10-Q 1 g10138e10vq.htm POPULAR, INC. POPULAR, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended   September 30, 2007
Commission File Number: 000-13818
POPULAR, INC.
 
(Exact name of registrant as specified in its charter)
     
 
Puerto Rico
   
66-0667416
     
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer Identification Number)
     
Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico
  00918
     
(Address of principal executive offices)   (Zip code)
(787) 765-9800
 
(Registrant’s telephone number, including area code)
 
NOT APPLICABLE
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                        þ Yes            o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ                          Accelerated filer o    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                        o Yes                þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 280,286,329 shares outstanding as of October 31, 2007.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page  
Part I – Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    61  
 
       
    108  
 
       
    113  
 
       
       
 
       
    113  
 
       
    113  
 
       
    116  
 
       
    117  
 
       
    118  
 EX-3.1 BYLAWS
 EX-12.1 COMPUTATION OF RATIO OF EARNINGS
 EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

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Forward-Looking Information
The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to: the rate of growth in the economy, as well as general business and economic conditions; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets; the performance of the stock and bond markets; competition in the financial services industry; possible legislative, tax or regulatory changes; and difficulties in combining the operations of acquired entities.
Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.
All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

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ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
                         
    September 30,   December 31,   September 30,
(In thousands, except share information)   2007   2006   2006
 
ASSETS
                       
Cash and due from banks
  $ 709,056     $ 950,158     $ 736,669  
 
Money market investments:
                       
Federal funds sold
    430,000       84,350       323,980  
Securities purchased under agreements to resell
    180,394       202,181       211,439  
Time deposits with other banks
    24,703       15,177       9,830  
 
 
    635,097       301,708       545,249  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    4,742,127       3,743,924       4,463,023  
Other investment securities available-for-sale
    4,136,368       6,106,938       5,695,302  
Investment securities held-to-maturity, at amortized cost (market value at September 30, 2007 - $280,072; December 31, 2006 - $92,764; September 30, 2006 – $358,849)
    279,267       91,340       357,430  
Other investment securities, at lower of cost or realizable value (realizable value at September 30, 2007 - $179,598; December 31, 2006 - $412,593; September 30, 2006 - $407,849)
    179,376       297,394       297,472  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    569,357       193,619       211,942  
Other trading securities
    92,801       188,706       239,720  
Loans held-for-sale, at lower of cost or market value
    423,303       719,922       447,314  
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
    160,923       306,320       51,260  
Other loans held-in-portfolio
    33,067,301       32,019,044       31,563,499  
Less – Unearned income
    330,723       308,347       305,114  
Allowance for loan losses
    600,273       522,232       487,339  
 
 
    32,297,228       31,494,785       30,822,306  
 
Premises and equipment, net
    580,768       595,140       588,282  
Other real estate
    133,508       84,816       83,636  
Accrued income receivable
    290,916       248,240       288,342  
Other assets
    1,441,681       1,611,890       1,374,900  
Goodwill
    668,807       667,853       678,666  
Other intangible assets
    100,471       107,554       104,497  
 
 
  $ 47,280,131     $ 47,403,987     $ 46,934,750  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 3,975,383     $ 4,222,133     $ 3,822,584  
Interest bearing
    22,626,132       20,216,198       19,314,861  
 
 
    26,601,515       24,438,331       23,137,445  
Federal funds purchased and assets sold under agreements to repurchase
    6,287,303       5,762,445       7,045,466  
Other short-term borrowings
    1,414,897       4,034,125       2,709,511  
Notes payable
    8,314,791       8,737,246       9,681,897  
Other liabilities
    857,795       811,424       724,296  
 
 
    43,476,301       43,783,571       43,298,615  
 
Commitments and contingencies (See Note 12)
                       
 
Minority interest in consolidated subsidiaries
    109       110       111  
 
Stockholders’ equity:
                       
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented
    186,875       186,875       186,875  
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 292,993,474 shares issued (December 31, 2006 – 292,190,924; September 30, 2006 – 291,977,949) and 279,597,529 outstanding (December 31, 2006 – 278,741,547; September 30, 2006 – 278,553,152)
    1,757,961       1,753,146       1,751,868  
Surplus
    536,129       526,856       494,398  
Retained earnings
    1,689,384       1,594,144       1,611,103  
Accumulated other comprehensive loss, net of tax of ($56,551) (December 31, 2006 – ($84,143); September 30, 2006 – ($61,834))
    (161,061 )     (233,728 )     (201,687 )
Treasury stock – at cost, 13,395,945 shares (December 31, 2006 – 13,449,377; September 30, 2006 – 13,424,797)
    (205,567 )     (206,987 )     (206,533 )
 
 
    3,803,721       3,620,306       3,636,024  
 
 
  $ 47,280,131     $ 47,403,987     $ 46,934,750  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands, except per share information)   2007   2006   2007   2006
 
INTEREST INCOME:
                               
Loans
  $ 662,973     $ 637,246     $ 1,963,572     $ 1,842,873  
Money market investments
    6,807       7,038       17,168       22,926  
Investment securities
    109,793       129,323       338,347       396,130  
Trading account securities
    10,653       7,724       29,645       23,649  
 
 
    790,226       781,331       2,348,732       2,285,578  
 
INTEREST EXPENSE:
                               
Deposits
    196,825       151,008       552,657       411,380  
Short-term borrowings
    113,832       141,727       358,107       393,604  
Long-term debt
    119,453       146,558       351,453       413,013  
 
 
    430,110       439,293       1,262,217       1,217,997  
 
Net interest income
    360,116       342,038       1,086,515       1,067,581  
Provision for loan losses
    148,093       63,445       359,606       179,488  
 
Net interest income after provision for loan losses
    212,023       278,593       726,909       888,093  
Service charges on deposit accounts
    49,704       47,484       146,567       142,277  
Other service fees (See Note 13)
    93,364       79,637       270,803       240,000  
Net (loss) gain on sale and valuation adjustments of investment securities
    (3,089 )     7,123       79,857       5,039  
Trading account (loss) profit
    (2,867 )     10,019       (6,654 )     23,324  
Gain on sale of loans and valuation adjustments on loans held-for-sale
    5,991       20,113       37,719       96,428  
Other operating income
    23,902       26,973       94,264       97,100  
 
 
    379,028       469,942       1,349,465       1,492,261  
 
OPERATING EXPENSES:
                               
Personnel costs:
                               
Salaries
    120,810       130,613       384,239       392,845  
Pension, profit sharing and other benefits
    31,430       34,083       110,664       116,386  
 
 
    152,240       164,696       494,903       509,231  
Net occupancy expenses
    29,436       31,573       87,951       88,840  
Equipment expenses
    30,688       34,346       95,329       101,516  
Other taxes
    13,227       11,770       36,909       32,940  
Professional fees
    37,103       29,618       111,732       105,184  
Communications
    16,846       17,343       50,881       51,936  
Business promotion
    28,560       33,855       87,301       98,669  
Printing and supplies
    4,131       4,408       12,956       13,331  
Other operating expenses
    32,508       28,706       97,362       85,609  
Impact of change in fiscal period of certain subsidiaries
                      9,741  
Amortization of intangibles
    2,234       3,608       8,030       9,160  
 
 
    346,973       359,923       1,083,354       1,106,157  
 
Income before income tax
    32,055       110,019       266,111       386,104  
Income tax
    (3,948 )     27,859       36,511       88,060  
 
NET INCOME
  $ 36,003     $ 82,160     $ 229,600     $ 298,044  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 33,024     $ 79,181     $ 220,665     $ 289,109  
 
BASIC EARNINGS PER COMMON SHARE (“EPS”)
  $ 0.12     $ 0.28     $ 0.79     $ 1.04  
 
DILUTED EPS
  $ 0.12     $ 0.28     $ 0.79     $ 1.04  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16     $ 0.48     $ 0.48  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Nine months ended
    September 30,
(In thousands)   2007   2006
 
Preferred stock:
               
Balance at beginning and end of year
  $ 186,875     $ 186,875  
 
Common stock:
               
Balance at beginning of year
    1,753,146       1,736,443  
Common stock issued under the Dividend Reinvestment Plan
    4,755       3,919  
Issuance of common stock
          11,312  
Stock options exercised
    60       194  
 
Balance at end of period
    1,757,961       1,751,868  
 
Surplus:
               
Balance at beginning of year
    526,856       452,398  
Common stock issued under the Dividend Reinvestment Plan
    7,835       8,634  
Issuance of common stock
          28,281  
Issuance cost of common stock
          1,462  
Stock options expense on unexercised options, net of forfeitures
    1,289       2,160  
Stock options exercised
    149       463  
Transfer from retained earnings
          1,000  
 
Balance at end of period
    536,129       494,398  
 
Retained earnings:
               
Balance at beginning of year
    1,594,144       1,456,612  
Net income
    229,600       298,044  
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)
    8,667        
Cash dividends declared on common stock
    (134,092 )     (133,618 )
Cash dividends declared on preferred stock
    (8,935 )     (8,935 )
Transfer to surplus
          (1,000 )
 
Balance at end of period
    1,689,384       1,611,103  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (233,728 )     (176,000 )
Other comprehensive income (loss), net of tax
    72,667       (25,687 )
 
Balance at end of period
    (161,061 )     (201,687 )
 
Treasury stock – at cost:
               
Balance at beginning of year
    (206,987 )     (207,081 )
Purchase of common stock
    (352 )      
Reissuance of common stock
    1,772       548  
 
Balance at end of period
    (205,567 )     (206,533 )
 
Total stockholders’ equity
  $ 3,803,721     $ 3,636,024  
 
Disclosure of changes in number of shares:
                         
    September 30,   December 31,   September 30,
    2007   2006   2006
 
Preferred Stock:
                       
Balance at beginning and end of period
    7,475,000       7,475,000       7,475,000  
 
Common Stock – Issued:
                       
Balance at beginning of year
    292,190,924       289,407,190       289,407,190  
Issued under the Dividend Reinvestment Plan
    792,486       858,905       653,142  
Issuance of common stock
          1,885,380       1,885,380  
Stock options exercised
    10,064       39,449       32,237  
 
Balance at end of period
    292,993,474       292,190,924       291,977,949  
 
Treasury stock
    (13,395,945 )     (13,449,377 )     (13,424,797 )
 
Common Stock – outstanding
    279,597,529       278,741,547       278,553,152  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
                                 
    Quarter ended     Nine months ended  
    September 30,     September 30,  
(In thousands)   2007     2006     2007     2006  
 
Net income
  $ 36,003     $ 82,160     $ 229,600     $ 298,044  
 
Other comprehensive income (loss), before tax:
                               
Foreign currency translation adjustment
    (966 )     (150 )     2,014       (467 )
Adjustment of pension and postretirement benefit plans
                (519 )      
Unrealized gains (losses) on securities available-for-sale arising during the period
    156,462       192,674       100,493       (23,150 )
Reclassification adjustment for losses (gains) included in net income
    3       (7,123 )     (80 )     (5,039 )
Unrealized net losses on cash flows hedges
    (2,065 )     (4,992 )     (1,117 )     (1,082 )
Reclassification adjustment for (gains) losses included in net income
    (164 )     1,126       (289 )     509  
Cumulative effect of accounting change
                (243 )      
 
 
    153,270       181,535       100,259       (29,229 )
Income tax (expense) benefit
    (39,514 )     (48,433 )     (27,592 )     3,542  
 
Total other comprehensive income (loss), net of tax
    113,756       133,102       72,667       (25,687 )
 
Comprehensive income
  $ 149,759     $ 215,262     $ 302,267     $ 272,357  
 
Tax Effects Allocated to Each Component of Other Comprehensive Income:
                                 
    Quarter ended     Nine months ended  
    September 30,     September 30,  
(In thousands)   2007     2006     2007     2006  
 
Underfunding of pension and postretirement benefit plans
              $ 180        
Unrealized gains (losses) on securities available-for-sale arising during the period
    ($40,302 )     ($49,801 )     (28,280 )   $ 3,348  
Reclassification adjustment for losses (gains) included in net income
    (1 )     3       13       (3 )
Unrealized net losses on cash flows hedges
    723       1,807       371       425  
Reclassification adjustment for (gains) losses included in net income
    66       (442 )     124       (228 )
 
Income tax (expense) benefit
    ($39,514 )     ($48,433 )     ($27,592 )   $ 3,542  
 
Disclosure of accumulated other comprehensive loss:
                       
    September 30,     December 31,     September 30,  
(In thousands)   2007     2006     2006  
 
Foreign currency translation adjustment
    ($34,687 )     ($36,701 )     ($36,782 )
 
Minimum pension liability adjustment
          (3,893 )     (2,354 )
Tax effect
          1,518       918  
 
Adoption of SFAS No. 158
          3,893        
Tax effect
          (1,518 )      
 
Net of tax amount
                (1,436 )
 
Underfunding of pension and postretirement benefit plans
    (69,779 )     (69,260 )      
Tax effect
    27,214       27,034        
 
Net of tax amount
    (42,565 )     (42,226 )      
 
Unrealized losses on securities available-for-sale
    (111,830 )     (212,243 )     (223,879 )
Tax effect
    28,879       57,146       60,642  
 
Net of tax amount
    (82,951 )     (155,097 )     (163,237 )
 
Unrealized (losses) gains on cash flows hedges
    (1,316 )     90       (749 )
Tax effect
    458       (37 )     274  
 
Net of tax amount
    (858 )     53       (475 )
 
Cumulative effect of accounting change, net of tax
          243       243  
 
Accumulated other comprehensive loss, net of tax
    ($161,061 )     ($233,728 )     ($201,687 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Nine months ended September 30,
(In thousands)   2007   2006
 
Cash flows from operating activities:
               
Net income
  $ 229,600     $ 298,044  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
          (6,129 )
 
Net income before change in fiscal period
    229,600       304,173  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    59,558       63,805  
Provision for loan losses
    359,606       179,488  
Amortization of intangibles
    8,030       9,160  
Amortization and fair value adjustments of servicing assets
    34,941       43,309  
Net gain on sale and valuation adjustments of investment securities
    (79,857 )     (5,039 )
Net gain on disposition of premises and equipment
    (5,293 )     (7,177 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
    (37,719 )     (96,428 )
Net amortization of premiums and accretion of discounts on investments
    15,801       19,060  
Net amortization of premiums and deferred loan origination fees and costs
    70,645       99,065  
Earnings from investments under the equity method
    (19,514 )     (9,081 )
Stock options expense
    1,339       2,308  
Deferred income taxes
    (94,581 )     (19,630 )
Net disbursements on loans held-for-sale
    (4,007,301 )     (4,963,647 )
Acquisitions of loans held-for-sale
    (474,269 )     (1,188,844 )
Proceeds from sale of loans held-for-sale
    3,475,817       5,559,968  
Net decrease in trading securities
    1,003,078       1,195,639  
Net increase in accrued income receivable
    (42,675 )     (44,311 )
Net decrease in other assets
    30,507       67,881  
Net increase in interest payable
    4,586       41,257  
Net increase in postretirement benefit obligation
    2,407       3,028  
Net increase (decrease) in other liabilities
    18,645       (88,160 )
 
Total adjustments
    323,751       861,651  
 
Net cash provided by operating activities
    553,351       1,165,824  
 
Cash flows from investing activities:
               
Net (increase) decrease in money market investments
    (266,954 )     204,322  
Purchases of investment securities:
               
Available-for-sale
    (67,920 )     (243,481 )
Held-to-maturity
    (17,026,831 )     (20,847,771 )
Other
    (47,786 )     (50,980 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    1,066,304       1,560,612  
Held-to-maturity
    16,844,551       20,644,100  
Other
    17,071       72,611  
Proceeds from sale of investment securities available-for-sale
    37,352       198,191  
Proceeds from sale of other investment securities
    246,352        
Net disbursements on loans
    (1,137,982 )     (877,628 )
Proceeds from sale of loans
    16,367       759,518  
Acquisition of loan portfolios
    (22,312 )     (291,330 )
Assets acquired, net of cash
    (2,378 )     (2,752 )
Mortgage servicing rights purchased
    (25,596 )     (18,723 )
Acquisition of premises and equipment
    (69,607 )     (85,415 )
Proceeds from sale of premises and equipment
    29,501       39,031  
Proceeds from sale of foreclosed assets
    113,776       99,928  
 
Net cash (used in) provided by investing activities
    (296,092 )     1,160,233  
 
Cash flows from financing activities:
               
Net increase in deposits
    2,150,668       494,091  
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase
    524,858       (1,770,146 )
Net decrease in other short-term borrowings
    (2,619,228 )     (97,642 )
Payments of notes payable
    (1,245,332 )     (1,822,303 )
Proceeds from issuance of notes payable
    821,087       777,171  
Dividends paid
    (142,898 )     (140,765 )
Proceeds from issuance of common stock
    12,836       51,895  
Treasury stock acquired
    (352 )      
 
Net cash used in financing activities
    (498,361 )     (2,507,699 )
 
Cash effect of change in fiscal period of certain subsidiaries
          11,914  
 
Net decrease in cash and due from banks
    (241,102 )     (169,728 )
Cash and due from banks at beginning of period
    950,158       906,397  
 
Cash and due from banks at end of period
  $ 709,056     $ 736,669  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
Note 1 – Nature of Operations and Basis of Presentation
Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider based in Puerto Rico with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in New York, California, Illinois, New Jersey, Florida and Texas, while E-LOAN provides online consumer direct lending for obtaining mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in technology as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 21 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Corporation also consolidates the variable interest entities for which it is the primary beneficiary and, therefore, will absorb the majority of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2007 presentation.
The statement of condition data as of December 31, 2006 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of September 30, 2007, December 31, 2006 and September 30, 2006 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2006, included in the Corporation’s 2006 Annual Report. The Corporation’s Form 10-K filed on March 1, 2007 incorporates by reference the 2006 Annual Report.
SUBSEQUENT EVENTS
Sale of BPNA’s Retail Bank Branches in Houston
On October 22, 2007, the Corporation announced the signing of a definitive agreement to sell the six Houston retail bank branches of BPNA to Prosperity Bank. Prosperity Bank has agreed to pay a premium of 10.10% for approximately $140 million in deposits, as well as purchase certain loans and other assets attributable to the branches. Prosperity Bank also agreed to retain all branch-based employees of BPNA’s Houston locations as part of the transaction. BPNA will continue to operate its mortgage business based in Houston as well as its franchise and small business lending activities in Texas. BPNA will also continue to maintain a retail branch in Arlington, Texas. The agreement was approved by the Boards of Directors of both banks and is expected to close during the fourth quarter of 2007. The transaction is subject to certain customary closing conditions, including receipt of regulatory approvals.
E-LOAN Restructuring Plan
On November 5, 2007, the Board of Directors of Popular adopted a Restructuring Plan for its internet financial services subsidiary E-LOAN (the “E-LOAN’s Restructuring Plan”).
Considering the losses in the operation of E-LOAN, market conditions and other factors, the Board of Directors approved a substantial reduction of marketing and personnel costs at E-LOAN. This change will include concentrating marketing investment toward the internet and the origination of first mortgage loans that are actually being sold to Government Sponsored Entities (GSEs). The E-LOAN Restructuring Plan continues to promote the expansion of the Internet deposit gathering initiative with BPNA.
The cost-control plan initiative at the E-LOAN subsidiary will result in the elimination of approximately 513 positions out of a total of 771 and will be substantially accomplished in the fourth quarter of 2007. As a result of the E-LOAN Restructuring Plan, operating expenses are expected to be reduced by approximately $79 million for 2008. E-LOAN’s estimated net losses for the year ended December 31, 2008 are expected to decline by $28 million, resulting principally from the reduction in operating expenses, partially offset by the related tax impact and by lower volume of loan originations in certain business channels that are impacted by this plan.
It is expected that this Plan will result in estimated restructuring charges as follows:
         
(In millions)   Fourth Quarter 2007  
Severance
  $ 4.4  
Stay and retention bonuses
    0.2  
Lease terminations
    4.2  
 
     
Total restructuring charges
    8.8  
Impairment of long-lived assets
    12.3  
Impairment charges on definite-life intangible assets
    3.1  
 
     
Total estimated charges
  $ 24.2  
 
     
These estimates are preliminary as management continues to work on the E-LOAN Restructuring Plan. Further, the Corporation is currently evaluating whether this change in E-LOAN’s business model could result in impairment in the value of its recorded goodwill and trademark. As of September 30, 2007, E-LOAN’s accounting records reflect $164 million in goodwill and $64 million in trademark. The impairment valuation analysis is to be completed in the fourth quarter of 2007. Any impairment charge will not impact the regulatory capital ratios of the Corporation or its liquidity since it would be a non-cash transaction.

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Note 2 – Recent Accounting Developments
SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits companies to elect, on a transaction-by-transaction basis, to apply a fair value measurement to hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation under SFAS No. 133. This statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in 2007 did not have a material impact on the Corporation’s consolidated financial statements during the nine months ended September 30, 2007.
SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140”
SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation adopted SFAS No. 156 in January 2007. The Corporation elected the fair value measurement for mortgage servicing rights (“MSRs”). Servicing rights associated with Small Business Administration (“SBA”) commercial loans will continue to be accounted for at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs during the first quarter of 2007 was included as a cumulative effect of a change in accounting principle directly in stockholders’ equity and resulted in a net increase in stockholders’ equity of approximately $9.6 million, net of deferred taxes. Refer to Note 7 to the consolidated financial statements for required SFAS No. 156 disclosures.
FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48)
In 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to income taxes. The accounting provisions of FIN 48 were effective for the Corporation beginning in the first quarter of 2007. Based on management’s assessment, there was no impact on retained earnings as of January 1, 2007 due to the initial application of the provisions of FIN 48. Also, as a result of the implementation, the Corporation did not recognize any change in the liability for unrecognized tax benefits. Refer to Note 14 to the consolidated financial statements for further information on the impact of FIN 48.
EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-03)
EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Corporation adopted the EITF 06-03 guidance in the first quarter of 2007. The Corporation’s accounting policy is to account on a net basis for the taxes collected from customers and remitted to governmental authorities on a net basis. The corresponding amounts recognized in the consolidated financial statements are not significant.

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EITF Issue No. 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5)
EITF 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis. At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable in cash to the policyholder should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $0.9 million cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation will adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have on its consolidated financial statements and disclosures.
SFAS No. 159 “Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities”
In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between the carrying amount and the fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, “Fair Value Measurements,” and No. 107, “Disclosures about Fair Value of Financial Instrument.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this accounting standard may have on its consolidated financial statements and disclosures.
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1 which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as

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the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 is not expected to have a material impact on the Corporation’s consolidated financial statements and disclosures.
SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”
The Statement of Position (“SOP”) 07-01 issued in June 2007 provides guidance for determining whether an entity is within the scope of the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies (“the AICPA Guide”). Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the AICPA Guide. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007. On October 17, 2007, the FASB agreed to propose an indefinite delay of the effective dates of SOP 07-01 and, for entities that meet the definition of an “investment company” in SOP 07-01, of FSP FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies”. The proposed delays, which will be exposed for comment for 30 days, will enable the FASB to add a project to its technical agenda to address the implementation issues that have arisen and possibly revise SOP 07-01. Until that occurs, affected entities should continue to follow existing guidance. Nevertheless, management is evaluating the impact, if any, that the adoption of SOP 07-01 may have on its consolidated financial statements and disclosures.
FSP FIN No. 46(R) – 7 “Application of FASB Interpretation No. 46(R) to Investment Companies”
In May 2007, the FASB issued Staff Position FSP FIN No. 46 (R) – 7 , which amends the scope of the exception to FIN No. 46 (R) to indicate that investments accounted for at fair value in accordance with the specialized accounting guidance in the AICPA Guide, are not subject to consolidation under FIN No. 46 (R). This interpretation is effective for fiscal years beginning on or after December 15, 2007. Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements and disclosures. Also, management is considering the guidance of SOP 07-01 which was previously described that considers an indefinite delay on its implementation until further notification by the FASB.
Note 3 — Restrictions on Cash and Due from Banks and Highly-Liquid Securities
The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $588 million at September 30, 2007 (December 31, 2006 — $621 million; September 30, 2006 — $591 million). Cash and due from banks as well as other short-term, highly-liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, at September 30, 2007, the Corporation had securities with a market value of $397 thousand (December 31, 2006 - $445 thousand; September 30, 2006 — $445 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Law, at September 30, 2007, December 31, 2006, and September 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally divided for the two IBEs, which were considered restricted assets.
As part of a line of credit facility with a financial institution, at September 30, 2007, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2006 — $1.9 million; September 30, 2006 — $1.9 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

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Note 4 – Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, borrowings and other available credit facilities. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    September 30,   December 31,   September 30,
(In thousands)   2007   2006   2006
 
Investment securities available-for-sale
  $ 3,222,644     $ 2,645,272     $ 2,882,589  
Investment securities held-to-maturity
    340       658       659  
Loans held-for-sale
    41,266       332,058       20,838  
Loans held-in-portfolio
    11,482,585       10,260,198       10,642,884  
 
 
  $ 14,746,835     $ 13,238,186     $ 13,546,970  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.
Note 5 — Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of September 30, 2007, December 31, 2006 and September 30, 2006 were as follows:
                                 
    AS OF SEPTEMBER 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 497,893     $ 41     $ 22,114     $ 475,820  
Obligations of U.S. Government sponsored entities
    5,871,339       2,628       55,613       5,818,354  
Obligations of Puerto Rico, States and political subdivisions
    109,289       420       2,871       106,838  
Collateralized mortgage obligations
    1,479,951       3,216       13,798       1,469,369  
Mortgage-backed securities
    969,023       3,190       22,738       949,475  
Equity securities
    46,100       1,780       6,598       41,282  
Others
    16,730       627             17,357  
 
 
  $ 8,990,325     $ 11,902     $ 123,732     $ 8,878,495  
 
                                 
    AS OF DECEMBER 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 504,653           $ 29,818     $ 474,835  
Obligations of U.S. Government sponsored entities
    6,603,252     $ 57       147,524       6,455,785  
Obligations of Puerto Rico, States and political subdivisions
    118,214       265       3,537       114,942  
Collateralized mortgage obligations
    1,657,613       4,904       17,191       1,645,326  
Mortgage-backed securities
    1,061,850       1,458       26,492       1,036,816  
Equity securities
    70,954       6,692       3,901       73,745  
Others
    46,326       3,087             49,413  
 
 
  $ 10,062,862     $ 16,463     $ 228,463     $ 9,850,862  
 

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    AS OF SEPTEMBER 30, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 521,885           $ 28,418     $ 493,467  
Obligations of U.S. Government sponsored entities
    6,776,956     $ 178       154,923       6,622,211  
Obligations of Puerto Rico, States and political subdivisions
    119,999       308       3,927       116,380  
Collateralized mortgage obligations
    1,725,068       5,031       17,198       1,712,901  
Mortgage-backed securities
    1,099,321       1,412       29,535       1,071,198  
Equity securities
    70,987       4,938       3,109       72,816  
Others
    67,745       2,289       682       69,352  
 
 
  $ 10,381,961     $ 14,156     $ 237,792     $ 10,158,325  
 
The table below shows the Corporation’s gross unrealized losses and market value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2007, December 31, 2006 and September 30, 2006.
                         
    AS OF SEPTEMBER 30, 2007
    Less than 12 Months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 106,914     $ 3,960     $ 102,954  
Obligations of Puerto Rico, States and political subdivisions
    22,680       411       22,269  
Collateralized mortgage obligations
    283,814       1,869       281,945  
Mortgage-backed securities
    22,328       399       21,929  
Equity securities
    22,638       6,572       16,066  
 
 
  $ 458,374     $ 13,211     $ 445,163  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 478,436     $ 22,114     $ 456,322  
Obligations of U.S. Government sponsored entities
    5,212,523       51,653       5,160,870  
Obligations of Puerto Rico, States and political subdivisions
    50,235       2,460       47,775  
Collateralized mortgage obligations
    576,852       11,929       564,923  
Mortgage-backed securities
    818,782       22,339       796,443  
Equity securities
    300       26       274  
 
 
  $ 7,137,128     $ 110,521     $ 7,026,607  
 

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    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 478,436     $ 22,114     $ 456,322  
Obligations of U.S. Government sponsored entities
    5,319,437       55,613       5,263,824  
Obligations of Puerto Rico, States and political subdivisions
    72,915       2,871       70,044  
Collateralized mortgage obligations
    860,666       13,798       846,868  
Mortgage-backed securities
    841,110       22,738       818,372  
Equity securities
    22,938       6,598       16,340  
 
 
  $ 7,595,502     $ 123,732     $ 7,471,770  
 
                         
    AS OF DECEMBER 31, 2006
    Less than 12 Months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 19,421     $ 134     $ 19,287  
Obligations of U.S. Government sponsored entities
    425,076       4,345       420,731  
Obligations of Puerto Rico, States and political subdivisions
    21,426       259       21,167  
Collateralized mortgage obligations
    501,705       4,299       497,406  
Mortgage-backed securities
    28,958       484       28,474  
Equity securities
    11,180       3,699       7,481  
 
 
  $ 1,007,766     $ 13,220     $ 994,546  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 485,232     $ 29,684     $ 455,548  
Obligations of U.S. Government sponsored entities
    6,097,274       143,179       5,954,095  
Obligations of Puerto Rico, States and political subdivisions
    55,238       3,278       51,960  
Collateralized mortgage obligations
    564,217       12,892       551,325  
Mortgage-backed securities
    954,293       26,008       928,285  
Equity securities
    300       202       98  
 
 
  $ 8,156,554     $ 215,243     $ 7,941,311  
 
                         
            Total    
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 504,653     $ 29,818     $ 474,835  
Obligations of U.S. Government sponsored entities
    6,522,350       147,524       6,374,826  
Obligations of Puerto Rico, States and political subdivisions
    76,664       3,537       73,127  
Collateralized mortgage obligations
    1,065,922       17,191       1,048,731  
Mortgage-backed securities
    983,251       26,492       956,759  
Equity securities
    11,480       3,901       7,579  
 
 
  $ 9,164,320     $ 228,463     $ 8,935,857  
 

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    AS OF SEPTEMBER 30, 2006
    Less than 12 Months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 19,410     $ 91     $ 19,319  
Obligations of U.S. Government sponsored entities
    443,593       4,348       439,245  
Obligations of Puerto Rico, States and political subdivisions
    26,398       375       26,023  
Collateralized mortgage obligations
    507,121       4,037       503,084  
Mortgage-backed securities
    165,200       2,363       162,837  
Equity securities
    46,811       2,811       44,000  
Others
    10,360       682       9,678  
 
 
  $ 1,218,893     $ 14,707     $ 1,204,186  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 502,475     $ 28,327     $ 474,148  
Obligations of U.S. Government sponsored entities
    6,254,447       150,575       6,103,872  
Obligations of Puerto Rico, States and political subdivisions
    53,305       3,552       49,753  
Collateralized mortgage obligations
    576,660       13,161       563,499  
Mortgage-backed securities
    858,717       27,172       831,545  
Equity securities
    300       298       2  
 
 
  $ 8,245,904     $ 223,085     $ 8,022,819  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 521,885     $ 28,418     $ 493,467  
Obligations of U.S. Government sponsored entities
    6,698,040       154,923       6,543,117  
Obligations of Puerto Rico, States and political subdivisions
    79,703       3,927       75,776  
Collateralized mortgage obligations
    1,083,781       17,198       1,066,583  
Mortgage-backed securities
    1,023,917       29,535       994,382  
Equity securities
    47,111       3,109       44,002  
Others
    10,360       682       9,678  
 
 
  $ 9,464,797     $ 237,792     $ 9,227,005  
 
At September 30, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $55 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) the rating on which was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, one notch below investment grade. Standard & Poor’s (“S&P”), another nationally-recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of September 30, 2007, these Appropriation Bonds represented approximately $2.2 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary.

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Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities at September 30, 2007, except for the obligations of the Puerto Rico government described above are primarily associated with U.S. government sponsored entities, and to a lesser extent, U.S. Treasury obligations and U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly-liquid securities, which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at September 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the nine months ended September 30, 2007, the Corporation recognized through earnings approximately $32.7 million in losses on residual interests classified as available-for-sale ($2.0 million for the third quarter of 2007) and $7.6 million in losses on equity securities that management considered to be other-than-temporarily impaired. The equity securities that generated this other-than-temporary impairment in the first quarter of 2007 were sold in the second quarter of 2007.
The following table states the names of issuers and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
                                                 
    September 30, 2007   December 31, 2006   September 30, 2006
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,184,225     $ 1,169,857     $ 1,539,651     $ 1,517,525     $ 1,594,165     $ 1,570,842  
FHLB
    5,841,614       5,788,544       6,230,841       6,086,885       6,621,836       6,470,786  
Freddie Mac
    954,598       944,533       1,149,185       1,134,853       1,195,093       1,178,715  
 
Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of September 30, 2007, December 31, 2006 and September 30, 2006 were as follows:
                                 
    AS OF SEPTEMBER 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,190           $ 71     $ 196,119  
Obligations of Puerto Rico, States and political subdivisions
    71,465     $ 1,400       148       72,717  
Collateralized mortgage obligations
    331             18       313  
Others
    11,281             358       10,923  
 
 
  $ 279,267     $ 1,400     $ 595     $ 280,072  
 

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    AS OF DECEMBER 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 3,017                 $ 3,017  
Obligations of Puerto Rico, States and political subdivisions
    72,152     $ 1,559     $ 161       73,550  
Collateralized mortgage obligations
    381             21       360  
Others
    15,790       60       13       15,837  
 
 
  $ 91,340     $ 1,619     $ 195     $ 92,764  
 
                                 
    AS OF SEPTEMBER 30, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 269,683           $ 34     $ 269,649  
Obligations of Puerto Rico, States and political subdivisions
    72,154     $ 1,605       158       73,601  
Collateralized mortgage obligations
    409             22       387  
Others
    15,184       43       15       15,212  
 
 
  $ 357,430     $ 1,648     $ 229     $ 358,849  
 
The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2007, December 31, 2006 and September 30, 2006:
                         
    AS OF SEPTEMBER 30, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,190     $ 71     $ 196,119  
Obligations of Puerto Rico, States and political subdivisions
    1,545       24       1,521  
Others
    6,225       354       5,871  
 
 
  $ 203,960     $ 449     $ 203,511  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 23,460     $ 124     $ 23,336  
Collateralized mortgage obligations
    331       18       313  
Others
    1,250       4       1,246  
 
 
  $ 25,041     $ 146     $ 24,895  
 

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    Total  
            Gross        
    Amortized     Unrealized     Market  
(In thousands)   Cost     Losses     Value  
 
Obligations of U.S. Government sponsored entities
  $ 196,190     $ 71     $ 196,119  
Obligations of Puerto Rico, States and political subdivisions
    25,005       148       24,857  
Collateralized mortgage obligations
    331       18       313  
Others
    7,475       358       7,117  
 
 
  $ 229,001     $ 595     $ 228,406  
 
                         
    AS OF DECEMBER 31, 2006
    12 months or more and Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 26,623     $ 161     $ 26,462  
Collateralized mortgage obligations
    381       21       360  
Others
    1,250       13       1,237  
 
 
  $ 28,254     $ 195     $ 28,059  
 
                         
    AS OF SEPTEMBER 30, 2006
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 269,683     $ 34     $ 269,649  
Obligations of Puerto Rico, States and political subdivisions
    2,110       3       2,107  
 
 
  $ 271,793     $ 37     $ 271,756  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 2,534     $ 155     $ 2,379  
Collateralized mortgage obligations
    409       22       387  
Others
    1,250       15       1,235  
 
 
  $ 4,193     $ 192     $ 4,001  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 269,683     $ 34     $ 269,649  
Obligations of Puerto Rico, States and political subdivisions
    4,644       158       4,486  
Collateralized mortgage obligations
    409       22       387  
Others
    1,250       15       1,235  
 
 
  $ 275,986     $ 229     $ 275,757  
 

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Management believes that the unrealized losses in the held-to-maturity portfolio at September 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.
Note 7 – Mortgage Servicing Rights
The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights in connection with on-balance sheet mortgage loan securitizations.
Effective January 1, 2007, under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage loans as a class of servicing rights and elected to apply fair value accounting to these mortgage servicing rights (“MSRs”). These MSRs are segregated between loans serviced by PFH and by the Corporation’s banking subsidiaries. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served (i.e. PFH — primarily subprime mortgage loans Vs. banking subsidiaries – primarily conforming loans). Servicing rights associated with Small Business Administration (“SBA”) commercial loans, the other class of servicing assets held by the Corporation, will continue to be accounted for at the lower of cost or market method.
Classes of servicing rights were determined based on the different markets or types of assets served. Management also considered trends in the markets and elections by other major participants in the industries served in determining the accounting methodology to be followed for the different types of servicing rights.
Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting from asset transfers are capitalized and carried at fair value. Prior to the adoption of SFAS No. 156, the Corporation capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the relative fair value of the servicing right and the residential mortgage loan at the time of sale. Prior to SFAS No. 156, both purchased MSRs and MSRs from asset transfers were accounted for at quarter-end at the lower of cost or market value.
Effective January 1, 2007, upon the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation recorded a cumulative effect adjustment to increase the 2007 beginning balance of MSRs by $15.3 million, which resulted in a $9.6 million, net of tax, increase in the retained earnings account of stockholders’ equity. The table below reconciles the balance of MSRs as of December 31, 2006 and January 1, 2007.
                         
    Banking subsidiaries   PFH   Total
(In thousands)   Residential MSRs   Residential MSRs        
 
Balance at December 31, 2006
  $ 77,801     $ 82,338     $ 160,139  
Remeasurement upon adoption of SFAS No. 156 (a)
    13,630       1,700       15,330  
 
Balance at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
 
(a)   The remeasurement effect, net of deferred taxes, amounted to $9.6 million on a consolidated basis.
 
At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs, which is benchmarked against third party opinions of fair value. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. The Corporation uses assumptions in the model that it believes are comparable to those used by brokers or other service providers. Refer to Note 8 – Retained Interests on Sales of Mortgage Loans for information on assumptions used in the valuation model of MSRs as of September 30, 2007.

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The change in MSRs measured using the fair value method for the nine months ended September 30, 2007 was:
                         
    Banking        
    subsidiaries   PFH   Total
 
(In thousands)   Residential MSRs   Residential MSRs        
 
Fair value at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
Purchases
    3,345       22,251       25,596  
Servicing from securitizations or asset transfers
    17,682       8,040       25,722  
Changes due to payments on loans (1)
    (6,821 )     (29,285 )     (36,106 )
Changes in fair value due to changes in valuation model inputs or assumptions
    4,276       (1,636 )     2,640  
Other changes
          (66 )     (66 )
 
Fair value at September 30, 2007
  $ 109,913     $ 83,342     $ 193,255  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
The changes in amortized MSRs for the nine months ended September 30, 2006 were:
         
(In thousands)   Residential MSRs
 
Balance at January 1, 2006
  $ 137,701  
Rights originated
    58,497  
Rights purchased
    18,723  
Amortization
    (46,842 )
 
Balance at September 30, 2006
    168,079  
Less: Valuation allowance
    316  
 
Balance at September 30, 2006, net of valuation allowance
  $ 167,763  
 
Fair value at September 30, 2006
  $ 185,923  
 
Residential mortgage loans serviced for others were $18.1 billion at September 30, 2007 (December 31, 2006 — $13.3 billion; September 30, 2006 — $13.0 billion).
Net mortgage servicing fees, a component of other service fees in the consolidated statement of income, include the changes from period to period in fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, representing changes due to collection / realization of expected cash flows. Prior to the adoption of SFAS No. 156, the Corporation carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net mortgage servicing fees.
Note 8 – Retained Interests on Sales of Mortgage Loans
Popular Financial Holdings
The Corporation, through its consumer lending subsidiary PFH, has retained mortgage servicing rights and residual interests in connection with securitizations of subprime mortgage loans.
The Corporation accounts for the residual interests derived from PFH’s off-balance sheet securitizations that took place prior to 2006 as investment securities available-for-sale. Under SFAS No. 140, interest-only strips, retained interests in securitizations or other financial assets that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its investment shall be subsequently measured like investments in debt securities classified as available-for-sale or trading under SFAS No. 115. In 2006, as permitted by SFAS No. 115, management determined, on a prospective basis, to begin classifying PFH’s new residual interests as trading securities and as such, account for any changes in fair value through earnings (recorded as part of trading account profit (loss) in the consolidated statements of income).
PFH’s residual interests classified as available-for-sale as of September 30, 2007 amounted to $17 million. In the quarter and nine-month periods ended September 30, 2007, the Corporation recognized other-than-temporary impairment losses of $2.0 million and $32.7 million, respectively, on these residual interests.
Residual interests accounted for as trading securities from PFH’s securitizations approximated $5 million at

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September 30, 2007. For the third quarter and nine-month periods ended September 30, 2007, the Corporation recognized trading losses of $12.1 million and $36.4 million, respectively, on these residual interests.
During 2007, the Corporation conducted one off-balance sheet asset securitization that involved the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred these assets and their titles to a different trust, thus isolating those loans from the Corporation’s assets. Approximately, $461 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH as part of this transaction, with a gain on sale of approximately $13.5 million.
Key economic assumptions used in measuring the retained interests at the date of this off-balance sheet securitization were:
                         
            MSRs
            Fixed-    
            rate   ARM
    Residual Interests   loans   Loans
 
 
  28% (Fixed-rate loans)                
Average prepayment speed
  35% (ARM loans)     28 %     35 %
Weighted average life of collateral (in years)
  4.2 years   4.8 years   2.2 years
Cumulative credit losses
  4.75% (Fixed-rate loans)            
 
  8.40% (ARM loans)            
Discount rate (annual rate)
    25 %     17 %     17 %
 
Key economic assumptions used to estimate the fair value of residual interests and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                                                   
    September 30, 2007     December 31, 2006
            MSRs             MSRs
    Residual   Fixed-rate   ARM     Residual   Fixed-rate    
(In thousands)   Interests   loans   loans     Interests   loans   ARM loans
       
Carrying amount of retained interests
  $ 22,469     $ 32,069     $ 21,343       $ 85,965     $ 38,017     $ 29,838  
Fair value of retained interests
  $ 22,469     $ 32,069     $ 21,343       $ 85,965     $ 37,815     $ 32,212  
Weighted average life of collateral (in years)
  3.0 years   3.8 years   2.0 years     3.2 years   3.1 years   2.1 years
Weighted average prepayment speed (annual rate)
  23% (Fixed-rate loans)                     28% (Fixed-rate loans)                
 
  35% (ARM loans)     23 %     35 %     35% (ARM loans)     28 %     35 %
Impact on fair value of 10% increase in prepayment rate
  ($ 563 )   ($ 316 )   ($ 268 )     ($ 5,543 )   $ 210     ($ 149 )
Impact on fair value of 20% increase in prepayment rate
  ($ 1,489 )   ($ 372 )   ($ 493 )     ($ 9,284 )   $ 234     ($ 200 )
Weighted average discount rate (annual rate)
    30 %     17 %     17 %       17 %     16 %     16 %
Impact on fair value of 10% adverse change
  ($ 2,132 )   ($ 913 )   ($ 408 )     ($ 4,172 )   ($ 901 )   ($ 542 )
Impact on fair value of 20% adverse change
  ($ 4,056 )   ($ 1,777 )   ($ 800 )     ($ 8,081 )   ($ 1,761 )   ($ 1,060 )
Cumulative credit losses
  3.17% to 8.50%                 1.28% to 3.19%            
Impact on fair value of 10% adverse change
  ($ 10,268 )                 ($ 4,792 )            
Impact on fair value of 20% adverse change
  ($ 18,327 )                 ($ 9,558 )            
       
PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced loans; as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.

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The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation.
Banking subsidiaries
The Corporation’s banking subsidiaries also retain servicing responsibilities in connection with the sale of mortgage loans to third parties. Also, servicing responsibilities are retained under securitization arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the Corporation’s banking subsidiaries, in which the Corporation retains a servicing right, have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.
Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the quarter ended September 30, 2007 were:
         
    MSRs
 
Prepayment speed
    8.8 %
Weighted average life (in years)
    11.3  years
Discount rate (annual rate)
    10.7 %
 
Key economic assumptions used to estimate the fair value of MSRs derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                 
    September 30, 2007   December 31, 2006
 
(In thousands)   MSRs   MSRs
 
Fair value of retained interests
  $ 86,550     $ 73,332  
Weighted average life (in years)
    12.4  years     9.2  years
Weighted average prepayment speed (annual rate)
    8.1 %     14.0 %
Impact on fair value of 10% adverse change
  ($ 2,536 )   ($ 1,868 )
Impact on fair value of 20% adverse change
  ($ 4,544 )   ($ 4,151 )
Weighted average discount rate (annual rate)
    10.7 %     10.3 %
Impact on fair value of 10% adverse change
  ($ 3,513 )   ($ 2,142 )
Impact on fair value of 20% adverse change
  ($ 6,394 )   ($ 4,200 )
 
The amounts of MSRs presented in the table above exclude purchased MSRs.
The sensitivity analyses presented above for residual interests and MSRs are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

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Note 9 – Derivative Instruments and Hedging Activities
Refer to Note 28 to the consolidated financial statements included in the 2006 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the third quarter of 2007:
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of September 30, 2007 and December 31, 2006 were as follows:
                                         
    As of September 30, 2007
 
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 155,000     $ 181     $ 105     $ 46        
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 439     $ 1,665     ($ 797 )      
 
                                         
    As of December 31, 2006
 
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 190,000     $ 175     $ 2     $ 106        
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 887     $ 523     $ 237        
 
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at September 30, 2007 have a maximum remaining maturity of 78 days.
The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 1.5 years.

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Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding at September 30, 2007 and December 31, 2006 were as follows:
                         
September 30, 2007
            Fair Values
(In thousands)   Notional amount     Derivative assets     Derivative liabilities  
 
Forward contracts
  $ 730,700     $ 424     $ 1,801  
Call options and put options
    38,000       41       85  
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       392        
- bond certificates offered in an on-balance sheet securitization
    406,347             2,924  
- financing of auto loans held-in-portfolio
    344,066             1,485  
- swaps with corporate clients
    583,744             5,039  
- swaps offsetting position of corporate client swaps
    583,744       5,039        
Credit default swap
    33,463              
Interest rate caps
    836,883       1,260        
Interest rate caps for benefit of corporate clients
    50,000             45  
Indexed options on deposits
    211,267       50,200        
Indexed options on S&P Notes
    31,152       7,439        
Bifurcated embedded options
    222,732             56,124  
Mortgage rate lock commitments
    177,791             266  
 
Total
  $ 4,649,889     $ 64,795     $ 67,769  
 
                         
As of December 31, 2006
            Fair Values
(In thousands)   Notional amount     Derivative assets     Derivative liabilities  
 
Forward contracts
  $ 400,572     $ 1,277     $ 125  
Call options and put options
    37,500       83       46  
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       2,153        
- bond certificates offered in an on-balance sheet securitization
    516,495       90       1,168  
- financing of auto loans held-in-portfolio
    470,146       728        
- auto loans approvals locked interest rates
    17,442       22        
- swaps with corporate clients
    410,533             2,146  
- swaps offsetting position of corporate client swaps
    410,533       2,146        
- investment securities
    89,385             1,645  
- mortgage loan portfolio prior to securitization
    75,000       302        
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    103             2  
Foreign currency and exchange rate commitments w/ counterparty
    103       2        
Interest rate caps
    889,417       4,099        
Interest rate caps for benefit of corporate clients
    50,000             90  
Indexed options on deposits
    204,946       38,323        
Indexed options on S&P Notes
    31,152       5,648        
Bifurcated embedded options
    229,455             43,844  
Mortgage rate lock commitments
    215,676       13       635  
 
Total
  $ 4,481,921     $ 54,886     $ 49,701  
 
Interest Rates Swaps
The Corporation has an interest rate swap outstanding to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized losses of $3.8 million for the third quarter and $1.8 million for the nine months ended September 30, 2007 due to changes in its fair value. During the quarter and nine-month periods ended September 30, 2006, the Corporation recognized losses of $2.4 million.

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The Corporation has interest rate swaps to economically hedge the cost of short-term debt. For the third quarter of 2007, the Corporation recognized a loss of $1.6 million, and for the nine months ended September 30, 2007, recognized losses of $1.8 million due to changes in their fair value, which were included as part of short-term interest expense. During the third quarter and nine months ended September 30, 2006, the Corporation recognized losses of $3.4 million and $2.0 million, respectively, associated with changes in the fair value of these interest rate swaps.
Additionally, the Corporation entered into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with auto loans held-in-portfolio. Losses of $3.0 million and $2.2 million for the quarter and nine months ended September 30, 2007, respectively, were recognized as part of long-term interest expense related to these swaps. During the quarter and nine-month periods ended September 30, 2006, the Corporation recognized losses of $3.5 million and $572 thousand, respectively, associated with changes in the fair value of these swaps.
Interest Rate Caps
During the quarter ended June 30, 2007, the Corporation entered into a $100 million interest rate cap to mitigate its exposure to rising interest rates on short-term borrowings.
The Corporation has interest rate caps in conjunction with a series of mortgage loan securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income. Losses of $1.2 million and $2.6 million for the quarter and nine months ended September 30, 2007, respectively, were recognized as part of long-term interest expense related to these interest rate cap contracts. For the quarter and nine months ended September 30, 2006, losses on these contracts amounted to $3.5 million and $6.6 million, respectively.
Forward Contracts
The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter and nine months ended September 30, 2007, losses of $3.7 million and $2.1 million, respectively, were recognized due to changes in fair value of these forward sales commitments. During the third quarter and nine months ended September 30, 2006, the Corporation recognized losses of $1.9 million and $112 thousand, respectively, related to these forward contracts.
Mortgage Rate Lock Commitments
The Corporation has mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed for a specified period of time. These contracts are recognized at fair value with changes directly reported in income as part of gain on sale of loans. For the quarter and nine months ended September 30, 2007, gains of $1.9 million and $356 thousand, respectively, were recognized due to changes in fair value of these commitments. During the third quarter and nine months ended September 30, 2006, the Corporation recognized gains of $464 thousand and losses of $10 thousand, respectively, related to these commitments.
Credit Default Swap
The Corporation’s credit default swap guarantees a “third-party” performance under an interest rate swap with the counterparty. The interest rate swap was in the money in favor of the “third-party”. The credit default swap matures in April 2008. The credit default swap is marked-to-market through earnings. Its fair value has historically been zero because of the credit standing of the “third-party”.

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Note 10 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 and 2006, allocated by reportable segment, were as follows (refer to Note 21 for the definition of the Corporation’s reportable segments):
                                 
2007
 
    Balance at   Goodwill           Balance at
(In thousands)   January 1, 2007   acquired   Other   September 30, 2007
 
Banco Popular de Puerto Rico:
                               
Commercial Banking
  $ 14,674                 $ 14,674  
Consumer and Retail Banking
    34,999                   34,999  
Other Financial Services
    4,391                   4,391  
Popular North America:
                               
Banco Popular North America
    568,647                   568,647  
Popular Financial Holdings
                       
EVERTEC
    45,142     $ 1,137       ($183 )     46,096  
 
Total Popular, Inc.
  $ 667,853     $ 1,137       ($183 )   $ 668,807  
 
                                         
2006
 
                    Purchase            
    Balance at   Goodwill   accounting           Balance at
(In thousands)   January 1, 2006   acquired   adjustments   Other   September 30, 2006
 
Banco Popular de Puerto Rico:
                                       
Commercial Banking
  $ 14,674                       $ 14,674  
Consumer and Retail Banking
    34,999                         34,999  
Other Financial Services
    4,110                         4,110  
Popular North America:
                                       
Banco Popular North America
    542,834           $ 23,378       ($210 )     566,002  
Popular Financial Holdings
    14,236             3             14,239  
EVERTEC
    43,131     $ 1,511                   44,642  
 
Total Popular, Inc.
  $ 653,984     $ 1,511     $ 23,381       ($210 )   $ 678,666  
 
Purchase accounting adjustments consist of adjustments to the value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs, if any, and contingent consideration paid during a contractual contingency period. The purchase accounting adjustments during the first nine months of 2006 at the PNA reportable segment were mostly related to the E-LOAN acquisition.
The Corporation performed the annual impairment test required by SFAS No. 142, “Goodwill and Other Intangible Assets.” This test did not result in impairment of the Corporation’s recorded goodwill.
At September 30, 2007 and December 31, 2006, other than goodwill, the Corporation had $65 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (September 30, 2006 — $59 million).

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The following table reflects the components of other intangible assets subject to amortization:
                                                 
    September 30, 2007   December 31, 2006   September 30, 2006
 
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 46,302     $ 22,836     $ 76,708     $ 48,367     $ 76,956     $ 46,688  
 
Other customer relationships
    11,925       3,609       11,156       2,171       10,028       1,703  
 
Other intangibles
    9,170       5,092       9,099       3,426       10,808       4,003  
 
 
Total
  $ 67,397     $ 31,537     $ 96,963     $ 53,964     $ 97,792     $ 52,394  
 
Certain core deposits intangibles with a gross amount of $30.4 million became fully amortized during 2007 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.
During the quarter and nine months ended September 30, 2007, the Corporation recognized $2.2 million and $8.0 million, respectively, in amortization expense related to other intangible assets with definite lives (September 30, 2006 — $3.6 million and $9.2 million, respectively).
The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:
         
    (In thousands)
2007
  $ 10,259  
2008
    8,454  
2009
    6,632  
2010
    5,674  
2011
    4,016  
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 11 – Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    September 30,   December 31,   September 30,
(In thousands)   2007   2006   2006
 
Federal funds purchased
  $ 690,332     $ 1,276,818     $ 2,056,610  
Assets sold under agreements to repurchase
    5,596,971       4,485,627       4,988,856  
 
 
  $ 6,287,303     $ 5,762,445     $ 7,045,466  
 

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Other short-term borrowings consisted of:
                         
    September 30,   December 31,   September 30,
(In thousands)   2007   2006   2006
 
Advances with FHLB paying interest at:
                       
-fixed rates ranging from 5.14% to 5.17% (September 30, 2006 – 5.40% to 5.42%)
  $ 172,000     $ 230,000     $ 230,000  
-floating rate with a spread over the fed funds rate (Fed funds rate at September 30, 2006 was 5.38%)
                55,000  
 
                       
Advances under credit facilities with other institutions at:
                       
-fixed rates ranging from 5.25% to 5.96% (September 30, 2006 – 5.38% to 5.52%)
    210,000       386,000       23,385  
-floating rates ranging from 0.45% to 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%)
          481,062       112,915  
-a floating rate of 0.20% over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2006 – 5.37%)
          10,000       10,000  
 
                       
Commercial paper at rates ranging from 5.05% to 5.92% (September 30, 2006 – 4.85% to 5.33%)
    249,041       193,383       97,172  
 
                       
Term funds purchased at:
                       
-fixed rates ranging from 5.13% to 5.82% (September 30, 2006 – 5.28% to 5.39%)
    749,000       2,140,900       1,487,162  
-a floating rate of 0.08% over the fed funds rate (Fed funds rate at September 30, 2006 was 5.38%)
          500,000       600,000  
 
                       
Others
    34,856       92,780       93,877  
 
 
  $ 1,414,897     $ 4,034,125     $ 2,709,511  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable consisted of:
                         
    September 30,   December 31,   September 30,
(In thousands)   2007   2006   2006
 
Advances with FHLB:
                       
-with maturities ranging from 2007 through 2018 paying interest at fixed rates ranging from 2.51% to 6.98% (September 30, 2006 – 2.44% to 6.98%)
  $ 738,099     $ 289,881     $ 414,403  
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)
    250,000       250,000       250,000  
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02% (1-month LIBOR rate at September 30, 2006 – 5.32%)
          5,000       5,000  
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04% (3-month LIBOR rate at September 30, 2006 was 5.37%)
          6,000       6,000  
 
                       
Advances under revolving lines of credit maturing in 2008 paying interest monthly at a floating rate of 0.75% (September 30, 2006 – 0.90%) over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)
    317,926       426,687       388,432  
 
                       
Advances under revolving lines of credit with maturities ranging from 2007 to 2009 paying interest quarterly at a floating rate of 0.20% to 0.35% over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2007 was 5.23%)
    154,999       69,994        
 
                       
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%
    3,100       3,100       3,100  
 
                       
Term notes with maturities ranging from 2008 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate (10-year U.S. Treasury note rate at September 30, 2007 was 4.59%; September 30, 2006 – 4.63%)
    7,502       10,428       11,029  
 
                       
Term notes with maturities ranging from 2007 to 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% (September 30, 2006 – 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2007
was 5.23%, September 30, 2006 – 5.37%)
    349,610       349,295       469,182  
 
                       
Term notes with maturities ranging from 2007 through 2011 paying interest semiannually at fixed rates ranging from 3.60% to 5.65% (September 30, 2006 – 3.25% to 6.39%)
    2,014,323       2,014,928       2,713,078  
 
                       
Secured borrowings with maturities ranging from 2007 to 2012 paying interest monthly at fixed rates ranging from 4.00% to 7.12% (September 30, 2006 – 3.05% to 7.12%)
    2,381,081       2,695,916       2,914,523  
 
                       
Secured borrowings with maturities ranging from 2007 to 2012 paying interest monthly ranging from 0.06% to 3.51% (September 30, 2006 – 0.05% to 4.75%) over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2007 was 5.12%; September 30, 2006 – 5.32%)
    1,189,286       1,708,650       1,623,142  
 
                       
Notes linked to the S&P 500 Index maturing in 2008
    37,876       36,112       34,136  
 
                       
Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 17)
    849,672       849,672       849,672  
 
                       
Other
    21,317       21,583       200  
 
 
  $ 8,314,791     $ 8,737,246     $ 9,681,897  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Note 12 – Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $18 million and $196 million, respectively, at September 30, 2007 (December 31, 2006 — $21 million and $181 million; September 30, 2006 — $21 million and $169 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
At September 30, 2007, the Corporation recorded a liability of $721 thousand (December 31, 2006 - $658 thousand; September 30, 2006 — $574 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under stand-by letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The stand-by letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in stand-by letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s stand-by letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which aggregated to $3.3 billion at September 30, 2007 (December 31, 2006 — $3.3 billion and September 30, 2006 — $3.9 billion). In addition, at September 30, 2007, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2006 and September 30, 2006 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.
Note 13 – Other Service Fees
The caption of other service fees in the consolidated statements of income consists of the following major categories:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands)   2007   2006   2007   2006
 
Credit card fees and discounts
  $ 25,975     $ 22,035     $ 74,498     $ 66,979  
Debit card fees
    16,228       15,345       49,184       45,349  
Insurance fees
    15,024       13,327       42,693       39,879  
Processing fees
    11,674       11,164       35,463       32,382  
Sale and administration of investment products
    8,043       7,345       22,614       21,451  
Mortgage servicing fees, net of amortization and fair value adjustments
    7,400       (1,756 )     18,269       (2,423 )
Other
    9,020       12,177       28,082       36,383  
 
Total
  $ 93,364     $ 79,637     $ 270,803     $ 240,000  
 
Note 14 – Income Taxes
As indicated in Note 2, the Corporation adopted FIN 48 effective January 1, 2007. The initial adoption of FIN 48 had no impact on the Corporation’s financial statements since management determined that there was no need to recognize changes in the liability for unrecognized tax benefits.

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The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
         
(In millions)        
 
Balance as of January 1, 2007
  $ 20.4  
Additions for tax positions Jan – March 2007
    1.7  
 
Balance as of March 31, 2007
  $ 22.1  
Additions for tax positions April – June 2007
    2.3  
 
Balance as of June 30, 2007
  $ 24.4  
Additions for tax positions July – Sept 2007
    2.9  
 
Balance as of September 30, 2007
  $ 27.3  
 
As of September 30, 2007, the related accrued interest approximated $3.2 million. Management has determined that as of September 30, 2007 there is no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, are reported in other operating expenses in the consolidated statements of income.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $26 million as of September 30, 2007.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of September 30, 2007, the following years remain subject to examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto Rico – 2003 through 2006. The U.S. Internal Revenue Service (“IRS”) commenced an examination of the Corporation’s U.S. operations tax return for 2005 that is anticipated to be finished by the end of 2007. As of September 30, 2007, the IRS has not proposed any adjustment as a result of the audit. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Note 15 – Stock-Based Compensation
The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. Nevertheless, all outstanding award grants under the Stock Option Plan continue to remain in effect at September 30, 2007 under the original terms of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all

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options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
The following table presents information on stock options outstanding as of September 30, 2007:
                                         
(Not in thousands)
 
                Weighted Average            
        Weighted Average   Remaining Life of   Options   Weighted Average
Exercise Price   Options   Exercise Price of   Options Outstanding   Exercisable   Exercise Price of
Range per Share   Outstanding   Options Outstanding   (in years)   (fully vested)   Options Exercisable
 
$14.39 - $18.50
    1,513,582     $ 15.81       4.98       1,382,319     $ 15.72  
$19.25 - $27.20
    1,586,035     $ 25.27       6.75       1,012,839     $ 25.02  
 
$14.39 - $27.20
    3,099,617     $ 20.65       5.89       2,395,158     $ 19.65  
 
The aggregate intrinsic value of options outstanding as of September 30, 2007 was $8.7 million. There was no intrinsic value of options exercisable as of September 30, 2007.
The following table summarizes the stock option activity and related information:
                 
    Options   Weighted-Average
(Not in thousands)   Outstanding   Exercise Price
 
Outstanding at January 1, 2006
    3,223,703     $ 20.63  
Granted
           
Exercised
    (39,449 )     15.78  
Forfeited
    (37,818 )     23.75  
Expired
    (1,637 )     24.05  
 
Outstanding at December 31, 2006
    3,144,799     $ 20.65  
Granted
           
Exercised
    (10,064 )     15.83  
Forfeited
    (19,063 )     25.50  
Expired
    (16,055 )     19.14  
 
Outstanding at September 30, 2007
    3,099,617     $ 20.65  
 
The stock options exercisable at September 30, 2007 totaled 2,395,158 (September 30, 2006 – 1,953,606). There were no stock options exercised during the quarter ended September 30, 2007. For the nine months ended September 30, 2007, the cash received from stock options exercised amounted to $159 thousand. The total intrinsic value of options exercised during the quarter ended September 30, 2006 was $60 thousand. The total intrinsic value of options exercised during the nine-month period ended September 30, 2007 was $28 thousand (September 30, 2006 — $127 thousand).
There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2006 or the nine months ended September 30, 2007.
The Corporation recognized $432 thousand of stock option expense, with a tax benefit of $165 thousand, for the quarter ended September 30, 2007 (September 30, 2006 — $724 thousand, with a tax benefit of $293 thousand). For the nine months ended September 30, 2007, the Corporation recognized $1.3 million of stock option expense, with a tax benefit of $515 thousand (September 30, 2006 - $2.3 million, with a tax benefit of $899 thousand). The total unrecognized compensation cost at September 30, 2007 related to non-vested stock option awards was $2.1 million and is expected to be recognized over a weighted-average period of 1.3 years.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term

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Performance Unit Awards, Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.
Under the Incentive Plan, the Corporation has issued only restricted shares, which become vested based on the employees’ continued service with Popular. The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.
Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under a long-term incentive plan. The performance shares award consists of the opportunity to receive shares of Popular, Inc.’s common stock provided the Corporation achieves certain performance goals during a 3-year performance cycle. The compensation cost associated with the performance shares will be recorded ratably over a three-year performance period. The performance shares will be granted at the end of the three-year period and will be vested at grant date. As of September 30, 2007, no shares have been granted under this plan.
The following table summarizes the restricted stock activity under the Incentive Plan and related information to members of management:
                 
 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2006
    172,622     $ 27.65  
Granted
    444,036       20.54  
Vested
           
Forfeited
    (5,188 )     19.95  
 
Non-vested at December 31, 2006
    611,470     $ 22.55  
Granted
           
Vested
    (69,471 )     20.56  
Forfeited
    (3,781 )     19.95  
 
Non-vested at September 30, 2007
    538,218     $ 22.83  
 
During the quarters ended September 30, 2007 and 2006, no shares of restricted stock were awarded to management under the Incentive Plan. During the nine-month period ended September 30, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (September 30, 2006 – 444,036).
During the quarter ended September 30, 2007, the Corporation recognized $33 thousand of restricted stock expense related to management incentive awards, with a tax benefit of $14 thousand (September 30, 2006 – ($433) thousand, with a tax impact of $160 thousand). For the nine-month period ended September 30, 2007, the Corporation recognized $1.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $718 thousand (September 30, 2006 — $1.7 million, with a tax benefit of $663 thousand). The fair market value of the restricted stock vested was $1.2 million. The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at September 30, 2007 was $4.5 million and is expected to be recognized over a weighted-average period of 2.7 years. During the nine-month period ended September 30, 2007, there was a vesting of restricted stock that triggered a shortfall of $194 thousand, which was recorded as an additional income tax expense.

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The following table summarizes the restricted stock under Incentive Award and related information to members of the Board of Directors:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2006
    46,948     $ 23.61  
Granted
    32,267       19.82  
Vested
    (2,601 )     23.54  
Forfeited
           
 
Non-vested at December 31, 2006
    76,614     $ 22.02  
Granted
    32,381       16.96  
Vested
    (22,486 )     22.03  
Forfeited
           
 
Non-vested at September 30, 2007
    86,509     $ 20.12  
 
During the quarter ended September 30, 2007, the Corporation granted 3,018 (September 30, 2006 – 1,038) shares of restricted stock to members of the Board of Directors of Popular, Inc. During this period, the Corporation recognized $115 thousand of restricted stock expense related to these restricted stock grants, with a tax benefit of $45 thousand (September 30, 2006 — $150 thousand, with a tax benefit of $59 thousand). For the nine-month period ended September 30, 2007, the Corporation granted 32,381 (September 30, 2006 – 30,897) shares of restricted stock to members of the Board of Directors of Popular, Inc. The fair market value of the restricted stock vested was $394 thousand. During this period, the Corporation recognized $423 thousand of restricted stock expense related to these restricted stock grants, with a tax benefit of $165 thousand (September 30, 2006 — $430 thousand, with a tax benefit of $168 thousand).
Note 16 – Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and nine months ended September 30, 2007 and 2006 were as follows:
                                                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Nine months ended   Quarters ended   Nine months ended
    September 30,   September 30,   September 30,   September 30,
(In thousands)   2007   2006   2007   2006   2007   2006   2007   2006
 
Service cost
  $ 2,639     $ 3,135     $ 8,384     $ 9,405     $ 221     $ 262     $ 678     $ 786  
Interest cost
    7,958       7,641       23,890       22,923       419       400       1,258       1,200  
Expected return on plan assets
    (10,532 )     (10,009 )     (31,589 )     (29,918 )     (369 )     (264 )     (1,105 )     (792 )
Amortization of prior service cost
    52       44       156       132       (13 )     (13 )     (39 )     (39 )
Amortization of net loss
          488             1,464       248       276       743       828  
 
Net periodic cost
  $ 117     $ 1,299     $ 841     $ 4,006     $ 506     $ 661     $ 1,535     $ 1,983  
Curtailment gain
                (246 )                       (258 )      
 
Total cost
  $ 117     $ 1,299     $ 595     $ 4,006     $ 506     $ 661     $ 1,277     $ 1,983  
 
During the first quarter of 2007, the Corporation adopted an amendment to freeze the benefits for all employees under the U.S. Retirement and Restoration plans. These plans were remeasured at January 31, 2007 to account for the freeze. The discount rate of the U.S. Retirement plan was changed to 4.5% to reflect the expected plan termination. The remeasurement and curtailment effects were considered for these plans in the first quarter of 2007 and are included as part of the year-to-date disclosures.
For the nine months ended September 30, 2007, contributions made to the pension and restoration plans approximated $1.9 million. The total contributions expected to be paid during 2007 for the pension and restoration plans approximate $2.2 million.

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The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and nine months ended September 30, 2007 and 2006 were as follows:
                                 
    Quarters ended   Nine months ended
    September 30,   September 30,
(In thousands)   2007   2006   2007   2006
 
Service cost
  $ 578     $ 696     $ 1,734     $ 2,095  
Interest cost
    1,889       1,927       5,667       5,781  
Amortization of prior service cost
    (261 )     (262 )     (784 )     (786 )
Amortization of net loss
          240             720  
 
Total net periodic cost
  $ 2,206     $ 2,601     $ 6,617     $ 7,810  
 
For the nine months ended September 30, 2007, contributions made to the postretirement benefit plan approximated $4.9 million. The total contributions expected to be paid during 2007 for the postretirement benefit plan approximate $6.4 million.
Note 17 – Trust Preferred Securities
At September 30, 2007 and 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46(R).
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
Financial data pertaining to the trusts follows:
(In thousands, including reference notes)
                                 
                    Popular North        
    BanPonce     Popular Capital     America Capital     Popular Capital  
Issuer   Trust I     Trust I     Trust I     Trust II  
 
Issuance date
  February 1997     October 2003     September 2004     November 2004  
Capital securities
  $ 144,000     $ 300,000     $ 250,000     $ 130,000  
Distribution rate
    8.327 %     6.700 %     6.564 %     6.125 %
Common securities
  $ 4,640     $ 9,279     $ 7,732     $ 4,021  
Junior subordinated debentures aggregate liquidation amount
  $ 148,640     $ 309,279     $ 257,732     $ 134,021  
Stated maturity date
  February 2027     November 2033     September 2034     December 2034  
Reference notes
    (a),(c),(e),(f),(g)       (b),(d),(f)       (a),(c),(f)       (b),(d),(f)  
 
(a)   Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

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(d)   These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(e)   The original issuance was for $150,000. In 2003, the Corporation reacquired $6,000 of the 8.327% capital securities.
 
(f)   The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46(R).
 
(g)   Same as (f) above, except that the investment company event does not apply for early redemption.
 
The capital securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.
Under the Federal Reserve Board’s risk-based capital guidelines, the capital securities are included as part of the Corporation’s Tier I capital.
Note 18 — Stockholders’ Equity
During the fourth quarter of 2005, existing shareholders of record of the Corporation’s common stock at November 7, 2005 fully subscribed to an offering of 10,500,000 newly issued shares of Popular, Inc.’s common stock at a price of $21.00 per share under a subscription rights offering. This offering resulted in approximately $216 million in additional capital, of which approximately $175 million impacted stockholders’ equity at December 31, 2005 and the remainder impacted the Corporation’s financial condition in the first quarter of 2006. As of December 31, 2005, this subscription rights offering resulted in 8,614,620 newly issued shares of common stock; the remaining 1,885,380 were issued during the first quarter of 2006.
The Corporation has a dividend reinvestment and stock purchase plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments at prevailing market prices.
The Corporation’s authorized preferred stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s only outstanding class of preferred stock is its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are perpetual, nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter.
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $346 million at September 30, 2007 (December 31, 2006 — $346 million; September 30, 2006 — $317 million). During the nine months ended September 30, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the nine months ended September 30, 2007.

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Note 19 — Earnings per Common Share
The computation of earnings per common share (“EPS”) follows:
                                 
    Quarter ended   Nine months ended
    September 30,   September 30,
(In thousands, except share information)   2007   2006   2007   2006
 
Net income
  $ 36,003     $ 82,160     $ 229,600     $ 298,044  
Less: Preferred stock dividends
    2,979       2,979       8,935       8,935  
 
 
                               
Net income applicable to common stock
  $ 33,024     $ 79,181     $ 220,665     $ 289,109  
 
 
                               
Average common shares outstanding
    279,625,715       278,602,482       279,355,496       278,349,354  
Average potential common shares
          210,465       78,016       255,751  
 
Average common shares outstanding – assuming dilution
    279,625,715       278,812,947       279,433,512       278,605,105  
 
 
                               
Basic and diluted EPS
  $ 0.12     $ 0.28     $ 0.79     $ 1.04  
 
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and nine-month period ended September 30, 2007, there were 3,099,617 and 2,209,290 weighted average antidilutive stock options outstanding, respectively (September 30, 2006 – 1,895,081 and 1,897,983).
Note 20 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
As mentioned in Note 1 of the Corporation’s 2006 Annual Report, as of the end of the first quarter of 2006, all subsidiaries of the Corporation had changed the reporting period to a December 31st calendar period. The impact of this change corresponds to the financial results for the month of December 2005 for those subsidiaries which implemented the change in the first reporting period of 2006.
The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above.
         
    Nine months ended
(In thousands)   September 30, 2006
 
Net cash used in operating activities
  ($ 80,906 )
Net cash used in investing activities
    (104,732 )
Net cash provided by financing activities
    197,552  
 
 
       
Net increase in cash and due from banks
  $ 11,914  
 
Loans receivable transferred to other real estate and other property for the nine months ended September 30, 2007 amounted to $134 million and $27 million, respectively (September 30, 2006 — $92 million and $24 million, respectively).
During the nine months ended September 30, 2006, $613 million in non-conforming loans classified as held-in-portfolio were pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $1 billion and $519 million in non-cash reclassifications of loans held-for-sale securitized

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into trading securities for the nine months ended September 30, 2007 and 2006, respectively.
The Corporation recognized mortgage servicing rights of $26 million during the nine months ended September 30, 2007 as a result of the securitization and sale of mortgage loans with servicing retained (nine months ended September 30, 2006 — $58 million).
Note 21 — Segment Reporting
Commencing in the first quarter of 2007, the Corporation’s corporate structure consists of three reportable segments – Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.
As indicated in the 2006 Annual Report, in January 2007, the Corporation announced a restructuring and integration plan (the “Restructuring Plan”) for PFH’s businesses. The Restructuring Plan, which is being implemented throughout 2007, has the following four basic components:
  o   exiting the wholesale subprime mortgage origination business during the first quarter of 2007, which entailed shutting down the wholesale broker, retail and call center business divisions;
 
  o   consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA to reduce expenses;
 
  o   integrating PFH’s existing commercial lending businesses (mortgage warehouse, mixed use, and construction lending) into BPNA’s business lending groups; and
 
  o   focusing on the core Equity One network of 132 consumer finance branches in 15 states.
As part of the Restructuring Plan, the Corporation also executed an internal corporate reorganization of its U.S. subsidiaries. In January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH. E-LOAN continues to offer its broad range of products and conducts its direct activities through its online platform. Management will be leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.
This reorganization and the Restructuring Plan led management to redefine its business reportable segments. Commencing in 2007, the U.S. operations are defined as one reportable segment defined as “Popular North America”. This segment includes the operations of BPNA and PFH, including all of its wholly-owned subsidiaries.
The reportable segment disclosures for periods prior to 2007 were restated to reflect the new segmentation.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s net income and total assets as of September 30, 2007, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of

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      Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.
Popular North America:
Popular North America, which includes the Corporation’s U.S. operations, consists of:
    BPNA, including its subsidiaries E-LOAN, Popular Leasing, U.S.A. (name being changed to Popular Equipment Finance, Inc.) and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.
 
    PFH, which activities are described above.
All of Popular’s U.S. operations now report to the same president. The PNA segment is disaggregated for additional disclosures between BPNA and PFH. The results of E-LOAN are included as part of BPNA for the quarters ended September 30, 2007 and 2006. PNA Holding Company only is included as part of the Corporate group.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC USA, Inc. incorporated in the United States; and ATH Costa Rica, S.A., EVERTEC Centroamérica S.A. and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in CONTADO and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.     
Corporate:
The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations, are included as part of the processing segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, Communications and Planning. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the business circles.
The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment. The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

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2007
For the quarter ended September 30, 2007
                                         
                                Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 241,725     $ 122,467     ($ 74 )         $ 364,118  
Provision for loan losses
    66,077       82,016                   148,093  
Non-interest income
    116,522       25,948       59,585     ($ 34,840 )     167,215  
Amortization of intangibles
    190       1,810       234             2,234  
Depreciation expense
    10,290       4,678       4,035       (19 )     18,984  
Other operating expenses
    172,267       134,310       43,157       (34,696 )     315,038  
Income tax
    29,247       (29,700 )     3,987       (48 )     3,486  
 
 
                                       
Net income (loss)
  $ 80,176     ($ 44,699 )   $ 8,098     ($ 77 )   $ 43,498  
 
 
                                       
Segment Assets
  $ 26,137,863     $ 21,153,471     $ 224,834     ($ 508,032 )   $ 47,008,136  
 
For the quarter ended September 30, 2007
                                 
    Total Reportable                     Total  
(In thousands)   Segments     Corporate     Eliminations     Popular, Inc.  
 
Net interest income (expense)
  $ 364,118     ($ 4,300 )   $ 298     $ 360,116  
Provision for loan losses
    148,093                   148,093  
Non-interest income
    167,215       945       (1,155 )     167,005  
Amortization of intangibles
    2,234                   2,234  
Depreciation expense
    18,984       601             19,585  
Other operating expenses
    315,038       11,670       (1,554 )     325,154  
Income tax
    3,486       (7,709 )     275       (3,948 )
 
 
                                       
Net income (loss)
  $ 43,498     ($ 7,917 )   $ 422     $ 36,003  
 
 
                                       
Segment Assets
  $ 47,008,136     $ 6,550,633     ($ 6,278,638 )   $ 47,280,131  
 
For the nine months ended September 30, 2007
                                         
                                    Total  
    Banco Popular de     Popular North             Intersegment     Reportable  
(In thousands)   Puerto Rico     America     EVERTEC     Eliminations     Segments  
 
Net interest income (expense)
  $ 711,103     $ 394,138     ($ 547 )         $ 1,104,694  
Provision for loan losses
    176,557       183,042                   359,599  
Non-interest income
    358,364       64,783       179,060     ($ 103,974 )     498,233  
Amortization of intangibles
    1,508       5,821       701             8,030  
Depreciation expense
    31,455       14,020       12,355       (55 )     57,775  
Other operating expenses
    525,259       427,777       131,782       (103,892 )     980,926  
Income tax
    87,629       (64,016 )     11,736       (10 )     35,339  
 
 
                                       
Net income (loss)
  $ 247,059     ($ 107,723 )   $ 21,939     ($ 17 )   $ 161,258  
 

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For the nine months ended September 30, 2007
                                 
    Total Reportable                   Total Popular,
(In thousands)   Segments   Corporate   Eliminations   Inc.
 
Net interest income (expense)
  $ 1,104,694     ($ 19,076 )   $ 897     $ 1,086,515  
Provision for loan losses
    359,599       7             359,606  
Non-interest income
    498,233       128,994       (4,671 )     622,556  
Amortization of intangibles
    8,030                   8,030  
Depreciation expense
    57,775       1,783             59,558  
Other operating expenses
    980,926       39,831       (4,991 )     1,015,766  
Income tax
    35,339       677       495       36,511  
 
Net income
  $ 161,258     $ 67,620     $ 722     $ 229,600  
 
2006
For the quarter ended September 30, 2006
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 227,245     $ 124,659     ($ 501 )         $ 351,403  
Provision for loan losses
    31,930       31,515                   63,445  
Non-interest income
    101,827       69,166       57,481     ($ 33,264 )     195,210  
Amortization of intangibles
    634       2,851       123             3,608  
Depreciation expense
    10,871       5,687       4,173       (18 )     20,713  
Other operating expenses
    169,356       149,275       40,793       (33,277 )     326,147  
Income tax
    28,342       2,663       4,168       12       35,185  
 
Net income
  $ 87,939     $ 1,834     $ 7,723     $ 19     $ 97,515  
 
Segment Assets
  $ 25,124,056     $ 21,029,460     $ 217,658     ($ 121,252 )   $ 46,249,922  
 
For the quarter ended September 30, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 351,403     ($ 9,664 )   $ 299     $ 342,038  
Provision for loan losses
    63,445                   63,445  
Non-interest income (loss)
    195,210       (1,571 )     (2,290 )     191,349  
Amortization of intangibles
    3,608                   3,608  
Depreciation expense
    20,713       586             21,299  
Other operating expenses
    326,147       11,481       (2,612 )     335,016  
Income tax
    35,185       (7,575 )     249       27,859  
 
Net income (loss)
  $ 97,515     ($ 15,727 )   $ 372     $ 82,160  
 
Segment Assets
  $ 46,249,922     $ 6,579,170     ($ 5,894,342 )   $ 46,934,750  
 

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For the nine months ended September 30, 2006
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 682,046     $ 416,321     ($ 1,568 )         $ 1,096,799  
Provision for loan losses
    89,395       90,093                   179,488  
Non-interest income
    318,551       189,874       169,523     ($ 103,731 )     574,217  
Amortization of intangibles
    1,900       6,915       345             9,160  
Depreciation expense
    32,915       16,812       12,411       (57 )     62,081  
Other operating expenses
    508,032       451,496       126,515       (103,772 )     982,271  
Impact of change in fiscal period
    (2,072 )     6,181                   4,109  
Income tax
    92,066       14,397       10,441       38       116,942  
 
Net income
  $ 278,361     $ 20,301     $ 18,243     $ 60     $ 316,965  
 
For the nine months ended September 30, 2006
                                 
    Total Reportable                   Total Popular,
(In thousands)   Segments   Corporate   Eliminations   Inc.
 
Net interest income (expense)
  $ 1,096,799     ($ 30,047 )   $ 829     $ 1,067,581  
Provision for loan losses
    179,488                   179,488  
Non-interest income
    574,217       33,260       (3,309 )     604,168  
Amortization of intangibles
    9,160                   9,160  
Depreciation expense
    62,081       1,724             63,805  
Other operating expenses
    982,271       44,229       (3,049 )     1,023,451  
Impact of change in fiscal period
    4,109       3,495       2,137       9,741  
Income tax
    116,942       (28,176 )     (706 )     88,060  
 
Net income (loss)
  $ 316,965     ($ 18,059 )   ($ 862 )   $ 298,044  
 
During the nine months ended September 30, 2007, the holding companies realized net gains on sale and valuation adjustments of investment securities (before tax) of approximately $107.3 million, compared with $14.2 million for the nine months ended September 30, 2006. These net gains are included in “non-interest income” within the “Corporate” group.
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
2007
For the quarter ended September 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 95,607     $ 143,108     $ 2,842     $ 168     $ 241,725  
Provision for loan losses
    21,248       44,829                   66,077  
Non-interest income
    22,200       70,807       23,633       (118 )     116,522  
Amortization of intangibles
    30       47       113             190  
Depreciation expense
    3,563       6,395       332             10,290  
Other operating expenses
    42,556       113,365       16,424       (78 )     172,267  
Income tax
    14,728       11,061       3,403       55       29,247  
 
 
Net income
  $ 35,682     $ 38,218     $ 6,203     $ 73     $ 80,176  
 
 
Segment Assets
  $ 11,729,908     $ 18,651,108     $ 508,838     ($ 4,751,991 )   $ 26,137,863  
 

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For the nine months ended September 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 279,789     $ 422,844     $ 8,022     $ 448     $ 711,103  
Provision for loan losses
    57,070       119,487                   176,557  
Non-interest income
    67,307       225,382       66,440       (765 )     358,364  
Amortization of intangibles
    470       705       333             1,508  
Depreciation expense
    10,941       19,609       905             31,455  
Other operating expenses
    130,909       345,292       49,315       (257 )     525,259  
Income tax
    42,128       37,783       7,731       (13 )     87,629  
 
Net income
  $ 105,578     $ 125,350     $ 16,178     ($ 47 )   $ 247,059  
 
2006
For the quarter ended September 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 86,563     $ 137,998     $ 2,640     $ 44     $ 227,245  
Provision for loan losses
    9,007       22,923                   31,930  
Non-interest income
    26,589       48,961       26,596       (319 )     101,827  
Amortization of intangibles
    220       335       79             634  
Depreciation expense
    3,599       6,967       305             10,871  
Other operating expenses
    43,105       109,965       16,421       (135 )     169,356  
Income tax
    17,944       5,733       4,685       (20 )     28,342  
 
 
Net income
  $ 39,277     $ 41,036     $ 7,746     ($ 120 )   $ 87,939  
 
 
Segment Assets
  $ 10,821,963     $ 17,798,620     $ 564,088     ($ 4,060,615 )   $ 25,124,056  
 
For the nine months ended September 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 252,786     $ 421,234     $ 7,695     $ 331     $ 682,046  
Provision for loan losses
    24,210       65,185                   89,395  
Non-interest income
    73,100       178,143       69,237       (1,929 )     318,551  
Amortization of intangibles
    661       1,006       233             1,900  
Depreciation expense
    10,591       21,462       862             32,915  
Other operating expenses
    131,193       330,682       46,794       (637 )     508,032  
Impact of change in fiscal period
                (2,072 )           (2,072 )
Income tax
    46,054       35,265       11,149       (402 )     92,066  
 
Net income
  $ 113,177     $ 145,777     $ 19,966     ($ 559 )   $ 278,361  
 

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Additional disclosures with respect to the Popular North America reportable segment are as follows:
2007
For the quarter ended September 30, 2007
                                 
            Popular            
    Banco Popular   Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 93,995     $ 27,526     $ 946     $ 122,467  
Provision for loan losses
    20,263       61,753             82,016  
Non-interest income (loss)
    35,976       (9,202 )     (826 )     25,948  
Amortization of intangibles
    1,810                   1,810  
Depreciation expense
    4,126       552             4,678  
Other operating expenses
    107,568       27,568       (826 )     134,310  
Income tax
    (2,696 )     (27,392 )     388       (29,700 )
 
Net loss
  ($ 1,100 )   ($ 44,157 )   $ 558     ($ 44,699 )
 
Segment Assets
  $ 13,818,525     $ 7,569,419     ($ 234,473 )   $ 21,153,471  
 
For the nine months ended September 30, 2007
                                 
            Popular            
    Banco Popular   Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 275,733     $ 115,935     $ 2,470     $ 394,138  
Provision for loan losses
    42,913       140,129             183,042  
Non-interest income (loss)
    138,585       (59,805 )     (13,997 )     64,783  
Amortization of intangibles
    5,821                   5,821  
Depreciation expense
    12,208       1,812             14,020  
Other operating expenses
    320,325       108,906       (1,454 )     427,777  
Income tax
    10,206       (70,100 )     (4,122 )     (64,016 )
 
Net income (loss)
  $ 22,845     ($ 124,617 )   ($ 5,951 )   ($ 107,723 )
 
2006
For the quarter ended September 30, 2006
                                 
            Popular            
    Banco Popular   Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 89,774     $ 34,885           $ 124,659  
Provision for loan losses
    11,997       19,518             31,515  
Non-interest income
    52,559       17,759     ($ 1,152 )     69,166  
Amortization of intangibles
    2,763       88             2,851  
Depreciation expense
    3,779       1,908             5,687  
Other operating expenses
    106,023       43,890       (638 )     149,275  
Income tax
    7,243       (4,400 )     (180 )     2,663  
 
Net income (loss)
  $ 10,528     ($ 8,360 )   ($ 334 )   $ 1,834  
 
Segment Assets
  $ 13,176,616     $ 8,293,978     ($ 441,134 )   $ 21,029,460  
 

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For the nine months ended September 30, 2006
                                 
            Popular            
    Banco Popular   Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 284,882     $ 131,439           $ 416,321  
Provision for loan losses
    35,442       54,651             90,093  
Non-interest income
    158,007       33,780     ($ 1,913 )     189,874  
Amortization of intangibles
    6,648       267             6,915  
Depreciation expense
    11,896       4,916             16,812  
Other operating expenses
    318,029       134,246       (779 )     451,496  
Impact of change in fiscal period
          6,181             6,181  
Income tax
    26,943       (12,149 )     (397 )     14,397  
 
Net income (loss)
  $ 43,931     ($ 22,893 )   ($ 737 )   $ 20,301  
 
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:
                                 
INTERSEGMENT REVENUES*   Quarter ended   Nine months ended
    September 30,   September 30,   September 30,   September 30,
(In thousands)   2007   2006   2007   2006
 
Banco Popular de Puerto Rico:
                               
Commercial Banking
  $ 459     ($ 271 )   $ 401     ($ 886 )
Consumer and Retail Banking
    997       (689 )     819       (2,040 )
Other Financial Services
    (83 )     (86 )     (314 )     (241 )
Popular North America:
                               
Banco Popular North America
    (1,481 )     922       (1,309 )     2,814  
EVERTEC
    (34,732 )     (33,140 )     (103,571 )     (103,378 )
 
Total
  ($ 34,840 )   ($ 33,264 )   ($ 103,974 )   ($ 103,731 )
 
*   For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to processing / information technology services.

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A breakdown of revenues and selected balance sheet information by geographical area follows:
                                 
Geographic Information   Quarter ended   Nine months ended
    September 30,   September 30,   September 30,   September 30,
(In thousands)   2007   2006   2007   2006
 
Revenues**
                               
Puerto Rico
  $ 362,805     $ 336,086     $ 1,203,601     $ 1,044,293  
United States
    142,342       178,218       439,825       570,111  
Other
    21,974       19,083       65,645       57,345  
 
Total consolidated revenues
  $ 527,121     $ 533,387     $ 1,709,071     $ 1,671,749  
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain on sale of loans and valuation adjustments on loans held-for-sale, and other operating income.
                         
    September 30,   December 31,   September 30,
(In thousands)   2007   2006   2006
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 25,154,194     $ 24,621,684     $ 24,559,859  
Loans
    15,433,933       14,735,092       14,275,223  
Deposits
    14,790,442       13,504,860       13,091,696  
Mainland United States
                       
Total assets
  $ 20,892,802     $ 21,570,276     $ 21,200,909  
Loans
    17,194,818       17,363,382       16,870,565  
Deposits
    10,535,551       9,735,264       8,880,915  
Other
                       
Total assets
  $ 1,233,135     $ 1,212,027     $ 1,173,982  
Loans
    692,053       638,465       611,171  
Deposits *
    1,275,522       1,198,207       1,164,834  
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
Note 22 – Restructuring Costs
During the third quarter and nine months ended September 30, 2007, the Corporation recorded pre-tax restructuring costs in the Popular North America segment related to the Restructuring Plan as follows:
                 
    Quarter ended   Nine months ended
(In thousands)   September 30, 2007   September 30, 2007
 
Personnel costs
        $ 8,124 (a)
Net occupancy expenses
          4,413 (b)
Equipment expenses
  ($ 20 )     261  
Professional fees
          1,762 (c)
Communications
          67  
Other operating expenses
          269  
 
Total
  ($ 20 )   $ 14,896  
 
(a)   Severance, stay bonuses, related taxes, and other employee benefits
 
(b)   Lease terminations
 
(c)   Outplacement and professional service contract terminations
 

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Of the above restructuring costs, approximately $4.2 million were recognized as a liability as of September 30, 2007.
During the fourth quarter of 2006, and as a result of the Restructuring Plan, the Corporation recognized impairment charges on long-lived assets of $7.2 million, mainly associated with software and leasehold improvements, and in goodwill of $14.2 million.
As of September 30, 2007, the Restructuring Plan has resulted in estimated combined charges of $36.4 million, broken down as follows:
                         
    Impairments        
    on goodwill        
    and long-lived   Restructuring    
(In thousands)   assets   costs   Total
 
Quarter ended:
                       
December 31, 2006
  $ 21,471           $ 21,471  
March 31, 2007
        $ 15,135       15,135  
June 30, 2007
          (219 )     (219 )
September 30, 2007
          (20 )     (20 )
 
Total
  $ 21,471     $ 14,896     $ 36,367  
 
The Corporation does not expect to incur additional significant restructuring costs in the remaining quarters of 2007. Settlement amounts in lease terminations may differ and are subject to the outcome of negotiations.
Note 23 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of September 30, 2007, December 31, 2006 and September 30, 2006, and the results of their operations and cash flows for the periods ended September 30, 2007 and 2006.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC Centroamérica S.A., T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;
 
    Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc. (formerly Popular Leasing, U.S.A.), Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN, Inc.;
 
    Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and
 
    EVERTEC USA, Inc.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the Securities and Exchange Commission.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.
The principal source of income for PIHC consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of

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

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
 
                                               
Cash and due from banks
  $ 890     $ 1,079     $ 15,567     $ 829,306     ($ 137,786 )   $ 709,056  
Money market investments
    71,000       300       195       1,261,971       (698,369 )     635,097  
Investment securities available-for-sale, at fair value
            38,578               8,839,932       (15 )     8,878,495  
Investment securities held-to-maturity, at amortized cost
    626,189       1,250               81,828       (430,000 )     279,267  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       152,558               179,376  
Trading account securities, at fair value
                            663,283       (1,125 )     662,158  
Investment in subsidiaries
    3,218,956       1,009,325       1,959,999       684,853       (6,873,133 )        
Loans held-for-sale, at lower of cost or market value
                            423,303               423,303  
 
Loans held-in-portfolio
    378,107       21,550       3,084,479       37,447,521       (7,703,433 )     33,228,224  
Less – Unearned income
                            330,723               330,723  
Allowance for loan losses
    60                       600,213               600,273  
 
 
    378,047       21,550       3,084,479       36,516,585       (7,703,433 )     32,297,228  
 
Premises and equipment, net
    24,359               132       556,390       (113 )     580,768  
Other real estate
                            133,508               133,508  
Accrued income receivable
    742       54       14,274       306,563       (30,717 )     290,916  
Other assets
    42,374       60,592       59,188       1,361,010       (81,483 )     1,441,681  
Goodwill
                            668,807               668,807  
Other intangible assets
    554                       99,917               100,471  
 
 
  $ 4,377,536     $ 1,132,729     $ 5,146,226     $ 52,579,814     ($ 15,956,174 )   $ 47,280,131  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                           
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,113,111     ($ 137,728 )   $ 3,975,383  
Interest bearing
                            23,123,566       (497,434 )     22,626,132  
 
 
                            27,236,677       (635,162 )     26,601,515  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 265,332       6,211,672       (189,701 )     6,287,303  
Other short-term borrowings
  $ 25,000               849,716       2,531,236       (1,991,055 )     1,414,897  
Notes payable
    486,494               2,920,305       10,584,543       (5,676,551 )     8,314,791  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    62,321     $ 80       119,174       800,501       (124,281 )     857,795  
 
 
    573,815       80       4,154,527       47,794,629       (9,046,750 )     43,476,301  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,757,961       3,961       2       70,421       (74,384 )     1,757,961  
Surplus
    531,128       851,193       734,964       3,156,701       (4,737,857 )     536,129  
Retained earnings
    1,694,385       330,750       269,284       1,687,153       (2,292,188 )     1,689,384  
Accumulated other comprehensive loss, net of tax
    (161,061 )     (53,255 )     (12,551 )     (128,535 )     194,341       (161,061 )
Treasury stock, at cost
    (205,567 )                     (664 )     664       (205,567 )
 
 
    3,803,721       1,132,649       991,699       4,785,076       (6,909,424 )     3,803,721  
 
 
  $ 4,377,536     $ 1,132,729     $ 5,146,226     $ 52,579,814     ($ 15,956,174 )   $ 47,280,131  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 2     $ 157     $ 322     $ 1,015,470     ($ 65,793 )   $ 950,158  
Money market investments
    8,700       1,075       2,553       508,424       (219,044 )     301,708  
Investment securities available-for-sale, at fair value
            71,262               9,782,815       (3,215 )     9,850,862  
Investment securities held-to-maturity, at amortized cost
    430,000       2,157               89,183       (430,000 )     91,340  
Other investment securities, at lower of cost or realizable value
    143,469       5,001       26,152       122,772               297,394  
Trading account securities, at fair value
                            382,325               382,325  
Investment in subsidiaries
    3,177,371       1,135,808       2,062,710       816,684       (7,192,573 )        
Loans held-for-sale, at lower of cost or market value
                            719,922               719,922  
 
Loans held-in-portfolio
    467,649               2,958,559       35,467,096       (6,567,940 )     32,325,364  
Less — Unearned income
                            308,347               308,347  
Allowance for loan losses
    40                       522,192               522,232  
 
 
    467,609               2,958,559       34,636,557       (6,567,940 )     31,494,785  
 
Premises and equipment, net
    25,628               134       569,545       (167 )     595,140  
Other real estate
                            84,816               84,816  
Accrued income receivable
    1,058       12       11,581       264,089       (28,500 )     248,240  
Other assets
    60,430       42,883       28,125       1,528,398       (47,946 )     1,611,890  
Goodwill
                            667,853               667,853  
Other intangible assets
    554                       107,000               107,554  
 
 
  $ 4,314,821     $ 1,258,355     $ 5,090,136     $ 51,295,853     ($ 14,555,178 )   $ 47,403,987  
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                           
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,287,868     ($ 65,735 )   $ 4,222,133  
Interest bearing
                            20,283,441       (67,243 )     20,216,198  
 
 
                            24,571,309       (132,978 )     24,438,331  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 159,829       5,739,416       (136,800 )     5,762,445  
Other short-term borrowings
  $ 150,787               894,959       5,297,595       (2,309,216 )     4,034,125  
Notes payable
    484,406               2,835,595       9,651,217       (4,233,972 )     8,737,246  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    59,322     $ 60       78,988       758,613       (85,559 )     811,424  
 
 
    694,515       60       3,969,371       46,448,150       (7,328,525 )     43,783,571  
 
Minority interest in consolidated subsidiaries
                            110               110  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,753,146       3,961       2       70,421       (74,384 )     1,753,146  
Surplus
    521,855       851,193       734,964       3,182,285       (4,763,441 )     526,856  
Retained earnings
    1,599,145       458,922       406,811       1,804,476       (2,675,210 )     1,594,144  
Accumulated other comprehensive loss, net of tax
    (233,728 )     (55,781 )     (21,012 )     (207,443 )     284,236       (233,728 )
Treasury stock, at cost
    (206,987 )                     (2,146 )     2,146       (206,987 )
 
 
    3,620,306       1,258,295       1,120,765       4,847,593       (7,226,653 )     3,620,306  
 
 
  $ 4,314,821     $ 1,258,355     $ 5,090,136     $ 51,295,853     ($ 14,555,178 )   $ 47,403,987  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 769     $ 204     $ 15,019     $ 777,966     ($ 57,289 )   $ 736,669  
Money market investments
    60,000       300       242       678,444       (193,737 )     545,249  
Investment securities available-for-sale, at fair value
    8,536       70,500       9,677       10,069,659       (47 )     10,158,325  
Investment securities held-to-maturity, at amortized cost
    699,683       2,160               85,587       (430,000 )     357,430  
Other investment securities, at lower of cost or realizable value
    143,782       5,001       18,671       130,018               297,472  
Trading account securities, at fair value
                            451,684       (22 )     451,662  
Investment in subsidiaries
    3,198,490       1,158,368       2,077,657       803,046       (7,237,561 )        
Loans held-for-sale, at lower of cost or market value
                            447,314               447,314  
 
Loans held-in-portfolio
    27,032               2,819,009       34,601,455       (5,832,737 )     31,614,759  
Less – Unearned income
                            305,114               305,114  
Allowance for loan losses
    40                       487,299               487,339  
 
 
    26,992               2,819,009       33,809,042       (5,832,737 )     30,822,306  
 
Premises and equipment, net
    26,217               135       562,117       (187 )     588,282  
Other real estate
                            83,636               83,636  
Accrued income receivable
    359       43       11,243       301,402       (24,705 )     288,342  
Other assets
    61,963       41,661       44,255       1,236,372       (9,351 )     1,374,900  
Goodwill
                            678,666               678,666  
Other intangible assets
    554                       103,943               104,497  
 
 
  $ 4,227,345     $ 1,278,237     $ 4,995,908     $ 50,218,896     ($ 13,785,636 )   $ 46,934,750  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                           
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 3,879,816     ($ 57,232 )   $ 3,822,584  
Interest bearing
                            19,408,598       (93,737 )     19,314,861  
 
 
                            23,288,414       (150,969 )     23,137,445  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 73,000       7,058,466       (86,000 )     7,045,466  
Other short-term borrowings
          $ 300       130,556       3,711,662       (1,133,007 )     2,709,511  
Notes payable
  $ 532,428               3,533,639       10,286,509       (4,670,679 )     9,681,897  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    58,894       58       114,508       594,723       (43,887 )     724,296  
 
 
    591,322       358       3,851,703       45,369,774       (6,514,542 )     43,298,615  
 
Minority interest in consolidated subsidiaries
                            111               111  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,751,868       3,961       2       70,421       (74,384 )     1,751,868  
Surplus
    489,397       851,193       734,964       3,103,198       (4,684,354 )     494,398  
Retained earnings
    1,616,104       481,905       432,772       1,852,429       (2,772,107 )     1,611,103  
Accumulated other comprehensive loss, net of tax
    (201,688 )     (59,180 )     (23,533 )     (175,251 )     257,965       (201,687 )
Treasury stock, at cost
    (206,533 )                     (1,786 )     1,786       (206,533 )
 
 
    3,636,023       1,277,879       1,144,205       4,849,011       (7,271,094 )     3,636,024  
 
 
  $ 4,227,345     $ 1,278,237     $ 4,995,908     $ 50,218,896       ($13,785,636 )   $ 46,934,750  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 4,800     $ 31     $ 40,827     $ 713,782     ($ 96,467 )   $ 662,973  
Money market investments
    176       244       3       9,719       (3,335 )     6,807  
Investment securities
    10,092       307       223       106,508       (7,337 )     109,793  
Trading account securities
                            10,653               10,653  
 
 
    15,068       582       41,053       840,662       (107,139 )     790,226  
 
INTEREST EXPENSE:
                                               
Deposits
                            199,409       (2,584 )     196,825  
Short-term borrowings
    382               14,635       129,035       (30,220 )     113,832  
Long-term debt
    8,368               38,071       150,661       (77,647 )     119,453  
 
 
    8,750               52,706       479,105       (110,451 )     430,110  
 
Net interest income (expense)
    6,318       582       (11,653 )     361,557       3,312       360,116  
Provision for loan losses
                            148,093               148,093  
 
Net interest income (expense) after provision for loan losses
    6,318       582       (11,653 )     213,464       3,312       212,023  
Service charges on deposit accounts
                            49,704               49,704  
Other service fees
                            121,030       (27,666 )     93,364  
Net (loss) gain on sale and valuation adjustments of investment securities
    (1,025 )     258               (2,322 )             (3,089 )
Trading account loss
                            (2,827 )     (40 )     (2,867 )
Gain on sale of loans and valuation
adjustments on loans held-for-sale
                            5,987       4       5,991  
Other operating income (loss)
    67       2,296       (94 )     31,374       (9,741 )     23,902  
 
 
    5,360       3,136       (11,747 )     416,410       (34,131 )     379,028  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    3,882       99               117,687       (858 )     120,810  
Pension, profit sharing and other benefits
    978       15               30,681       (244 )     31,430  
 
 
    4,860       114               148,368       (1,102 )     152,240  
Net occupancy expenses
    541       7       1       28,887               29,436  
Equipment expenses
    387                       30,349       (48 )     30,688  
Other taxes
    438                       12,789               13,227  
Professional fees
    2,717       (2 )     (14 )     69,693       (35,291 )     37,103  
Communications
    116                       16,772       (42 )     16,846  
Business promotion
    989                       27,667       (96 )     28,560  
Printing and supplies
    15               1       4,115               4,131  
Other operating expenses
    (11,547 )     (100 )     95       44,708       (648 )     32,508  
Amortization of intangibles
                            2,234               2,234  
 
 
    (1,484 )     19       83       385,582       (37,227 )     346,973  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    6,844       3,117       (11,830 )     30,828       3,096       32,055  
Income tax
    1,755               (4,140 )     (2,672 )     1,109       (3,948 )
 
Income (loss) before equity in earnings of subsidiaries
    5,089       3,117       (7,690 )     33,500       1,987       36,003  
Equity in earnings of subsidiaries
    30,914       (52,915 )     (46,191 )     (51,726 )     119,918          
 
NET INCOME (LOSS)
  $ 36,003     ($ 49,798 )   ($ 53,881 )   ($ 18,226 )   $ 121,905     $ 36,003  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 694             $ 37,876     $ 671,409     ($ 72,733 )   $ 637,246  
Money market investments
    200     $ 12       2       9,234       (2,410 )     7,038  
Investment securities
    11,318       366       517       124,119       (6,997 )     129,323  
Trading account securities
                            7,724               7,724  
 
 
    12,212       378       38,395       812,486       (82,140 )     781,331  
 
INTEREST EXPENSE:
                                               
Deposits
                            152,164       (1,156 )     151,008  
Short-term borrowings
    71       396       3,776       152,553       (15,069 )     141,727  
Long-term debt
    9,134               47,722       157,288       (67,586 )     146,558  
 
 
    9,205       396       51,498       462,005       (83,811 )     439,293  
 
Net interest income (expense)
    3,007       (18 )     (13,103 )     350,481       1,671       342,038  
Provision for loan losses
                            63,445               63,445  
 
Net interest income (expense) after provision for loan losses
    3,007       (18 )     (13,103 )     287,036       1,671       278,593  
Service charges on deposit accounts
                            47,484               47,484  
Other service fees
                            106,498       (26,861 )     79,637  
Net (loss) gain on sale and valuation adjustments of investment securities
    (143 )     106               846       6,314       7,123  
Trading account profit
                            5,221       4,798       10,019  
Gain on sale of loans
                            16,421       3,692       20,113  
Other operating income (loss)
    696       1,676       (3,090 )     38,318       (10,627 )     26,973  
 
 
    3,560       1,764       (16,193 )     501,824       (21,013 )     469,942  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    4,165       95               127,252       (899 )     130,613  
Pension, profit sharing and other benefits
    1,129       15               33,178       (239 )     34,083  
 
 
    5,294       110               160,430       (1,138 )     164,696  
Net occupancy expenses
    594       4       1       30,974               31,573  
Equipment expenses
    420       3       3       33,946       (26 )     34,346  
Other taxes
    353                       11,417               11,770  
Professional fees
    2,028       11       56       62,044       (34,521 )     29,618  
Communications
    152                       17,221       (30 )     17,343  
Business promotion
    800                       33,694       (639 )     33,855  
Printing and supplies
    26               1       4,381               4,408  
Other operating expenses
    (9,309 )     (100 )     109       38,391       (385 )     28,706  
Amortization of intangibles
                            3,608               3,608  
 
 
    358       28       170       396,106       (36,739 )     359,923  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    3,202       1,736       (16,363 )     105,718       15,726       110,019  
Income tax
    (938 )             (1,855 )     26,845       3,807       27,859  
 
Income (loss) before equity in earnings of subsidiaries
    4,140       1,736       (14,508 )     78,873       11,919       82,160  
Equity in earnings of subsidiaries
    78,020       (13,525 )     337       1,523       (66,355 )        
 
NET INCOME (LOSS)
  $ 82,160     ($ 11,789 )   ($ 14,171 )   $ 80,396     ($ 54,436 )   $ 82,160  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 14,339     $ 31     $ 117,001     $ 2,097,088     ($ 264,887 )   $ 1,963,572  
Money market investments
    1,116       359       13       23,128       (7,448 )     17,168  
Investment securities
    27,456       1,503       670       330,457       (21,739 )     338,347  
Trading account securities
                            29,645               29,645  
 
 
    42,911       1,893       117,684       2,480,318       (294,074 )     2,348,732  
 
INTEREST EXPENSE:
                                               
Deposits
                            557,184       (4,527 )     552,657  
Short-term borrowings
    2,348               43,521       402,175       (89,937 )     358,107  
Long-term debt
    25,100               111,956       423,348       (208,951 )     351,453  
 
 
    27,448               155,477       1,382,707       (303,415 )     1,262,217  
 
Net interest income (expense)
    15,463       1,893       (37,793 )     1,097,611       9,341       1,086,515  
Provision for loan losses
    7                       359,599               359,606  
 
Net interest income (expense) after provision for loan losses
    15,456       1,893       (37,793 )     738,012       9,341       726,909  
Service charges on deposit accounts
                            146,567               146,567  
Other service fees
                            354,484       (83,681 )     270,803  
Net gain (loss) on sale and valuation adjustments of investment securities
    115,567       (8,249 )             (27,461 )             79,857  
Trading account loss
                            (6,614 )     (40 )     (6,654 )
Gain on sale of loans and valuation
adjustments on loans held-for-sale
                            50,254       (12,535 )     37,719  
Other operating income (loss)
    9,830       13,506       (723 )     100,073       (28,422 )     94,264  
 
 
    140,853       7,150       (38,516 )     1,355,315       (115,337 )     1,349,465  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    15,500       293               370,402       (1,956 )     384,239  
Pension, profit sharing and other benefits
    4,295       52               106,881       (564 )     110,664  
 
 
    19,795       345               477,283       (2,520 )     494,903  
Net occupancy expenses
    1,707       22       2       86,220               87,951  
Equipment expenses
    1,061               3       94,413       (148 )     95,329  
Other taxes
    1,148                       35,761               36,909  
Professional fees
    8,495       17       107       209,030       (105,917 )     111,732  
Communications
    393                       50,610       (122 )     50,881  
Business promotion
    2,152                       85,853       (704 )     87,301  
Printing and supplies
    56               1       12,899               12,956  
Other operating expenses
    (36,499 )     (300 )     328       135,249       (1,416 )     97,362  
Amortization of intangibles
                            8,030               8,030  
 
 
    (1,692 )     84       441       1,195,348       (110,827 )     1,083,354  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    142,545       7,066       (38,957 )     159,967       (4,510 )     266,111  
Income tax
    31,001               (13,635 )     21,445       (2,300 )     36,511  
 
Income (loss) before equity in earnings of subsidiaries
    111,544       7,066       (25,322 )     138,522       (2,210 )     229,600  
Equity in earnings of subsidiaries
    118,056       (135,832 )     (112,800 )     (140,641 )     271,217          
 
NET INCOME (LOSS)
  $ 229,600     ($ 128,766 )   ($ 138,122 )   ($ 2,119 )   $ 269,007     $ 229,600  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 6,118             $ 111,043     $ 1,934,965     ($ 209,253 )   $ 1,842,873  
Money market investments
    1,722     $ 131       439       29,389       (8,755 )     22,926  
Investment securities
    27,686       1,029       964       387,361       (20,910 )     396,130  
Trading account securities
                            23,649               23,649  
 
 
    35,526       1,160       112,446       2,375,364       (238,918 )     2,285,578  
 
INTEREST EXPENSE:
                                               
Deposits
                            414,636       (3,256 )     411,380  
Short-term borrowings
    174       1,237       13,878       422,032       (43,717 )     393,604  
Long-term debt
    27,184               138,060       445,564       (197,795 )     413,013  
 
 
    27,358       1,237       151,938       1,282,232       (244,768 )     1,217,997  
 
Net interest income (expense)
    8,168       (77 )     (39,492 )     1,093,132       5,850       1,067,581  
Provision for loan losses
                            179,488               179,488  
 
Net interest income (expense) after provision for loan losses
    8,168       (77 )     (39,492 )     913,644       5,850       888,093  
Service charges on deposit accounts
                            142,277               142,277  
Other service fees
                            321,510       (81,510 )     240,000  
Net gain (loss) on sale and valuation adjustments of investment securities
    589       13,595               (15,869 )     6,724       5,039  
Trading account profit
                            6,404       16,920       23,324  
Gain on sale of loans
                            100,653       (4,225 )     96,428  
Other operating income (loss)
    15,169       5,177       (271 )     106,845       (29,820 )     97,100  
 
 
    23,926       18,695       (39,763 )     1,575,464       (86,061 )     1,492,261  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    14,823       283               380,183       (2,444 )     392,845  
Pension, profit sharing and other benefits
    4,149       51               112,878       (692 )     116,386  
 
 
    18,972       334               493,061       (3,136 )     509,231  
Net occupancy expenses
    1,723       11       1       87,105               88,840  
Equipment expenses
    1,221       6       10       100,336       (57 )     101,516  
Other taxes
    853                       32,087               32,940  
Professional fees
    12,187       34       132       196,099       (103,268 )     105,184  
Communications
    471                       51,531       (66 )     51,936  
Business promotion
    3,887                       95,561       (779 )     98,669  
Printing and supplies
    62               1       13,268               13,331  
Other operating expenses
    (39,508 )     (299 )     327       126,182       (1,093 )     85,609  
Impact of change in fiscal period at certain subsidiaries
                    3,495       4,109       2,137       9,741  
Amortization of intangibles
                            9,160               9,160  
 
 
    (132 )     86       3,966       1,208,499       (106,262 )     1,106,157  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    24,058       18,609       (43,729 )     366,965       20,201       386,104  
Income tax
    1,778               (11,015 )     93,258       4,039       88,060  
 
Income (loss) before equity in earnings of subsidiaries
    22,280       18,609       (32,714 )     273,707       16,162       298,044  
Equity in earnings of subsidiaries
    275,764       (17,246 )     14,214       (9,110 )     (263,622 )        
 
NET INCOME (LOSS)
  $ 298,044     $ 1,363     ($ 18,500 )   $ 264,597     ($ 247,460 )   $ 298,044  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 229,600       ($128,766 )     ($138,122 )     ($2,119 )   $ 269,007     $ 229,600  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (118,056 )     135,832       112,800       140,641       (271,217 )        
Depreciation and amortization of premises and equipment
    1,781               2       57,830       (55 )     59,558  
Provision for loan losses
    7                       359,599               359,606  
Amortization of intangibles
                            8,030               8,030  
Amortization and fair value adjustment of servicing assets
                            34,941               34,941  
Net (gain) loss on sale and valuation adjustment of investment securities
    (115,567 )     8,249               27,461               (79,857 )
Net loss (gain) on disposition of premises and equipment
    1                       (5,294 )             (5,293 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
                            (50,254 )     12,535       (37,719 )
Net amortization of premiums and accretion of discounts on investments
    (5,525 )     7               21,337       (18 )     15,801  
Net amortization of premiums and deferred loan origination fees and costs
                            77,963       (7,318 )     70,645  
(Earnings) losses from investments under the equity method
    (4,580 )     (13,506 )     723       (927 )     (1,224 )     (19,514 )
Stock options expense
    464                       875               1,339  
Deferred income taxes
    1,451               (13,635 )     (111,812 )     29,415       (94,581 )
Net disbursements on loans held-for-sale
                            (4,007,301 )             (4,007,301 )
Acquisitions of loans held-for-sale
                            (474,269 )             (474,269 )
Proceeds from sale of loans held-for-sale
                            3,475,817               3,475,817  
Net decrease in trading securities
                            1,001,953       1,125       1,003,078  
Net decrease (increase) in accrued income receivable
    316       (43 )     (2,693 )     (42,473 )     2,218       (42,675 )
Net decrease (increase) in other assets
    23,128       2,699       (4,220 )     3,556       5,344       30,507  
Net increase (decrease) in interest payable
    375               6,436       (38 )     (2,187 )     4,586  
Net increase in postretirement benefit obligation
                            2,407               2,407  
Net increase in other liabilities
    3,370       20       32,608       19,181       (36,534 )     18,645  
 
Total adjustments
    (212,835 )     133,258       132,021       539,223       (267,916 )     323,751  
 
Net cash provided by (used in) operating activities
    16,765       4,492       (6,101 )     537,104       1,091       553,351  
 
Cash flows from investing activities:
                                               
Net (increase) decrease in money market investments
    (62,300 )     775       2,357       (687,112 )     479,326       (266,954 )
Purchases of investment securities:
                                               
Available-for-sale
    (6,808 )     (2 )             (793,475 )     732,365       (67,920 )
Held-to-maturity
    (2,749,665 )                     (14,277,166 )             (17,026,831 )
Other
                    (928 )     (46,858 )             (47,786 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            1,801,852       (735,548 )     1,066,304  
Held-to-maturity
    2,559,000       900               14,284,651               16,844,551  
Other
                            17,071               17,071  
Proceeds from sale of investment securities available-for-sale
    5,783       16,605               14,964               37,352  
Proceeds from sale of other investment securities
    245,484       2       865       1               246,352  
Net repayments (disbursements) on loans
    89,556       (21,550 )     (125,919 )     (1,883,576 )     803,507       (1,137,982 )
Proceeds from sale of loans
                            16,367               16,367  
Acquisition of loan portfolios
                            (22,312 )             (22,312 )
Capital contribution to subsidiary
            (300 )             (1,141 )     1,441          
Assets acquired, net of cash
                            (2,378 )             (2,378 )
Mortgage servicing rights purchased
                            (25,596 )             (25,596 )
Acquisition of premises and equipment
    (513 )                     (69,094 )             (69,607 )
Proceeds from sale of premises and equipment
                            29,501               29,501  
Proceeds from sale of foreclosed assets
                            113,776               113,776  
Dividends received from subsidiary
    159,200                               (159,200 )        
 
Net cash provided by (used in) investing activities
    239,737       (3,570 )     (123,625 )     (1,530,525 )     1,121,891       (296,092 )
 
Cash flows from financing activities:
                                               
Net increase in deposits
                            2,652,852       (502,184 )     2,150,668  
Net increase in federal funds purchased and assets sold under agreements to repurchase
                    105,503       472,255       (52,900 )     524,858  
Net decrease in other short-term borrowings
    (125,787 )             (45,242 )     (2,766,359 )     318,160       (2,619,228 )
Payments of notes payable
                    (4,583 )     (2,369,207 )     1,128,458       (1,245,332 )
Proceeds from issuance of notes payable
    298               89,293       2,975,764       (2,244,268 )     821,087  
Dividends paid to parent company
                            (159,200 )     159,200          
Dividends paid
    (142,898 )                                     (142,898 )
Proceeds from issuance of common stock
    12,836                                       12,836  
Treasury stock acquired
    (63 )                     (289 )             (352 )

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    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Capital contribution from parent
                            1,441       (1,441 )        
 
Net cash (used in) provided by financing activities
    (255,614 )             144,971       807,257       (1,194,975 )     (498,361 )
 
Net increase (decrease) in cash and due from banks
    888       922       15,245       (186,164 )     (71,993 )     (241,102 )
Cash and due from banks at beginning of period
    2       157       322       1,015,470       (65,793 )     950,158  
 
Cash and due from banks at end of period
  $ 890     $ 1,079     $ 15,567     $ 829,306       ($137,786 )   $ 709,056  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 298,044     $ 1,363       ($18,500 )   $ 264,597       ($247,460 )   $ 298,044  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
                    (2,271 )     (2,638 )     (1,220 )     (6,129 )
 
Net income before impact of change in fiscal period
    298,044       1,363       (16,229 )     267,235       (246,240 )     304,173  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (275,764 )     17,246       (14,214 )     9,110       263,622          
Depreciation and amortization of premises and equipment
    1,723               1       62,135       (54 )     63,805  
Provision for loan losses
                            179,488               179,488  
Amortization of intangibles
                            9,160               9,160  
Amortization of servicing assets
                            43,333       (24 )     43,309  
Net (gain) loss on sale and valuation adjustment of investment securities
    (589 )     (13,595 )             15,870       (6,725 )     (5,039 )
Net gain on disposition of premises and equipment
    4                       (7,181 )             (7,177 )
Net gain on sale of loans
                            (100,653 )     4,225       (96,428 )
Net amortization of premiums and accretion of discounts on investments
    (394 )     10       (118 )     19,752       (190 )     19,060  
Net amortization of premiums and deferred loan origination fees and costs
    (54 )                     103,619       (4,500 )     99,065  
Earnings from investments under the equity method
    (1,924 )     (5,165 )             (894 )     (1,098 )     (9,081 )
Stock options expense
    566                       1,742               2,308  
Deferred income taxes
    (480 )             (11,015 )     (12,174 )     4,039       (19,630 )
Net disbursements on loans held-for-sale
                            (4,963,647 )             (4,963,647 )
Acquisitions of loans held-for-sale
                            (1,188,844 )             (1,188,844 )
Proceeds from sale of loans held-for-sale
                            5,559,968               5,559,968  
Net decrease in trading securities
                            1,196,104       (465 )     1,195,639  
Net decrease (increase) in accrued income receivable
    172       (9 )     1,301       (48,925 )     3,150       (44,311 )
Net (increase) decrease in other assets
    (12,190 )     4,644       4,338       68,882       2,207       67,881  
Net increase (decrease) in interest payable
    818       (23 )     27,452       16,173       (3,163 )     41,257  
Net increase in postretirement benefit obligation
                            3,028               3,028  
Net increase (decrease) in other liabilities
    9,014       3       40,905       (138,083 )     1       (88,160 )
 
Total adjustments
    (279,098 )     3,111       48,650       827,963       261,025       861,651  
 
Net cash provided by operating activities
    18,946       4,474       32,421       1,095,198       14,785       1,165,824  
 
Cash flows from investing activities:
                                               
 
Net decrease (increase) in money market investments
    170,000               (91 )     381,685       (347,272 )     204,322  
Purchases of investment securities:
                                               
Available-for-sale
            (21,189 )             (437,372 )     215,080       (243,481 )
Held-to-maturity
    (269,683 )                     (20,578,088 )             (20,847,771 )
Other
                    (5,529 )     (45,451 )             (50,980 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            1,777,303       (216,691 )     1,560,612  
Held-to-maturity
                            20,644,100               20,644,100  
Other
    1,753                       70,858               72,611  
Proceeds from sale of investment securities available for sale
    7,195       28,628               154,426       7,942       198,191  
Net (disbursements) repayments on loans
    (1,325 )             12,467       (1,066,200 )     177,430       (877,628 )
Proceeds from sale of loans
                            759,518               759,518  
Acquisition of loan portfolios
                            (291,330 )             (291,330 )
Capital contribution to subsidiary
    (36,000 )     (4,000 )     (4