accounting pronouncement.

Stock-based compensation

In 2002, the Corporation opted to use the fair value method of recording stock-based compensation as described in SFAS No. 123 “Accounting for Stock Based Compensation”. The Corporation adopted SFAS No. 123-R “Share-Based Payment” on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123-R. Accounting and reporting under SFAS No. 123-R is generally similar to the SFAS No. 123 approach

since fair value accounting has been used by the Corporation to recognize the stock-based compensation expense since 2002.

Refer to Note 23 for disclosures on the impact of the adoption of SFAS No. 123-R in 2006.

Comprehensive income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The presentation of comprehensive income is included in separate consolidated statements of comprehensive income.

Earnings per common share

Basic earnings per common share are computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares of the Corporation outstanding during the year. Diluted earnings per common share take into consideration the weighted average common shares adjusted for the effect of stock options and restricted stock, using the treasury stock method.

Statement of cash flows

For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks.

Reclassifications

Certain reclassifications have been made to the 2005 and 2004 consolidated financial statements to conform with the 2006 presentation.

Recently issued accounting pronouncements and interpretations

SFAS No. 153 “Exchanges of Nonmonetary Assets”

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 was effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows upon adoption in 2006.

SFAS No. 154 “Accounting Changes and Error Corrections”

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. SFAS No. 154 does not change the transition provisions of any existing accounting pronouncements. SFAS No. 154, effective in 2006, did not have a significant impact on the statement of condition or results of operations of the Corporation.

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

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

instrument that pertains to a beneficial interest other than another derivative financial instrument. The Corporation elected to adopt SFAS No. 155 commencing in January 2007. The adoption of SFAS No. 155 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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

SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The adoption of SFAS No. 156 is not expected to have a material impact on the Corporation’s consolidated financial statements.

SFAS No. 157 “Fair Value Measurements"

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation plans to adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its consolidated financial statements and disclosures.

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

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

FASB Staff Position (“FSP”) Interpretation No. 46 (R)-6, “Determining the Variability to Be Considered in Applying Interpretation No. 46 (R)” (FSP FIN 46 (R)-6)

In April 2006, the FASB issued FSP FIN No. 46 (R)-6, “Determining the Variability to Be Considered in Applying Interpretation No. 46 (R).” This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FIN No. 46 (R). The variability that is considered in applying FIN No. 46 (R) affects the determination of: (a) whether the entity is a variable interest entity, (b) which interests are variable interests in the entity, and (c) which party, if any, is the primary beneficiary of the VIE. FSP FIN No. 46 (R)-6 states that the design of the entity shall be considered in the determination of variable interests. The adoption of this standard during 2006 did not have a material impact on the consolidated financial statements of the Corporation.

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

In 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The accounting provisions of FIN 48 will be effective for the Corporation beginning in the first quarter of 2007. The Corporation is currently evaluating the effects of FIN 48, but based on the analysis performed at the time, management does not

anticipate that its adoption will have a material impact on the consolidated financial statements.

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)

In June 2006, the EITF reached a consensus on 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 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 provisions of EITF 06-03 will be effective for the Corporation in January 2007. The adoption of EITF 06-03 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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 to the policyholder in cash 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 consensus would be effective for fiscal years beginning after December 15, 2006. The guidance should be adopted with a cumulative effect adjustment to beginning retained earnings for all existing arrangements or retrospectively in accordance with SFAS No. 154. The Corporation is currently evaluating any impact that the adoption of Issue 06-5 may have on its statement of financial condition or results of operations as it relates to the bank-owned life insurance policy for which the Corporation is beneficiary. Management does not expect such impact to be material.

Staff Accounting Bulletin No. 108 — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108)

In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 expressing the SEC staff’s views regarding the process of quantifying financial statement misstatements and the build up of improper amounts on the balance sheet. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of SAB 108 in 2006 did not result in a material impact on the Corporation’s consolidated financial statements.

Note 2 — 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 $621,387,000 at December 31, 2006 (2005 — $583,678,000). 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 December 31, 2006, the Corporation had securities with a market value of $445,000 (2005 — $549,000) 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 December 31, 2006 and 2005, the Corporation maintained separately for its two international banking entities (IBEs), $600,000 in time deposits, equally split for the two IBEs, which were considered restricted assets.

The Corporation had restricted securities available-for-sale with a market value of $1,245,000 at December 31, 2006 to comply with certain requirements of the Insurance Code of Puerto Rico.

As part of a line of credit facility with a financial institution, at December 31, 2006, the Corporation maintained restricted cash of $1,860,000 (2005 — $2,350,000) as collateral for the line of credit. The cash is being held in certificates of deposits which

mature in less than 90 days. The line of credit is used to support letters of credit.

Note 3 — Securities purchased under agreements to resell:

The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities. The Corporation is permitted by contract to repledge the securities, and has agreed to resell to the counterparties the same or substantially similar securities at the maturity of the agreements.

The fair value of the collateral securities held by the Corporation on these transactions at December 31, was as follows:


(In thousands)	2006		2005

Repledged	$	179,303	$	528,662
Not repledged		103,124		61,952

Total	$	282,427	$	590,614

The repledged securities were used as underlying securities for repurchase agreement transactions.

Note 4 — Investment securities available-for-sale:

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2006 and 2005 (2004 — only market value is presented) were as follows:


2006
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average
	cost		gains		losses		value		yield
	(Dollars in thousands)
U.S. Treasury securities
After 1 to 5 years	$	29,343		—	$	271	$	29,072		3.99	%
After 5 to 10 years		475,310		—		29,547		445,763		3.82

		504,653		—		29,818		474,835		3.83

Obligations of U.S. government sponsored entities
Within 1 year		902,898		—		5,711		897,187		3.63
After 1 to 5 years		2,234,285	$	57		43,896		2,190,446		4.03
After 5 to 10 years		3,393,190		—		96,794		3,296,396		4.45
After 10 years		72,879		—		1,123		71,756		5.93

		6,603,252		57		147,524		6,455,785		4.21

Obligations of P.R., States and political subdivisions
Within 1 year		6,695		18		10		6,703		5.44
After 1 to 5 years		19,688		105		179		19,614		5.32
After 5 to 10 years		18,227		20		164		18,083		5.10
After 10 years		73,604		122		3,184		70,542		5.04

		118,214		265		3,537		114,942		5.12

Collateralized mortgage obligations
After 1 to 5 years		10,040		—		105		9,935		5.75
After 5 to 10 years		134,487		343		1,890		132,940		5.01
After 10 years		1,513,086		4,561		15,196		1,502,451		5.34

		1,657,613		4,904		17,191		1,645,326		5.32

Mortgage-backed securities
After 1 to 5 years		150,884		54		3,661		147,277		4.37
After 5 to 10 years		74,668		46		2,288		72,426		4.43
After 10 years		836,298		1,358		20,543		817,113		5.35

		1,061,850		1,458		26,492		1,036,816		5.15

Equity securities (without contractual maturity)		70,954		6,692		3,901		73,745		1.85

Other
After 1 to 5 years		121		27		—		148
After 5 to 10 years		307		329		—		636
After 10 years		45,898		2,731		—		48,629

		46,326		3,087		—		49,413		14.06

	$	10,062,862	$	16,463	$	228,463	$	9,850,862		4.51	%


2005													2004
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average			Market
	cost		gains		losses		value		yield			value

	(Dollars in thousands)
U.S. Treasury securities
Within 1 year	$	14,982		—	$	190	$	14,792		3.01	%	$	39,644
After 1 to 5 years		29,230	$	14		136		29,108		4.16			14,953
After 10 years		484,166		—		23,741		460,425		3.82			469,388

		528,378		14		24,067		504,325		3.82			523,985

Obligations of U.S. government sponsored entities
Within 1 year		1,204,694		—		10,335		1,194,359		3.10			40,040
After 1 to 5 years		2,993,721		116		64,511		2,929,326		3.84			3,666,983
After 5 to 10 years		3,596,320		—		82,583		3,513,737		4.47			3,165,212
After 10 years		72,878		424		48		73,254		5.93			6,628

		7,867,613		540		157,477		7,710,676		4.04			6,878,863

Obligations of P.R., States and political subdivisions
Within 1 year		451		—		—		451		5.95			3,857
After 1 to 5 years		26,793		389		211		26,971		5.42			30,310
After 5 to 10 years		12,705		101		13		12,793		5.40			17,861
After 10 years		67,915		141		1,617		66,439		4.83			79,930

		107,864		631		1,841		106,654		5.05			131,958

Collateralized mortgage obligations
After 1 to 5 years		12,755		9		57		12,707		4.58			2,818
After 5 to 10 years		41,559		5		328		41,236		4.66			—
After 10 years		1,800,529		8,195		13,904		1,794,820		4.70			1,603,136

		1,854,843		8,209		14,289		1,848,763		4.70			1,605,954

Mortgage-backed securities
After 1 to 5 years		214,686		68		4,763		209,991		4.03			156,926
After 5 to 10 years		112,701		443		3,456		109,688		4.32			255,923
After 10 years		1,068,859		5,740		20,536		1,054,063		5.25			1,434,920

		1,396,246		6,251		28,755		1,373,742		4.99			1,847,769

Equity securities (without contractual maturity)		68,521		15,120		1,107		82,534		0.94			106,923

Other
Within 1 year		6,500		155		—		6,655		8.33			—
After 1 to 5 years		11,386		506		—		11,892		9.91			1,506
After 5 to 10 years		923		342		—		1,265		13.03			5,234
After 10 years		69,759		321		—		70,080		11.30			59,953

		88,568		1,324		—		89,892		10.92			66,693

	$	11,912,033	$	32,089	$	227,536	$	11,716,586		4.28	%	$	11,162,145

The weighted average yield on investment securities available-for-sale is based on amortized cost, therefore it does not give effect to changes in fair value.

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The “Other” category in 2006 is composed substantially of interest-only strips derived from off-balance sheet mortgage loan securitizations by PFH.

The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 2006, by contractual maturity are shown below:


(In thousands)	Amortized cost		Market value

Within 1 year	$	909,593	$	903,890
After 1 to 5 years		2,444,361		2,396,492
After 5 to 10 years		4,096,189		3,966,244
After 10 years		2,541,765		2,510,491

Total	$	9,991,908	$	9,777,117
Equity securities		70,954		73,745

Total investment securities available-for-sale	$	10,062,862	$	9,850,862

Proceeds from the sale of investment securities available-for-sale during 2006 were $208,802,000 (2005 -$388,596,000; 2004 - $632,151,000). Gross realized gains and losses on these securities during 2006 were $22,924,000 and $691,000, respectively (2005 — $68,946,000 and $1,529,000; 2004 -$15,497,000 and $243,000).

The following table shows the Corporation’s gross unrealized losses and fair 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 December 31, 2006 and 2005:



December 31, 2006
	Less than 12 months
	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
	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
	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



December 31, 2005
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	9,854	$	136	$	9,718
Obligations of U.S. government sponsored entities		4,401,412		69,250		4,332,162
Obligations of Puerto Rico, States and political subdivisions		18,070		33		18,037
Collateralized mortgage obligations		672,546		6,394		666,152
Mortgage-backed securities		486,266		9,406		476,860
Equity securities		22,168		915		21,253

	$	5,610,316	$	86,134	$	5,524,182


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

U.S. Treasury securities	$	499,148	$	23,931	$	475,217
Obligations of U.S. government sponsored entities		3,379,970		88,227		3,291,743
Obligations of Puerto Rico, States and political subdivisions		54,680		1,808		52,872
Collateralized mortgage obligations		238,254		7,895		230,359
Mortgage-backed securities		672,428		19,349		653,079
Equity securities		3,837		192		3,645

	$	4,848,317	$	141,402	$	4,706,915


			Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	509,002	$	24,067	$	484,935
Obligations of U.S. government sponsored entities		7,781,382		157,477		7,623,905
Obligations of Puerto Rico, States and political subdivisions		72,750		1,841		70,909
Collateralized mortgage obligations		910,800		14,289		896,511
Mortgage-backed securities		1,158,694		28,755		1,129,939
Equity securities		26,005		1,107		24,898

	$	10,458,633	$	227,536	$	10,231,097

At December 31, 2006, “Obligations of Puerto Rico, States and political subdivisions” include approximately $58 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”). The rating on these bonds was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, one notch below investment grade. At that time, Moody’s commented that this action reflected the Government’s strained financial condition, the ongoing political conflict and the lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. In July 2006, this credit rating agency maintained the credit rating, but removed the Puerto Rico Government obligations from its watch list for further downgrades as the Government of Puerto Rico approved the 2007 fiscal year budget and established a new sales tax. A percentage of this sales tax is designated to be used as a revenue source to repay Puerto Rico Government Obligations. Future rating stability will be subject to the Government’s actions to reduce operating expenditures, improve managerial and budgetary controls, and eliminate its reliance on loans from the Government Development Bank for Puerto Rico, the Commonwealth’s fiscal agent, to cover operating deficits. Standard & Poor’s (S&P), another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of December 31, 2006, the Appropriation Bonds indicated above represented approximately $3.0 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 and evaluates 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.

During the year ended December 31, 2006, the Corporation recognized through earnings approximately $17,873,000 in losses in the investment securities available-for-sale portfolio that management considered to be other-than-temporarily impaired. These realized losses were associated with interest-only strips and equity securities.

The unrealized loss positions of available-for-sale securities at December 31, 2006 are primarily associated with U.S. Government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency-issued collateralized mortgage obligations, and mortgage-backed securities. 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 the available-for-sale portfolio at December 31, 2006 are temporary and are substantially related to market interest rate fluctuations and not to 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.

The following table states the name of issuers, and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.


	2006				2005
	Amortized		Market		Amortized		Market
(In thousands)	cost		Value		cost		Value

FNMA	$	1,539,651	$	1,517,525	$	1,790,840	$	1,776,604
FHLB		6,230,841		6,086,885		7,480,188		7,327,736
Freddie Mac		1,149,185		1,134,853		1,244,044		1,228,566

Note 5 — Investment securities held-to-maturity:

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2006 and 2005 (2004 — only amortized cost is presented) were as follows:


	2006
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average
	cost		gains		losses		value		yield
	(Dollars in thousands)
Obligations of U.S. government sponsored entities
Within 1 year	$	3,017		—		—	$	3,017		5.19	%

Obligations of P.R., States and political subdivisions
Within 1 year		1,360		—		—		1,360		4.94
After 1 to 5 years		7,002	$	28	$	53		6,977		5.47
After 5 to 10 years		10,515		213		3		10,725		5.93
After 10 years		53,275		1,318		105		54,488		6.06

		72,152		1,559		161		73,550		5.96

Collateralized mortgage obligations
After 10 years		381		—		21		360		5.45

Other
Within 1 year		6,570		16		—		6,586		5.52
After 1 to 5 years		9,220		44		13		9,251		5.65

		15,790		60		13		15,837		5.59

	$	91,340	$	1,619	$	195	$	92,764		5.87	%


					2005							2004
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average			Amortized
	cost		gains		losses		value		yield			cost
	(Dollars in thousands)
Obligations of U.S. government sponsored entities
Within 1 year	$	42,011		—	$	25	$	41,986		3.99	%	$	176,954

Obligations of P.R., States and political subdivisions
Within 1 year		5,270	$	2		—		5,272		2.75			42,005
After 1 to 5 years		6,918		60		22		6,956		5.63			6,688
After 5 to 10 years		9,870		400		4		10,266		5.83			9,265
After 10 years		56,190		2,383		108		58,465		4.97			58,920

		78,248		2,845		134		80,959		4.99			116,878

Collateralized mortgage obligations
After 10 years		497		—		27		470		5.45			623

Other
Within 1 year		29,928		308		10		30,226		5.53			17,337
After 1 to 5 years		1,420		7		—		1,427		4.52			28,558
After 5 to 10 years		1,000		—		—		1,000		4.15			500

		32,348		315		10		32,653		5.45			46,395

	$	153,104	$	3,160	$	196	$	156,068		4.81	%	$	340,850

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 2006, by contractual maturity are shown below:


(In thousands)	Amortized cost		Market value

Within 1 year	$	10,947	$	10,963
After 1 to 5 years		16,222		16,228
After 5 to 10 years		10,515		10,725
After 10 years		53,656		54,848

Total investment securities held-to-maturity	$	91,340	$	92,764

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 December 31, 2006 and 2005:


December 31, 2006
	12 months or more and Total
	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
Other		1,250		13		1,237

	$	28,254	$	195	$	28,059


December 31, 2005
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. government sponsored entities	$	42,011	$	25	$	41,986
Obligations of Puerto Rico, States and political subdivisions		3,605		20		3,585
Other		1,000		10		990

	$	46,616	$	55	$	46,561


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

Obligations of Puerto Rico, States and political subdivisions	$	22,533	$	114	$	22,419
Collateralized mortgage obligations		497		27		470
Other		250		—		250

	$	23,280	$	141	$	23,139


			Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. government sponsored entities	$	42,011	$	25	$	41,986
Obligations of Puerto Rico, States and political subdivisions		26,138		134		26,004
Collateralized mortgage obligations		497		27		470
Other		1,250		10		1,240

	$	69,896	$	196	$	69,700

Management believes that the unrealized losses in the held-to-maturity portfolio at December 31, 2006 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments until maturity.

Note 6 — Pledged assets:

At December 31, 2006 and 2005, 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 pledged assets, which the secured parties are not permitted to sell or repledge the collateral at December 31, were as follows:


(In thousands)	2006		2005

Investment securities available-for-sale	$	2,645,272	$	2,566,668
Investment securities held-to-maturity		658		953
Loans held-for-sale		332,058		30,584
Loans held-in-portfolio		10,260,198		12,049,850

	$	13,238,186	$	14,648,055

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

Note 7 — Loans and allowance for loan losses:

The composition of loans held-in-portfolio at December 31, was as follows:


(In thousands)	2006		2005

Loans secured by real estate:
Insured or guaranteed by the U.S. Government or its agencies	$	94,125	$	104,454
Guaranteed by the Commonwealth of Puerto Rico		125,600		130,996
Commercial loans secured by real estate		7,185,965		6,597,149
Residential conventional mortgages		10,739,777		11,508,315
Construction and land development		1,664,592		1,092,640
Consumer loans secured by real estate		701,934		681,738

		20,511,993		20,115,292
Depository institutions		11,267		10,297
Commercial, industrial and agricultural		4,741,862		4,602,645
Lease financing		1,410,728		1,493,184
Consumer for household, credit cards and other consumer expenditures		4,636,398		4,357,405
Obligations of states and political subdivisions		510,844		338,978
Other		502,272		390,838

	$	32,325,364	$	31,308,639

As of December 31, 2006, loans on which the accrual of interest income had been discontinued amounted to $717,588,000 (2005 — $547,509,000; 2004 — $554,017,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $58,223,000 (2005 — $46,198,000; 2004 — $45,089,000). Non-accruing loans as of December 31,

2006 include $48,074,000 (2005 — $39,316,000; 2004 —$32,010,000) in consumer loans.

The commercial loans that were considered impaired at December 31, and the related disclosures follow:


	December 31,
(In thousands)	2006		2005

Impaired loans with a related allowance	$	125,728	$	69,617
Impaired loans that do not require allowance		82,462		46,236

Total impaired loans	$	208,190	$	115,853

Allowance for impaired loans	$	36,998	$	20,359

Average balance of impaired loans during the year	$	156,951	$	133,985

Interest income recognized on impaired loans during the year	$	3,858	$	5,113

The changes in the allowance for loan losses for the year ended December 31, were as follows:


(In thousands)	2006			2005			2004

Balance at beginning of year	$	461,707		$	437,081		$	408,542
Net allowances acquired		—			6,291			27,185
Provision for loan losses		287,760			195,272			178,657
Impact of change in reporting period		2,510			1,586			—
Recoveries		59,775			62,926			61,178
Loans charged-off		(289,520	)		(241,449	)		(238,481	)

Balance at end of year	$	522,232		$	461,707		$	437,081

The components of the net financing leases receivable at December 31, were:


(In thousands)	2006		2005

Total minimum lease payments	$	1,168,685	$	1,255,128
Estimated residual value of leased property		237,235		234,281
Deferred origination costs, net of fees		4,808		3,775
Less — Unearned financing income		184,238		185,093

Net minimum lease payments		1,226,490		1,308,091
Less — Allowance for loan losses		24,842		27,617

	$	1,201,648	$	1,280,474

At December 31, 2006, future minimum lease payments are expected to be received as follows:


(In thousands)

2007	$	355,636
2008		292,141
2009		224,242
2010		162,373
2011 and thereafter		134,293

	$	1,168,685

Note 8 — Related party transactions:

The Corporation grants loans to its directors, executive officers and certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:


	Executive
(In thousands)	Officers			Directors			Total

Balance at December 31, 2004	$	6,019		$	86,097		$	92,116
New loans		1,377			18,964			20,341
Payments		(3,390	)		(40,238	)		(43,628	)
Other changes		1,257			(35,384	)		(34,127	)

Balance at December 31, 2005	$	5,263		$	29,439		$	34,702
New loans		2,084			26,705			28,789
Payments		(1,535	)		(23,903	)		(25,438	)
Other changes		(1,851	)		(7,138	)		(8,989	)

Balance at December 31, 2006	$	3,961		$	25,103		$	29,064

The amounts reported as “other changes” include changes in the status of those who are considered related parties.

Management believes these loans have been consummated on terms no more favorable than those that would have been obtained if the transactions had been with unrelated parties and do not involve more than the normal risk of collectibility.

At December 31, 2006, the Corporation’s banking subsidiaries held deposits from related parties amounting to $32,760,000 (2005 — $45,902,000).

From time to time the Corporation, in the ordinary course of its business, obtains services from related parties or makes contributions to non-profit organizations that have some association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties.

During 2006, the Corporation engaged, in the ordinary course of business, the legal services of certain law firms in Puerto Rico, in which the Secretary of the Board of Directors of Popular, Inc. and immediate family members of an executive officer of the Corporation acted as Senior Counsel or as partners. The fees paid to these law firms for fiscal year 2006 amounted to approximately $1,622,000 (2005 — $2,130,000). These fees included $93,000 (2005 — $364,000) paid by the Corporation’s clients in connection with commercial loan transactions and $23,000 (2005 — $71,000) paid by mutual funds managed by the Bank.

During 2006, the Corporation paid to an insurance broker who is considered a related party approximately $1,642,000 in commissions for the institutional insurance business of the Corporation and its subsidiaries (2005 — $1,661,000).

During 2006, the Corporation made payments of approximately $1,163,000 under construction contracts granted to a special partnership whose officer and partner is considered a related party (2005 — $14,153,000). These contracts were granted on the basis

of competitive bids or approved by the Audit Committee as required by the Corporation’s policy.

For the year ended December 31, 2006, the Corporation made contributions of approximately $2,508,000 to non-profit organizations, principally Banco Popular Foundations dedicated to philanthropic work (2005 — $1,694,000).

Note 9 — Premises and equipment:

Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:


	Useful life
(In thousands)	in years		2006		2005

Land			$	84,753	$	83,514

Buildings		10-40		397,863		361,927
Equipment		3-10		586,001		615,168
Leasehold improvements		2-10		111,794		102,254

				1,095,658		1,079,349
Less — Accumulated depreciation and amortization				610,267		615,066

				485,391		464,283

Construction in progress				24,996		48,774

			$	595,140	$	596,571

Depreciation and amortization of premises and equipment for the year 2006 was $84,388,000 (2005 — $81,947,000; 2004 — $74,270,000) of which $26,398,000 (2005 — $23,979,000; 2004 —$21,224,000) was charged to occupancy expense and $57,990,000 (2005 — $57,968,000; 2004 — $53,046,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $28,374,000 (2005 — $23,100,000; 2004 — $19,396,000).

Note 10 — Goodwill and other intangible assets:

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005, allocated by reportable segment were as follows (refer to Note 30 for a discussion of the changes in the Corporation’s reportable segments):


	2006
	Balance at				Purchase					Balance at
	January 1,		Goodwill		accounting					December 31,
(In thousands)	2006		acquired		adjustments		Other			2006

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—		—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—		—			34,999
P.R. Other Financial Services		4,110		—	$	281		—			4,391
Popular North America:
Banco Popular North America		542,834		—		26,023		($ 210	)		568,647
Popular Financial Holdings		14,236		—		3		(14,239	)		—
EVERTEC		43,131	$	1,511		500		—			45,142

Total Popular, Inc.	$	653,984	$	1,511	$	26,807		($14,449	)	$	667,853


	2005
	Balance at				Purchase						Balance at
	January 1,		Goodwill		accounting						December 31,
(In thousands)	2005		acquired		adjustments			Other			2005

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—			—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—			—			34,999
P.R. Other Financial Services		3,322	$	507	$	281			—			4,110
Popular North America:
Banco Popular North America		309,709		252,003		(2,926	)		($15,952	)		542,834
Popular Financial Holdings		9,514		4,722		—			—			14,236
EVERTEC		39,090		3,779		262			—			43,131

Total Popular, Inc.	$	411,308	$	261,011		($2,383	)		($15,952	)	$	653,984

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.

In 2006, the amount included in the “other” category was related mostly to goodwill impairment losses of $14,239,000 in PFH. These losses were associated with the updated goodwill impairment evaluation during the fourth quarter of 2006 due to the exited operations at PFH as part of the 2007 Restructuring and Integration Plan. Refer to Note 34 for information on this plan. Banco Popular North America also includes an amount in the “other” category related to the sale of the remaining retail outlets of Popular Cash Express (PCE) to PLS Financial during the first quarter of 2006. The purchase accounting adjustments for 2006 at Banco Popular North America were mostly related to E-LOAN’s acquisition.

The increase in goodwill for Banco Popular North America during 2005 was mostly related to the acquisitions of Kislak Financial Corporation (Kislak) and E-LOAN. The amount included in the “other” category for Banco Popular North America during 2005 was related to the partial sale of PCE operations to ACE Cash Express, Inc.

At December 31, 2006, other than goodwill, the Corporation had $64,555,000 of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (2005 —$58,919,000; 2004 — $65,000).

Except for PFH’s goodwill impairment taken in 2006, the Corporation determined that there were no impairment losses to be recognized in 2004, 2005 and 2006 related to goodwill and other intangible assets with indefinite lives.

The following table reflects the components of other intangible assets subject to amortization at December 31:


	2006				2005
	Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization

Core deposits	$	76,708	$	48,367	$	76,956	$	40,848
Other customer relationships		11,156		2,171		8,175		507
Other intangibles		9,099		3,426		9,320		1,807

Total	$	96,963	$	53,964	$	94,451	$	43,162

During the year ended December 31, 2006, the Corporation recognized $12,377,000 in amortization expense related to other intangible assets with definite lives (2005 — $9,579,000; 2004 -$7,844,000). Also, in December 2006, the Corporation recorded an impairment loss of $654,000 associated with the write-off of a customer relationship intangible asset at PFH due to the exited operations previously mentioned. This amount is included in the caption of impairment losses on long-lived assets in the consolidated statement of income.

The following table presents the estimated aggregate amortization expense of the intangible assets with definite lives that the Corporation has at December 31, 2006, for each of the next five years:


(In thousands)

2007	$	10,266
2008		8,455
2009		6,633
2010		5,677
2011		4,004

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

Note 11 — Deposits:

Total interest bearing deposits at December 31, consisted of:


(In thousands)	2006		2005

Savings accounts	$	5,811,192	$	5,617,445
NOW, money market and other interest bearing demand		4,078,255		3,640,182

		9,889,447		9,257,627

Certificates of deposit:
Under $100,000		5,034,030		4,440,546
$100,000 and over		5,292,721		4,981,440

		10,326,751		9,421,986

	$	20,216,198	$	18,679,613

A summary of certificates of deposit by maturity at December 31, 2006, follows:


(In thousands)

2007	$	7,471,633
2008		1,314,779
2009		651,972
2010		500,006
2011		248,361
2012 and thereafter		140,000

	$	10,326,751

At December 31, 2006, the Corporation had brokered certificates of deposit amounting to $865,685,000 (2005 —$1,166,317,000).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $135,764,000 as of December 31, 2006 (2005 — $118,834,000).

Note 12 — Federal funds purchased and assets sold under agreements to repurchase:

The following table summarizes certain information on federal funds purchased and assets sold under agreements to repurchase at December 31:


( Dollars in thousands)	2006			2005			2004

Federal funds purchased	$	1,276,818		$	1,500,575		$	619,792
Assets sold under agreements to repurchase		4,485,627			7,201,886			5,817,061

Total amount outstanding	$	5,762,445		$	8,702,461		$	6,436,853

Maximum aggregate balance outstanding at any month-end	$	8,963,244		$	8,883,733		$	7,315,058

Average monthly aggregate balance outstanding	$	7,290,853		$	7,430,174		$	6,309,117

Weighted average interest rate:
For the year		5.27	%		3.61	%		2.07	%
At December 31		5.12			4.22			2.57

The following table presents the liability associated with the repurchase transactions (including accrued interest), their maturities and weighted average interest rates. Also, it includes the carrying value and approximate market value of the collateral (including accrued interest) as of December 31, 2006 and 2005. The information excludes repurchase agreement transactions which were collateralized with securities or other assets held for trading purposes or which have been obtained under agreements to resell:


2006
							Weighted
	Repurchase		Carrying value		Market value		average
	liability		of collateral		of collateral		interest rate
	(Dollars in thousands)
U.S. Treasury securities
Within 30 days	$	182,721	$	179,717	$	179,717		5.21	%
After 30 to 90 days		245,169		239,623		239,623		5.22

		427,890		419,340		419,340		5.21

Obligations of other U.S. Government agencies and corporations
Overnight		310,970		316,302		316,302		5.28
Within 30 days		824,313		834,329		834,329		5.30
After 30 to 90 days		704,362		715,041		715,041		5.26
After 90 days		383,639		421,510		421,510		4.50

		2,223,284		2,287,182		2,287,182		5.15

Mortgage — backed securities
Overnight		45,319		51,601		51,601		3.16
Within 30 days		31,903		34,449		34,449		5.32
After 30 to 90 days		50,045		44,699		44,699		2.32
After 90 days		465,447		435,756		435,756		4.22

		592,714		566,505		566,505		4.03

Collateralized mortgage obligations
Overnight		53,201		61,755		61,755		3.16
Within 30 days		281,146		288,715		288,715		5.33
After 90 days		232,083		244,418		244,418		4.66

		566,430		594,888		594,888		4.85

Loans
Overnight		110,087		183,038		183,038		5.90
Within 30 days		147,513		150,724		150,724		5.80

		257,600		333,762		333,762		5.84

	$	4,067,918	$	4,201,677	$	4,201,677		4.99	%


2005
							Weighted
	Repurchase		Carrying value		Market value		average
	liability		of collateral		of collateral		interest rate
	(Dollars in thousands)
U.S. Treasury securities
Within 30 days	$	125,696	$	123,721	$	123,721		4.04	%
After 30 to 90 days		181,816		202,995		202,995		4.24
After 90 days		124,479		123,721		123,721		4.37

		431,991		450,437		450,437		4.22

Obligations of other U.S. Government agencies and corporations
Overnight		14,010		14,189		14,189		2.60
Within 30 days		1,204,169		1,235,501		1,235,501		4.17
After 30 to 90 days		1,614,994		1,657,756		1,657,756		4.29
After 90 days		1,381,450		1,449,828		1,449,828		3.65

		4,214,623		4,357,274		4,357,274		4.04

Mortgage — backed securities
Overnight		79,560		106,194		106,194		2.60
Within 30 days		193,569		200,008		200,008		4.28
After 30 to 90 days		159,419		158,440		158,440		4.98
After 90 days		338,162		364,265		364,265		3.30

		770,710		828,907		828,907		3.82

Collateralized mortgage obligations
Overnight		19,541		19,621		19,621		2.60
Within 30 days		121,400		128,197		128,197		4.39
After 30 to 90 days		76,191		78,581		78,581		4.38
After 90 days		416,142		427,878		427,878		4.24

		633,274		654,277		654,277		4.23

Loans
Overnight		85,389		88,145		88,145		4.79
Within 30 days		194,173		199,646		199,646		4.62

		279,562		287,791		287,791		4.67

	$	6,330,160	$	6,578,686	$	6,578,686		4.07	%

Note 13 — Other short-term borrowings:

Other short-term borrowings as of December 31, consisted of:


(Dollars in thousands)	2006		2005

Advances with FHLB paying interest monthly at fixed rates ranging from 5.39% to 5.40% (2005 - 4.16% to 4.50%)	$	230,000	$	475,000
Advances under credit facilities with other institutions at:
- fixed rates ranging from 5.38% to 5.65% (2005 - 3.77% to 4.40%)		386,000		282,734
- floating rates ranging from 0.45% to 0.75% (2005 - 0.75% to 2.00%) over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%; 2005 - 4.39%)		481,062		29,274
- a floating rate of 0.20% (2005 - 0.16%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2006 was 5.36%; 2005 - 4.54%)		10,000		20,000
Commercial paper at rates ranging from 4.80% to 5.44% (2005 - 3.50% to 4.42%)		193,383		419,423
Term funds purchased at:
- fixed rates ranging from 5.30% to 5.38% (2005 - 4.25% to 4.48%)		2,140,900		1,122,000
- floating rates ranging from 0.06% to 0.08% over the fed funds rate (Fed funds rate at December 31, 2006 was 5.38%; 2005 - 4.00%)		500,000		350,000
Others		92,780		1,830

	$	4,034,125	$	2,700,261

The weighted average interest rate of other short-term borrowings at December 31, 2006 was 5.36% (2005 — 4.31%; 2004 — 2.24%). The maximum aggregate balance outstanding at any month-end was approximately $4,034,125,000 (2005 -$3,370,943,000; 2004 — $3,139,639,000). The average aggregate balance outstanding during the year was approximately $3,386,308,000 (2005 — $2,897,243,000; 2004 -$2,472,925,000). The weighted average interest rate during the year was 3.99% (2005 — 2.89%; 2004 - 1.39%).

Note 15 presents additional information with respect to available credit facilities.

Note 14 — Notes payable:

Notes payable outstanding at December 31, consisted of the following:


(Dollars in thousands)	2006		2005

Advances with FHLB:
- maturing from 2007 through 2028 paying interest at fixed rates ranging from 2.44% to 6.98% (2005-3.53% to 3.96%)	$	289,881	$	906,623
- maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 4 basis points (3-month LIBOR rate at December 31, 2006 was 5.36%; 2005 - 4.54%)		6,000		7,250
- maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 2 basis points (1-month LIBOR rate at December 31, 2006 was 5.32%; 2005 - 4.39%)		5,000		5,000
- maturing in 2008 paying interest monthly at a floating rate of 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%; 2005 - 4.39%)		250,000		250,000
Advances under revolving lines of credit maturing in 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%; 2005 - 4.39%)		426,687		195,008
Advances under revolving lines of credit with maturities until 2008 paying interest quarterly at a floating rate of 0.35% over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2006 was 5.36%)		69,994		—
Term notes with maturities ranging from 2007 through 2010 paying interest semiannually at fixed rates ranging from 3.25% to 5.65% (2005 - 2.40% to 7.29%)		2,014,928		2,427,113
Term notes with maturities until 2009 paying interest quarterly at a floating rate of 0.35% to 0.40% (2005 - 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2006 was 5.36%; 2005 - 4.54%)		349,295		54,988
Term notes with maturities until 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%		3,100		3,100
Term notes with maturities until 2013 paying interest monthly at floating rates of 3.00% over the US treasury notes rate (US treasury notes rate at December 31, 2006 was 5.00%; 2005 - 4.40%)		10,428		12,783
Secured borrowings with maturities until 2015 paying interest monthly at fixed rates ranging from 3.52% to 7.12% (2005 - 2.83% to 7.12%)		2,695,916		3,241,677
Secured borrowings with maturities until 2015 paying interest monthly at rates ranging from 0.10% to 3.50% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%; 2005 - 4.39%)		1,708,650		1,905,953
Notes linked to the S&P500 Index maturing in 2008		36,112		33,703
Junior subordinated deferrable interest debentures with maturities ranging from 2027 through 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 16)		849,672		849,672
Other		21,583		707

	$	8,737,246	$	9,893,577

The aggregate amounts of maturities of notes payable at December 31, 2006 were as follows:


	Notes
Year	Payable
(In thousands)
2007	$	2,836,291
2008		2,557,622
2009		1,489,986
2010		517,479
2011		331,831
Later years		1,004,037

Total	$	8,737,246

Note 15 — Unused lines of credit and other funding sources:

At December 31, 2006, the Corporation had borrowing facilities available with the Federal Home Loan Banks (FHLB) whereby the Corporation could borrow up to approximately $897,269,000 based on the assets pledged with the FHLB at that date (2005 -$1,710,802,000). Refer to Notes 13 and 14 for the amounts of FHLB advances outstanding under these facilities at December 31, 2006 and 2005.

The FHLB advances are collateralized by investment securities and mortgage loans, do not have restrictive covenants and do not have callable features. The maximum borrowing potential with the FHLB is dependent on certain restrictive computations determined by the FHLB and which are dependent on the amount and type of assets available for collateral, among the principal factors. The available lines of credit with the FHLB included in this note are based on the assets pledged as collateral with the FHLB as of the end of the years presented. At December 31, 2006, the FHLB advances had no callable features (2005 — $25,000,000). Also, at December 31, 2006, there were $35,000,000 in putable advances with fixed rates ranging from 5.34% to 6.55% and maturities extending up to 2010 (2005 — $37,000,000). The FHLB has the option to convert the putable advances before maturity on any given conversion date to an adjustable rate advance of predetermined index for the remaining term to maturity, at the FHLB’s discretion.

At December 31, 2006, the Corporation maintained certain committed lines of credit with unaffiliated banks under formal agreements that provide for financing of auto, mortgage and consumer loans. The maximum committed amount available under these borrowing facilities approximated $1,810,000,000 at December 31, 2006 (2005 — $2,360,000,000). At December 31, 2006, $1,022,847,000 were outstanding under these facilities (2005 - $503,284,000), and were included in the statement of condition within the following categories: repurchase agreements (Note

12), advances under credit facilities with other institutions (Note 13) and advances under revolving lines of credit (Note 14). Borrowings under these facilities are collateralized by the related mortgage, consumer or auto loans being financed or their security interests. These committed lines of credit expire or have renewal dates in 2007. The interest rate charged on these borrowings is primarily based on LIBOR plus various percentage points. These credit facilities require compliance with certain financial and non-financial covenants. As of December 31, 2006, the Corporation was in breach of a profitability covenant and a tangible net worth covenant in two of the credit facilities with borrowings outstanding amounting to $169,663,000. The Corporation received written waivers for these covenant violations.

The Corporation has established a borrowing facility at the discount window of the Federal Reserve Bank of New York. At December 31, 2006, the borrowing capacity at the discount window approximated $2,935,472,000, which remained unused at December 31, 2006 (2005 - $2,600,480,000). The facility is a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under this line is dependent upon the balance of loans and securities pledged as collateral.

At December 31, 2006, the Corporation and its subsidiary Popular North America had obtained a committed credit facility from a syndicate of institutions (the lenders). Under this credit facility, which requires the payment of facility and utilization fees, the Corporation can request the lenders to extend credit in the form of revolving loans, in an aggregate principal amount at any time outstanding not in excess of $555,000,000 (2005 -$520,000,000). This facility can be used for general corporate purposes and also serves as a backup facility to the Corporation’s commercial paper program. The credit facility expires in October 2007. As of December 31, 2006 and 2005, the Corporation has not drawn any funds under this credit facility.

To provide further liquidity, at December 31, 2006 and 2005, BPPR had a $1,000,000,000 bank note program available for future issuance. Under this program BPPR has the requisite agreements in place to issue and sell its bank notes to institutional investors. At December 31, 2006 and 2005, the full amount was available for issuance.

In 2005, the SEC adopted amendments to its rules with respect to the registration, communications and offerings processes under the Securities Act of 1933. The rules, which became effective December 1, 2005, facilitate access to the capital markets by well-established public companies, modernize the existing restrictions on corporate communications during a securities offering and further integrate disclosure under the Securities Act of 1933 and the Securities Act of 1934. The amended rules provide the most flexibility to “well-known seasoned issues” (the seasoned issuers), including the option of automatic effectiveness upon filing of shelf registration statements and relief under the less restrictive communications rules. Seasoned issuers generally include those companies with a public float of common equity of at least $700,000,000 or those companies that have at least issued $1,000,000,000 in aggregate principal amount of non-convertible securities, other than common equity, in the last three years. Based on each of these criteria, Popular, Inc. met the eligibility requirements to qualify as a seasoned issuer as of December 31, 2006.

Note 16 — Trust preferred securities:

At December 31, 2006 and 2005, 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 FIN No. 46 (R).

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition. The Corporation also recorded in the caption of other investment securities in the consolidated statements of condition, the common securities issued by the issuer trusts. 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. The Corporation had 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.

Note 17 — Earnings per common share:

The following table sets forth the computation of earnings per common share (“EPS”), basic and diluted, for the years ended December 31:


(In thousands, except share information)	2006		2005		2004

Net income	$	357,676	$	540,702	$	489,908
Less: Preferred stock dividends		11,913		11,913		11,913


Net income applicable to common stock after cumulative effect of accounting change	$	345,763	$	528,789	$	477,995

Net income applicable to common stock before cumulative effect of accounting change	$	345,763	$	525,182	$	477,995


Average common shares outstanding		278,468,552		267,334,606		266,302,105
Average potential common shares		235,372		504,412		372,751

Average common shares outstanding - assuming dilution		278,703,924		267,839,018		266,674,856

Basic EPS before cumulative effect of accounting change	$	1.24	$	1.97	$	1.79

Diluted EPS before cumulative effect of accounting change	$	1.24	$	1.96	$	1.79

Basic EPS after cumulative effect of accounting change	$	1.24	$	1.98	$	1.79

Diluted EPS after cumulative effect of accounting change	$	1.24	$	1.97	$	1.79

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 year 2006 there were 718,533 weighted average antidilutive stock options outstanding (2005 - 547,030; 2004 - 908,802). All shares of restricted stock are treated as outstanding for purposes of the diluted EPS computation.

Note 18 — Stockholders’ equity:

Effective April 30, 2004, the Corporation’s Restated Certificate of Incorporation was amended to increase the number of authorized shares of common stock from 180,000,000 to 470,000,000 and the number of authorized shares of preferred stock from 10,000,000 to 30,000,000.

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 $216,326,000 in additional capital, of which $175,271,000 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 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.

During the year 2006, cash dividends of $0.64 (2005 - $0.64; 2004 - $0.62) per common share outstanding amounting to $178,231,000 (2005 - $170,970,000; 2004 - $163,787,000) were declared. In addition, dividends declared on preferred stock amounted to $11,913,000 (2005 - $11,913,000; 2004 -$11,913,000). Dividends payable to shareholders of common stock at December 31, 2006 was $44,614,000 (2005 - $42,791,000).

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 $346,192,000 at December 31, 2006 (2005 -$316,192,000). During 2006, $30,000,000 (2005 - $31,000,000) was transferred to the statutory reserve account. During 2004, $53,000,000 was transferred out from the statutory reserve account to retained earnings. The excess in the reserve that was transferred out resulted principally from the redemption of $300,000,000 of BPPR’s preferred stock that was wholly-owned by the Corporation and from a reduction in BPPR’s surplus resulting mostly from the reorganization of certain of the Corporation’s subsidiaries, including the transfer of the information processing and technology functions of BPPR to EVERTEC, Inc. At December 31, 2006, 2005 and 2004, BPPR was in compliance with the statutory reserve requirement.

Note 19 — Regulatory capital requirements:

The Corporation and its banking subsidiaries are subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Federal Reserve Bank and the other bank regulators have adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements. The regulations define well-capitalized levels of Tier I, total capital and Tier I leverage of 6%, 10% and 5%, respectively. Management has determined that as of December 31, 2006 and 2005, the Corporation exceeded all capital adequacy requirements to which it is subject.

At December 31, 2006 and 2005, BPPR, BPNA and Banco Popular, National Association (BP, N.A.) were well-capitalized under the regulatory framework for prompt corrective action, and there are no conditions or events since December 31, 2006 that management believes have changed the institutions’ category.

The adjustment to capital as a result of the adoption of SFAS No. 158 on December 31, 2006 did not impact the regulatory capital ratios of the Corporation or any of its banking subsidiaries. In December 2006, regulatory agencies announced an interim decision that SFAS No. 158 would not affect regulatory capital of banking organizations. This is the position taken by the Corporation until the agencies issue the final rules.

The Corporation’s risk-based capital and leverage ratios at December 31, were as follows:


						Capital adequacy minimum
	Actual					requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
			2006

Total Capital
(to Risk-Weighted Assets):
Corporation	$	4,169,451		11.86	%	$	2,811,418		8	%
BPPR		2,362,713		12.81			1,475,460		8
BPNA		1,032,555		11.04			748,329		8

Tier I Capital
(to Risk-Weighted Assets):
Corporation	$	3,727,860		10.61	%	$	1,405,709		4	%
BPPR		1,700,583		9.22			737,730		4
BPNA		944,506		10.10			374,165		4

Tier I Capital
(to Average Assets):
Corporation	$	3,727,860		8.05	%	$	1,389,915		3	%
							1,853,220		4
BPPR		1,700,583		6.90			739,850		3
							986,467		4
BPNA		944,506		7.91			358,115		3
							477,486		4


						Capital adequacy minimum
	Actual					requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
			2005

Total Capital
(to Risk-Weighted Assets):
Corporation	$	3,943,625		12.44	%	$	2,535,941		8	%
BPPR		2,249,379		13.59			1,324,318		8
BPNA		930,939		11.38			654,378		8

Tier I Capital
(to Risk-Weighted Assets):
Corporation	$	3,540,270		11.17	%	$	1,267,971		4	%
BPPR		1,610,978		9.73			662,159		4
BPNA		844,109		10.32			327,189		4

Tier I Capital
(to Average Assets):
Corporation	$	3,540,270		7.47	%	$	1,422,458		3	%
							1,896,610		4
BPPR		1,610,978		6.28			770,083		3
							1,026,778		4
BPNA		844,109		7.14			354,428		3
							472,571		4

The following table also presents the minimum amounts and ratios for the Corporation’s banks to be categorized as well-capitalized under prompt corrective action:


(Dollars in thousands)	2006					2005
	Amount		Ratio			Amount		Ratio

Total Capital
(to Risk-Weighted Assets):
BPPR	$	1,844,325		10	%	$	1,655,398		10	%
BPNA		935,412		10			817,973		10

Tier I Capital
(to Risk-Weighted Assets):
BPPR	$	1,106,595		6	%	$	993,239		6	%
BPNA		561,247		6			490,784		6

Tier I Capital
(to Average Assets):
BPPR	$	1,233,083		5	%	$	1,283,472		5	%
BPNA		596,858		5			590,713		5

Note 20 — Servicing assets:

The changes in servicing assets for the years ended December 31, were as follows:


(In thousands)	2006			2005			2004

Balance at beginning of year	$	142,440		$	58,103		$	58,572
Rights originated		65,411			105,064			9,984
Rights purchased		23,769			5,039			4,320
Amortization		(65,615	)		(25,766	)		(14,773	)

Balance at end of year		166,005			142,440			58,103
Less: Valuation allowance		1,006			951			920

Balance at end of year, net of valuation allowance	$	164,999		$	141,489		$	57,183

Included in the table above were $11,207,000 in rights originated and $2,796,000 in amortization corresponding to the activity for the month of December 2005 for PFH, which changed its fiscal year in the first quarter of 2006, as described in Note 1 to the consolidated financial statements.

Total loans serviced for others were $13,779,258,000 at December 31, 2006 (2005 - $9,531,713,000; 2004 - $6,695,297,000). The estimated fair value of capitalized servicing rights was $183,117,000 at December 31, 2006 (2005 - $157,827,000; 2004 - $63,705,000).

The activity in the valuation allowance for impairment of recognized servicing assets for the years ended December 31, was as follows:


(In thousands)	2006			2005			2004

Balance at beginning of year	$	951		$	920		$	1,780
Additions charged to operations		536			362			233
Reductions credited to operations		(481	)		(331	)		(1,093	)

Balance at end of year	$	1,006		$	951		$	920

Note 21 — Retained interests on transfers of financial assets:

During the years ended December 31, 2006 and 2005, the Corporation retained servicing responsibilities and other residual interests on various securitization transactions and whole loan sales of residential mortgage and commercial loans performed by various subsidiaries. Valuation methodologies used in determining the fair value of the retained interests, including servicing assets and interest-only strips (IOs), are disclosed in Note 1 to the consolidated financial statements.

Popular Financial Holdings

During 2006, the Corporation, through its consumer lending subsidiary PFH, retained mortgage servicing rights (MSRs) and IOs on mortgage loans securitizations.

During 2006, the Corporation conducted three off-balance sheet asset securitizations that involved the transfer of mortgage loans to qualifying special purpose entities (QSPE), which in turn transferred these assets and their titles to different trusts, thus isolating those loans from the Corporation’s assets. Approximately $1,024,633,000 in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH during 2006, with a gain on sale of approximately $18,849,000. As part of these transactions, the Corporation recognized MSRs of $18,542,000 and IOs of $36,927,000.

When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing (“on-balance sheet securitization”). The loans are included in Note 6 as pledged loans held-in-portfolio.

During 2006, the Corporation completed three on-balance sheet securitizations consisting of approximately $1,163,619,000 in adjustable and fixed-rate nonprime mortgage loans. As part of these transactions, the Corporation recognized MSRs of $16,521,000.

IOs retained as part of off-balance sheet securitizations of nonprime mortgage loans prior to 2006 had been classified as investment securities available-for-sale and are presented at fair value in the consolidated statements of condition. PFH’s IOs classified as available-for-sale as of December 31, 2006 amounted to $49,413,000.

Commencing in January 2006, the IOs derived from newly-issued PFH’s off-balance sheet securitizations are accounted as trading securities. As such, any valuation adjustment related to these particular IOs was recorded as part of trading account profit (loss) in the consolidated statements of income. IOs from PFH’s securitizations accounted for as trading securities amounted to $36,552,000 at December 31, 2006. The Corporation recognized trading losses on these IOs of $970,000 for the year ended December 31, 2006.

The Corporation reviews the IOs for potential impairment on a quarterly basis and records impairment in accordance with SFAS No. 115 and EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” During the year ended December 31, 2006, the Corporation recorded other-than-temporary impairment losses of $17,761,000 related to the IOs classified as available-for-sale (2005 — $14,922,000).

PFH receives average annual servicing fees based on a percentage of the outstanding loan balance. In 2006, those average fees were 0.50% for mortgage loans.

Key economic assumptions used in measuring the retained interests at the date of these off-balance sheet and on-balance sheet securitizations were:

MSRs

Fixed-rate

ARM

IOs

loans

Prepayment speed

28% (Fixed-rate loans)

28%

35%

35% (ARM loans)

Weighted average life of collateral (in years)

2.5 to 2.9 years

3.5 years

2.5 years

Expected credit losses (annual rate)

1.7% to 3.2%

—

Discount rate (annual rate)

15% - 17%

14% - 16%

ARM loans consist of loans which have a fixed rate during the first two, three or five years and change to a variable interest rate thereafter.

In connection with the securitizations accounted for as sales, PFH’s retained interests are subordinated to investors’ interests. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. The securitization related assets recorded in the statements of condition at year-end were as follows:


(In thousands)	2006		2005

IOs	$	85,965	$	61,578
MSRs		67,855		75,700
Servicing advances		13,214		34,942

At December 31, 2006, key economic assumptions used to estimate the fair value of IOs and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


				MSRs
				Fixed-rate			ARM
(Dollars in thousands)	IOs			loans			loans

Carrying amount of retained interests	$	85,965		$	38,017		$	29,838
Fair value of retained interests	$	85,965		$	37,815		$	32,212
Weighted average collateral life (in years)	3.2 years			3.1 years			2.1 years

Weighted average prepayment speed (annual rate)	28% (Fixed-rate loans)				28	%		35	%
	35% (ARM loans)
Impact on fair value of 10% adverse change		($5,543	)		$210			($149	)
Impact on fair value of 20% adverse change		($9,284	)		$234			($200	)

Weighted average discount rate (annual rate)		17	%		16	%		16	%
Impact on fair value of 10% adverse change		($4,172	)		($901	)		($542	)
Impact on fair value of 20% adverse change		($8,081	)		($1,761	)		($1,060	)

Expected credit losses (annual rate)	1.28% to 3.19%				—			—
Impact on fair value of 10% adverse change		($4,792	)		—			—
Impact on fair value of 20% adverse change		($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. Purchased MSRs are valued under the same framework and the valuations are based on substantially similar assumptions. Purchased and originated MSRs are stratified as fixed/arm and are evaluated for impairment in the aggregate by strata.

Certain cash flows received from and paid to securitization trusts for the years ended December 31, included:


(In thousands)	2006		2005

Servicing fees received	$	20,440	$	7,478
Servicing advances, net of repayments		25,990		11,705
Other cash flows received on retained interests		25,250		28,337

Banking subsidiaries

In addition, the Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans and loans guaranteed by the Small Business Administration (SBA). Also, servicing responsibilities are retained under pooling/selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the banking subsidiaries have fixed rates. Under these servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.

Gains of $42,672,000 and $48,155,000 were realized by the banking subsidiaries on the securitization transactions that met the sale criteria under SFAS No. 140 and the whole loan sales involving retained interests, which took place in 2006 and 2005, respectively.

The banking subsidiaries receive average annual servicing fees based on a percentage of the outstanding loan balance. In 2006, those weighted average fees were 0.27% for mortgage loans (2005 - 0.28%) and 1.10% for SBA loans (2005 — 1.2%).

Key economic assumptions used in measuring the servicing rights retained at the date of the securitizations and whole loan sales by the banking subsidiaries were:


	Residential
	Mortgage Loans						SBA Loans
	2006			2005			2006			2005

Prepayment speed		13.9	%		10.6	%		17.0	%		15.0	%
Weighted average life (in years)	10.4 years			11.1 years			3.3 years			3.6 years
Expected credit losses (annual rate)		—			—			—			—
Discount rate (annual rate)		10.2	%		10.0	%		13.0	%		13.0	%

At December 31, 2006, key economic assumptions used to estimate the fair value of servicing rights derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


	Residential
(Dollars in thousands)	Mortgage Loans			SBA Loans

Carrying amount of retained interests	$	62,784		$	4,860
Fair value of retained interests	$	73,332		$	7,705
Weighted average life (in years)	9.2 years			3.3 years
Weighted average prepayment speed (annual rate)		14.0	%		17.0	%
Impact on fair value of 10% adverse change		($1,868	)		($355	)
Impact on fair value of 20% adverse change		($4,151	)		($724	)
Weighted average discount rate (annual rate)		10.3	%		13.0	%
Impact on fair value of 10% adverse change		($2,142	)		($235	)
Impact on fair value of 20% adverse change		($4,200	)		($479	)

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

The expected credit losses for the residential mortgage loans securitized / sold are minimal. Also, no credit losses are anticipated on the retained servicing assets derived from the sale of SBA loans since the participation sold is substantially guaranteed by SBA.

The sensitivity analyses presented in the tables above for IOs and servicing rights of PFH and the banking subsidiaries 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.

Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation for the years ended December 31, 2006 and 2005, were as follows:


2006
	Total principal			Principal amount
	amount of loans,			60 days or more			Net credit
(In thousands)	net of unearned			past due			losses

Loans (owned and managed):
Commercial	$	14,599,245		$	186,257		$	38,322
Lease financing		1,226,490			35,083			13,883
Mortgage		10,667,139			927,036			67,478
Consumer		11,695,156			117,976			118,906
Less:
Loans securitized / sold		(5,451,091	)		(204,701	)		(8,844)
Loans held-for-sale		(719,922	)		—			—

Loans held-in-portfolio	$	32,017,017		$	1,061,651		$	229,745


2005
	Total principal			Principal amount
	amount of loans,			60 days or more			Net credit
(In thousands)	net of unearned			past due			losses

Loans (owned and managed):
Commercial	$	12,815,172		$	155,707		$	42,492
Lease financing		1,308,091			8,716			9,629
Mortgage		17,282,905			794,956			51,181
Consumer		4,771,778			86,992			78,965
Less:
Loans securitized / sold		(4,467,739	)		(222,050	)		(3,744	)
Loans held-for-sale		(699,181	)		—			—

Loans held-in-portfolio	$	31,011,026		$	824,321		$	178,523

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase, at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans. At December 31, 2006, the Corporation had recorded $24,822,000 in mortgage loans under this buy-back option program (2005 — $36,698,000).

Note 22 — Employee benefits:

Pension and benefit restoration plans

Certain employees of BPPR and BPNA are covered by noncontributory defined benefit pension plans. Pension benefits are based on age, years of credited service and final average compensation.

The Corporation’s funding policy is to make annual contributions to the plans in amounts which fully provide for all benefits as they become due under the plans.

The Corporation’s pension fund investment strategy is to invest in a prudent manner for the exclusive purpose of providing benefits to participants. A well defined internal structure has been established to develop and implement a risk-controlled investment strategy that is targeted to produce a total return that, when combined with the bank’s contributions to the fund, will maintain the funds’ ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income.

Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee, with the assistance of an external consultant, periodically reviews the performance of the pension

plans’ investments and assets allocation. The Trustee and the money managers are allowed to exercise investment discretion, subject to limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee.

The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place.

The plans’ weighted-average asset allocations at December 31, by asset category were as follows:


	2006			2005

Equity securities		67	%		69	%
Fixed income securities		31			29
Other		2			2

		100	%		100	%

The plans’ target allocation for 2006 and 2005, by asset category, approximated 70% in equity securities and 30% in debt securities.

At December 31, 2006, these plans included 2,745,720 shares (2005 — 2,745,720) of the Corporation’s common stock with a market value of approximately $49,286,000 (2005 -$58,072,000). Dividends paid on shares of the Corporation’s common stock held by the plan during 2006 amounted to $1,757,000 (2005 — $1,757,000). BPPR and BPNA also have supplementary pension and profit sharing plans for certain employees whose compensation exceeds the limits established by ERISA.

As indicated in Note 1, the Corporation adopted SFAS No. 158 as of December 31, 2006. Under SFAS No. 158 each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The initial impact of the standard due to unrecognized prior service costs or credits and net actuarial gains or losses as well as subsequent changes in the funded status is recognized as a component of accumulated comprehensive loss in stockholders’ equity. Additional minimum pension liabilities (AMPL) and related intangible assets are also derecognized upon adoption of the new standard. The following table summarizes the effect of required changes in the AMPL as of December 31, 2006 prior to the adoption of SFAS No. 158 as well as the impact of the initial adoption of SFAS No. 158.


Pension Plans:
	December 31,								December 31,
	2006 prior to								2006 Post
	AMPL and					SFAS			AMPL and
	SFAS No. 158			AMPL		No. 158			SFAS No. 158
(In thousands)	Adjustments			Adjustment		Adjustment			Adjustment

Prepaid pension costs	$	21,071			—		($21,071	)		—
Benefit liabilities		(4,595	)		—		(28,007	)		($32,602	)
Accumulated other comprehensive loss		—			—		49,078			49,078


Benefit Restoration Plans:
	December 31,								December 31,
	2006 prior to								2006 Post
	AMPL and					SFAS			AMPL and
	SFAS No. 158			AMPL		No. 158			SFAS No. 158
(In thousands)	Adjustments			Adjustment		Adjustment			Adjustment

Prepaid pension costs	$	2,057			—		($2,057	)		—
Benefit liabilities		(5,634	)		—		(6,507	)		($12,141	)
Accumulated other comprehensive loss		2,354		$	1,539		8,564			12,457

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (credit) during 2007 are as follows:


(In thousands)	Pension Plans		Benefit		Restoration Plans

Net prior service cost (credit)	$	207		—		($53	)
Net loss		—		—		992

The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31:


				Benefit
	Pension Plans			Restoration Plans			Total
(In thousands)				2006

Change in benefit obligation:
Benefit obligation at beginning of year	$	567,154		$	29,316		$	596,470
Service cost		12,509			1,047			13,556
Interest cost		30,558			1,601			32,159
Actuarial (gain) loss		(18,265	)		(983	)		(19,248	)
Benefits paid		(23,561	)		(300	)		(23,861	)
Transfer of obligation*		1,062			(1,062	)		—

Benefit obligations at end of year	$	569,457		$	29,619		$	599,076

Change in plan assets:
Fair value of plan assets at beginning of year	$	509,457		$	12,259		$	521,716
Actual return on plan assets		49,037			(20	)		49,017
Employer contributions		1,923			5,538			7,461
Benefits paid		(23,561	)		(300	)		(23,861	)

Fair value of plan assets at end of year	$	536,856		$	17,477		$	554,333

Amounts recognized in accumulated other comprehensive loss under SFAS No. 158:
Net prior service cost	$	1,340		($	412	)	$	928
Net loss		47,738			12,869			60,607

Accumulated other comprehensive loss	$	49,078		$	12,457		$	61,535

Reconciliation of (accrued) prepaid benefit cost:
Prepaid (accrued) benefit cost at beginning of year	$	20,485		($	3,228	)	$	17,257
Net periodic benefit cost		(5,289	)		(2,637	)		(7,926	)
Contributions		1,923			5,538			7,461
Amount recognized in accumulated other comprehensive loss		(49,078	)		(12,457	)		(61,535	)
Transfer of unrecognized amounts*		(643	)		643			—

Accrued benefit cost at end of year	($	32,602	)	($	12,141	)	($	44,743	)

Accumulated benefit obligation	$	504,976		$	20,801		$	525,777


*		Benefit obligations were transferred from the benefit restoration plans to the qualified retirement plan due to removal of the compensation limit “sunset provisions” under the Pension Protection Act of 2006. Pro-rata amounts of the unrecognized prior service costs and losses were also transferred.


				Benefit
	Pension Plans			Restoration Plans			Total
(In thousands)				2005

Change in benefit obligation:
Benefit obligation at beginning of year	$	528,123		$	21,880		$	550,003
Service cost		15,274			967			16,241
Interest cost		29,873			1,330			31,203
Curtailment		(6,739	)		138			(6,601	)
Actuarial loss		24,324			5,276			29,600
Benefits paid		(23,701	)		(275	)		(23,976	)

Benefit obligations at end of year	$	567,154		$	29,316		$	596,470

Change in plan assets:
Fair value of plan assets at beginning of year	$	519,709		$	9,636		$	529,345
Actual return on plan assets		13,132			274			13,406
Employer contributions		317			2,624			2,941
Benefits paid		(23,701	)		(275	)		(23,976	)

Fair value of plan assets at end of year	$	509,457		$	12,259		$	521,716

Unfunded status	($	57,697	)	($	17,057	)	($	74,754	)
Unrecognized net prior service cost (benefit)		1,531			(481	)		1,050
Unrecognized net actuarial loss		76,651			14,310			90,961

Prepaid (accrued) pension cost	$	20,485		($	3,228	)	$	17,257

Amount recognized in the statement of financial condition consists of:
Prepaid benefit cost	$	24,751			—		$	24,751
Accrued benefit liability		(4,266	)	($	5,582	)		(9,848	)
Accumulated other comprehensive income		—			2,354			2,354

Net amount recognized	$	20,485		($	3,228	)	$	17,257

Reconciliation of (accrued) prepaid benefit cost:
Prepaid (accrued) benefit cost at beginning of year	$	26,377		($	4,110	)	$	22,267
Net periodic benefit cost		(4,227	)		(2,080	)		(6,307	)
Additional benefit (cost) income		(1,982	)		338			(1,644	)
Contributions		317			2,624			2,941

Prepaid (accrued) benefit cost at end of year	$	20,485		($	3,228	)	$	17,257

Accumulated benefit obligation	$	494,013		$	17,627		$	511,640

Information for plans with an accumulated benefit obligation in excess of plan assets for the years ended December 31, follows:


					Benefit
	Pension Plans				Restoration Plans
(In thousands)	2006		2005		2006		2005

Projected benefit obligation	$	13,721	$	12,045	$	29,619	$	29,316
Accumulated benefit obligation		9,318		7,897		20,801		17,627
Fair value of plan assets		8,075		5,435		17,477		12,259

Information for plans with plan assets in excess of the accumulated benefit obligation for the years ended December 31, follows:


	Pension Plans
(In thousands)	2006		2005

Projected benefit obligation	$	555,736	$	555,109
Accumulated benefit obligation		495,658		486,116
Fair value of plan assets		528,781		504,022

The measurement dates of the assets and liabilities of all plans presented above for 2006 and 2005 were December 31, 2006 and December 31, 2005, respectively.

The actuarial assumptions used to determine benefit obligations for the years ended December 31, were as follows:


	2006			2005

Discount rate		5.75	%		5.50	%
Rate of compensation increase — weighted average		4.20	%		4.20	%

The actuarial assumptions used to determine the components of net periodic pension cost for the years ended December 31, were as follows:


											Benefit
	Pension Plans										Restoration Plans
	2006			2005			2004			2006			2005			2004

Discount rate		5.50	%		5.75	%		6.00	%		5.50	%		5.75	%		6.00	%
Expected return on plan assets		8.00	%		8.00	%		8.00	%		8.00	%		8.00	%		8.00	%
Rate of compensation increase — weighted average		4.20	%		5.10	%		5.10	%		4.20	%		5.10	%		5.10	%

The components of net periodic pension cost for the years ended December 31, were as follows:


											Benefit
				Pension Plans							Restoration Plans
(In thousands)	2006			2005			2004			2006			2005			2004

Components of net periodic pension cost:
Service cost	$	12,509		$	15,274		$	14,495		$	1,047		$	967		$	690
Interest cost		30,558			29,873			27,915			1,601			1,330			936
Expected return on plan assets		(39,901	)		(40,674	)		(37,338	)		(1,056	)		(843	)		(687	)
Amortization of asset obligation		—			(862	)		(2,460	)		—			—			—
Amortization of prior service cost		177			345			421			(55	)		(93	)		(106	)
Amortization of net loss		1,946			271			50			1,100			719			303

Net periodic cost (benefit)		5,289			4,227			3,083			2,637			2,080			1,136
Curtailment loss (gain)		—			1,982			849			—			(338	)		—
Special termination benefits		—			—			2,219			—			—			—

Total cost	$	5,289		$	6,209		$	6,151		$	2,637		$	1,742		$	1,136

In October 2005, the Board of Directors of BPPR adopted an amendment for the Puerto Rico Retirement and Tax Qualified Retirement Restoration Plans to freeze benefits for all employees under age 30 or who have less than 10 years of credited service effective January 1, 2006. As part of the amendment, these employees were 100% vested in their accrued benefit as of December 31, 2005. The expense for these plans was remeasured as of September 30, 2005 to consider this change using a discount rate of 5.50%. Curtailment costs were considered for these plans and are included as part of the December 31, 2005 disclosures. In connection with the plan’s change, these employees received a base salary increase according to their age and years of service, effective January 1, 2006.

During 2004, the Corporation consolidated the information processing and technology functions of both Banco Popular de Puerto Rico and GM Group, Inc. into GM Group, Inc., renamed EVERTEC, Inc. The effective date for the transaction was April 1, 2004. As part of this reorganization, the Corporation incurred certain curtailment gains / losses on the pension and postretirement plans related with the employees that were transferred to EVERTEC, Inc. and whose benefits were frozen. Also, the Corporation incurred certain costs related to employees of BPPR who elected early retirement effective March 31, 2004, as part of this reorganization.

During 2007, the Corporation expects to contribute $1,199,000 to the pension plans and $1,957,000 to the benefit restoration plans.

The following benefit payments, attributable to past and estimated future service, as appropriate, are expected to be paid:


			Benefit
(In thousands)	Pension		Restoration Plans

2007	$	25,180	$	453
2008		25,864		602
2009		26,769		787
2010		27,761		988
2011		28,839		1,219
2012 - 2016		165,459		9,308

Postretirement health care benefits

In addition to providing pension benefits, BPPR provides certain health care benefits for retired employees. Regular employees of BPPR, except for employees hired after February 1, 2000, may become eligible for health care benefits, provided they reach retirement age while working for BPPR.

The adoption of SFAS No. 158 also impacted the accounting for the postretirement health care benefits plan. The following table summarizes the impact of the initial adoption of SFAS No. 158.


	December 31,						December 31,
	prior to						2006 Post
	SFAS No. 158			SFAS No. 158			SFAS No. 158
(In thousands)	adjustments			adjustment			Adjustment

Postretirement liabilities	($	126,881	)	($	7,725	)	($	134,606	)
Accumulated other
comprehensive loss		—		$	7,725		$	7,725

Of the total postretirement liabilities as of December 31, 2006, approximately $6,397,000 were considered current liabilities.

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2007 for the postretirement health care benefit plan are as follows:


(In thousands)

Net prior service credit	($	1,046	)

The status of the Corporation’s unfunded postretirement benefit plan at December 31, was as follows:


(In thousands)	2006			2005

Change in benefit obligation:
Benefit obligation at beginning of the year	$	143,183		$	147,145
Service cost		2,797			2,713
Interest cost		7,707			8,267
Benefits paid		(6,304	)		(6,174	)
Actuarial gain		(12,777	)		(8,768	)

Benefit obligation at end of year	$	134,606		$	143,183

Funded status at end of year:
Benefit obligation at end of year	($	134,606	)	($	143,183	)
Fair value of plan assets		—			—

Funded status at end of year	($	134,606	)	($	143,183	)

Unfunded status		N/A	(1)	($	143,183	)
Unrecognized net prior service benefits		N/A	(1)		(6,391	)
Unrecognized net actuarial loss		N/A	(1)		26,805

Accrued benefit cost		N/A	(1)	($	122,769	)

Amounts recognized in accumulated other comprehensive loss under SFAS No. 158:
Net prior service cost	($	5,345	)		N/A	(2)
Net loss		13,070			N/A	(2)

Accumulated other comprehensive loss	$	7,725			N/A	(2)

Reconciliation of (accrued)/prepaid benefit cost:
Accrued benefit cost at beginning of year	($	122,769	)	($	117,318	)
Net periodic benefit cost		(10,416	)		(11,625	)
Contributions		6,304			6,174
Amount recognized in accumulated other comprehensive loss		(7,725	)		—

Accrued benefit cost at end of year	($	134,606	)	($	122,769	)

N/A (1) — Disclosure not required by SFAS No. 158.

N/A (2) — These disclosures are non-applicable to the 2005 benefit plan since SFAS No. 158 was effective for the year ended December 31, 2006.

The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 2006 was 5.75% (2005 - 5.50%).

The weighted average discount rate used to determine the components of net periodic postretirement benefit cost for the year ended December 31, 2006 was 5.50% (2005 — 5.75%; 2004 - 6.00%).

The components of net periodic postretirement benefit cost for the year ended December 31, were as follows:


(In thousands)	2006			2005			2004

Service cost	$	2,797		$	2,713		$	2,898
Interest cost		7,707			8,267			8,798
Amortization of prior service benefit		(1,046	)		(1,046	)		(1,087	)
Amortization of net loss		958			1,691			2,132

Net periodic benefit cost		10,416			11,625			12,741
Curtailment gain		—			—			(1,005	)
Special termination benefits		—			—			347

Total benefit cost	$	10,416		$	11,625		$	12,083

The Corporation adopted the provisions of FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” on a prospective basis in the third quarter of 2004. The postretirement health care benefit obligation at December 31, 2005 reflects the implementation in 2006 of Medicare Advantage HMO’s for post-65 retirees.

The assumed health care cost trend rates at December 31, were as follows:

To determine postretirement benefit obligation:


	2006			2005

Initial health care cost trend rate		9.00	%		10.00	%
Rate to which the cost trend rate is assumed to decline		5.00	%		5.00	%
Year that the ultimate trend rate is reached		2011			2011

To determine net periodic benefit cost:


	2006			2005

Initial health care cost trend rate		10.00	%		9.00	%
Rate to which the cost trend rate is assumed to decline		5.00	%		5.00	%
Year that the ultimate trend rate is reached		2011			2009

The Plan provides that the cost will be capped to 3% of the annual health care cost increase affecting only those employees retiring after February 1, 2001.

Assumed health care trend rates generally have a significant effect on the amounts reported for a health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:


	1-Percentage		1-Percentage
(In thousands)	Point Increase		Point Decrease

Effect on total service cost and interest cost components	$	501		($453	)
Effect on postretirement benefit obligation		7,011		(6,127	)

The Corporation expects to contribute $6,397,000 to the postretirement benefit plan in 2007 to fund current benefit payment requirements.

The following benefit payments, attributable to past and estimated future service, as appropriate, are expected to be paid:


(In thousands)

2007	$	6,397
2008		6,744
2009		7,066
2010		7,343
2011		7,589
2012 - 2016		41,432

Savings and stock plans

The Corporation also provides contributory retirement and savings plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of certain of the Corporation’s subsidiaries. Some of these plans incorporate profit sharing benefits, which are determined by each subsidiary annually and may be paid in cash, as applicable to the different plans. Investments in the plans are participant-directed, and employer contributions are determined based on specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in 2006 was $27,306,000 (2005 — $32,975,000; 2004 - $32,942,000).

Prior to 2006, BPPR (the Bank) had a profit sharing plan covering all regular monthly salaried employees. Under that plan, the Board of Directors determined the Bank’s annual contribution according to the Bank’s profits. Since January 1, 2006 BPPR no longer provides a deferred profit sharing award under this plan. The assets and liabilities of the profit sharing plan were transferred to the employee savings and stock plan accounts during 2006. In connection with this change, employees received a pre-determined increase in base salary effective January 1, 2006, and BPPR raised its matching contribution in the savings and stock plan.

The plans held 14,483,925 (2005 — 15,950,027; 2004 -16,686,344) shares of common stock of the Corporation with a market value of approximately $259,986,000 at December 31, 2006 (2005 — $337,343,000; 2004 - $481,067,000).

Note 23 — Stock-based compensation:

Since 2001, 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. All outstanding award grants under the Stock Option Plan continue to remain outstanding at December 31, 2006 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 provided 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.

Upon the adoption of SFAS No. 123-R during the first quarter of 2006, the compensation cost related to the Stock Option Plan is being recognized in full for those employees that, as of year-end, had attained their minimum required eligible age for retirement, since the vesting is accelerated at retirement. The impact of SFAS No. 123-R related to the Stock Option Plan resulted in additional expense of $374,000 for the year ended December 31, 2006.

The following table presents information on stock options as of December 31, 2006:


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

$14.39 - $18.50		1,534,852	$	15.81		5.73		1,170,311	$	15.70
$19.25 - $27.20		1,609,947	$	25.27		7.50		779,211	$	24.96

$14.39 - $27.20		3,144,799	$	20.65		6.64		1,949,522	$	19.40

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2006 was $24,097,000 and $2,642,000, respectively.

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


	Options			Weighted-Average
	Outstanding			Exercise Price

Balance at January 1, 2004		1,779,219		$	15.88
Granted		997,232			23.95
Exercised		(110,681	)		15.82
Forfeited		(81,150	)		23.22

Balance at December 31, 2004		2,584,620		$	18.76
Granted		707,342			27.20
Exercised		(47,858	)		16.14
Forfeited		(20,401	)		22.18

Balance at December 31, 2005		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

The stock options exercisable at December 31, 2006 totaled 1,949,522 (2005 — 1,501,447; 2004 — 591,987). The total intrinsic value of options exercised during the year ended December 31, 2006 was $86,000 (2005 — $247,000; 2004 — $1,439,000).

The fair value of these options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2005 and 2004 were:


	2005			2004

Expected dividend yield		2.56	%		2.00	%
Expected life of options	10 years			10 years
Expected volatility		17.54	%		16.50	%
Risk-free interest rate		4.16	%		4.06	%
Weighted average fair value of options granted (per option)	$	5.95		$	5.74

There were no new grants issued by the Corporation under the Stock Option Plan during 2006.

The cash received from the stock options exercised during the year ended December 31, 2006 amounted to $622,000.

The Corporation recognized $3,006,000 in stock options expense for the year ended December 31, 2006 (2005 — $5,226,000; 2004 — $3,223,000), with a tax benefit of $1,221,000 (2005 —$2,095,000; 2004 — $1,234,000). The total unrecognized compensation cost at December 31, 2006 related to non-vested stock option awards was $3,329,000 and is expected to be recognized over a weighted-average period of 1.7 years.

Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance Share. 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.

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.

No additional compensation cost related to the Incentive Plan was recognized by the Corporation during the year ended December 31, 2006 as a result of the adoption of SFAS No. 123-R.

The following table summarizes the restricted stock under Management Incentive Award and related information:


	Restricted			Weighted-Average
	Stock			Grant Date Fair Value

Nonvested at January 1, 2005		—			—
Granted		172,622		$	27.65
Vested		—			—
Forfeited		—			—

Nonvested at December 31, 2005		172,622		$	27.65
Granted		444,036			20.54
Vested		—			—
Forfeited		(5,188	)		19.95

Nonvested at December 31, 2006		611,470		$	22.55

During the year ended December 31, 2006, the Corporation granted 444,036 shares of restricted stock to management (2005 — 172,622).

During the year ended December 31, 2006, the Corporation recognized $2,296,000 (2005 — $3,998,000; 2004 — $1,030,000) of restricted stock expense related to management incentive awards, with an income tax benefit of $898,000 (2005 —$1,524,000; 2004 — $402,000). The total unrecognized compensation cost related to non-vested restricted stock awards was $6,584,000 and is expected to be recognized over a weighted-average period of 2.7 years.

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


	Restricted			Weighted-Average
	Stock			Grant Date Fair Value

Nonvested at January 1, 2005		20,802		$	23.51
Granted		29,208			23.71
Vested		(3,062	)		23.87
Forfeited		—			—

Nonvested at December 31, 2005		46,948		$	23.61
Granted		32,267			19.82
Vested		(2,601	)		23.54
Forfeited		—			—

Nonvested at December 31, 2006		76,614		$	22.02

For the year ended December 31, 2006, the Corporation granted 32,267 (2005 — 29,208; 2004 — 20,802) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $570,000, with a tax benefit of $222,000 (2005 — $635,000, with a tax benefit of $247,000) of restricted stock expense related to these restricted stock grants.

Note 24 — Rental expense and commitments:

At December 31, 2006, the Corporation was obligated under a number of noncancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:


	Minimum		Sublease
Year	payments		rentals		Net
	(In thousands)
2007	$	56,086	$	2,041	$	54,045
2008		48,289		1,893		46,396
2009		37,417		1,627		35,790
2010		28,185		1,279		26,906
2011		21,283		1,185		20,098
Later years		139,968		5,158		134,810

	$	331,228	$	13,183	$	318,045

Total rental expense for the year ended December 31, 2006 was $70,562,000 (2005 — $62,395,000; 2004 — $56,972,000), which is included in net occupancy, equipment and communication expenses, according to their nature.

Note 25 — Income tax:

The components of income tax expense for the years ended December 31, are summarized below.


(In thousands)	2006			2005			2004

Current income tax expense:
Puerto Rico	$	131,687		$	113,888		$	86,734
Federal and States		2,848			38,162			62,162

Subtotal		134,535			152,050			148,896

Deferred income tax (benefit) cost:
Puerto Rico		(6,596	)		(10,986	)		(4,088	)
Federal and States		(21,053	)		7,851			(103	)

Subtotal		(27,649	)		(3,135	)		(4,191	)

Total income tax expense	$	106,886		$	148,915		$	144,705

The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:


	2006						2005						2004
				% of						% of						% of
				pre-tax						pre-tax						pre-tax
(Dollars in thousands)	Amount			income			Amount			income			Amount			income

Computed income tax at statutory rates	$	202,084			43.5	%	$	284,694			41.5	%	$	247,499			39.0	%
Benefits of net tax exempt interest income		(67,055	)		(14	)		(75,880	)		(11	)		(74,599	)		(12	)
Effect of income subject to capital gain tax rate		(2,426	)		(1	)		(24,612	)		(4	)		(3,459	)		(1	)
Federal, States taxes and other		(25,717	)		(6	)		(35,287	)		(5	)		(24,736	)		(3	)

Income tax expense	$	106,886			22.5	%	$	148,915			21.5	%	$	144,705			23.0	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities at December 31, were as follows:


(In thousands)	2006		2005

Deferred tax assets:
Tax credits available for carryforward	$	23,568	$	6,963
Net operating loss and donation carryforward available		35,327		44,505
Deferred compensation		4,452		3,525
Postretirement and pension benefits		71,277		44,543
Unrealized net loss on trading and available-for-sale securities		51,417		49,519
Deferred loan origination fees		5,766		3,342
Allowance for loan losses		200,155		176,690
Amortization of intangibles		168
Unearned income		1,218		1,169
Unrealized loss on derivatives		—		427
Basis difference related to securitizations treated as sales for tax and borrowings for books		7,588		—
Intercompany deferred gains		16,369		21,037

Other temporary differences		19,725		8,480

Total gross deferred tax assets		437,030		360,200

Deferred tax liabilities:
Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations		38,546		15,363
Basis difference related to securitizations treated as sales for tax and borrowings for books		—		6,703
Deferred loan origination costs		24,112		19,728

Accelerated depreciation		12,037		11,044
Amortization of intangibles		—		481
Unrealized gain on derivatives		258		—
Other temporary differences		2,628		5,067

Total gross deferred tax liabilities		77,581		58,386

Valuation allowance		39		39

Net deferred tax asset	$	359,410	$	301,775

The net deferred tax asset shown in the table above at December 31, 2006 is reflected in the consolidated statements of condition as $359,433,000 in deferred tax assets (in the “other assets” caption) (2005 — $305,723,000) and $23,000 in deferred tax liabilities (in the “other liabilities” caption) (2005 — $3,948,000), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

At December 31, 2006, the Corporation had total credits of $23,568,000 that will reduce the regular income tax liability in future years, $5,245,000 expiring in annual installments through year 2016 and $18,323,000 expiring through year 2010.

A valuation allowance of $39,000 is reflected in 2006 and 2005, related to deferred tax assets arising from temporary differences for which the Corporation could not determine the likelihood of its realization. Based on the information available,

the Corporation expects to fully realize all other items comprising the net deferred tax asset as of December 31, 2006.

The net operating loss carryforwards (NOLs) outstanding at December 31, 2006 expire in the years 2008 through 2026.

Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation has not recorded any deferred tax liability on the unremitted earnings of its U.S. subsidiaries because the reinvestment of such earnings is considered permanent. The Corporation believes that the likelihood of receiving dividend payments from any of its U.S. subsidiaries in the foreseeable future is remote based on the growth it is undertaking in the U.S. mainland.

The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The Corporation’s federal income tax (benefit) provision for 2006 was ($26,994,000) (2005 — $34,571,000; 2004 — $58,934,000). The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis.

On May 13, 2006, the Government of Puerto Rico approved a legislation that imposed an additional 2% tax to corporations operating under the Banking Law. With this additional tax, the maximum rate increased to 43.5% for BPPR. This law was effective for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. Under another temporary increase approved in August 2005, the maximum rate for all other Puerto Rico corporations increased to 41.5% for 2005 and 2006. After this period, the applicable statutory tax rate will be 39% for all Puerto Rico corporations.

Note 26 — Off-balance sheet activities and concentration of credit risk:

Off-balance sheet risk

The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of condition.

Financial instruments with off-balance sheet credit risk at December 31, whose contract amounts represent potential credit risk were as follows:


(In thousands)	2006		2005

Commitments to extend credit:
Credit card lines	$	2,896,090	$	2,846,549
Commercial lines of credit		4,329,664		4,062,599
Other unused credit commitments		508,815		654,397
Commercial letters of credit		20,689		22,281
Standby letters of credit		180,869		177,034
Commitments to purchase mortgage loans		—		128,508
Commitments to originate mortgage loans		547,695		562,600

Commitments to extend credit

Contractual commitments to extend credit are legally binding agreements to lend money to customers for a specified period of time. To extend credit the Corporation evaluates each customer’s creditworthiness. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment and investment securities, among others. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Letters of credit

There are two principal types of letters of credit: commercial and standby letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In general, commercial letters of credit are short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction.

Standby letters of credit are issued by the Corporation to disburse funds to a third party beneficiary if the Corporation’s customer fails to perform under the terms of an agreement with the

beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon.

Other commitments

At December 31, 2006, the Corporation also maintained other non-credit commitments for $43,378,000, primarily for the acquisition of other investments (2005 — $8,393,000).

Geographic concentration

As of December 31, 2006, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. Note 30 provides further information on the asset composition of the Corporation by geographical area as of December 31, 2006 and 2005.

Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $5,439,000 and $6,570,000 in 2006 and 2005, respectively.

Note 27 — Disclosures about fair value of financial instruments:

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items.

Derivatives are considered financial instruments and their carrying value equals fair value. For disclosures about the fair value of derivative instruments refer to Note 28 to the consolidated financial statements.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows and prepayment assumptions.

The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 2006 and 2005, respectively. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2006 and 2005.

Short-term financial assets and liabilities have relatively short maturities, or no defined maturities, and little or no credit risk. The carrying amounts reported in the consolidated statements of condition approximate fair value. Included in this category are: cash and due from banks, federal funds sold and securities purchased under agreements to resell, time deposits with other banks, bankers acceptances, customers’ liabilities on acceptances, accrued interest receivable, federal funds purchased and assets sold under agreements to repurchase, short-term borrowings, acceptances outstanding and accrued interest payable. Resell and repurchase agreements with long-term maturities are valued using discounted cash flows based on market rates currently available for agreements with similar terms and remaining maturities.

Trading and investment securities, except for investments classified as other investment securities in the consolidated statement of condition, are financial instruments that regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to-market for accounting purposes. These instruments are detailed in the consolidated statements of condition and in Notes 4, 5 and 28.

The estimated fair value for loans held-for-sale is based on secondary market prices. The fair values of the loan portfolios have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on loan characteristics, including repricing term and pricing. The fair value of most fixed-rate loans was estimated by discounting scheduled cash flows using interest rates currently being offered on loans with similar terms. For variable rate loans with frequent repricing terms, fair values were based on carrying values. Prepayment assumptions have been applied to the mortgage and installment loan portfolio. The fair value of the loans was also reduced by an estimate of credit losses inherent in the portfolio. Generally accepted accounting principles do not require, and the Corporation has not performed a fair valuation of its lease financing portfolio, therefore it is included in the loans total at its carrying amount.

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts is, for purpose of this disclosure, equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, using interest rates currently being offered on certificates with similar maturities.

Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments at December 31, 2006 and 2005, respectively.

Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments, which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements.

Carrying or notional amounts, as applicable, and estimated fair values for financial instruments at December 31, were:


(In thousands)	2006				2005
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value

Financial Assets:
Cash and money market investments	$	1,251,866	$	1,251,866	$	1,655,820	$	1,660,739
Trading securities		382,325		382,325		519,338		519,338
Investment securities available-for-sale		9,850,862		9,850,862		11,716,586		11,716,586
Investment securities held-to-maturity		91,340		92,764		153,104		156,068
Other investment securities		297,394		412,593		319,103		426,407
Loans held-for-sale		719,922		737,439		699,181		710,700
Loans held-in-porfolio, net		31,494,785		31,448,328		30,549,319		30,414,647
Financial Liabilities:
Deposits	$	24,438,331	$	24,416,523	$	22,638,005	$	22,564,233
Federal funds purchased		1,276,818		1,276,818		1,500,575		1,500,575
Assets sold under agreements to repurchase		4,485,627		4,474,171		7,201,886		7,152,569
Short-term borrowings		4,034,125		4,034,125		2,700,261		2,700,261
Notes payable		8,737,246		8,647,942		9,893,577		9,700,869


	Notional		Fair		Notional		Fair
(In thousands)	amount		value		amount		value

Commitments to extend credit and letters of credit:
Commitments to extend credit	$	7,734,569	$	19,110	$	7,563,545	$	18,552
Letters of credit		201,558		1,935		199,315		1,875

Note 28 — Derivative instruments and hedging activities:

The Corporation incorporates the use of derivative instruments as part of the overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest income is not, on a material basis, adversely affected by movements in interest rates. The Corporation uses derivatives in its trading activities to facilitate customer transactions, to take proprietary positions and as means of risk management. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities.

As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. The discussion and tables below provide a description of the derivative instruments used as part of the Corporation’s interest rate risk management strategies.

By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Corporation, thus creating a repayment risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, assumes no repayment risk. To manage the level of credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Credit risk related to derivatives was not significant at December 31, 2006 and 2005. The Corporation has not incurred any losses from counterparty nonperformance on derivatives.

Market risk is the adverse effect that a change in interest rates, currency exchange rates, or implied volatility rates might have on the value of a financial instrument. The Corporation manages the market risk associated with interest rates, and to a limited extent, with fluctuations in foreign currency exchange rates, by establishing and monitoring limits for the types and degree of risk that may be undertaken. The Corporation regularly measures this risk by using static gap analysis, simulations and duration analysis.

The Corporation’s treasurers and senior finance officers at the subsidiaries are responsible for evaluating and implementing hedging strategies that are developed through analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Corporation’s overall interest rate risk management and trading strategies. The resulting derivative activities are monitored by the Corporate Treasury and Corporate Comptroller’s areas within the Corporation.

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges for the years ended December 31, 2006, and 2005 are presented below:


2006
	Notional		Derivative		Derivative		Equity
(In thousands)	Amount		Assets		Liabilities		OCI		Ineffectiveness

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

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

Total	$	580,000	$	1,062	$	525	$	343		—


2005
	Notional		Derivative		Derivative		Equity
(In thousands)	Amount		Assets		Liabilities		OCI			Ineffectiveness

Asset Hedges
Forward commitments	$	95,500	$	20	$	420	$	(244	)		—

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These securities are hedging 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. These contracts have a maximum remaining maturity of 72 days.

During 2006, the Corporation entered into interest rate swap contracts to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to changes in interest rates. These interest rate swaps have a maximum remaining maturity of 2.3 years.

For cash flow hedges, gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current period earnings are included in the line item in which the hedged item is recorded and in the same period in which the forecasted transaction affects earnings.

Fair Value Hedges

At December 31, 2006, there are no derivatives designated as fair value hedges.

Derivative financial instruments designated as fair value hedges for the year ended December 31, 2005 were:

2005

Notional

Derivative

Equity

(In thousands)

Amount

Assets

Liabilities

OCI

Ineffectiveness

Asset Hedges

Interest rate swaps associated with:

- loans and investment securities

534,623

3,145

—

(388

)

Interest rate swaps generally involve the exchange of fixed-and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date.

During 2005, the Corporation had interest rate swaps designated as fair value hedges to protect its exposure to the changes in fair value resulting from movements in the benchmark interest rate of fixed rate assets, particularly loans and investment securities. The net losses representing the hedge ineffectiveness were reported as part of the other income.

Additionally, during 2005, the Corporation entered into interest rate swaps to hedge the change in fair value of loans acquired and originated prior to securitization. The net gains representing the hedge ineffectiveness were reported as part of interest income. These derivative contracts expired or were terminated in the first quarter of 2006.

Trading and Non-Hedging Activities

The fair value and notional amounts of non-hedging derivatives at December 31, 2006, and 2005 were:


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 loans 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
Index options on deposits		204,946		38,323		—
Index 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


December 31, 2005
						Fair Values
(In thousands)	Notional Amount		Derivative Assets			Derivative Liabilities

Forward contracts	$	486,457	$	15		$	1,691
Futures contracts		11,500		17			—
Call options and put options		47,500		114			—
Interest rate swaps associated with:
- brokered CDs		157,088		—			3,226
- short-term borrowings		400,000		—			—
- financing of auto loans held-in-portfolio		209,222		851			—
- auto loans approvals locked interest rates		26,297		(13	)		—
- investment securities		40,250		837			—
- swaps with corporate clients		293,331		—			2,361
- swaps offsetting position of corporate client swaps		293,331		2,361			—
Foreign currency and exchange rate commitments w/clients		252		—			32
Foreign currency and exchange rate commitments w/counterparty		252		32			—
Interest rate caps		1,650,907		12,215			—
Index options on deposits		122,711		17,715			—
Index options on S&P notes		31,152		3,626			—
Bifurcated embedded options		170,121		10,593			24,398
Mortgage rate lock commitments		234,938		330			—

Total	$	4,175,309	$	48,693		$	31,708

Forward Contracts

The Corporation has forward contracts to sell mortgage-backed securities with terms lasting less than a month, which were accounted for as trading derivatives. Also, the Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale and mortgage pipeline associated with interest rate lock commitments through both mandatory and best efforts forward sale agreements. These contracts are recognized at fair market value with changes directly reported in income. These contracts are entered into in order to optimize the gain on sales of loans and / or mortgage-backed securities, given levels of interest rate risk consistent with the Corporation’s business strategies.

Futures Contracts

The Corporation also enters into interest rate future contracts which are commitments to either purchase or sell designated instruments, such as U.S. Treasury securities, at a future date for a specified price. At December 31, 2006, there were no future contracts outstanding.

Call Options and Put Options

The Corporation has option contracts that grant the purchaser the right to buy or sell the underlying asset by a certain date at a specified price.

Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments

The Corporation has outstanding interest rate swap derivative contracts to economically hedge the cost of short-term borrowings associated with certain securitizations of mortgage loans. Changes in their fair value are recognized in interest expense.

During 2006, the Corporation entered into an interest rate swap to economically hedge the payments of bond certificates offered as part of an on-balance sheet securitization. This swap contract is marked-to-market and the resulting impact is recognized as part of interest expense.

The Corporation enters into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with certain auto loans held-in-portfolio. Other amortizing swaps are entered to economically hedge the interest rate changes in auto loan approvals. When the Corporation issues an auto loan approval, the Corporation extends a put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement, but the Corporation must honor the interest rate for up to a 45-day period.

During 2006, the Corporation entered into interest rate swaps to economically hedge the changes in fair value of loans acquired and originated prior to securitization. Changes in the swaps fair value are reported as part of interest income.

In addition to using derivative instruments as part of its interest rate risk management strategy, the Corporation also utilizes derivatives, such as interest rate swaps and foreign exchange contracts in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and conditions with credit limit approvals and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in income in the period of change.

During 2005, there were interest rate swap agreements to convert fixed rate brokered certificates of deposits to short-term adjustable rate liabilities. The interest rate swaps economically hedged the exposure of the brokered certificates to changes in fair value due to movements in the benchmark interest rate. The terms of the interest rate swaps were identical to the terms of the callable CD’s. These contracts were terminated in the first quarter of 2006.

Credit Default swaps

The credit default swap allows one party to transfer the credit risk to another for a fee in case of a credit default. The credit default relates to the failure to make payment obligations due to bankruptcy or insolvency. It is not foreseen that the Corporation will have to make any payments associated with the credit default swaps.

Interest Rate Caps

Interest rate caps entered in conjunction with a series of mortgage loans securitizations are recognized as non-hedging derivatives. Changes in fair value are recognized in the consolidated statement of income as part of interest expense, while the derivative contract value is included as other assets.

Index and Embedded Options

In connection with customers’ deposits offered by the Corporation whose returns are tied to the performance of the Standard and Poor’s 500 (S&P 500) stock market index and other deposits whose returns are tied to the Puerto Rico stock market index, certain equity securities performance or a commodity index, the Corporation bifurcated the related options embedded within the customers’ deposits from the host contract which does not qualify for hedge accounting in accordance with SFAS No. 133. In order to limit the Corporation’s exposure to changes in these indexes, the Corporation purchases index options from major broker dealer companies which returns are tied to the same indexes. Accordingly, the embedded options and the related index options are marked-to-market through earnings. These options are traded in the over the counter (OTC) market. OTC options are not listed on an options exchange and do not have standardized terms. OTC contracts are executed between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and expiration date. The Corporation also had bifurcated and accounted for separately the option related to the issuance of notes payable whose return is linked to the S&P 500 Index. In order to limit its exposure, the Corporation has a related S&P 500 index option intended to produce the same cash outflows that the notes could produce.

Mortgage Rate Lock Commitments

Mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed for a specified period of time are accounted for as derivatives as per SFAS No. 133, as amended. Forward sale commitments are utilized to economically hedge the interest rate risk associated with the time lag between when fixed rate mortgage loans are rate-locked and when they are committed for sale or exchange in the secondary market.

Note 29 — Supplemental disclosure on the consolidated statements of cash flows:

As previously mentioned in Note 1 in 2005, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period. The impact of this change corresponded to the financial results for the month of December 2004 of those non-banking subsidiaries which implemented the change in the first reporting period of 2005 and the month of December 2005 for those 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 for the year ended December 31:


(In thousands)	2006			2005

Net cash used in operating activities		($80,906	)		($26,648	)
Net cash (used in) provided by investing activities		(104,732	)		19,503
Net cash provided by financing activities		197,552			5,573

Net increase (decrease) in cash and due from banks	$	11,914			($1,572	)

Also, related to the difference in the reporting period of certain non-banking subsidiaries, as a result of the one- month lag, certain intercompany transactions between subsidiaries having different year-end periods remained outstanding at December 31, 2005. In balancing the consolidated statement of condition, management reversed an intercompany elimination in order to reinstall loans outstanding to third parties. The impact of this reversal resulted in an increase of $429,000,000 in the caption of other liabilities at December 31, 2005. For the cash flow statement presentation, for the year ended December 31, 2005, this amount was reflected as cash provided by financing activities, while the reinstallment of loan disbursements was presented as cash flows used in investing activities. As of December 31, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.

During the year ended December 31, 2006, the Corporation paid interest and income taxes amounting to $1,604,054,000 and $194,423,000, respectively (2005 — $1,206,434,000 and $196,028,000; 2004 — $810,669,000 and $128,558,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 2006, amounted to $116,250,000 and $34,340,000, respectively (2005 — $113,840,000 and $24,395,000).

During 2006, $613,468,000 (2005 — $552,273,000) 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 $784,874,000 and $752,476,000 in non-cash reclassifications of loans held-for-sale to trading securities for the years ended December 31, 2006 and 2005, respectively.

During 2005, the Corporation transferred $42,174,000 from investment securities available-for-sale to commercial loans. During 2004, the Corporation transferred mortgage-backed securities totaling $351,000,000 from trading to investment securities available-for-sale based on management’s intention and business purpose.

In addition, the consolidated statements of cash flows for the years ended December 31, 2005 and 2004, were impacted by the business combinations that occurred in those years, including Kislak, E-LOAN, Infinity Mortgage Corporation and Quaker City Bancorp. The net assets acquired are included in a separate line item in such financial statements under the caption “Assets acquired, net of cash”.

Note 30 — Segment reporting:

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.

The Corporation changed its basis of presentation by combining the operations of Banco Popular North America and Popular Financial Holdings segments into a single reportable segment named Popular North America. This change is the result of the Restructuring and Integration Plan and the U.S. Reorganization described in Note 34—Subsequent Events.

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.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes approximately 99% of the Corporation’s net income and 54% of its total assets as of December 31, 2006, 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. 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 Leasing, U.S.A. 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 offers mortgage and personal loans and provides mortgage loan servicing. Its clientele is primarily for subprime borrowers. Note 34 — Subsequent Events provides information on the business changes that have impacted PFH’s operations in 2006 and 2007.

The Popular North America reportable segment is disaggregated for additional disclosures between BPNA and PFH. The results of E-LOAN are included as part of BPNA. Prior to changing the basis of presentation of the Corporation’s reportable segments, E-LOAN was included as part of Popular Financial Holdings. The holding company of Popular North America operations 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., CreST,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.

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 EVERTEC 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 reportable segments.

The Corporation may periodically reclassify reportable 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 reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

2006
At December 31, 2006
Popular, Inc.


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

Net interest income (loss)	$	914,907		$	553,509		($1,894	)
Provision for loan losses		141,083			146,677
Non-interest income		431,940			255,115		229,237			($138,644	)
Amortization of intangibles and goodwill impairment losses		2,540			23,477		599
Depreciation expense		43,556			21,970		16,599			(72	)
Other operating expenses		679,892			601,318		169,117			(139,163	)
Impact of change in fiscal period		(2,072	)		6,181
Income tax		125,985			4,043		15,052			61

Net income	$	355,863		$	4,958	$	25,976		$	530

Segment assets	$	25,501,522		$	21,512,244	$	223,384			($138,033	)

At December 31, 2006


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

Net interest income (loss)	$	1,466,522		($39,741	)	$	1,129		$	1,427,910
Provision for loan losses		287,760								287,760
Non-interest income		777,648		36,642			(4,805	)		809,485
Amortization of intangibles and goodwill impairment losses		26,616								26,616
Depreciation expense		82,053		2,335						84,388
Other operating expenses		1,311,164		57,342			(4,178	)		1,364,328
Impact of change in fiscal period		4,109		3,495			2,137			9,741
Income tax		145,141		(37,515	)		(740	)		106,886

Net income (loss)	$	387,327		($28,756	)		($895	)	$	357,676

Segment assets	$	47,099,117	$	6,376,487			($6,071,617	)	$	47,403,987

2005
At December 31, 2005
Popular, Inc.


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

Net interest income (loss)	$	897,007	$	561,185			($404	)
Provision for loan losses		98,732		96,526
Non-interest income		428,249		202,268			221,369			($139,633	)
Amortization of intangibles and goodwill impairment losses		2,522		6,813			244
Depreciation expense		42,508		20,594			17,405			(71	)
Other operating expenses		681,133		468,238			166,929			(139,502	)
Income tax		104,907		63,001			12,149			(57	)

Net income before cumulative effect of accounting change	$	395,454	$	108,281		$	24,238			($3	)
Cumulative effect of accounting change		3,221		(209	)		412			(247	)

Net income after cumulative effect of accounting change	$	398,675	$	108,072		$	24,650			($250	)

Segment assets	$	26,522,983	$	21,633,437		$	250,749			($138,504	)

At December 31, 2005


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

Net interest income (loss)	$	1,457,788		($34,959	)	$	1,378		$	1,424,207
Provision for loan losses		195,258		14						195,272
Non-interest income		712,253		73,612			(590	)		785,275
Amortization of intangibles and goodwill impairment losses		9,579								9,579
Depreciation expense		80,436		1,511						81,947
Other operating expenses		1,176,798		59,988			(112	)		1,236,674
Income tax		180,000		(31,417	)		332			148,915

Net income before cumulative effect of accounting change	$	527,970	$	8,557		$	568		$	537,095
Cumulative effect of accounting change		3,177		430						3,607

Net income after cumulative effect of accounting change	$	531,147	$	8,987		$	568		$	540,702

Segment assets	$	48,268,665	$	6,333,610			($5,978,607	)	$	48,623,668

2004
At December 31, 2004
Popular, Inc.


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

Net interest income (loss)	$	881,234	$	534,497		($1,304	)		($63	)
Provision for loan losses		90,777		87,880
Non-interest income		365,697		122,527		200,474			(108,350	)
Amortization of intangibles and goodwill impairment losses		2,529		5,260		55
Depreciation expense		40,954		17,335		14,013			926
Other operating expenses		616,306		369,520		166,188			(110,490	)
Income tax		96,005		64,340		4,724			457

Net income	$	400,360	$	112,689	$	14,190		$	694

Segment assets	$	24,682,823	$	19,168,923	$	234,966			($221,224	)

At December 31, 2004


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

Net interest income (loss)	$	1,414,364		($39,669	)	$	816		$	1,375,511
Provision for loan losses		178,657								178,657
Non-interest income		580,348		31,578			(3,155	)		608,771
Amortization of intangibles and goodwill impairment losses		7,844								7,844
Depreciation expense		73,228		1,042						74,270
Other operating expenses		1,041,524		47,461			(87	)		1,088,898
Income tax		165,526		(19,936	)		(885	)		144,705

Net income (loss)	$	527,933		($36,658	)		($1,367	)	$	489,908

Segment assets	$	43,865,488	$	5,597,861			($5,061,773	)	$	44,401,576

During the year ended December 31, 2006, the Corporation’s holding companies realized net gains on sale of securities, mainly marketable equity securities, of approximately $14,000,000 (2005 - $59,706,000; 2004 — $14,574,000). These gains are included as part of “non-interest income” within the Corporate group.

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

2006
At December 31, 2006
Banco Popular de Puerto Rico


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

Net interest income	$	342,419	$	561,788	$	10,229		$	471		$	914,907
Provision for loan losses		43,952		97,131								141,083
Non-interest income		94,517		248,117		91,303			(1,997	)		431,940
Amortization of intangibles and goodwill impairment losses		881		1,338		321						2,540
Depreciation expense		14,192		28,214		1,150						43,556
Other operating expenses		174,427		444,024		62,175			(734	)		679,892
Impact of change in fiscal period						(2,072	)					(2,072	)
Income tax		60,476		51,351		14,491			(333	)		125,985

Net income	$	143,008	$	187,847	$	25,467			($459	)	$	355,863

Segment assets	$	11,283,178	$	17,935,610	$	581,981			($4,299,247	)	$	25,501,522

2005
At December 31, 2005
Banco Popular de Puerto Rico


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

Net interest income	$	304,142	$	579,852	$	12,970	$	43		$	897,007
Provision for loan losses		26,600		72,132							98,732
Non-interest income		144,008		208,567		77,351		(1,677	)		428,249
Amortization of intangibles and goodwill impairment losses		881		1,332		309					2,522
Depreciation expense		14,296		26,903		1,309					42,508
Other operating expenses		199,670		424,783		58,112		(1,432	)		681,133
Income tax		47,706		47,309		9,988		(96	)		104,907

Net income before cumulative effect of accounting change	$	158,997	$	215,960	$	20,603		($106	)	$	395,454
Cumulative effect of accounting change				3,797		755		(1,331	)		3,221

Net income after cumulative effect of accounting change	$	158,997	$	219,757	$	21,358		($1,437	)	$	398,675

Segment assets	$	10,404,721	$	18,537,688	$	1,043,096		($3,462,522	)	$	26,522,983

2004
At December 31, 2004
Banco Popular de Puerto Rico


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

Net interest income	$	286,427	$	579,086	$	15,718	$	3		$	881,234
Provision for loan losses		15,600		75,177							90,777
Non-interest income		155,515		142,701		68,865		(1,384	)		365,697
Amortization of intangibles and goodwill impairment losses				2,231		298					2,529
Depreciation expense		14,348		25,197		1,409					40,954
Other operating expenses		199,437		367,802		50,168		(1,101	)		616,306
Income tax		46,556		38,029		11,531		(111	)		96,005

Net income	$	166,001	$	213,351	$	21,177		($169	)	$	400,360

Segment assets	$	9,195,304	$	16,998,058	$	1,116,054		($2,626,593	)	$	24,682,823

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

2006
At December 31, 2006
Popular North America


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

Net interest income	$	379,977	$	173,532					$	553,509
Provision for loan losses		46,472		100,205						146,677
Non-interest income		218,590		38,977			($2,452	)		255,115
Amortization of intangibles and goodwill impairment losses		8,881		14,596						23,477
Depreciation expense		15,811		6,159						21,970
Other operating expenses		422,640		179,907			(1,229	)		601,318
Impact of change in fiscal period				6,181						6,181
Income tax		37,280		(32,809	)		(428	)		4,043

Net income	$	67,483		($61,730	)		($795	)	$	4,958

Segment assets	$	13,565,992	$	8,396,926			($450,674	)	$	21,512,244

2005
At December 31, 2005
Popular North America


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

Net interest income	$	359,836		$	201,349				$	561,185
Provision for loan losses		23,238			73,288					96,526
Non-interest income		149,604			52,664					202,268
Amortization of intangibles and goodwill impairment losses		6,783			30					6,813
Depreciation expense		15,678			4,916					20,594
Other operating expenses		309,151			159,087					468,238
Income tax		56,796			6,205					63,001

Net income before cumulative effect of accounting change		97,794			10,487					108,281
Cumulative effect of accounting change		(209	)							(209	)

Net income after cumulative effect of accounting change	$	97,585		$	10,487				$	108,072

Segment assets	$	12,593,434		$	9,411,263		($371,260	)	$	21,633,437

2004
At December 31, 2004
Popular North America


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

Net interest income	$	277,815	$	256,682				$	534,497
Provision for loan losses		42,589		45,291					87,880
Non-interest income		98,893		23,634					122,527
Amortization of intangibles and goodwill impairment losses		5,260							5,260
Depreciation expense		13,536		3,799					17,335
Other operating expenses		230,859		138,661					369,520
Income tax		29,979		34,361					64,340

Net income	$	54,485	$	58,204				$	112,689

Segment assets	$	10,285,587	$	9,020,271		($136,935	)	$	19,168,923


Intersegment revenues*

(In thousands)	2006			2005			2004

Banco Popular de Puerto Rico:
P.R. Commercial Banking		($619	)		($2,437	)		($1,075	)
P.R. Consumer and Retail Banking		(1,409	)		(5,743	)		(2,238	)
P.R. Other Financial Services		(326	)		(399	)		(285	)
EVERTEC		(138,172	)		(139,100	)		(107,840	)
Banco Popular North America		1,882			8,046			3,025

Total intersegment revenues		($138,644	)		($139,633	)		($108,413	)


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


Geographic Information

(In thousands)	2006		2005		2004

Revenues*:
Puerto Rico	$	1,396,714	$	1,252,906	$	1,274,497
United States		762,313		891,820		647,554
Other		78,368		64,756		62,231

Total consolidated revenues	$	2,237,395	$	2,209,482	$	1,984,282


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


Selected Balance Sheet Information
(In thousands)	2006		2005		2004

Puerto Rico
Total assets	$	24,621,684	$	25,759,437	$	24,226,240
Loans		14,735,092		14,130,645		12,540,668
Deposits		13,504,860		13,093,540		12,630,045
United States
Total assets	$	21,570,276	$	21,780,226	$	19,303,924
Loans		17,363,382		17,023,443		15,736,033
Deposits		9,735,264		8,370,150		6,898,517
Other
Total assets	$	1,212,027	$	1,084,005	$	871,412
Loans		638,465		556,119		465,560
Deposits		1,198,207		1,174,315		1,064,598

Note 31 — Contingent liabilities:

The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, 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 32 — Guarantees:

The Corporation has obligations upon the occurrence of certain events under financial guarantees provided in certain contractual agreements. These various arrangements are summarized below.

The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by other financial institutions, in each case to guarantee the performance of various customers to third parties. If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN No. 45, at December 31, 2006 and 2005, the Corporation recorded a liability of $658,000 and $548,000, respectively, which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002. 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 contract amounts in standby letters of credit outstanding at December 31, 2006 and 2005, shown in Note 26, 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 standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.

The Corporation securitizes mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. Also, from time to time, the Corporation may sell in bulk sale transactions, residential mortgage loans and SBA commercial loans subject to credit recourse or to certain representations and warranties from the Corporation to the purchaser. Those may relate to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties. Generally, the Corporation retains the right to service the loans when securitized or sold with credit recourse.

At December 31, 2006, the Corporation serviced $3,054,325,000 (2005 — $2,346,359,000) in residential mortgage loans with credit recourse or other servicer-provided credit enhancement. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to reimburse the third party investor. The maximum potential amount of future payments that the Corporation would be required to make under the agreement in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced. In the event of nonperformance, the Corporation has rights to the underlying collateral securing the mortgage loan, thus, historically the losses associated to these guarantees had not been significant. At December 31, 2006, the Corporation had reserves of approximately $3,066,000 (2005 — $1,308,000) to cover the estimated credit loss exposure. At December 31, 2006, the Corporation also serviced $10,213,375,000 (2005 — $6,769,167,000) in mortgage loans without recourse or other servicer-provided credit enhancement. Although the Corporation may, from time to time, be required to make advances to maintain a regular flow of scheduled interest and principal payments to investors, including special purpose entities, this does not represent an insurance against losses. These loans serviced are mostly insured by FHA, VA, and others, or the certificates arising in securitization transactions may be covered by a funds guaranty insurance policy.

Also, in the ordinary course of business, the Corporation sold SBA loans with recourse, in which servicing was retained. At December 31, 2006, SBA loans serviced with recourse amounted to $62,408,000 (2005 — $57,286,000). Due to the guaranteed nature of the SBA loans sold, the Corporation’s exposure to loss under these agreements should not be significant.

Popular, Inc. Holding Company (PIHC) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $3,278,827,000 at December 31, 2006 (2005 — $4,015,186,000). In addition, at December 31, 2006 and 2005, PIHC fully and unconditionally guaranteed $824,000,000 of Capital Securities issued by four wholly-owned issuing trust entities that have been deconsolidated based on FIN No. 46R. Refer to Note 16 to the consolidated financial statements for further information.

A number of the acquisition agreements to which the Corporation is a party and under which it has purchased various types of assets, including the purchase of entire businesses, require the Corporation to make additional payments in future years if certain predetermined goals, such as revenue targets, are achieved or certain specific events occur within a specified time. Management’s estimated maximum future payments at December 31, 2006 approximated $4,606,000 (2005 — $11,406,000). Due to the nature and size of the operations acquired, management does not anticipate that these additional payments will have a material impact on the Corporation’s financial condition or results of future operations.

Note 33 — Other service fees:

The caption of other service fees in the consolidated statements of income consists of the following major categories that exceed one percent of the aggregate of total interest income plus non-interest income as of December 31,


(In thousands)	2006		2005		2004

Credit card fees and discounts	$	89,827	$	82,062	$	69,702
Debit card fees		61,643		52,675		51,256
Insurance fees		53,889		50,734		38,924
Processing fees		44,050		42,773		40,169
Other		71,466		103,257		95,500

Total	$	320,875	$	331,501	$	295,551

Note 34 — Subsequent events:

Restructuring and Integration Plan

In January 2007, the Corporation announced the adoption of a Restructuring and Integration Plan for PFH, including PFH’s internet financial services subsidiary E-LOAN. Based on a comprehensive strategic and financial assessment of all the PFH operations by Popular’s management, the Plan calls for PFH to exit the wholesale nonprime mortgage origination business, focus on existing profitable businesses, and consolidate support functions with its sister U.S. banking entity BPNA, creating a single integrated North American financial services unit.

The Restructuring and Integration Plan for 2007 includes the following:

	•		Exiting the wholesale nonprime mortgage origination business at PFH during early first quarter 2007 and shutting down the wholesale broker, retail and call center business divisions;

	•		Consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA;

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

	•		Focusing on the core Equity One network of 135 consumer finance branches in 14 states;

	•		Growing the third party mortgage servicing business operated by Popular Mortgage Servicing Inc., a subsidiary of PFH (PMSI). PMSI provides the ability to generate income without the collateral risk associated with ownership of the loan portfolio. PMSI was approved as a mortgage servicer by both the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) during 2006; and

	•		Leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that is incurred over time.

The Restructuring and Integration Plan charges between the fourth quarter of 2006 and the first two quarters of 2007 are as follows:


	Fourth
	Quarter		Six months ended
(Dollars in millions)	2006		June 30, 2007		Total

Severance payments		—	$	11.0	$	11.0
Stay and retention bonus				1.0		1.0
Lease terminations		—		7.0		7.0

Total restructuring charges		—		19.0		19.0

Impairment of long-lived assets (included in a separate category in the statement of income)	$	7.2		—	$	7.2
Goodwill impairment (included within amortization of intangibles and goodwill impairment losses in the statement of income)		14.2		—		14.2

Total restructuring and impairment charges	$	21.4	$	19.0	$	40.4

The estimates for 2007 are preliminary as management continues working on the Restructuring and Integration Plan. The impairment of long-lived assets is mainly composed of software and leasehold improvements. The goodwill impairment charges are attributable to businesses being exited at PFH.

U.S. Reorganization

As part of the Integration and Restructuring Plan of PFH, the Corporation actively worked in an internal corporate reorganization of its U.S. subsidiaries (the “Reorganization”). After notifying the Board of Governors of the Federal Reserve System and obtaining approval of the Corporation’s Board of Directors 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 full range of products and conducts its direct activities through its online platform.

Note 35 — Popular, Inc. (Holding Company only) financial information:

The following condensed financial information presents the financial position of Holding Company only as of December 31, 2006 and 2005, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2006.

Statements of Condition


	December 31,
(In thousands)	2006		2005

Assets
Cash	$	2	$	696
Money market investments		8,700		230,000
Investment securities available-for-sale, at market value				18,271
Investments securities held-to-maturity, at amortized cost		430,000		430,000
Other investment securities, at lower of cost or realizable value		143,469		145,535
Investment in BPPR and subsidiaries, at equity		1,690,968		1,596,946
Investment in Popular International Bank and subsidiaries, at equity		1,257,748		1,251,074
Investment in other subsidiaries, at equity		228,655		264,105
Advances to subsidiaries		452,400		10,000
Loans to affiliates		10,000		10,000
Loans		5,249		5,752
Less — Allowance for loan losses		40		40
Premises and equipment		25,628		23,026
Other assets		62,042		45,338

Total assets	$	4,314,821	$	4,030,703


Liabilities and Stockholders’ Equity
Other short-term borrowings	$	150,787
Notes payable		484,406	$	532,441
Accrued expenses and other liabilities		59,322		49,015
Subordinated notes
Stockholders’ equity		3,620,306		3,449,247

Total liabilities and stockholders’ equity	$	4,314,821	$	4,030,703

Statements of Income


	Year ended December 31,
(In thousands)	2006		2005		2004

Income:
Dividends from subsidiaries	$	247,899	$	171,000	$	332,927
Interest on money market and investment securities		39,286		34,259		4,351
Other operating income		17,518		11,771		12,741
Gain on sale and valuation adjustment of investment securities		290		50,469		12,354
Interest on advances to subsidiaries		6,069		416		789
Interest on loans to affiliates		1,256		1,176		1,460
Interest on loans		457		530		212

Total income		312,775		269,621		364,834

Expenses:
Interest expense		36,154		43,850		35,735
Provision for loan losses				14
Operating expenses		1,057		1,380		4,702

Total expenses		37,211		45,244		40,437

Income before income taxes and equity in undistributed earnings of subsidiaries		275,564		224,377		324,397
Income taxes		1,648		3,155		(110	)

Income before equity in undistributed earnings of subsidiaries		273,916		221,222		324,507
Equity in undistributed earnings of subsidiaries		83,760		319,480		165,401

Net income	$	357,676	$	540,702	$	489,908

Statements of Cash Flows


	Year ended December 31,
(In thousands)	2006			2005			2004

Cash flows from operating activities:
Net income	$	357,676		$	540,702		$	489,908

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries and dividends from subsidiaries		(331,659	)		(490,480	)		(498,328	)
Provision for loan losses					14
Net gain on sale and valuation adjustment of investment securities		(290	)		(50,469	)		(12,354	)
Net amortization of premiums and accretion of discounts on investments		(427	)		(546	)
Net amortization of premiums and deferred loan origination fees and costs		(54	)		(99	)		(38	)
Earnings from investments under the equity method		(2,507	)		(3,097	)		(2,430	)
Stock options expense		684			305			459
Net (increase) decrease in other assets		(6,885	)		6,941			(6,178	)
Net (increase) decrease in deferred taxes		(2,876	)		(182	)		882
Net increase in interest payable		647			1,349			880
Net increase in other liabilities		10,158			5,722			2,607

Total adjustments		(333,209	)		(530,542	)		(514,500	)

Net cash provided by (used in) operating activities		24,467			10,160			(24,592	)

Cash flows from investing activities:
Net decrease (increase) in money market investments		221,300			(181,500	)		65,797
Purchases of investment securities:
Available-for-sale					(127,628	)
Held-to-maturity		(269,683	)					(279,985	)
Other					(445	)		(3,904	)
Proceeds from maturities and redemptions of investment securities:
Available-for-sale					110,432
Held-to-maturity		269,683			150,000
Other		2,646			500
Proceeds from sales of investment securities available-for-sale		17,781			57,458			14,502
Capital contribution to subsidiaries		(36,000	)		(75,000	)		(55,559	)
Net change in advances to subsidiaries and affiliates		(442,400	)		15,569			43,899
Net repayments (disbursements) on loans		459			216			(1,806	)
Acquisition of loan portfolios								(4,776	)
Acquisition of premises and equipment		(4,939	)		(3	)		(15,198	)
Proceeds from sale of foreclosed assets		99			297			480
Dividends received from subsidiaries		247,899			171,000			332,927

Net cash provided by investing activities		6,845			120,896			96,377

Cash flows from financing activities:
Net (decrease) increase in assets sold under agreements to repurchase					(6,690	)		6,690
Net (decrease) increase in commercial paper					(4,501	)		4,501
Net increase (decrease) in other short-term borrowings		150,787						(35,675	)
Payments of notes payable		(50,450	)		(135,763	)		(40,549	)
Proceeds from issuance of notes payable		393			5,383			144,220
Cash dividends paid		(188,321	)		(182,751	)		(168,927	)
Proceeds from issuance of common stock		55,678			193,679			17,243
Treasury stock acquired		(93	)

Net cash used in financing activities		(32,006	)		(130,643	)		(72,497	)

Net (decrease) increase in cash		(694	)		413			(712	)
Cash at beginning of year		696			283			995

Cash at end of year	$	2		$	696		$	283

The principal source of income for the Holding Company consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve Board, BPPR 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 described in Note 19. At December 31, 2006, BPPR and BPNA could have declared a dividend of approximately $208,109,000 and $245,644,000, respectively (2005 — $230,685,000 and $191,904,000) without the approval of the Federal Reserve. However, the Corporation has never received any dividend payments from its U.S. subsidiaries and it believes that the likelihood of receiving them in the foreseeable future is remote based on the growth it is undertaking in the U.S. mainland.

Note 36 — 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 December 31, 2006 and 2005, and the results of their operations and cash flows for each of the years ended December 31, 2006, 2005 and 2004, respectively. Prior to 2005, PIBI, PNA, and their wholly-owned subsidiaries, except Banco Popular North America (BPNA) and Banco Popular, National Association (BP, N.A.), had a fiscal year that ended on November 30. Accordingly, the consolidated financial information of PIBI and PNA as of November 30, 2004 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of December 31, 2004.

In 2005, the Corporation commenced a two-year plan to change its non-banking subsidiaries to a calendar reporting year-end. As of December 31, 2005, Popular Securities, Inc., Popular North America (holding company), Popular FS, LLC and Popular Financial Holdings, Inc. (PFH), including its wholly-owned subsidiaries, except E-LOAN, Inc., which already had a December 31^st year-end since its acquisition, continued to have a fiscal year that ended on November 30. Accordingly, their financial information as of November 30, 2005 corresponds to their financial information included in the consolidated financial statements of

Popular, Inc. as of December 31, 2005. As of December 31, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.

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

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., CreST, 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., Popular Mortgage Servicing, Inc. and E-LOAN, Inc.;

	•		BPNA, including its wholly-owned subsidiaries Popular Leasing, U.S.A., Popular Insurance Agency, U.S.A. and Popular FS, LLC;

	•		BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc.; and

	•		EVERTEC USA, Inc.

PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA. As described in Note 35 to the consolidated financial statements, the principal source of income for PIHC consists of dividends from BPPR.

Condensed Consolidating Statement of Condition


At December 31, 2006
	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
Trading account securities, at fair value											382,325						382,325
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
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
Treasury stock, at cost		(206,987	)								(2,146	)		2,146			(206,987	)
Accumulated other comprehensive loss, net of tax		(233,728	)		(55,781	)		(21,012	)		(207,443	)		284,236			(233,728	)

		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

Condensed Consolidating Statement of Condition


At December 31, 2005
	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	$	696		$	2,103		$	448		$	962,395			($59,245	)	$	906,397
Money market investments		230,000			300			245			1,048,586			(529,708	)		749,423
Trading account securities, at fair value											520,236			(898	)		519,338
Investment securities available-for-sale, at fair value		18,271			77,861						11,620,673			(219	)		11,716,586
Investment securities held-to-maturity, at amortized cost		430,000			2,170						150,934			(430,000	)		153,104
Other investment securities, at lower of cost or realizable value		145,535			5,001			13,142			155,425						319,103
Investment in subsidiaries		3,112,125			1,169,867			1,832,349			767,615			(6,881,956	)
Loans held-for-sale, at lower of cost or market value											699,181						699,181

Loans held-in-portfolio		25,752						2,993,028			34,034,625			(5,744,766	)		31,308,639
Less — Unearned income											297,613						297,613
Allowance for loan losses		40									461,667						461,707

		25,712						2,993,028			33,275,345			(5,744,766	)		30,549,319

Premises and equipment, net		23,026									573,786			(241	)		596,571
Other real estate											79,008						79,008
Accrued income receivable		532			33			11,982			253,818			(20,719	)		245,646
Other assets		44,252			40,526			23,804			1,221,472			(4,254	)		1,325,800
Goodwill											653,984						653,984
Other intangible assets		554									109,654						110,208

	$	4,030,703		$	1,297,861		$	4,874,998		$	52,092,112			($13,672,006	)	$	48,623,668


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,025,227			($66,835	)	$	3,958,392
Interest bearing											18,811,225			(131,612	)		18,679,613

											22,836,452			(198,447	)		22,638,005

Federal funds purchased and assets sold under agreements to repurchase							$	117,226			8,968,332			(383,097	)		8,702,461
Other short-term borrowings				$	46,112			721,866			3,521,486			(1,589,203	)		2,700,261
Notes payable	$	532,441						2,833,035			11,055,117			(4,527,016	)		9,893,577
Subordinated notes											430,000			(430,000	)
Other liabilities		49,015			871			42,382			757,646			390,088			1,240,002

		581,456			46,983			3,714,509			47,569,033			(6,737,675	)		45,174,306

Minority interest in consolidated subsidiaries											115						115

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,736,443			3,961			2			70,385			(74,348	)		1,736,443
Surplus		449,787			815,193			734,964			2,778,437			(4,325,983	)		452,398
Retained earnings		1,459,223			480,541			451,271			1,838,530			(2,772,953	)		1,456,612
Treasury stock, at cost		(207,081	)								(4,392	)		4,392			(207,081	)
Accumulated other comprehensive loss, net of tax		(176,000	)		(48,817	)		(25,748	)		(159,996	)		234,561			(176,000	)

		3,449,247			1,250,878			1,160,489			4,522,964			(6,934,331	)		3,449,247

	$	4,030,703		$	1,297,861		$	4,874,998		$	52,092,112			($13,672,006	)	$	48,623,668

Condensed Consolidating Statement of Income


	Year ended December 31, 2006
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	7,782					$	149,166		$	2,615,635			($286,130	)	$	2,486,453
Money market investments		2,199		$	143			520			38,785			(12,021	)		29,626
Investment securities		37,087			1,397			1,403			504,376			(28,026	)		516,237
Trading securities											32,125						32,125

		47,068			1,540			151,089			3,190,921			(326,177	)		3,064,441


INTEREST EXPENSE:
Deposits											583,850			(3,756	)		580,094
Short-term borrowings		537			1,238			26,806			559,750			(69,371	)		518,960
Long-term debt		35,617						177,061			585,618			(260,819	)		537,477

		36,154			1,238			203,867			1,729,218			(333,946	)		1,636,531


Net interest income (loss)		10,914			302			(52,778	)		1,461,703			7,769			1,427,910
Provision for loan losses											287,760						287,760

Net interest income (loss) after provision for loan losses		10,914			302			(52,778	)		1,173,943			7,769			1,140,150
Service charges on deposit accounts											190,079						190,079
Other service fees											429,805			(108,930	)		320,875
Net gain (loss) on sale and valuation adjustment of investment securities		290			13,598						(16,253	)		6,724			4,359
Trading account profit											18,346			16,942			35,288
Gain on sale of loans											122,853			(5,432	)		117,421
Other operating income (loss)		17,518			7,006			(271	)		157,896			(40,686	)		141,463

		28,722			20,906			(53,049	)		2,076,669			(123,613	)		1,949,635


OPERATING EXPENSES:
Personnel costs:
Salaries		19,812			379						500,209			(3,222	)		517,178
Pension, profit sharing and other benefits		5,487			66						146,832			(892	)		151,493

		25,299			445						647,041			(4,114	)		668,671
Net occupancy expenses		2,341			14			2			114,385						116,742
Equipment expenses		1,820			8			12			134,150			(113	)		135,877
Other taxes		1,218									43,325						44,543
Professional fees		14,631			46			225			264,672			(138,040	)		141,534
Communications		621									67,764			(102	)		68,283
Business promotion		4,590									126,604			(1,229	)		129,965
Printing and supplies		70						1			17,670						17,741
Impairment losses on long-lived assets											7,232						7,232
Other operating expenses		(49,533	)		(399	)		436			169,125			(1,501	)		118,128
Impact of change in fiscal period at certain subsidiaries								3,495			4,109			2,137			9,741
Amortization of intangibles and goodwill impairment losses											26,616						26,616

		1,057			114			4,171			1,622,693			(142,962	)		1,485,073

Income (loss) before income tax and equity in earnings of subsidiaries		27,665			20,792			(57,220	)		453,976			19,349			464,562
Income tax		1,648						(15,363	)		116,867			3,734			106,886

Income (loss) before equity in earnings of subsidiaries		26,017			20,792			(41,857	)		337,109			15,615			357,676
Equity in earnings of subsidiaries		331,659			(42,410	)		(2,602	)		(46,768	)		(239,879	)

NET INCOME	$	357,676			($21,618	)		($44,459	)	$	290,341			($224,264	)	$	357,676

Condensed Consolidating Statement of Income


	Year ended December 31, 2005
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	2,122					$	142,050		$	2,207,183			($235,056	)	$	2,116,299
Money market investments		3,955		$	8			90			45,350			(18,667	)		30,736
Investment securities		30,304			598			1,264			484,345			(27,697	)		488,814
Trading securities											30,010						30,010

		36,381			606			143,404			2,766,888			(281,420	)		2,665,859


INTEREST EXPENSE:
Deposits											439,269			(8,456	)		430,813
Short-term borrowings		256			988			17,488			387,362			(56,891	)		349,203
Long-term debt		43,594						154,508			488,839			(225,305	)		461,636

		43,850			988			171,996			1,315,470			(290,652	)		1,241,652


Net interest (loss) income		(7,469	)		(382	)		(28,592	)		1,451,418			9,232			1,424,207
Provision for loan losses		14									195,258						195,272

Net interest (loss) income after provision for loan losses		(7,483	)		(382	)		(28,592	)		1,256,160			9,232			1,228,935
Service charges on deposit accounts											181,749						181,749
Other service fees											435,505			(104,004	)		331,501
Net gain (loss) on sale and valuation adjustment of investment securities		50,469			9,236						(6,694	)		(898	)		52,113
Trading account profit											16,625			13,426			30,051
Gain on sale of loans											106,598			(23,301	)		83,297
Other operating income		11,771			5,971						127,680			(38,858	)		106,564

		54,757			14,825			(28,592	)		2,117,623			(144,403	)		2,014,210


OPERATING EXPENSES:
Personnel costs:
Salaries					367						478,118			(3,849	)		474,636
Pension, profit sharing and other benefits					58						149,092			(1,097	)		148,053

					425						627,210			(4,946	)		622,689
Net occupancy expenses					14						108,372						108,386
Equipment expenses		31			2			10			124,294			(61	)		124,276
Other taxes		1,021									38,176						39,197
Professional fees		4,536			16			80			249,558			(134,909	)		119,281
Communications		56									63,412			(73	)		63,395
Business promotion		6,292									94,142						100,434
Printing and supplies											18,378						18,378
Other operating expenses		(10,556	)		32			486			134,136			(1,513	)		122,585
Amortization of intangibles											9,579						9,579

		1,380			489			576			1,467,257			(141,502	)		1,328,200

Income (loss) before income tax, cumulative effect of accounting change and equity in earnings of subsidiaries		53,377			14,336			(29,168	)		650,366			(2,901	)		686,010
Income tax		3,155						(10,266	)		156,797			(771	)		148,915

Income (loss) before cumulative effect of accounting change and equity in earnings of subsidiaries		50,222			14,336			(18,902	)		493,569			(2,130	)		537,095
Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Income (loss) before equity in earnings of subsidiaries		50,222			15,027			(18,902	)		498,063			(3,708	)		540,702
Equity in earnings of subsidiaries		490,480			84,018			101,512			62,055			(738,065	)

NET INCOME	$	540,702		$	99,045		$	82,610		$	560,118			($741,773	)	$	540,702

Condensed Consolidating Statement of Income


	Year ended December 31, 2004
	Popular, Inc.			PIBI			PNA			Other		Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries		Entries			Consolidated

INTEREST INCOME:
Loans	$	2,461					$	127,400		$	1,815,330		($194,041	)	$	1,751,150
Money market investments		835		$	5			310			33,861		(9,351	)		25,660
Investment securities		3,516						867			410,245		(1,136	)		413,492
Trading securities											25,963					25,963

		6,812			5			128,577			2,285,399		(204,528	)		2,216,265


INTEREST EXPENSE:
Deposits											334,109		(3,758	)		330,351
Short-term borrowings		588			62			6,720			184,616		(26,561	)		165,425
Long-term debt		35,147			63			132,483			359,169		(181,884	)		344,978

		35,735			125			139,203			877,894		(212,203	)		840,754


Net interest (loss) income		(28,923	)		(120	)		(10,626	)		1,407,505		7,675			1,375,511
Provision for loan losses											178,657					178,657

Net interest (loss) income after provision for loan losses		(28,923	)		(120	)		(10,626	)		1,228,848		7,675			1,196,854
Service charges on deposit accounts											165,241					165,241
Other service fees											363,158		(67,607	)		295,551
Gain on sale of investment securities		12,354			2,206			14			680					15,254
Trading account profit (loss)											1,262		(1,421	)		(159	)
Gain on sale of loans											63,115		(18,947	)		44,168
Other operating income		12,741			5,640			81			89,897		(19,643	)		88,716

		(3,828	)		7,726			(10,531	)		1,912,201		(99,943	)		1,805,625

OPERATING EXPENSES:
Personnel costs:
Salaries					330						425,247		2,293			427,870
Pension, profit sharing and other benefits					55						142,365		728			143,148

					385						567,612		3,021			571,018
Net occupancy expenses					13						89,262		546			89,821
Equipment expenses		4			1			7			106,136		2,675			108,823
Other taxes		1,263									38,815		182			40,260
Professional fees		1,864			1			222			184,372		(91,375	)		95,084
Communications		68									60,595		302			60,965
Business promotion											75,695		13			75,708
Printing and supplies											17,761		177			17,938
Other operating expenses		1,503			82			543			102,081		(658	)		103,551
Amortization of intangibles											7,844					7,844

		4,702			482			772			1,250,173		(85,117	)		1,171,012

(Loss) income before income tax and equity in earnings of subsidiaries		(8,530	)		7,244			(11,303	)		662,028		(14,826	)		634,613
Income tax		(110	)					(3,070	)		152,042		(4,157	)		144,705

(Loss) income before equity in earnings of subsidiaries		(8,420	)		7,244			(8,233	)		509,986		(10,669	)		489,908
Equity in earnings of subsidiaries		498,328			110,412			117,535			49,641		(775,916	)

NET INCOME	$	489,908		$	117,656		$	109,302		$	559,627		($786,585	)	$	489,908

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2006
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net income	$	357,676		$	(21,618	)	$	(44,459	)	$	290,341		$	(224,264	)	$	357,676
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		357,676			(21,618	)		(42,188	)		292,979			(223,044	)		363,805

Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(331,659	)		42,410			2,602			46,768			239,879
Depreciation and amortization of premises and equipment		2,333						2			82,126			(73	)		84,388
Provision for loan losses											287,760						287,760
Amortization of intangibles and goodwill impairment losses											26,616						26,616
Impairment losses on long-lived assets											7,232						7,232
Amortization of servicing assets											62,849			(30	)		62,819
Net (gain) loss on sale and valuation adjustment of investment securities		(290	)		(13,598	)					16,253			(6,724	)		(4,359	)
Net loss (gain) on disposition of premises and equipment		4									(25,933	)					(25,929	)
Net gain on sale of loans											(122,853	)		5,432			(117,421	)
Net amortization of premiums and accretion of discounts on investments		(427	)		14			(118	)		24,648			(199	)		23,918
Net amortization of premiums and deferred loan origination fees and costs		(54	)								135,974			(5,829	)		130,091
Earnings from investments under the equity method		(2,507	)		(6,995	)					(1,286	)		(1,482	)		(12,270	)
Stock options expense		684									2,322						3,006
Net disbursements on loans held-for-sale											(6,580,246	)					(6,580,246	)
Acquisitions of loans held-for-sale											(1,547,800	)		44,783			(1,503,017	)
Proceeds from sale of loans held-for-sale											6,826,864			(44,783	)		6,782,081
Net decrease in trading securities											1,369,462			(487	)		1,368,975
Net (increase) decrease in accrued income receivable		(527	)		21			963			(11,612	)		6,946			(4,209	)
Net (increase) decrease in other assets		(11,002	)		4,636			24,566			1,946			5,793			25,939
Net increase (decrease) in interest payable		647			(23	)		2,828			35,984			(6,959	)		32,477
Deferred income taxes		(569	)					(15,471	)		(48,800	)		38,632			(26,208	)
Net increase in postretirement benefit obligation											4,112						4,112
Net increase (decrease) in other liabilities		10,158			6			30,341			(86,169	)		(37,880	)		(83,544	)

Total adjustments		(333,209	)		26,471			45,713			506,217			237,019			482,211

Net cash provided by operating activities		24,467			4,853			3,525			799,196			13,975			846,016

Cash flows from investing activities:
Net decrease (increase) in money market investments		221,300			(775	)		(2,407	)		485,269			(321,966	)		381,421
Purchases of investment securities:
Available-for-sale					(20,574	)					(708,142	)		473,786			(254,930	)
Held-to-maturity		(269,683	)								(20,593,684	)					(20,863,367	)
Other								(13,010	)		(53,016	)					(66,026	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale								10,360			2,338,309			(472,211	)		1,876,458
Held-to-maturity		269,683									20,656,164						20,925,847
Other		2,646									85,668						88,314
Proceeds from sales of investment securities available-for-sale		17,781			28,662						154,426			7,933			208,802
Net disbursements on loans		(441,941	)					(127,083	)		(1,881,055	)		862,753			(1,587,326	)
Proceeds from sale of loans											938,862						938,862
Acquisition of loan portfolios											(448,708	)					(448,708	)
Capital contribution to subsidiary		(36,000	)		(4,000	)		(4,127	)		(30,084	)		74,211
Assets acquired, net of cash											(3,034	)					(3,034	)
Acquisition of premises and equipment		(4,939	)								(102,971	)		3,317			(104,593	)
Proceeds from sale of premises and equipment											91,230			(3,317	)		87,913
Proceeds from sale of foreclosed assets		99									138,604						138,703
Dividends received from subsidiary		247,899									60,763			(308,662	)

Net cash provided by (used in) investing activities		6,845			3,313			(136,267	)		1,128,601			315,844			1,318,336

Cash flows from financing activities:
Net increase in deposits											1,724,205			65,457			1,789,662
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase								18,129			(3,328,993	)		257,697			(3,053,167	)
Net increase (decrease) in other short-term borrowings		150,787			(46,112	)		535,857			1,128,136			(541,695	)		1,226,973
Payments of notes payable		(50,450	)					(907,062	)		(3,464,344	)		952,427			(3,469,429	)
Proceeds from issuance of notes payable		393						485,614			2,318,236			(1,297,945	)		1,506,298
Dividends paid to parent company											(308,662	)		308,662
Dividends paid		(188,321	)														(188,321	)
Proceeds from issuance of common stock		55,678									3,300			(3,132	)		55,846
Treasury stock acquired		(93	)								(274	)					(367	)
Capital contribution from parent					36,000						34,104			(70,104	)
Net cash (used in) provided by financing activities		(32,006	)		(10,112	)		132,538			(1,894,292	)		(328,633	)		(2,132,505	)

Cash effect of change in fiscal period								78			19,570			(7,734	)		11,914

Net (decrease) increase in cash and due from banks		(694	)		(1,946	)		(126	)		53,075			(6,548	)		43,761
Cash and due from banks at beginning of period		696			2,103			448			962,395			(59,245	)		906,397

Cash and due from banks at end of period	$	2		$	157		$	322		$	1,015,470		$	(65,793	)	$	950,158

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2005
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net income	$	540,702		$	99,045		$	82,610		$	560,118		$	(741,773	)	$	540,702

Less: Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Net income before cumulative effect of accounting change		540,702			98,354			82,610			555,624			(740,195	)		537,095

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(490,480	)		(84,018	)		(101,512	)		(62,055	)		738,065
Depreciation and amortization of premises and equipment		1,511									80,508			(72	)		81,947
Provision for loan losses		14									195,258						195,272
Amortization of intangibles											9,579						9,579
Amortization of servicing assets											25,813			(47	)		25,766
Net (gain) loss on sale and valuation adjustment of investment securities		(50,469	)		(9,236	)					6,694			898			(52,113	)
Net gain on disposition of premises and equipment											(29,079	)					(29,079	)
Net gain on sale of loans											(106,598	)		23,301			(83,297	)
Net amortization of premiums and accretion of discounts on investments		(546	)		10						36,518			(694	)		35,288
Net amortization of premiums and deferred loan origination fees and costs		(99	)								134,452			(7,118	)		127,235
Earnings from investments under the equity method		(3,097	)		(5,518	)					(790	)		(1,577	)		(10,982	)
Stock options expense		305									4,887			34			5,226
Net disbursements on loans held-for-sale											(4,321,658	)					(4,321,658	)
Acquisitions of loans held-for-sale											(733,536	)					(733,536	)
Proceeds from sale of loans held-for-sale											4,127,381						4,127,381
Net decrease in trading securities											1,161,956			(976	)		1,160,980
Net increase in accrued income receivable		(347	)		(33	)		(1,146	)		(32,159	)		2,877			(30,808	)
Net decrease (increase) in other assets		5,777			2,613			2,856			(164,531	)		(24,633	)		(177,918	)
Net increase in interest payable		1,349			3			323			36,421			(2,878	)		35,218
Deferred income taxes		(182	)					(10,266	)		7,097			(328	)		(3,679	)
Net increase in postretirement benefit obligation											5,451						5,451
Net increase (decrease) in other liabilities		5,722			(21	)		7,010			7,627			93			20,431

Total adjustments		(530,542	)		(96,200	)		(102,735	)		389,236			726,945			386,704

Net cash provided by (used in) operating activities		10,160			2,154			(20,125	)		944,860			(13,250	)		923,799

Cash flows from investing activities:
Net ( increase) decrease in money market investments		(181,500	)					(31	)		209,122			132,470			160,061
Purchases of investment securities:
Available-for-sale		(127,628	)		(71,293	)					(4,954,363	)		910,122			(4,243,162	)
Held-to-maturity					(2,431	)					(33,577,371	)					(33,579,802	)
Other		(445	)					(770	)		(76,501	)					(77,716	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		110,432						4,978			4,115,508			(913,720	)		3,317,198
Held-to-maturity		150,000			250						33,637,018						33,787,268
Other		500									60,553						61,053
Proceeds from sales of investment securities available-for-sale		57,458			32,111						299,027						388,596
Net repayments (disbursements) on loans		15,785						(156,327	)		(568,155	)		365,604			(343,093	)
Proceeds from sale of loans											297,805						297,805
Acquisition of loan portfolios											(2,650,540	)					(2,650,540	)
Capital contribution to subsidiary		(75,000	)		(75,000	)		(478,510	)		(306,868	)		935,378
Assets acquired, net of cash											(411,782	)					(411,782	)
Acquisition of premises and equipment		(3	)								(159,163	)					(159,166	)
Proceeds from sale of premises and equipment											71,053						71,053
Proceeds from sale of foreclosed assets		297									116,862						117,159
Dividends received from subsidiary		171,000						150,000			52,500			(373,500	)

Net cash provided by (used in) investing activities		120,896			(116,363	)		(480,660	)		(3,845,295	)		1,056,354			(3,265,068	)

Cash flows from financing activities:
Net increase in deposits											1,261,945			109,723			1,371,668
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(6,690	)					45,926			2,438,448			(249,796	)		2,227,888
Net (decrease) increase in other short-term borrowings		(4,501	)		41,286			382,213			(817,323	)		(367,952	)		(766,277	)
Payments of notes payable		(135,763	)					(15,808	)		(3,558,141	)		1,058,740			(2,650,972	)
Proceeds from issuance of notes payable		5,383						13,518			3,362,405			(1,040,295	)		2,341,011
Dividends paid to parent company											(373,500	)		373,500
Dividends paid		(182,751	)														(182,751	)
Proceeds from issuance of common stock		193,679															193,679
Treasury stock acquired											(1,467	)					(1,467	)
Capital contribution from parent					75,000			75,000			784,915			(934,915	)

Net cash (used in) provided by financing activities		(130,643	)		116,286			500,849			3,097,282			(1,050,995	)		2,532,779

Cash effect of change in accounting principle					(28	)					(1,544	)					(1,572	)

Net increase in cash and due from banks		413			2,049			64			195,303			(7,891	)		189,938
Cash and due from banks at beginning of period		283			54			384			767,092			(51,354	)		716,459

Cash and due from banks at end of period	$	696		$	2,103		$	448		$	962,395		$	(59,245	)	$	906,397

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2004
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net income	$	489,908		$	117,656		$	109,302		$	559,627		$	(786,585	)	$	489,908

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(498,328	)		(110,412	)		(117,535	)		(49,641	)		775,916
Depreciation and amortization of premises and equipment		1,042									72,302			926			74,270
Provision for loan losses											178,657						178,657
Amortization of intangibles											7,844						7,844
Amortization of servicing assets											14,838			(65	)		14,773
Net gain on sale of investment securities		(12,354	)		(2,206	)		(14	)		(680	)					(15,254	)
Net gain on disposition of premises and equipment											(15,804	)					(15,804	)
Net gain on sale of loans											(63,115	)		18,947			(44,168	)
Net amortization of premiums and accretion of discounts on investments											41,948			(887	)		41,061
Net amortization of premiums and deferred loan origination fees and costs		(38	)								124,159			(6,034	)		118,087
Earnings from investments under the equity method		(2,430	)		(5,220	)					(621	)					(8,271	)
Stock options expense		459									2,742			22			3,223
Net disbursements on loans held-for-sale											(686,230	)					(686,230	)
Acquisitions of loans held-for-sale											(21,415	)					(21,415	)
Proceeds from sale of loans held-for-sale											163,753						163,753
Net increase in trading securities											(143,490	)		6,281			(137,209	)
Net decrease (increase) in accrued income receivable		20			1			344			(24,860	)		281			(24,214	)
Net increase in other assets		(6,247	)		(21,253	)		(2,083	)		(246,366	)		5,928			(270,021	)
Net increase (decrease) in interest payable		880			(18	)		5,546			23,960			(283	)		30,085
Deferred income taxes		(111	)					(3,563	)		3,640			(4,157	)		(4,191	)
Net increase in postretirement benefit obligation											5,679						5,679
Net increase (decrease) in other liabilities		2,607			(15	)		(950	)		70,970			28,026			100,638

Total adjustments		(514,500	)		(139,123	)		(118,255	)		(541,730	)		824,901			(488,707	)

Net cash (used in) provided by operating activities		(24,592	)		(21,467	)		(8,953	)		17,897			38,316			1,201

Cash flows from investing activities:
Net decrease (increase) in money market investments		65,797						56,676			(96,747	)		(132,274	)		(106,548	)
Purchases of investment securities:
Available-for-sale								(1,500	)		(6,222,302	)		603,705			(5,620,097	)
Held-to-maturity		(279,985	)								(1,197,603	)		130,000			(1,347,588	)
Other		(3,904	)					(7,732	)		(68,221	)					(79,857	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											5,230,556			(602,505	)		4,628,051
Held-to-maturity											1,085,175						1,085,175
Other					1						10,560						10,561
Proceeds from sales of investment securities available-for-sale		14,502			3,271			1,514			612,864						632,151
Net repayments (disbursements) on loans		42,093						(325,438	)		(1,717,628	)		718,171			(1,282,802	)
Proceeds from sale of loans											559,581			(4,510	)		555,071
Acquisition of loan portfolios		(4,776	)								(3,671,827	)		4,510			(3,672,093	)
Capital contribution to subsidiaries		(55,559	)		(40,000	)		(374,161	)					469,720
Assets acquired, net of cash											(169,036	)					(169,036	)
Acquisition of premises and equipment		(15,198	)								(130,662	)		(612	)		(146,472	)
Proceeds from sale of premises and equipment											34,846						34,846
Proceeds from sale of foreclosed assets		480									126,473						126,953
Dividends received from subsidiary		332,927												(332,927	)

Net cash provided by (used in) investing activities		96,377			(36,728	)		(650,641	)		(5,613,971	)		853,278			(5,351,685	)

Cash flows from financing activities:
Net increase in deposits											1,306,173			24,730			1,330,903
Net increase in federal funds purchased and assets sold under agreements to repurchase		6,690						71,300			429,797			69,825			577,612
Net (decrease) increase in other short-term borrowings		(31,174	)		4,620			163,892			1,191,070			(224,893	)		1,103,515
Payments of notes payable		(40,549	)		(8,573	)		(287,740	)		(2,489,900	)		162,559			(2,664,203	)
Proceeds from issuance of notes payable		144,220						670,082			5,063,116			(693,449	)		5,183,969
Dividends paid to parent company											(247,927	)		247,927
Dividends paid		(168,927	)														(168,927	)
Proceeds from issuance of common stock		17,243									15,000			(15,000	)		17,243
Treasury stock acquired											(1,259	)					(1,259	)
Capital contribution from parent					62,155			40,000			374,915			(477,070	)

Net cash (used in) provided by financing activities		(72,497	)		58,202			657,534			5,640,985			(905,371	)		5,378,853

Net (decrease) increase in cash and due from banks		(712	)		7			(2,060	)		44,911			(13,777	)		28,369
Cash and due from banks at beginning of year		995			47			2,444			722,181			(37,577	)		688,090

Cash and due from banks at end of year	$	283		$	54		$	384		$	767,092		$	(51,354	)	$	716,459