EX-13.1 ANNUAL REPORT TO SHAREHOLDERS


1		Letter to Shareholders
5		Institutional Values
6		25-Year Historical Financial Summary
8		Board of Directors Popular, Inc. / Corporate Information
		Our Creed / Our People

9		Carta a los Accionistas
13		Valores Institucionales

14		Resumen Financiero Histórico - 25 Años
16		Junta de Directores de Popular, Inc. / Información Corporativa
		Nuestro Credo / Nuestra Gente

17		Financial Review and Supplementary Information

Popular, Inc. is a full service financial institution 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, with over 300 branches and offices, the Corporation offers retail and commercial banking services through its franchise, Banco Popular de Puerto Rico, as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker/dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America, including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings. Banco Popular North America, a community bank, provides a wide range of financial services and products and operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending, while Popular Financial Holdings is dedicated to mortgage 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 the Corporation’s subsidiaries’ system infrastructures and transactional processing businesses. The Corporation is exporting its 114 years of experience through these regions while continuing its commitment to meeting the needs of retail and business clients through innovation, and to fostering growth in the communities it serves.

Popular, Inc. | 2007 | Annual Report 1

Decisions we made during 2007 were extremely difficult, but will place us in a better position moving forward.

Letter | 2007 | to Shareholders

Popular’s financial performance in 2007 was significantly influenced by the negative impact of the mortgage industry downturn in the results of our non-banking operations in the United States and by actions we undertook to address that situation. These decisions, while extremely difficult, place us in a better position going forward as we focus on our core banking franchise in the mainland. In Puerto Rico, our financial services business continued delivering strong results, despite an economic recession and deteriorating credit quality. EVERTEC, our processing business, showed steady earnings growth and made progress on several strategic fronts.

Popular reported a net loss of $64.5 million for 2007, compared with a net income of $357.7 million in 2006. Basic and diluted net loss per common share for the year was $0.27, compared with a net income per common share of $1.24 for 2006. These losses represented a negative return on assets (ROA) of 0.14% and a negative return on common equity (ROE) of 2.08%, compared to 0.74% and 9.73% in 2006, respectively.

Our results for 2007 were negatively affected by (i) a $274.9 million increase in the provision for loan losses in 2007 as compared to 2006, driven by the slowdown in the United States housing sector and weak economic conditions in Puerto Rico; (ii) a $90.1 million pre-tax loss related to the recharacterization of several on-balance sheet securitizations at Popular Financial Holdings (PFH); (iii) a reduction of $85.1 million in the fair value of residual interests recognized by PFH in previous securitizations;

Popular, Inc. At-a-Glance

Banco Popular de Puerto Rico

> Approximately 1.4 million clients

> 204 branches and 111 offices throughout Puerto Rico and the Virgin Islands

> 6,442 FTEs as of 12/31/07

> 615 ATMs and 28,000 POS throughout Puerto Rico and the Virgin Islands

> #1 market share in Total Deposits (34.9% — 9/30/07) and Total Loans (23.0% — 9/30/07)

> $27.1 billion in assets, $16.6 billion in loans and $18.8 billion in deposits as of 12/31/07

Banco Popular North America

> 147 branches throughout six states (Florida, California, New York, New Jersey, Texas, and Illinois)

> 24 leasing offices with a presence in 15 states

> 2,923 FTEs as of 12/31/07

> 5th SBA lender in the United States in terms of dollars of loans

> E-LOAN held $1.5 billion in deposits and originated $3.6 billion in loans during 2007

> $13.4 billion in assets, $10.3 billion in loans and $9.8 billion in total deposits as of 12/31/07

EVERTEC

> 11 offices throughout the United States and Latin America serving 15 countries

> 1,765 FTEs as of 12/31/07

> Processed over 1 billion transactions in 2007, of which more than 535 million corresponded to the ATH^{^®}Network

> 4,944 ATMs and over 100,500 POS throughout the United States and Latin America

Popular Financial Holdings

> 135 offices in 16 states as of 12/31/07

> Total originations amounted to $3.4 billion in 2007

> Mortgage portfolio serviced for others of $9.4 billion as of 12/31/07

> 930 FTEs as of 12/31/07

> $3.9 billion in assets and $3.3 billion in loans

Letter to Shareholders, continued

(iv) $16.6 million in restructuring charges at PFH; and (v) $231.9 million in restructuring and impairment charges at E-LOAN. These negative variances were partially offset by a pre-tax gain of $118.7 million stemming from the sale of the Corporation’s shares of common stock of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) in March of 2007.

Our stock price fell 41% during 2007, closing the year at $10.60. We are extremely disappointed with our financial results as well as the performance of our stock. We recognize these results are unacceptable and have begun a process to realign our operations in the United States to take them to acceptable profitability levels.

United States

At Popular Financial Holdings (PFH), our mainland United States sub-prime lending operation, we reduced the size of the business and took measures to lessen our exposure to the sub-prime mortgage market. At E-LOAN, we adapted the business model and right-sized our infrastructure to reflect a market with significantly lower volumes, higher delinquencies and a practically illiquid secondary market. In the case of Banco Popular North America (BPNA), we embarked on a process to focus our resources to improve the profitability of our retail franchise.

Popular Financial Holdings

PFH recorded a net loss of $269.4 million in 2007. These results reflect the deterioration of the sub-prime mortgage business as well as charges related to some of the initiatives we undertook during the year.

In January of 2007, we adopted a restructuring plan for PFH which included the decisions to exit the wholesale sub-prime origination business, to consolidate support functions with its sister United States banking entity, Banco Popular North America, and to focus on profitable businesses.

As a result of the restructuring plan and the decision to exit the wholesale sub-prime business, we completed the recharacterization of certain on-balance sheet securitizations that allowed us to recognize these transactions as sales. Consequently, we removed approximately $3.2 billion in mortgage loans and $3.1 billion in related liabilities from our balance sheet. The impact of the recharacterization was a pre-tax loss of $90.1 million. The removal of these mortgage assets from our books improves capital and credit quality ratios and reduces the amount of sub-prime mortgages on our books.

Most of PFH’s remaining loan portfolio amounting to approximately $1.5 billion and $287 million of bond certificates associated with on-balance sheet securitizations will be presented at market value based on FAS 159 (Fair Value Option for Financial Assets and Financial

Popular, Inc. | 2007 | Annual Report 3

Liabilities). The adoption of FAS 159, which will be implemented on January 1st, will result in a negative pre-tax adjustment that could range between $280 million and $300 million that will have no impact in the income statement since it will be deducted from retained earnings.

At the time of the January 2007 restructuring, we decided to continue the operations of Equity One and its subsidiaries, which are dedicated to originating and servicing consumer finance loans through a network of over 130 offices. However, given increasing funding costs stemming from the disruption in the capital markets that began in the summer of 2007, we became convinced that it would become progressively more difficult to generate an adequate return on the capital invested at Equity One. In January 2008, we announced the signing of an agreement to sell certain assets of Equity One to American General Financial, a member of the American International Group (AIG). As part of the agreement, American General acquired a significant portion of Equity One’s mortgage loan and consumer loan portfolio approximating $1.4 billion as well as 24 of Equity One’s branches. We will be closing the remaining branches. The transaction, which closed on March 1, 2008, resulted in restructuring charges of $19.5 million, most of which will be recorded in the first quarter, and generated a pre-tax gain of approximately $50 million.

The combined effect of the aforementioned initiatives is a reduction of PFH’s mortgage loans held-in portfolio from $6.9 billion in the beginning of 2007 to approximately $1.3 billion as of December 2007, of which $1 billion is sub-prime compared to a sub-prime portfolio amounting to $4.6 billion as of December 2006. Also, these initiatives enable us to present a clearer picture of Popular’s real exposure in this business.

Banco Popular North America

Banco Popular North America (BPNA), which includes E-LOAN as a subsidiary, reported a net loss of $195.4 million in 2007. This loss was driven by a net loss of $245.7 million at E-LOAN.

BPNA’s banking operations generated a net income of $50.5 million, which, even though positive, was 50% below 2006. BPNA’s results were adversely affected by increased credit costs and lower net interest income. BPNA’s provision totaled $77.8 million, 106% higher than in 2006, due to the higher non-performing assets in the construction loan and mortgage portfolios. Net interest income was $14.5 million below 2006 levels due to tighter margins.

Given the challenges we face, we took action to focus and prioritize resources. In October 2007, we announced the sale of six of our Houston, Texas branches to Prosperity Bank. Prosperity Bank paid a premium of 10.10% for approximately $125 million in deposits, and purchased certain loans and assets attributable to the branches. We will focus our efforts on improving the performance of the branch network we have built in the United States to enhance the value of our retail franchise.

E-LOAN incurred a net loss of $245.7 million in 2007, which includes restructuring charges of $20.1 million and goodwill and trademark impairment charges amounting to $211.8 million.

We will focus our efforts to enhance the value of our retail franchise.

E-LOAN’s business continued to be severely impacted by market conditions during 2007. A general decline in mortgage origination volume, significant increases in delinquencies and foreclosures and reduced liquidity in the secondary markets prompted us to restructure E-LOAN. In November 2007, we adopted a restructuring plan that substantially reduced marketing and personnel expenses and focused E-LOAN in the origination of agency conforming first mortgage loans. This plan resulted in restructuring charges of $20.1 million in the fourth quarter of 2007 and is expected to reduce operating expenses by $77 million in 2008.

Given the changes to the business model and the challenging environment faced by the mortgage industry in the United States, we conducted an assessment of the value of E-LOAN’s recorded goodwill and trademark. The review resulted in the recognition of an impairment. This charge was a non-cash transaction and did not impact Popular’s liquidity or regulatory capital ratios.

E-LOAN continues to be an important element for Popular given its technology platform, the wide geographic reach of its products, its ability to raise deposits for the Corporation and its widely known and respected brand.

Letter to Shareholders, continued

Puerto Rico

Our financial services operations in Puerto Rico, which consist of Banco Popular de Puerto Rico and other specialized subsidiaries, performed very well in 2007 despite an economy in recession, deteriorating credit quality and aggressive competition. These results confirm our capacity not only to withstand these negative forces, but to strengthen our position even in the most challenging of times.

Net income for the Puerto Rico circle totaled $327.3 million, $28.6 million lower than in 2006. Financial results were impacted by deterioration in credit quality, which translated in a provision for loan losses of $243.7 million, 73% higher than the previous year. Net charge-offs rose by 69%, reaching $191 million, mostly in the commercial, credit card and personal loan portfolios. Throughout the year, we focused on proactively managing credit quality by tightening underwriting standards, anticipating possible losses, increasing spreads and improving collection efforts.

Notwithstanding our careful approach in the credit arena, we were able to defend and increase our market share across the board. Market share gains get tougher every year, considering we are already the top player in seven out of the nine key product categories we closely track. During 2007, we improved our position in eight out of the nine categories, accounting for 23% of total loans and 35% of total deposits in the market. We will continue to focus on profitable market growth to further solidify our leadership position in Puerto Rico.

In addition to growing our existing business, we strengthened our franchise with the acquisition of Citibank’s local retail business and Smith Barney’s local retail brokerage operations. The retail business acquisition included 17 branches (seven of which were consolidated), approximately $1 billion in deposits, mostly core deposits, and over $220 million in loans. Including these deposits, Popular’s market share rose to approximately 38%. We welcomed over 200 new colleagues and a solid client base which offers great potential to cross-sell additional Popular products. The local securities business is highly concentrated, with 60% of assets under management (AUM) controlled by the top two players. The Smith Barney transaction strengthens our sales force and provides additional business volume ($1.2 billion in AUM), significantly closing the gap between Popular Securities and the second player.

Improving cost efficiency remained one of Banco Popular’s priorities in 2007. Expenses were 4.7% higher than in 2006, in great part due to costs related to the conversion of Citibank’s retail and brokerage operations. However, even though these costs were not in the original budget, total expenses for the year were below budget due to disciplined spending in other areas. As a result of our cost efficiency efforts throughout the last three years, we have improved our efficiency ratio from 55.8% in 2005 to 52.9% in 2007.

We expect the tough economic scenario to persist well into 2008, but as we proved in 2007, discipline, a focus on execution and a strong franchise can not only get us through the toughest times, it can make us emerge even stronger than before.

As we proved in 2007, discipline and focus on execution can make us emerge stronger.

EVERTEC

EVERTEC, our processing unit with operations in Puerto Rico, the Caribbean and Latin America, increased revenues, net income and transaction volume in 2007 despite a recession in its main market, Puerto Rico, and increased competition from larger processing companies across all regions.

EVERTEC’s net income in 2007 reached $31.3 million, an increase of 20% over 2006. These results were driven by good revenue growth, mainly from clients other than Popular companies, combined with tight expense management.

In addition to solid financial results, EVERTEC made important progress in several of its key strategic areas, such as enhancing the competitiveness of the ATH^{^®}Network. For over 20 years, ATH^{^®}has been the preferred, as well as the most secure and cost effective payment method for Puerto Ricans. During 2007, the ATH^{^®}network processed over 535 million transactions through 4,944 ATMs and 100,500 POS terminals. In recent years, ATH^{^®}has experienced increased competition from Visa and MasterCard due to the rise in signature debit cards. In response to this challenge, the ATH^{^®}Network in Puerto Rico updated its price structure to give greater financial

Popular, Inc. | 2007 | Annual Report 5

incentives to member banks while remaining the lowest-cost alternative for merchants. These changes will solidify and protect the ATH^{^®}brand and foster long-term growth of the business.

In Puerto Rico, we added several financial institutions to our client roster as well as expanded the services offered to existing clients. EVERTEC now processes approximately 75% of all checks and electronic interchange in Puerto Rico. We expanded our workforce management business with the acquisition of SENSE, a software development company that provides solutions for human resources, payroll, and time and attendance. The health systems business acquired a portfolio of medical providers and increased the number of processed transactions by approximately 20%. EVERTEC Latin America had an excellent year, significantly increasing revenues and adding important customers in the region, despite the entry of international processors resulting from the acquisition of local banks by large international players.

EVERTEC’s results and strategic accomplishments during 2007 corroborate the strategy we laid out four years ago of leveraging our existing infrastructure to generate additional revenues and further diversify our sources of income.

Moving Forward

Throughout this challenging year, the guidance and support of our Board of Directors has been very significant and greatly appreciated. I would like to recognize José B. Carrión (Pepe) for his service in the Banco Popular and Popular, Inc. Boards. For seven years, this organization greatly benefited from his counsel and insight. Pepe retired in 2007 upon reaching the mandatory retirement age. At the same time, we are extremely pleased to welcome Michael Masin to our Board of Directors. I know that Michael’s vast experience as part of the management and the Boards of some of the top corporations in the United States will be of great value to Popular.

Also, after serving Popular for 30 years, our Executive Vice President in charge of People, Communications and Planning, Tere Loubriel will retire in March. Tere held a wide variety of positions throughout the years, all of them with the same level of dedication and commitment to excellence. We will miss her tremendously and wish her the best. Eduardo Negrón, our Deputy Chief Legal Officer for seven years, will direct the People and Communications area going forward.

In retrospect, 2007 was definitely one of the most challenging years that our Corporation has faced to date. Unprecedented conditions and turmoil in the financial services industry have put our organization to the test. Our people responded as they always have, focusing their attention and energy to define and execute what was necessary to tackle the issues at hand. Now, more than ever, we are confident about our ability to go forward and return Popular to the growth and profitability levels that have characterized this organization’s history.

Richard L. Carrión
Chairman, President
and Chief Executive Officer

Institutional Values

Social Commitment

We are committed to work actively in promoting the social and economic well-being of the communities we serve.

Customer

We achieve satisfaction for our customers and earn their loyalty by adding value to each interaction. Our relationship with the customer takes precedence over any particular transaction.

Integrity

We are guided by the highest standards of ethics, integrity and morality. Our customers’ trust is of utmost importance to our institution.

Excellence

We believe there is only one way to do things: the right way.

Innovation

We foster a constant search for new solutions as a strategy to enhance our competitive advantage.

Our People

We strive to attract, develop, compensate and retain the most qualified people in a work environment characterized by discipline and affection.

Shareholder Value

Our goal is to produce high and consistent financial returns for our shareholders, based on a long-term view.

25-Year Historical Financial Summary


(Dollars in millions,
except per share data)	1983			1984			1985			1986			1987			1988			1989			1990			1991			1992			1993

Selected Financial Information
Net Interest Income	$	144.9		$	156.8		$	174.9		$	184.2		$	207.7		$	232.5		$	260.9		$	284.2		$	407.8		$	440.2		$	492.1
Non-Interest Income		19.6			19.0			26.8			41.4			41.0			54.9			63.3			70.9			131.8			124.5			125.2
Operating Expenses		127.3			137.2			156.0			168.4			185.7			195.6			212.4			229.6			345.7			366.9			412.3
Net Income		26.8			29.8			32.9			38.3			38.3			47.4			56.3			63.4			64.6			85.1			109.4

Assets		2,974.1			3,526.7			4,141.7			4,531.8			5,389.6			5,706.5			5,972.7			8,983.6			8,780.3			10,002.3			11,513.4
Net Loans		1,075.7			1,373.9			1,715.7			2,271.0			2,768.5			3,096.3			3,320.6			5,373.3			5,195.6			5,252.1			6,346.9
Deposits		2,347.5			2,870.7			3,365.3			3,820.2			4,491.6			4,715.8			4,926.3			7,422.7			7,207.1			8,038.7			8,522.7
Stockholders’ Equity		182.2			203.5			226.4			283.1			308.2			341.9			383.0			588.9			631.8			752.1			834.2

Market Capitalization	$	119.3		$	159.8		$	216.0		$	304.0		$	260.0		$	355.0		$	430.1		$	479.1		$	579.0		$	987.8		$	1,014.7
Return on Assets (ROA)		0.95	%		0.94	%		0.89	%		0.88	%		0.76	%		0.85	%		0.99	%		1.09	%		0.72	%		0.89	%		1.02	%
Return on Equity (ROE)		15.86	%		15.83	%		15.59	%		15.12	%		13.09	%		14.87	%		15.87	%		15.55	%		10.57	%		12.72	%		13.80	%
Per Common Share¹
Net Income – Basic	$	0.19		$	0.21		$	0.23		$	0.25		$	0.24		$	0.30		$	0.35		$	0.40		$	0.27		$	0.35		$	0.42
Net Income – Diluted	$	0.19		$	0.21		$	0.23		$	0.25		$	0.24		$	0.30		$	0.35		$	0.40		$	0.27		$	0.35		$	0.42
Dividends (Declared)		0.06			0.06			0.07			0.08			0.09			0.09			0.10			0.10			0.10			0.10			0.12
Book Value		1.24			1.38			1.54			1.73			1.89			2.10			2.35			2.46			2.63			2.88			3.19
Market Price	$	0.83		$	1.11		$	1.50		$	2.00		$	1.67		$	2.22		$	2.69		$	2.00		$	2.41		$	3.78		$	3.88
Assets by Geographical Area
Puerto Rico		94	%		91	%		92	%		92	%		94	%		93	%		92	%		89	%		87	%		87	%		79	%
United States		5	%		8	%		7	%		7	%		5	%		6	%		6	%		9	%		11	%		10	%		16	%
Caribbean and Latin America		1	%		1	%		1	%		1	%		1	%		1	%		2	%		2	%		2	%		3	%		5	%

Total		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Traditional Delivery System
Banking Branches
Puerto Rico		112			113			115			124			126			126			128			173			161			162			165
Virgin Islands		3			3			3			3			3			3			3			3			3			3			8
United States		6			9			9			9			9			10			10			24			24			30			32

Subtotal		121			125			127			136			138			139			141			200			188			195			205
Non-Banking Offices
Popular Financial Holdings																										27			41			58
Popular Cash Express
Popular Finance														14			17			18			26			26			26			26
Popular Auto																				4			9			9			9			8
Popular Leasing, U.S.A.
Popular Mortgage
Popular Securities
Popular Insurance
Popular Insurance Agency U.S.A.
Popular Insurance, V.I.
EVERTEC
Subtotal														14			17			22			35			62			76			92

Total		121			125			127			136			152			156			163			235			250			271			297
Electronic Delivery System
ATMs²
Owned and Driven
Puerto Rico		30			78			94			113			136			153			151			211			206			211			234
Caribbean														3			3			3			3			3			3			8
United States																													6			11
Subtotal		30			78			94			113			139			156			154			214			209			220			253

Driven
Puerto Rico					6			36			51			55			68			65			54			73			81			86
Caribbean
Subtotal					6			36			51			55			68			65			54			73			81			86

Total		30			84			130			164			194			224			219			268			282			301			339
Transactions (in millions)
Electronic Transactions³		0.6			4.4			7.0			8.3			12.7			14.9			16.1			18.0			23.9			28.6			33.2
Items Processed		102.1			110.3			123.8			134.0			139.1			159.8			161.9			164.0			166.1			170.4			171.8
Employees (full-time equivalent)		3,832			4,110			4,314			4,400			4,699			5,131			5,213			7,023			7,006			7,024			7,533


¹		Per common share data adjusted for stock splits.

²		Does not include host-to-host ATMs (2,186 in 2007) which are neither owned nor driven, but are part of the ATH^{^®}Network.

³		From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago, Internet Banking and ATH^{^®}Network transactions in Puerto Rico. Since 2004, these numbers were adjusted to include ATH^{^®}Network transactions in the Dominican Republic, Costa Rica, El Salvador and United States, health care transactions, wire transfers, and other electronic payment transactions in addition to those previously stated.

Popular, Inc. | 2007 | Annual Report 7


1994			1995			1996			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007



$	535.5		$	584.2		$	681.3		$	784.0		$	873.0		$	953.7		$	982.8		$	1,056.8		$	1,160.2		$	1,284.7		$	1,375.5		$	1,424.2		$	1,427.9		$	1,449.4
	141.3			173.3			205.5			247.6			291.2			372.9			464.1			491.8			543.8			626.0			608.8			785.3			809.5			694.3
	447.8			486.8			541.9			636.9			720.4			837.5			876.4			926.2			1,029.0			1,113.1			1,171.0			1,328.2			1,485.1			1,704.6
	124.7			146.4			185.2			209.6			232.3			257.6			276.1			304.5			351.9			470.9			489.9			540.7			357.7			-64.5

	12,778.4			15,675.5			16,764.1			19,300.5			23,160.4			25,460.5			28,057.1			30,744.7			33,660.4			36,434.7			44,401.6			48,623.7			47,404.0			44,411.4
	7,781.3			8,677.5			9,779.0			11,376.6			13,078.8			14,907.8			16,057.1			18,168.6			19,582.1			22,602.2			28,742.3			31,710.2			32,736.9			29,911.0
	9,012.4			9,876.7			10,763.3			11,749.6			13,672.2			14,173.7			14,804.9			16,370.0			17,614.7			18,097.8			20,593.2			22,638.0			24,438.3			28,334.4
	1,002.4			1,141.7			1,262.5			1,503.1			1,709.1			1,661.0			1,993.6			2,272.8			2,410.9			2,754.4			3,104.6			3,449.2			3,620.3			3,581.9


$	923.7		$	1,276.8		$	2,230.5		$	3,350.3		$	4,611.7		$	3,790.2		$	3,578.1		$	3,965.4		$	4,476.4		$	5,960.2		$	7,685.6		$	5,836.5		$	5,003.4		$	2,968.3

	1.02	%		1.04	%		1.14	%		1.14	%		1.14	%		1.08	%		1.04	%		1.09	%		1.11	%		1.36	%		1.23	%		1.17	%		0.74	%		-0.14	%

	13.80	%		14.22	%		16.17	%		15.83	%		15.41	%		15.45	%		15.00	%		14.84	%		16.29	%		19.30	%		17.60	%		17.12	%		9.73	%		-2.08	%

$	0.46		$	0.53		$	0.67		$	0.75		$	0.83		$	0.92		$	0.99		$	1.09		$	1.31		$	1.74		$	1.79		$	1.98		$	1.24			-$0.27

$	0.46		$	0.53		$	0.67		$	0.75		$	0.83		$	0.92		$	0.99		$	1.09		$	1.31		$	1.74		$	1.79		$	1.97		$	1.24			-$0.27

	0.13			0.15			0.18			0.20			0.25			0.30			0.32			0.38			0.40			0.51			0.62			0.64			0.64			0.64
	3.44			3.96			4.40			5.19			5.93			5.76			6.96			7.97			9.10			9.66			10.95			11.82			12.32			12.12
$	3.52		$	4.85		$	8.44		$	12.38		$	17.00		$	13.97		$	13.16		$	14.54		$	16.90		$	22.43		$	28.83		$	21.15		$	17.95		$	10.60


	76	%		75	%		74	%		74	%		71	%		71	%		72	%		68	%		66	%		62	%		55	%		53	%		52	%		59	%
	20	%		21	%		22	%		23	%		25	%		25	%		26	%		30	%		32	%		36	%		43	%		45	%		45	%		38	%

	4	%		4	%		4	%		3	%		4	%		4	%		2	%		2	%		2	%		2	%		2	%		2	%		3	%		3	%

	100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%



	166			166			178			201			198			199			199			196			195			193			192			194			191			196
	8			8			8			8			8			8			8			8			8			8			8			8			8			8
	34			40			44			63			89			91			95			96			96			97			128			136			142			147

	208			214			230			272			295			298			302			300			299			298			328			338			341			351




	73			91			102			117			128			137			136			149			153			181			183			213			159			135

													51			102			132			154			195			129			114			4			—			—
	28			31			39			44			48			47			61			55			36			43			43			49			52			51
	10			9			8			10			10			12			12			20			18			18			18			17			15			12

										7			8			10			11			13			13			11			15			14			11			24

				3			3			3			11			13			21			25			29			32			30			33			32			32

							1			2			2			2			3			4			7			8			9			12			12			13

																			2			2			2			2			2			2			2			2



																						1			1			1			1			1			1			1


																									1			1			1			1			1			1
																4			4			4			5			5			7			8			12			11
	111			134			153			183			258			327			382			427			460			431			423			354			297			282

	319			348			383			455			553			625			684			727			759			729			751			692			638			633





	262			281			327			391			421			442			478			524			539			557			568			583			605			615
	8			8			9			17			59			68			37			39			53			57			59			61			65			69

	26			38			53			71			94			99			109			118			131			129			163			181			192			187
	296			327			389			479			574			609			624			681			723			743			790			825			862			871


	88			120			162			170			187			102			118			155			174			176			167			212			226			433
							97			192			265			851			920			823			926			1,110			1,216			1,726			1,360			1,454
	88			120			259			362			452			953			1,038			978			1,100			1,286			1,383			1,938			1,586			1,887

	384			447			648			841			1,026			1,562			1,662			1,659			1,823			2,029			2,173			2,763			2,448			2,758



	43.0			56.6			78.0			111.2			130.5			159.4			199.5			206.0			236.6			255.7			568.5			625.9			690.2			772.7
	174.5			175.0			173.7			171.9			170.9			171.0			160.2			149.9			145.3			138.5			133.9			140.3			150.0			175.2

	7,606			7,815			7,996			8,854			10,549			11,501			10,651			11,334			11,037			11,474			12,139			13,210			12,508			12,303

Board of Directors

Richard L. Carrión
Chairman, President, Chief Executive Officer,
Popular, Inc.
Juan J. Bermúdez
Partner, Bermúdez & Longo, S.E.
María Luisa Ferré
President, Grupo Ferré Rangel
Michael Masin
Senior Partner, O’Melvany & Myers
Manuel Morales Jr.
President, Parkview Realty, Inc.
Francisco M. Rexach Jr.
President, Capital Assets, Inc.
Frederic V. Salerno
Investor
William J. Teuber Jr.
Vice Chairman, EMC Corporation
José R. Vizcarrondo
President and Chief Executive Officer
Desarrollos Metropolitanos, S.E.
Samuel T. Céspedes, Esq.
Secretary of the Board of Directors, Popular, Inc.

Corporate Leadership Circle

Richard L. Carrión
Chairman, President, Chief Executive Officer,
Popular, Inc.
David H. Chafey Jr.
Senior Executive Vice President, Popular, Inc.
President, Banco Popular de Puerto Rico
Roberto R. Herencia
Executive Vice President, Popular, Inc.
President, Banco Popular North America
Amílcar Jordán, Esq.
Executive Vice President, Risk Management, Popular, Inc.
Jorge A. Junquera
Senior Executive Vice President,
Chief Financial Officer, Popular, Inc.
Tere Loubriel
Executive Vice President,
People, Communications and Planning, Popular, Inc.
Brunilda Santos de Álvarez, Esq.
Executive Vice President,
Chief Legal Officer, Popular, Inc.
Félix M. Villamil
Executive Vice President, Popular, Inc.
President, EVERTEC, Inc.

Our Creed

Banco Popular is a local institution dedicating its efforts exclusively to the enhancement of the social and economic conditions in Puerto Rico and inspired by the most sound principles and fundamental practices of good banking.

Banco Popular pledges its efforts and resources to the development of a banking service for Puerto Rico within strict commercial practices and so efficient that it could meet the requirement of the most progressive community of the world.

These words, written in 1928 by Don Rafael Carrión Pacheco, Executive Vice President and President (1927–1956), embody the philosophy of Popular, Inc.

Our People

The men and women who work for our institution, from the highest executive to the employees who handle the most routine tasks, feel a special pride in serving our customers with care and dedication. All of them feel the personal satisfaction of belonging to the “Banco Popular Family,” which fosters affection and understanding among its members, and which at the same time firmly complies with the highest ethical and moral standards of behavior.

These words by Don Rafael Carrión Jr., President and Chairman of the Board (1956–1991), were written in 1988 to commemorate the 95th anniversary of Banco Popular de Puerto Rico, and reflect our commitment to human resources.

Corporate Information

Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP

Annual Meeting

The 2008 Annual Stockholders’ Meeting of Popular, Inc. will be held on Friday, April 25, at 9:00 a.m. at Centro Europa Building in San Juan, Puerto Rico.

Additional Information

The Annual Report to the Securities and Exchange Commission on Form 10-K and any other financial information may also be viewed by visiting our website:

www.popular.com

Popular, Inc. | 2007 | Annual Report 3

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis (“MD&A”) provides you with information management believes necessary for understanding the financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, consolidated financial statements and corresponding notes included in this “Financial Review and Supplementary Information - 2007 Annual Report” (“the report”) should be considered an integral part of this MD&A.

Forward-looking Statements

The information included in this report may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include descriptions of products or services, plans or objectives for future operations, and forecast of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.

Forward-looking statements are not guarantees of future performance and, by their nature, 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.

All forward-looking statements are based upon information available to the Corporation as of the date of this report. Management assumes 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.

Overview

The Corporation is a financial holding company, which is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. Since its foundation more than a century ago, Popular has evolved from a commercial bank based in Puerto Rico to a diverse financial services company with operations in Puerto Rico, the United States, the Caribbean and Latin America. The Corporation ranked 30^th among the top 50 bank holding companies based on total assets as per information gathered and disclosed by the Federal Reserve System as of December 31, 2007.

The Corporation operates four principal businesses or operating segments: Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. PFH, after certain restructuring events discussed later in this MD&A, is currently exiting the loan origination business, but still carries a maturing loan portfolio that approximated $3.3 billion at December 31, 2007, of which a carrying amount of $1.4 billion was classified as held-for-sale. Also, PFH continues to service for others over $9.4 billion in mortgage loans. 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 the Corporation’s subsidiaries’ system infrastructures and transactional processing businesses. Note 32 to the consolidated financial statements, as well as the Reportable Segments section in this MD&A, present further information about the Corporation’s business segments.

Popular, Inc.’s financial performance for the year ended December 31, 2007 reflected a net loss of $64.5 million, compared with net income of $357.7 million for 2006. The reduction in the Corporation’s results of operations continued to reflect the impact of unprecedented adverse market conditions, particularly on Popular’s U.S. mainland operations.

Net losses in the Corporation’s U.S. operations, which include the reportable segments of Banco Popular North America and PFH, amounted to $467.8 million for the year ended December 31, 2007, compared to net income of $5.0 million in 2006. The year 2007 was marked by very important decisions with respect to Popular’s U.S. operations, which had a significant impact in the financial results for the year, including:

•

the implementation of various restructuring plans, resulting in the recognition of significant associated costs, which approximated $36.7 million, and of non-cash impairment losses related to E-LOAN’s goodwill and trademark approximating $211.8 million, and

Table A

Components of Net (Loss) Income as a Percentage of Average Total Assets


	For the Year
	2007			2006			2005			2004			2003

Net interest income		3.08	%		2.96	%		3.07	%		3.45	%		3.71	%
Provision for loan losses		(1.19	)		(0.60	)		(0.42	)		(0.45	)		(0.57	)
Sales and valuation adjustments of investment securities		0.12			0.01			0.11			0.04			0.21
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale		(0.08	)		0.24			0.18			0.11			0.15
Trading (losses) gains		(0.01	)		0.07			0.06			—			(0.03	)
Other non-interest income		1.44			1.36			1.34			1.38			1.48

		3.36			4.04			4.34			4.53			4.95
Operating expenses		(3.62	)		(3.08	)		(2.86	)		(2.94	)		(3.21	)

Net (loss) income before tax and cumulative effect of accounting change		(0.26	)		0.96			1.48			1.59			1.74
Income tax		0.12			(0.22	)		(0.32	)		(0.36	)		(0.38	)
Cumulative effect of accounting change, net of tax		—			—			0.01			—			—

Net (loss) income		(0.14	)%		0.74	%		1.17	%		1.23	%		1.36	%

•

the loan recharacterization transaction of the majority of the on-balance sheet securitizations at PFH which resulted in a net pre-tax loss of approximately $90.1 million.

These U.S. strategic events are explained in detail in the Significant U.S. Strategic Events section of this MD&A and are integral to the understanding of the 2007 financial results.

The Corporation’s operations in Puerto Rico continued to perform well despite a difficult economic environment, which presents credit challenges and has led to a recessionary cycle. Solidifying Popular’s presence in the Puerto Rico market and sustaining the Corporation’s confidence in this market, in 2007, the Corporation completed the acquisition of Citibank’s retail banking operations in Puerto Rico, which added 17 branches to BPPR’s retail branch network prior to branch closing due to synergies, and contributed approximately $1 billion in deposits and $220 million in loans. Also, Popular Securities, a subsidiary within the Banco Popular de Puerto Rico reportable segment, strengthened its brokerage sales force and increased its assets under its management by acquiring Smith Barney’s retail brokerage operations in Puerto Rico. Both of these acquisitions took place in the latter part of the fourth quarter of 2007. The Corporation recorded $147 million in goodwill and other intangibles related to these two acquisitions.

Information on the analysis of financial results for the Puerto Rico, including EVERTEC, and U.S. operations is provided in the Reportable Segments section of this MD&A.

Table A presents a five-year summary of the components of net (loss) income as a percentage of average total assets. Table B presents the changes in net (loss) income applicable to common stock and (losses) earnings per common share for the last three years. In addition, Table C provides selected financial data for the past 10 years. A glossary of selected financial terms has been included at the end of this MD&A.

Financial results for the year ended December 31, 2007 were principally impacted by the following items (on a pre-tax basis), compared to the year 2006:

	•		A $274.9 million increase in the provision for loan losses, which was mostly influenced by a slowdown in the housing sector, principally in the U.S. mainland, and weak economic conditions in Puerto Rico and the U.S. mainland that impacted the commercial and consumer sectors and has resulted in higher delinquencies. Refer to the Credit Risk Management and Loan Quality section of this MD&A for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality statistics.

	•		A decrease of $115.2 million in non-interest income, mostly driven by loss on sale of loans that includes the impact of the PFH loan recharacterization transaction described in detail in the Significant U.S. Strategic Events section in this MD&A and unfavorable valuation adjustments on loans held-for-sale due to illiquidity in certain markets and higher credit loss expectations which impacted price margins. Also, the decrease in non-interest income was the result of reductions in value in the residual interests of PFH. These unfavorable variances were partially offset by higher gains on sale of equity securities by the Corporation’s holding company and higher service fees.

Popular, Inc. | 2007 | Annual Report 5

Table B

Changes in Net (Loss) Income Applicable to Common Stock and (Losses) Earnings per Common Share


	2007						2006						2005
(In thousands, except per common share amounts)	Dollars			` Per share			Dollars			Per share			Dollars			Per share

Net income applicable to common stock for prior year	$	345,763		$	1.24		$	528,789		$	1.98		$	477,995		$	1.79
Increase (decrease) from changes in:
Net interest income		21,480			0.08			3,703			0.01			48,696			0.18
Provision for loan losses		(274,890	)		(0.99	)		(92,488	)		(0.35	)		(16,615	)		(0.06	)
Sales and valuation adjustments of investment securities		50,800			0.18			(47,754	)		(0.18	)		36,859			0.14
Trading account		(37,752	)		(0.14	)		5,237			0.02			30,210			0.11
Sales of loans and valuation adjustments on loans held-for-sale		(156,391	)		(0.56	)		34,124			0.13			39,129			0.15
Other non-interest income		28,174			0.10			32,603			0.12			70,306			0.27
Impairment losses on long-lived assets*		(5,112	)		(0.02	)		(7,232	)		(0.03	)		—			—
Goodwill and trademark impairment losses*		(197,512	)		(0.71	)		(14,239	)		(0.05	)		—			—
Amortization of intangibles		1,933			0.01			(2,798	)		(0.01	)		(1,735	)		(0.01	)
All other operating expenses		(18,787	)		(0.06	)		(132,604	)		(0.50	)		(155,453	)		(0.58	)
Income tax		165,888			0.60			42,029			0.16			(4,210	)		(0.01	)
Cumulative effect of accounting change		—			—			(3,607	)		(0.01	)		3,607			0.01

Net (loss) income before preferred stock dividends and change in average common shares		(76,406	)		(0.27	)		345,763			1.29			528,789			1.99
Change in average common shares**		—			—			—			(0.05	)		—			(0.01	)

Net (loss) income applicable to common stock	$	(76,406	)	$	(0.27	)	$	345,763		$	1.24		$	528,789		$	1.98


*		Associated with the PFH Restructuring Plan, PFH Branch Network Restructuring Plan, and E-LOAN Restructuring Plan.

**		Reflects the effect of the shares repurchased, plus the shares issued through the Dividend Reinvestment Plan and the subscription rights offering, and the effect of stock options exercised in the years presented.

•

Higher operating expenses by $219.5 million, which includes restructuring charges that are detailed in the Significant U.S. Strategic Events section in this MD&A.

The above unfavorable variances were partially offset by:

	•		Higher net interest income by $21.5 million. For further information refer to the Net Interest Income and Market Risk sections of this MD&A.

	•		Income tax benefit of $59.0 million in 2007, compared to income tax expense of $106.9 million in 2006. Refer to the Income Tax section of this MD&A for additional information.

Total assets at December 31, 2007 amounted to $44.4 billion, or $3.0 billion lower than total assets at the same date in the previous year. Total earning assets at December 31, 2007 decreased by $2.8 billion, or 6%, compared with December 31, 2006. As of December 31, 2007, loans, the primary interest-earning asset category for the Corporation, totaled $29.9 billion, reflecting a decline of $2.8 billion, or 9%, from December 31, 2006. As explained in the Significant U.S. Strategic Events section of this MD&A, the loan recharacterization transaction and the PFH Restructuring Plan contributed substantially to the reduction in total loans. For more detailed information on lending activities, refer to the Statement of Condition Analysis and Credit Risk Management and Loan Quality sections of this MD&A. Investment and trading securities, the second largest component of interest-earning assets, accounted for $0.6 billion of the decline in total assets from December 31, 2006.

Assets at December 31, 2007 were funded principally through deposits, primarily time deposits. Deposits supported approximately 64% of the asset base, while borrowings, other liabilities and stockholders’ equity accounted for approximately 36%. As of December 31, 2006, 52% of total assets were funded through deposits, while borrowings, other liabilities and stockhoders’ equity accounted for 48%. In the third quarter of 2007, the Corporation increased its reliance on brokered certificates of deposit, as a result of expected reduced availability of non-deposit funding. Beginning in the third quarter of 2007,

Table C

Selected Financial Data


(Dollars in thousands, except per share data)	2007			2006			2005

CONDENSED INCOME STATEMENTS
Interest income	$	3,128,171		$	3,064,441		$	2,665,859
Interest expense		1,678,781			1,636,531			1,241,652

Net interest income		1,449,390			1,427,910			1,424,207

Provision for loan losses		562,650			287,760			195,272
Net gain (loss) on sale and valuation adjustment of investment securities		55,159			4,359			52,113
Trading account (loss) profit		(2,464	)		35,288			30,051
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale		(38,970	)		117,421			83,297
Other non-interest income		680,591			652,417			619,814
Operating expenses		1,704,551			1,485,073			1,328,200
Income tax (benefit) expense		(59,002	)		106,886			148,915
Net (gain) loss of minority interest		—			—			—
Cumulative effect of accounting change, net of tax		—			—			3,607

Net (loss) income	$	(64,493	)	$	357,676		$	$540,702

Net (loss) income applicable to common stock	$	(76,406	)	$	345,763		$	$528,789


PER COMMON SHARE DATA^*
Net (loss) income:
Basic before cumulative effect of accounting change	$	(0.27	)	$	1.24		$	1.97
Diluted before cumulative effect of accounting change		(0.27	)		1.24			1.96
Basic after cumulative effect of accounting change		(0.27	)		1.24			1.98
Diluted after cumulative effect of accounting change		(0.27	)		1.24			1.97
Dividends declared		0.64			0.64			0.64
Book value		12.12			12.32			11.82
Market price		10.60			17.95			21.15
Outstanding shares:
Average — basic		279,494,150			278,468,552			267,334,606
Average — diluted		279,494,150			278,703,924			267,839,018
End of period		280,029,215			278,741,547			275,955,391

AVERAGE BALANCES
Net loans^**	$	32,749,993		$	32,078,716		$	29,730,913
Earning assets		43,789,693			44,930,391			43,245,684
Total assets		47,104,935			48,294,566			46,362,329
Deposits		25,569,100			23,264,132			22,253,069
Borrowings		16,866,754			20,545,546			20,091,520
Total stockholders’ equity		3,861,426			3,741,273			3,274,808

PERIOD END BALANCES
Net loans**	$	29,911,002		$	32,736,939		$	31,710,207
Allowance for loan losses		548,832			522,232			461,707
Earning assets		40,901,854			43,660,568			45,167,761
Total assets		44,411,437			47,403,987			48,623,668
Deposits		28,334,478			24,438,331			22,638,005
Borrowings		11,560,596			18,533,816			21,296,299
Total stockholders’ equity		3,581,882			3,620,306			3,449,247

SELECTED RATIOS
Net interest yield (taxable equivalent basis)		3.52	%		3.44	%		3.59	%
Return on average total assets		(0.14	)		0.74			1.17
Return on average common stockholders’ equity		(2.08	)		9.73			17.12
Dividend payout ratio to common stockholders		(233.89	)		51.02			32.31
Efficiency ratio		81.99			67.16			62.30
Overhead ratio		69.70			47.31			38.12
Tier I capital to risk-adjusted assets		10.12			10.61			11.17
Total capital to risk-adjusted assets		11.38			11.86			12.44


*		Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data have been adjusted to reflect two stock splits effected in the form of dividends on July 8, 2004 and July 1, 1998.

**		Includes loans held-for-sale.

Popular, Inc. | 2007 | Annual Report 7


Year ended December 31,
2004			2003			2002			2001			2000			1999			1998


$	2,216,265		$	2,034,238		$	2,023,797		$	2,095,862		$	2,150,157		$	1,851,670		$	1,651,703
	840,754			749,550			863,553			1,039,105			1,167,396			897,932			778,691

	1,375,511			1,284,688			1,160,244			1,056,757			982,761			953,738			873,012

	178,657			195,939			205,570			213,250			194,640			148,948			137,213
	15,254			71,094			(3,342	)		27			11,201			638			8,933
	(159	)		(10,214	)		(804	)		(1,781	)		1,991			(1,582	)		3,653
	44,168			53,572			52,077			45,633			39,673			34,890			23,036
	549,508			511,558			495,832			447,937			411,195			338,970			255,624
	1,171,012			1,113,083			1,029,002			926,209			876,433			837,482			720,354
	144,705			130,326			117,255			105,280			100,797			85,120			74,671
	—			(435	)		(248	)		18			1,152			2,454			328
	—			—			—			686			—			—			—

$	489,908		$	470,915		$	351,932		$	304,538		$	276,103		$	257,558		$	232,348

$	477,995		$	460,996		$	349,422		$	296,188		$	267,753		$	249,208		$	223,998




$	1.79		$	1.74		$	1.31		$	1.09		$	0.99		$	0.92		$	0.83
	1.79			1.74			1.31			1.09			0.99			0.92			0.83
	1.79			1.74			1.31			1.09			0.99			0.92			0.83
	1.79			1.74			1.31			1.09			0.99			0.92			0.83
	0.62			0.51			0.40			0.38			0.32			0.30			0.25
	10.95			9.66			9.10			7.97			6.96			5.76			5.93
	28.83			22.43			16.90			14.54			13.16			13.97			17.00

	266,302,105			265,481,840			267,830,164			272,476,576			271,814,952			271,171,268			271,064,172
	266,674,856			265,595,832			267,830,550			272,476,938			271,814,952			271,171,268			271,064,172
	266,582,103			265,783,892			264,878,094			272,724,728			271,997,234			271,308,584			271,274,654


$	25,143,559		$	20,730,041		$	18,729,220		$	17,045,257		$	15,801,887		$	13,901,290		$	11,930,621
	37,621,648			32,781,355			30,194,914			26,414,204			24,893,366			22,244,959			19,261,949
	39,898,775			34,674,761			31,822,390			27,957,107			26,569,755			23,806,372			20,432,382
	19,409,055			17,757,968			16,984,646			15,575,791			14,508,482			13,791,338			12,270,101
	16,954,909			13,835,437			12,190,076			9,805,000			9,674,547			7,825,855			6,268,921
	2,903,137			2,545,113			2,150,386			2,096,534			1,884,525			1,712,792			1,553,258


$	28,742,261		$	22,602,192		$	19,582,119		$	18,168,551		$	16,057,085		$	14,907,754		$	13,078,795
	437,081			408,542			372,797			336,632			290,653			292,010			267,249
	41,812,475			34,451,748			31,899,765			29,139,288			26,339,431			23,754,620			21,591,950
	44,401,576			36,434,715			33,660,352			30,744,676			28,057,051			25,460,539			23,160,357
	20,593,160			18,097,828			17,614,740			16,370,042			14,804,907			14,173,715			13,672,214
	19,882,202			14,949,236			12,955,966			11,588,221			10,785,239			9,154,468			7,297,742
	3,104,621			2,754,417			2,410,879			2,272,818			1,993,644			1,660,986			1,709,113


	3.95	%		4.28	%		4.19	%		4.33	%		4.23	%		4.65	%		4.91	%
	1.23			1.36			1.11			1.09			1.04			1.08			1.14
	17.60			19.30			16.29			14.84			15.00			15.45			15.41
	32.85			27.05			30.76			33.10			32.47			31.56			28.42
	59.86			60.51			60.42			59.81			61.45			63.16			62.35
	40.88			37.91			41.82			41.11			41.96			48.71			49.15
	11.82			12.43			9.85			9.96			10.44			10.17			10.82
	13.21			13.93			11.52			11.74			12.37			12.29			13.14

the U.S. credit markets were marked by unprecedented instability and disruption, making even routine asset sale and funding activities much more challenging for financial institutions. Credit spreads widened significantly and rapidly as many investors allocated their funds to only the highest-quality financial assets such as U.S. government securities. The result of these actions by market participants made it more difficult for corporate borrowers to raise financing in the capital markets. In light of this scenario, the Corporation determined at that time to substitute overnight borrowings with longer term funding. Furthermore, the increase in deposits was the result of the acquisition of the Citibank retail branches in Puerto Rico in the fourth quarter of 2007, which contributed with approximately $1 billion in deposits, principally in time deposits and savings accounts. For additional data on funding sources refer to the Statement of Condition Analysis and Liquidity Risk sections of this MD&A.

Stockholders’ equity at December 31, 2007 showed a reduction of $38 million, compared to December 31, 2006. The impact of the net loss for the year 2007 and the dividend payouts was partially offset by the net impact of unrealized gains in the valuation of available-for-sale securities at year-end 2007 of $21 million, compared to unrealized losses of $155 million in year-end 2006.

The Corporation’s common stock declined 41% in market value in 2007 closing at $10.60. The Corporation’s market capitalization at December 31, 2007 was $3.0 billion, compared with $5.0 billion at December 31, 2006. The shares of the Corporation’s common and preferred stock are traded on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) system under the symbols BPOP and BPOPO, respectively. Table J shows the Corporation’s common stock performance on a quarterly basis during the last five years, including market prices and cash dividends declared.

The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. These four risks are covered in greater detail throughout this MD&A. In addition, the Corporation is subject to legal, compliance and reputational risks, among others.

As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.

The description of the Corporation’s business and risk factors contained in Item 1 and 1A of its Form 10-K for the year ended December 31, 2007, while not all inclusive, discusses additional information about the business of the Corporation and the material risk factors that, in addition to the other information in this report, readers should consider.

Further discussion of operating results, financial condition and business risks is presented in the narrative and tables included herein.

Significant U.S. Strategic Events

The following significant U.S. initiatives were adopted to improve the Corporation’s balance sheet, profitability and liquidity. Certain of these events occurred in 2007, while others are expected to be effected in early 2008.

PFH Restructuring Plan

In January 2007, the Corporation adopted a Restructuring and Integration Plan at PFH, the holding company of Equity One (the “PFH Restructuring Plan”). The PFH Restructuring Plan called for PFH to exit the wholesale subprime mortgage loan origination business during early first quarter of 2007 and to shut-down the wholesale broker, retail and call center business divisions. Also, the plan included consolidating PFH support functions with its sister U.S. banking entity, Banco Popular North America, creating a single integrated North American financial services unit. At that time, Popular decided to continue the operations of Equity One and its subsidiaries (“Equity One”), with over 130 consumer services branches, principally dedicated to direct subprime loan origination, consumer finance and mortgage servicing.

The PFH Restructuring Plan resulted in restructuring costs amounting to approximately $14.7 million in 2007, primarily in severance and lease termination charges. In 2006, the Corporation recognized $7.2 million in impairment of long-lived assets and $14.2 million in the impairment of PFH’s goodwill as a result of

Popular, Inc. | 2007 | Annual Report 9

the PFH Restructuring Plan. Refer to the Operating Expenses section in this MD&A for a breakdown of these costs by major categories. Exiting these origination channels also impacted financial results by reducing new loan volumes and, thus, had an impact on revenues generated by the sale of loans.

Refer to the Events Subsequent to Year-End 2007 section of this MD&A for additional steps taken by management with respect to PFH’s operations in 2008, which resulted in a second restructuring plan, namely the PFH Branch Network Restructuring Plan.

E-LOAN Restructuring Plan

In November 2007, the Board of Directors of Popular adopted a restructuring plan for its Internet financial services subsidiary E-LOAN (the “E-LOAN Restructuring Plan”). Considering E-LOAN’s operating losses in light of current market conditions and other factors, the Board of Directors approved a substantial reduction of marketing and personnel costs at E-LOAN and changes in E-LOAN’s business model to align it with revenue expectations. The changes include concentrating marketing investment toward the Internet and the origination of first mortgage loans that qualify for sale to government sponsored entities (“GSEs”). Also, as a result of escalating credit costs in the current economic environment and lower liquidity in the secondary markets for mortgage related products, in December 2007, the Corporation determined to hold back the origination by E-LOAN of home equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN Restructuring Plan continues to promote the Internet deposit gathering initiative with BPNA. As part of the E-LOAN Restructuring Plan, the Corporation evaluated the value of E-LOAN’s recorded goodwill and trademark by considering the changes in E-LOAN’s business model and the unprecedented conditions in the mortgage loan business. The E-LOAN Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting to $231.9 million, which included $211.8 million in non-cash impairment losses related to its goodwill and trademark intangible assets. Refer to the Operating Expenses section in this MD&A for a breakdown of these costs by major categories.

The cost-control plan initiative and changes in loan origination strategies incorporated as part of the plan will result in the elimination of over 400 positions between the fourth quarter of 2007 and first quarter of 2008. As a result of the E-LOAN Restructuring Plan, operating expenses are expected to be reduced by approximately $77 million for 2008. E-LOAN’s estimated net losses for the year ended December 31, 2008 are expected to decline by $15 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.

Recharacterization of Certain On-Balance Sheet Securitizations as Sales under FASB Statement No. 140

From 2001 through 2006, the Corporation conducted 21 mortgage loan securitizations that were sales for legal purposes but did not qualify for sale accounting treatment at the time of inception because the securitization trusts did not meet the criteria for qualifying special purpose entities (“QSPEs”) contained in SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. As a result, the transfers of the mortgage loans pursuant to these securitizations were initially accounted for as secured borrowings with the mortgage loans continuing to be reflected as assets on the Corporation’s consolidated statement of financial condition with appropriate footnote disclosure indicating that the mortgage loans were, for legal purposes, sold to the securitization trusts.

As part of the Corporation’s strategy of exiting the subprime business at PFH, on December 19, 2007, PFH and the trustee for each of the related securitization trusts amended the provisions of the related pooling and servicing agreements to delete the discretionary provisions that prevented the transactions from qualifying for sale treatment. These changes in the primary discretionary provisions included:

	•		deleting the provision that grants the servicer “sole discretion” to have the right to purchase for its own account or for resale from the trust fund any loan which is 91 days or more delinquent;

	•		deleting the provision that grants the servicer (PFH) “sole discretion” to sell loans with respect to which it believes default is imminent;

	•		deleting the provision that grants the servicer “sole discretion” to determine whether an immediate sale of a real estate owned (“REO”) property or continued management of such REO property is in the best interest of the certificateholders; and

	•		deleting the provision that grants the residual holder (PFH) to direct the trustee to acquire derivatives post closing.

The Corporation obtained a legal opinion, which among other considerations, indicated that each amendment (a) is authorized or permitted under the pooling and servicing agreement related to such amendment, and (b) will not adversely affect in any material respect the interests of any certificateholders covered by the related pooling and servicing agreement.

The amendments to the pooling and servicing agreement allowed the Corporation to recognize 16 out of the 21 transactions as sales under SFAS No. 140. When accounting for the transfers as sales, the Corporation (i) reclassified the loans as held-for-sale with the corresponding lower of cost or market adjustment as of the date of the transfer, (ii) removed from the Corporation’s books

approximately $3.2 billion in mortgage loans and $3.1 billion in related liabilities representing secured borrowings, (iii) recognized assets referred to as residual interests, which represent the fair value of residual interest certificates that were issued by the securitization trusts and retained by PFH, and (iv) recognized mortgage servicing rights, which represent the fair value of PFH’s right to continue to service the mortgage loans transferred to the securitization trusts. As part of the recharacterization, the Corporation recognized residual interests of $38 million and MSRs of $18 million. The Corporation had previously recorded MSRs in several of these securitization transactions, which amounted to $18 million at December 31, 2007. The net impact of the recharacterization transaction was a pre-tax loss of $90.1 million, which is included in the caption “(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale” in the consolidated statement of operations.

Because the loans in these trusts continued to be reflected as assets on the Corporation’s consolidated financial statements prior to affecting the loan recharacterization transaction, the Corporation was required to record charge-offs and make provision for inherent loan losses relating to such loans in accordance with FASB Statement No. 5, “Accounting for Contingencies.”

This loan recharacterization transaction as sale on the Corporation’s financial statements reflects management’s current strategy of exiting the subprime mortgage origination business of PFH. It also provides investors a better portrayal of the legal rights and obligations related to these transactions and will allow them to better assess their economic impact on the Corporation’s financial condition. The removal of the mortgage assets from Popular’s books had a favorable impact on its capital ratios and reduced the amount of subprime mortgages in the Corporation’s books. The loan recharacterization transaction contributed with a reduction in non-performing mortgage loans of approximately $316 million, when compared to December 31, 2006.

Events Subsequent To Year-End 2007

Sale of BPNA’s Retail Bank Branches in Houston

On January 10, 2008, the Corporation completed the sale of six branches of BPNA in Houston, Texas to Prosperity Bank. Prosperity Bank paid a premium of 10.10% for approximately $126 million in deposits, as well as purchased certain loans and other assets attributable to the branches. Prosperity retained all branch-based employees. BPNA continues 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.

PFH Branch Network Restructuring Plan

Given the unprecedented disruption in the capital markets since the summer of 2007 and its impact on funding, Popular’s management concluded that it would be difficult to generate an adequate return on the capital invested at Equity One’s consumer service branches.

In January 2008, the Corporation signed an Asset Purchase Agreement (the “Agreement”) to sell certain assets of Equity One, the U.S. mainland consumer finance operations of Popular Financial Holdings, to American General Finance, Inc., a member of American International Group. The closing of the Agreement with effective date of March 1, 2008 resulted in the sale of a significant portion of Equity One’s mortgage loan and consumer loan portfolio approximating $1.4 billion. This portfolio was reclassified by the Corporation from loans held-in-portfolio to loans held-for-sale in December 2007. American General Finance, Inc. will hire certain Equity One’s consumer services employees and will retain certain branch locations. Equity One will close all remaining consumer branches. Workforce reductions at Equity One will result in the loss of employment for those employees at the consumer services branches not hired by American General Finance, Inc., as well as for other related support functions.

This strategic initiative resulted in the adoption of an additional restructuring plan at PFH (the “PFH Branch Network Restructuring Plan”) during the first quarter of 2008. It is anticipated that this restructuring plan (the “PFH Branch Network Restructuring Plan”) will result in estimated combined charges for the Corporation of approximately $19.5 million, of which $1.9 million in impairment charges related to long-lived assets, primarily leasehold improvements, furniture and equipment, were recognized on December 31, 2007, and the remainder is expected to be substantially incurred in the first quarter of 2008.

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

The Corporation adopted the provisions of SFAS No. 159 in January 2008. Management elected the fair value option for approximately $287 million of loans and $287 million of bond certificates associated to PFH’s on-balance sheet securitizations that were outstanding at December 31, 2007 (transactions excluded from the recharacterization transaction described in Note 23 to the consolidated financial statements). These loans serve as collateral for the bond certificates. Due to accounting constraints, the Corporation is unable to recharacterize these loan securitizations as sales. Additionally, the Corporation elected the fair value option for approximately $1.2 billion of whole loans held-in-portfolio by PFH. These whole loans consist principally of mortgage loans, including second-liens, that were originated through the exited business of PFH and home equity lines of credit that had been originated by E-LOAN prior to the 2007 U.S. reorganization. Due to their subprime characteristics and current market disruptions, these loans are being held-in-portfolio as

Popular, Inc. | 2007 | Annual Report 11

potential buyers have withdrawn from the market given heightened concerns over credit quality of borrowers and continued deterioration in the housing markets. Management understands that accounting for these loans at fair value provides a more relevant and transparent measurement of the realizable value of the assets and differentiates the PFH portfolio from that loan portfolio that the Corporation will continue to originate through other channels outside PFH. The measurement of the bond certificates at fair value reflects the actual liability of the Corporation after considering the credit risk to be borne by the certificateholders on the on-balance sheet securitization. Management understands that the adoption of the fair value option for the financial assets and liabilities selected better reflects the inherent risks of these instruments and reflects the intention of the Corporation to discontinue most of the businesses previously conducted at PFH.

As a result of the adoption of SFAS No. 159, the Corporation expects to recognize a negative pre-tax adjustment that could range between $280 million and $300 million ($158 million and $169 million after-tax) due to the transitional adjustment for electing the fair value option on existing instruments at adoption. That amount represents the difference between the fair value and the carrying value of the loans at date of adoption. This negative adjustment would not impact earnings but instead be reflected as a reduction of beginning retained earnings as of January 1, 2008. Subsequent increases or decreases in the fair value of the assets and liabilities accounted under SFAS No. 159 provisions will be recorded as valuation adjustments through earnings in the consolidated statement of operations. The fair value adjustments disclosed here are only estimates as management is in the process of validating the methodologies used to value the assets and liabilities and the results of such valuations. Also, management continues to evaluate the impact that SFAS No. 159 will have on the consolidated financial statements, including disclosures.

Critical Accounting Policies / Estimates

The accounting and reporting policies followed by the Corporation and its subsidiaries conform with generally accepted accounting principles ( “GAAP”) in the United States of America and general practices within the financial services industry. The Corporation’s significant accounting policies are described in detail in Note 1 to the consolidated financial statements and should be read in conjunction with this section.

Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The following MD&A section is a summary of what management considers the Corporation’s critical accounting policies / estimates.

Securities’ Classification and Related Values

Management determines the appropriate classification of debt and equity securities at the time of purchase. Debt securities are classified as held-to-maturity ( “HTM”) when the Corporation has the intent and ability to hold the securities to maturity. HTM securities are reported on the Corporation’s financial statements at amortized cost. Debt and equity securities classified as trading securities are reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as HTM or trading, except for equity or other securities which do not have readily available fair values, are classified as available-for-sale ( “AFS”). Securities AFS are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of taxes in accumulated other comprehensive income (a component of stockholders’ equity). At December 31, 2007, unrealized net gains on the AFS securities, net of taxes, amounted to $21 million. Investments in equity or other securities that do not have publicly and readily determinable fair values are classified as other investment securities in the statement of condition and carried at the lower of cost or realizable value.

The assessment of fair value applies to certain of the Corporation’s assets and liabilities, including the trading and investment portfolios. Fair values are volatile and are affected by factors such as market interest rates, technical factors affecting supply and demand, prepayment speeds and discount rates.

Fair values for most of the Corporation’s trading and investment securities, including publicly-traded equity securities, are based on quoted market prices. If quoted market prices are not readily available, fair values are based on quoted prices of similar instruments. For information on the determination of the fair value of interest-only strips derived from securitization transactions, refer to the critical accounting policy described under the section Retained Interests on Transfers of Financial Assets — Subprime Mortgage Loan Securitizations, in this MD&A. Significant changes in factors such as interest and prepayment rates could affect the value of the trading, AFS and HTM securities and cause the Corporation to recognize other-than-temporary impairments, thereby adversely affecting results of operations. Management assesses the fair value of its portfolio at least on a quarterly basis. Factors considered include for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees, and the ability to hold the security until maturity or recovery. Any impairment that is considered other-than-temporary is recorded directly in the statement of operations.

Notwithstanding the judgment required in determining the fair value of the Corporation’s assets and liabilities, management believes that its estimates of fair value are reasonable given the process of obtaining external prices, periodic reviews of internal models and the consistent application of methodologies from period to period.

Loans and Allowance for Loan Losses

Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding.

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

One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan losses. The provision for loan losses charged to current operations is based on this determination. The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, the Corporation has defined as impaired loans those commercial loans that amount to $250,000 or more and with interest and /or principal 90 days or more past due. Also, specific commercial loans over $500,000 are deemed impaired when, based on current information and events, management considers that it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired commercial loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, if available, or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired commercial loans is part of the Corporation’s overall allowance for loan losses. SFAS No. 5 provides for the recognition of a loss allowance for groups of homogeneous loans. To determine the allowance for loan losses under SFAS No. 5, the Corporation applies a historic loss and volatility factor to specific loan balances segregated by loan type and legal entity. For subprime mortgage loans, the allowance for loan losses is established to cover at least one year of projected losses which are inherent in these portfolios.

The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis following a systematic methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of the allowance for loan losses, the Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data to include when estimating losses, the level of volatility of losses in a specific portfolio, changes in underwriting standards, financial accounting standards and loan impairment measurement, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold, may all affect the required level of the allowance for loan losses. Consequently, the business, financial condition, liquidity, capital and results of operations could also be affected.

A discussion about the process used to estimate the allowance for loan losses is presented in the Credit Risk Management and Loan Quality section of this MD&A.

Retained Interests on Transfers of Financial Assets

–

Subprime Mortgage Loan Securitizations

In subprime mortgage loan securitizations, the Corporation combines the subprime mortgage loans that are originated or purchased in pools to serve as collateral for asset-backed securities that are issued and sold to the public. In connection with PFH’s securitization transactions, the Corporation is party to pooling and servicing agreements in which the Corporation transfers (on a servicing retained basis) certain of the Corporation’s loans to a special purpose entity, which in turn transfers the loans to a securitization trust vehicle.

In order to determine the proper accounting treatment for each securitization transaction, management evaluates whether or not the Corporation retained or surrendered control over the transferred assets by reference to the conditions set forth in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a replacement of FASB Statement No. 125.” All terms of these transactions are evaluated against the conditions set forth in this statement, including among the principal factors the isolation of transferred assets from the

Popular, Inc. | 2007 | Annual Report 13

transferor, transferee’s right to pledge or exchange the transferred assets, and entitlement and obligation to repurchase or redeem the assets.

When the transfer of subprime mortgage loans is executed in a manner such that the Corporation surrenders control over the collateral and meets all required sale criteria of SFAS No. 140, the transfer is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange (“off-balance sheet securitizations”). In accordance with SFAS No. 140, a gain or loss on the sale is recognized based on the carrying amount of the financial assets involved in the transfer, allocated between the assets transferred and the retained interests based on their relative fair value at the date of transfer. In a loan securitization accounted for as a sale of assets, the Corporation normally retains the right to service the underlying mortgage loans and also retains the residual interest certificates. The estimated fair value of the securitization components is considered a critical accounting estimate as the valuation assumptions used regarding economic conditions and the make-up of the collateral, including interest rates, principal payments, prepayments and loan defaults, are highly uncertain and require a high degree of judgment.

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 different trusts. Approximately $461 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH during 2007 as part of this off-balance sheet asset securitization and PFH realized a gain on sale of approximately $13.5 million. As part of this transaction, the Corporation initially recognized MSRs of $8 million and residual interests of $5 million. Also, in December 2007, the Corporation completed the recharacterization of certain on-balance sheet securitizations that allowed the Corporation to recognize the transactions as sales under SFAS No. 140. This recharacterization was described in the Significant U.S. Strategic Events section of this MD&A.

When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 sales criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing. In these cases, the assets remain on the Corporation’s financial statements and a liability is recorded for the related asset-backed securities (“on-balance sheet securitizations”). The loans transferred to the trusts are included on the consolidated statement of condition as pledged loans held-in-portfolio. During 2007, PFH did not execute any on-balance sheet securitization.

The recorded residual interests and MSRs resulting from the subprime mortgage loan securitizations are subject to the valuation techniques described below since quoted market prices for these types of assets are not readily available because these assets are not actively traded.

Residual interests

Under SFAS No. 140, residual interests retained 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.

Residual interests retained as part of off-balance sheet securitizations of subprime mortgage loans prior to 2006 have been classified as investment securities available-for-sale and are presented at fair value in the consolidated statements of condition. PFH’s residual interests classified as available-for-sale as of December 31, 2007 amounted to $5 million.

Commencing in January 2006 and as permitted by accounting guidance, the residual interests derived from newly-issued PFH’s off-balance sheet securitizations and from the recharacterization were accounted for as trading securities. Trading securities are marked-to-market with changes in value reflected in current period earnings (favorable and unfavorable value changes) as opposed to available-for-sale securities in which the changes in value are recorded as unrealized gains (losses) through equity, unless unfavorable changes are considered other-than temporary. Residual interests from PFH’s securitizations and recharacterization accounted for as trading securities amounted to $40 million at December 31, 2007.

Management’s determination to prospectively classify the residual interests as trading securities was driven by accounting considerations and not by intent to actively trade these assets. Illiquidity in the subprime markets had a direct impact on the value and liquidity of the Corporation’s residual interests as will be described below. Given market conditions, management does not anticipate selling these residual interests in the near term unless an opportunity arises as part of strategic initiatives.

The cash flows the Corporation receives on residual interests are dependent on the interest rate environment, default and prepayment experience of the borrowers of the underlying mortgage loan collateral and the interest spread between the coupon on the underlying loans and the cost of financing, considering overcollateralization, which is designed to protect the primary security holder from credit loss on the underlying loans. As payments are received, they are applied to the cost basis of the residual interest. Each period, the accretable yield for each residual interest is evaluated and, to the extent there has been a change in the estimated cash flows, it is adjusted and applied prospectively. The accretable yield is recorded as interest income with a corresponding increase to the cost basis of the residual interest.

The Corporation reviews the residual interests for potential impairment on a quarterly basis and records impairment in accordance with SFAS No. 115 and EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). Management’s basis in determining when these securities must be written down to fair value due to other-than-temporary impairment is based on EITF 99-20. Whenever the current fair value of the residual interests classified as available-for-sale is lower than its current amortized cost, management evaluates if an impairment charge for the deficiency is required to be taken through earnings. If there has been an adverse change in estimated cash flows (considering both the timing and amount of flows), then the residual interest security is written-down to fair value, which becomes the new amortized cost basis. The Corporation recognized other-than-temporary impairment losses on these residual interests of $45.4 million for the year ended December 31, 2007 that are classified as part of net gain (loss) on sale and valuation adjustment of investment securities in the consolidated statements of operations. During 2007, all declines in fair value in residual interests classified as available-for-sale were considered other-than-temporary.

The fair value determinations for residual interests classified as trading securities are also performed on a quarterly basis. Any valuation adjustment related to these particular residual interests is reflected in earnings as it occurs and is recorded as part of trading account (loss) profit in the consolidated statements of operations. The Corporation recognized trading losses on these residual interests of $39.7 million for the year ended December 31, 2007.

The fair value of the residual interests for each securitization is determined by using a third-party cash flow valuation model to calculate the present value of projected future cash flows. However, all economic assumptions are internally developed and provided to the third-party (the internal-based valuation). The assumptions, which are highly uncertain and require a high degree of judgment, include primarily market discount rates, anticipated prepayment speeds, delinquency and loss rates. The assumptions used are drawn from a combination of internal and external data sources. The principal assumptions and their sources are summarized below:

	•		Prepayment rates on loan collateral are estimated by product types (adjustable and fixed rate mortgages) by analyzing internal loan collateral prepayment performance and prepayment data obtained from research reports and publications provided by industry participants.

	•		Discount rates are determined based on the inherent risk associated with the specific cash flow stream and rates of return observed in the capital markets for instruments with similar cash flow characteristics.

	•		Future interest rates are projected from a forward yield curve obtained from nationally recognized market data service providers, such as Bloomberg.

	•		Credit losses are estimated by utilizing an industry standard predictive credit performance model and allocated over the expected life of the collateral by utilizing a default curve developed by a nationally recognized credit rating agency. Credit losses are determined for the major product types (adjustable and fixed rate mortgages) in the collateral pool being securitized and are calibrated by analyzing actual loss experience realized by the Corporation to that projected by the model for the same type of collateral.

These assumptions are periodically refined as data is updated, accumulated and analyzed, tools utilized for analysis become more sophisticated and market conditions change. This is based on the same framework utilized to determine the initial assumptions used to calculate fair value. Any measurement of the fair value of residual interests is limited by the existing conditions and the assumptions utilized as of a particular point in time. Those same assumptions may not be appropriate if applied at a different point in time.

A third-party valuation of the residual interests, in which all economic assumptions are determined by this third-party (the external-based valuation), is obtained on a quarterly basis in connection with the preparation of the financial statements, and is used by management as a benchmark to evaluate the adequacy of the cash flow model and the reasonableness of the assumptions and fair value estimates developed internally for the internal-based valuation. The external-based valuations are analyzed and assumptions are evaluated and incorporated in the internal-based valuation model when deemed necessary and agreed by management.

The Corporation requires that internally determined assumptions be documented and validated quarterly, and that significant deviations in assumptions when compared with outside sources be investigated and substantiated with factual data.

In 2007, the subprime mortgage market has continued to experience (1) deteriorating credit performance trends, particularly in loans originated in 2005, 2006 and 2007, (2) unprecedented turmoil with subprime lenders due to increases in losses, bankruptcies and liquidity problems, (3) lower levels of housing activity and home price appreciation, and (4) a general tightening of credit standards that may adversely affect subprime borrowers when trying to refinance their mortgages. Furthermore, since the third quarter of 2007, the U.S. credit markets have been affected by unprecedented instability and disruption, making even routine asset sales much more challenging. Credit spreads have widened

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significantly and rapidly, as many investors have allocated their funds to only the highest-quality financial assets such as U.S. government securities.

These factors led to an increase in cash flow uncertainty for investors in subprime mortgage securities thereby causing risk premiums to increase. Given the increase in risk premiums, along with lower liquidity for subprime mortgage securities observed in the market, in the first quarter of 2007, the Corporation changed the discount rate utilized to discount projected residual cash flows from 17% at the end of the fourth quarter in 2006 to 25% at March 31, 2007. Market liquidity deteriorated further during the third quarter of 2007, as evidenced by wider spreads on subordinated interests in newly issued asset-backed security transactions. As a result of the incremental market disruptions, management increased again the discount rate utilized in the valuation of the residual interests to 30% in the third quarter of 2007 and to 40% in the fourth quarter of 2007.

For the reasons described below, the prepayment assumption for fixed-rate loans was changed to 20.7% HEP (“home equity prepayment curve”) by December 31, 2007 from the 28% HEP utilized at the same date in the previous year. The HEP model assumes that prepayment speeds increase evenly over the seasoning ramp of 12 months. The revised HEP reflects a decrease in the long-term projected prepayment rates for the fixed-rate mortgage collateral influenced by factors such as decreases in home prices, slowdown in the purchases and sales of both new and existing homes, and interest rates behavior, which impact refinance activity.

With respect to credit losses, reduction in home prices, declining demand for housing units leading to rising inventories, housing affordability challenges and a general tightening of underwriting standards are expected to lead to higher future cumulative credit losses. Based on an analysis by management of PFH’s historical collateral performance, risk model estimates and rating agency loss coverage levels, the cumulative credit loss assumptions were also changed, worsening throughout all quarters of 2007. The cumulative credit loss estimates range between 3.35% and 11.03% as of December 31, 2007, compared to 1.28% and 3.19% basis points at December 31, 2006. The increase reflects current conditions in the housing and credit markets and higher delinquencies in 2005 through 2007 vintages.

Refinements to assumptions, as well as model mechanics, are typical in the on-going modeling process. As such, enhancements to the estimation process are to be expected in the normal assumption development process. Management believes that the value of the Corporation’s residual interests as of December 31, 2007 is reasonable, but no assurance can be provided that future changes in interest rates, prepayments and loss experience, or changes in the market discount rate will not require additional write-downs.

Refer to Note 23 to the consolidated financial statements for information on the key economic assumptions used in measuring the fair value of the residual interests at the dates of the securitizations and as of the end of 2007. Also, such note provides a sensitivity analysis based on immediate changes to the most critical assumptions used in determining the fair value at December 31, 2007.

Mortgage Servicing Rights

The Corporation accounts for mortgage servicing rights (“MSRs”) at fair value.

The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

Similar to the residual interests, the Corporation estimates fair value of MSRs using a third-party valuation model that calculates the present value of projected future cash flows in which all economic assumptions are determined by the Corporation. The valuation of MSRs requires the Corporation to make estimates of numerous market assumptions, such as interest rates, prepayment assumptions, servicing costs, discount rates, and the payment performance of the underlying loans. These MSRs are valued using a static interest rate simulation.

Economic assumptions are reviewed for reasonableness on a quarterly basis and adjusted as necessary to reflect current and anticipated market conditions. Thus, any measurement of the fair value of MSRs is limited by the existing conditions and the assumptions utilized as of a particular point in time. Those same assumptions may not be appropriate if applied at a different point in time.

Third-party valuations of the fair value of the subprime mortgage loans’ MSRs, in which all economic assumptions are determined by the third party, are obtained on a quarterly basis, and are used by management only as a benchmark to evaluate the reasonableness of the fair value estimates made internally. These external-based valuations are analyzed and assumptions are evaluated and incorporated in the internal-based valuation model when validated and agreed upon by management. The Corporation requires that internally determined assumptions be documented and validated quarterly, and that significant deviations in assumptions when compared with outside sources be investigated and substantiated with factual data.

Refer to Note 22 to the consolidated financial statements for information on the impact of the adoption of SFAS No. 156 and other information on the Corporation’s MSRs. Refer to Note 23 to the consolidated financial statements for information on the key economic assumptions used in measuring the fair value of the

MRSs recorded by PFH and BPPR at the dates of the securitizations, recharacterization or sales and as of December 31, 2007. Also, Note 23 provides a sensitivity analysis based on immediate changes to the most critical assumptions used in determining the fair value at December 31, 2007.

Income Taxes

The calculation of our periodic income taxes is complex and requires the use of estimates and judgments. The Corporation has recorded two accruals for income taxes: (1) the net estimated amount currently due or to be received from taxing jurisdictions, including any reserve for potential examination issues, and (2) a deferred income tax that represents the estimated impact of temporary differences between how the Corporation recognizes assets and liabilities under GAAP, and how such assets and liabilities are recognized under the tax code. Differences in the actual outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into consideration statutory, judicial and regulatory guidance. Valuation allowances are established, when necessary, to reduce the deferred tax assets to the amount expected to be realized. The net deferred tax asset at December 31, 2007 amounted to $520 million of which $215 million was related to timing differences in the recognition of the provision for loan losses under GAAP and actual charge offs under the tax code, and $175 million was related to net operating losses carryforward in the U.S. operations. The realization of the deferred tax asset related to the net operating loss carryforward of the Corporation’s U.S. operations is dependent upon the existence of, or generation of, taxable income prior to their expiration term of 20 years. Based on the information available as of December 31, 2007, the Corporation expects to fully realize the net deferred tax asset. Refer to Note 27 to the consolidated financial statements for the Corporation’s net deferred tax assets and valuation allowance requirements at December 31, 2007.

Changes in the Corporation’s estimates can occur due to changes in tax rates, new business strategies, newly enacted guidance, and resolution of issues with taxing authorities regarding previously taken tax positions. Such changes could affect the amount of accrued taxes. The current income tax payable for 2007 has been paid during the year in accordance with estimate tax payments rules. Any remaining payment will not have any significant impact on liquidity and capital resources.

SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of income taxes on the unremitted earnings of subsidiaries, unless these can be remitted on a tax-free basis or are permanently invested. The Corporation’s U.S. subsidiaries (which are considered foreign under Puerto Rico income tax law) have never remitted retained earnings. The Corporation considers the reinvestment of such earnings permanent. The Corporation’s subsidiaries in the United States file a consolidated return. As of December 31, 2007, the Corporation had no current or accumulated earnings and profits on its combined U.S. subsidiaries’ operations and, accordingly, the recognition of a deferred tax liability was not considered necessary.

During the first quarter of 2007, the Corporation adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (FIN 48), which 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. Under the accounting guidance, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. 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 since the Corporation did not recognize any change in the liability for unrecognized tax benefits. The amount of unrecognized tax benefits, including accrued interest, as of December 31, 2007 amounted to $22.2 million. Refer to Note 27 to the consolidated financial statements for further information on the impact of FIN 48. 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. 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.

From time to time, the Corporation is audited by various federal, state and local authorities regarding income tax matters. The audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit, appeal and, in some cases, litigation process. Although management believes its approach to determining the appropriate tax treatment is supportable and in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” it is possible that the final tax authority will take a tax position that is

Popular, Inc. | 2007 | Annual Report 17

different than that which is reflected in the Corporation’s income tax provision and other tax reserves. As each audit is conducted, adjustments, if any, are appropriately recorded in the consolidated financial statement in the period determined. Such differences could have an adverse effect on our income tax provision or benefit, or other tax reserves, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period.

Goodwill and Other Intangible Assets

The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment based on the requirements of SFAS No. 142, “Goodwill and Other Intangible Assets.” Intangibles with indefinite lives are evaluated for impairment at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit.

As of December 31, 2007, goodwill totaled $631 million, while other intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark, amounted to $17 million. Refer to Notes 1 and 12 to the consolidated financial statements for further information on goodwill and other intangible assets. Note 12 to the consolidated financial statements provides an allocation of goodwill by business segment.

During 2007, the Corporation performed the annual goodwill impairment evaluation for the entire organization. The reporting units utilized for this evaluation were those that are one level below the business segments identified in Note 12 to the consolidated financial statements. The impairment evaluation is performed in two steps. The first step of the goodwill evaluation process is to determine if potential impairment exists in any of the Corporation’s reporting units, and is performed by comparing the fair value of the reporting units with their carrying amount, including goodwill. If required from the results of this step, a second step measures the amount of any impairment loss. The second step process estimates the fair value of the unit’s individual assets and liabilities in the same manner as if a purchase of the reporting unit was taking place. If the implied fair value of goodwill calculated in step two is less than the carrying amount of goodwill for the reporting unit, an impairment is indicated and the carrying value of goodwill is written down to the calculated value.

In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and the discounted cash flow analysis.

The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include:

	•		selection of comparable publicly traded companies, based on nature of business, location and size;

	•		selection of comparable acquisition transactions;

	•		the discount rate applied to future earnings, based on an estimate of the cost of equity;

	•		the potential future earnings of the reporting unit;

	•		market growth and new business assumptions;

	•		the relative weight given to the valuations derived by the different valuation methods.

For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant revenue drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the revenue drivers of the reporting unit. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment.

For purposes of the discounted cash flows approach, the valuation is based on estimated future cash flows. The Corporation uses its internal Asset Liability Management Committee (ALCO) forecasts to estimate future cash flows. The cost of equity used to discount the cash flows was calculated using the Ibbotson BuildUp Method and ranged from 10.88% to 18.62%.

As indicated in the Significant U.S. Strategic Events section of this MD&A, management made a decision during the fourth quarter of 2007 to restructure the operations of E-LOAN. As a result, management updated the valuation test of E-LOAN’s goodwill during the fourth quarter of 2007 to consider the new business developments at that subsidiary. As a result of this impairment analysis, the Corporation recorded goodwill impairment losses of $164.4 million associated with the operations of E-LOAN.

The annual goodwill impairment evaluation performed for the other reporting units resulted in no impairment of goodwill or other intangible assets with indefinite lives.

The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill is recorded. However, had our estimated fair value calculated for all units evaluated using the market comparable approach been approximately 10% lower, there would

still be no indication of impairment for any of the Corporation’s reporting units.

	•		an appropriate royalty rate;

	•		the revenue projections that benefit from the use of this intangible;

	•		the after-tax royalty savings derived from the ownership of the intangible; and

	•		the discount rate to apply to the projected benefits to arrive at the present value of this intangible.

Since estimates are an integral part of this trademark impairment analysis, changes in these estimates could have a significant impact on the calculated fair value.

Based on the impairment evaluation test completed as of December 31, 2007, the Corporation recorded impairment losses of $47.4 million associated with E-LOAN’s trademark.

Pension and Postretirement Benefit Obligations

The Corporation provides pension and restoration benefit plans for certain employees of various subsidiaries. The Corporation also provides certain health care benefits for retired employees of BPPR. The benefit costs and obligations of these plans are impacted by the use of subjective assumptions, which can materially affect recorded amounts, including expected returns on plan assets, discount rates, rates of compensation increase and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against industry assumptions and the actual experience of the Corporation. The Corporation uses an independent actuarial firm for assistance in the determination of the pension and postretirement benefit costs and obligations. Detailed information on the plans and related valuation assumptions are included in Note 24 to the consolidated financial statements.

The Corporation periodically reviews its assumption for long-term expected return on pension plan assets in the Banco Popular de Puerto Rico Retirement Plan, which is the Corporation’s largest pension plan with a market value of assets of $516.5 million at December 31, 2007. The expected return on plan assets is determined by considering a total fund return estimate based on a weighted average of estimated returns for each asset class in the plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of return, inflation, credit spreads, equity risk premiums and excess return expectations.

As part of the review, the Corporation’s independent consulting actuaries performed an analysis of expected returns based on the plan’s asset allocation at January 1, 2008. This analysis is validated by the Corporation and used to develop expected rates of return. This forecast reflects the actuarial firm’s view of expected long-term rates of return for each significant asset class or economic indicator; for example, 9.0% for large / mid-cap stocks, 5.3% for fixed income, and 2.7% inflation at January 1, 2008. A range of expected investment returns is developed, and this range relies both on forecasts and on broad-market historical benchmarks for expected returns, correlations, and volatilities for each asset class.

As a consequence of recent reviews, the Corporation left unchanged its expected return on plan assets for year 2008 at 8.0%, similar to the expected rate assumed in 2006 and 2007.

Pension expense for the Banco Popular de Puerto Rico Retirement Plan in 2007 amounted to $0.6 million. This included a credit of $41.4 million reflecting the expected return on assets.

Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2008 from 8.00% to 7.50% would increase the projected 2008 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.5 million.

On December 31, 2006, the Corporation adopted SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”, and commenced to account for the underfunded status of the Corporation’s pension and postretirement benefit plans as a liability, with an offset, net of tax, in accumulated other comprehensive income. The determination of the fair value of pension plan obligations involves judgment, and any changes in those estimates could impact the Corporation’s consolidated statement of financial condition. The valuation of pension plan obligations is discussed above. Management believes that the fair value estimates of the pension plan assets are reasonable given that the plan assets are managed, in the most part, by the fiduciary division of BPPR, which is subject to periodic audit verifications. Also, the composition of the plan assets, as disclosed in Note 24 of the consolidated financial statements, is primarily in equity and debt securities, which have readily determinable quoted market prices.

The Corporation uses the Citigroup Yield Curve to discount the expected program cash flows as a guide in the selection of the discount rate, as well as the Citigroup Pension Liability Index. The Corporation decided to use a discount rate of 6.40% to determine the benefit obligation at December 31, 2007, compared with 5.75% at December 31, 2006.

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A 40 basis point decrease in the assumed discount rate of 6.40% as of the beginning of 2008 would increase the projected 2008 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.0 million. The change would not affect the minimum required contribution to the Plan.

The Corporation also provides a postretirement health care benefit plan for certain employees of BPPR. This plan was unfunded (no assets were held by the plan) at December 31, 2007. The Corporation had an accrual for postretirement benefit costs of $126 million at December 31, 2007. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. Note 24 to the consolidated financial statements provides information on the assumed rates considered by the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have in the cost components and postretirement benefit obligation of the Corporation.

Statement of Operations Analysis

Net Interest Income

Net interest income is the Corporation’s primary source of earnings representing 68% of total revenues (defined as net interest income plus non-interest income) for 2007, compared to 64% in 2006. It is defined as the difference between the revenue generated on interest earning assets less the interest cost of funding those assets. Various factors may cause the net interest income to fluctuate from period to period, which may include interest rate volatility, the shape of the yield curve, changes in volume and mix of earning assets and interest bearing liabilities, repricing characteristics of assets and liabilities, and derivative transactions, among others.

Interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are investments in obligations of some U.S. Government agencies and sponsored entities of the Puerto Rico Commonwealth and its agencies, and assets held by the Corporation’s international banking entities, which are tax-exempt under Puerto Rico laws. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates. The marginal tax rate for the Puerto Rico subsidiaries in 2007 was 39%, compared to 43.5% for BPPR and 41.5% for the other Puerto Rico subsidiaries in 2006. The marginal tax rate was 41.5% for all the Puerto Rico subsidiaries in 2005. The decrease in the marginal tax rate was responsible for the majority of the reduction in the taxable equivalent benefit between 2006 and 2007, as shown in Table D. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law, also affected by the mentioned decrease in tax rate.

Average outstanding securities balances are based on amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Interest income for the year ended December 31, 2007 included an unfavorable impact of $8.4 million, consisting principally of amortization of net loan origination costs (net of origination fees) and amortization of net premiums on loans purchased, partially offset by prepayment penalties and late payment charges. These amounts approximated unfavorable impacts of $18 million and $42 million, respectively, for the years ended December 31, 2006 and 2005. The reduction in the unfavorable impact for 2007, compared with 2006 and 2005, was mainly the result of a lower balance of premium amortized related to mortgage loans purchased by PFH, mainly in years prior to 2006, due to reduced loan prepayments and to the direct impact of the maturity run-off of the purchased mortgage loan portfolio.

In 2007, management continued its strategy to improve the net interest margin by not reinvesting maturities of securities; focusing on growing the commercial and consumer loan portfolio; and reducing the level of residential mortgage loans (mainly through a reduction of volume at PFH). These strategies assisted in increasing the yield on earning assets and reduced the Corporation’s dependence on wholesale funding, while the purchase of the Citibank retail network in Puerto Rico provided a more stable funding source.

However, even though the Corporation showed improvement in its margin, the year 2007 presented various challenges: Internet-based deposits carry a higher rate than deposits from branches due to the competitive nature of this business channel, the liquidity crisis that took place in the second half of 2007 lead the Corporation to enter into certain financing agreements which may delay the expected benefit of reduced market interest rates, and competitive pressures that resulted in increases in the cost of interest bearing deposits, and that affected the volume and spreads of consumer and mortgage loans in the Puerto Rico subsidiaries.

During 2006, the Federal Reserve (“FED”) raised the federal funds target rate 100 basis points, increasing this rate from 4.25% on December 31, 2005 to 5.25% by June 30, 2006 and remaining at that rate as of December 31, 2006. In 2007, the FED reduced the federal funds rate 50 basis points in September 2007, 25 basis points in October 2007 and 25 basis points in December 2007, reaching 4.25% at December 31, 2007. As a result of financial markets remaining under considerable stress, further credit tightening throughout 2007 for some businesses and households, the housing sector contracting and some labor markets softening, among other considerations, the FED announced these interest rate cuts in 2007.

The average key index rates for the years 2005 through 2007 were as follows:


	2007			2006			2005

Prime rate		8.05	%		7.96	%		6.19	%
Fed funds rate		5.05			4.96			3.20
3-month LIBOR		5.30			5.20			3.57
3-month Treasury Bill		4.46			4.84			3.20
10-year Treasury		4.63			4.79			4.28
FNMA 30-year		6.24			6.32			5.72

Table D presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2007, as compared with the same period in 2006, segregated by major categories of interest earning assets and interest bearing liabilities.

The decrease in average earning assets for the year ended December 31, 2007, compared with the previous year, was principally due to the Corporation’s decision not to reinvest maturities of securities, mainly U.S. Government agencies, as well as selling low yielding mortgage loans in the second half of 2006. These strategies, in addition to the growth in the commercial and consumer loan portfolios and the reduction experienced in the Corporation’s U.S. subprime mortgage loan originations, contributed to a change in the mix of earning assets and funding sources. Refer to the Statement of Condition Analysis section of this MD&A for additional information on factors that contributed to the fluctuation in major earning assets categories.

The Corporation’s funding sources also experienced a change in its mix, which contributed to the variance attributable to the change in volume shown in Table D. The decline in low yielding assets, an increase in the Corporation’s deposit base, and liquidity measures taken in the second half of 2007 in response to market disruptions, resulted in reduced levels of borrowed money. The E-LOAN Internet deposit gathering initiative, launched in the latter part of 2006, as well as increases in non-Internet certificates of deposit, including brokered CDs and money market accounts, coupled with the deposits derived from the acquisition of Citibank’s retail branches in Puerto Rico, contributed also to the reduction in borrowed money.

The increase in the net interest margin for the year ended December 31, 2007, compared with the previous year, was partly attributed to the following factors:

	•		The yield for commercial loans increased, when compared to 2006, in part due to a high proportion of these loans with floating rates. As of December 31, 2007, approximately 63% of the portfolio of commercial and construction loans had floating or adjustable interest rates. For the majority of 2007, rates remained higher than 2006. In addition, due to the timing of the rate resets, certain adjustable rate portfolios have not had the complete impact of the decrease in market rates that occurred in the last quarter of 2007.

	•		The yield of residential mortgage loans increased, when compared to 2006, mainly as a result of a decrease in the premium amortization for secured mortgage loans due to a slowdown in the prepayment activity in the U.S. market, as well as the direct impact of the maturity run-off of the purchased mortgage portfolio.

	•		The yield of consumer loans increased, when compared to 2006, mainly as a result of higher rates for the Puerto Rico consumer loan portfolio, and a higher volume and rate of credit cards. The yield of the credit card portfolio increased by 39 basis points.

Partially offsetting the above mentioned favorable variances were the following negative impacts:

	•		Increased cost of interest bearing deposits as a result of a higher proportion of Internet-based deposits raised through the E-LOAN platform and higher rates for money markets and time deposits. The overall increase in the Corporation’s cost of deposits was also affected by the lagged impact of the FED’s rate increase in 2006 and competitive pressures.

	•		Higher cost of short-term borrowings primarily as a result of the tightening performed by the FED during 2006 and higher funding costs in response to the market disruptions in the second half of 2007.

	•		Increase in the cost of long-term debt, in part due to secured debt with floating rates derived from on-balance sheet mortgage loan securitizations that were outstanding for most of the year prior the loan recharacterization transaction that took effect in late December 2007.

	•		Unfavorable impact of mark-to-market adjustment related to derivative instruments that were associated with borrowed funds. The Corporation recognized $15.9 million in derivative losses for the year ended December 31, 2007, compared with derivative losses of $8.2 million in 2006, which are included as funding costs on borrowed funds. Most of these derivatives are economically hedging long-term debt. The decline in the fair value of the derivative instruments was influenced by disruptions in the financial markets during the third quarter of 2007 and the reduction in interest rates by the FED in the second half of 2007.

As part of its asset / liability management strategies, the Corporation has entered into some activities with derivative financial instruments to protect its exposure to market risk. Refer to the Market Risk – Derivatives section of this MD&A and Note 30 to the audited consolidated financial statements for additional

Popular, Inc. | 2007 | Annual Report 21

information regarding the Corporation’s involvement in derivative activities.

As shown in Table D, the decrease in net interest income on a taxable equivalent basis from 2005 to 2006 was mainly the result of a lower taxable equivalent adjustment and lower net interest margin, partially offset by an increase in average earning assets. The decrease in the net interest margin for the year ended December 31, 2006, compared with 2005, was partly attributed to a higher average cost of interest bearing liabilities, principally due to the tightening in monetary policy by the FED. During 2006, the FED raised the federal funds target rate from 4.25% on December 31, 2005 to 5.25% by June 30, 2006 and remaining at that rate as of December 31, 2006. Also, there was an increase in the cost of long-term debt resulting primarily from secured debt with floating rates derived from mortgage loan on-balance sheet securitization transactions by PFH and higher cost of interest bearing deposits. Partially offsetting these unfavorable variances were higher yields in commercial, mortgage and consumer loans. Contributors to the increase in loan yields for 2006 included the favorable impact of rising rates in collateralized mortgage obligations and commercial loans with floating rates, a decline in premium amortization on mortgage loans purchased due to a slowdown in the prepayment activity in the U.S. market, as well as a decrease in the amount of mortgage loans purchased as part of PFH’s operations. Also contributing to this variance were the impact of sales of low yielding mortgage loans during the third quarter of 2006 and maturities of low yielding securities during 2006, mainly agency securities.

The decrease in the taxable equivalent adjustment from 2005 to 2006, as shown in Table D, was mainly the result of a higher cost of funds, partially offset by the increase in exempt interest income and a greater benefit derived from a higher statutory rate in 2006, when compared to 2005, as mentioned above. Puerto Rico tax law requires that an interest expense be assigned to the exempt interest income in order to calculate a net benefit. The interest expense is determined by applying the ratio of exempt assets to total assets to the Corporation’s total interest expense in Puerto Rico. To the extent that the cost of funds increases at a faster pace than the yield of earning assets, the net benefit will be reduced. The cost of funds increased in part due to the FED’s tightening in monetary policy, which increased the federal funds target rate by 100 basis points during 2006.

Average tax-exempt earning assets approximated $8.9 billion in 2007, of which 83% represented tax-exempt investment securities, compared with $9.7 billion and 87% in 2006, and $10.0 billion and 88% in 2005.

Provision for Loan Losses

The Corporation’s provision for loan losses for the year ended December 31, 2007 increased by $274.9 million, compared with 2006, and exceeded net charge-offs by $139.6 million. This increase was mainly attributed to higher net charge-offs by $193.4 million, mainly in the mortgage, consumer, and commercial loan portfolios, which reflect the continued credit problems in the U.S. mainland subprime mortgage market, as well as higher delinquencies in U.S. and Puerto Rico, due in part by the slowdown in the economy. Also, the increase reflects probable losses inherent in the loan portfolio, as a result of current economic conditions and deteriorating market trends, primarily in the mortgage and commercial loan sectors. The net charge-offs to average loans held-in-portfolio ratio deteriorated, increasing to 1.31% in 2007, from 0.74% in 2006 and 0.62% in 2005.

The provision for loan losses for the year ended December 31, 2006 increased by $92.5 million, or 47%, and exceeded net-charge offs by $58 million compared with 2005. This increase was mainly attributed to the growth in the loan portfolio and higher net charge-offs, mainly in the consumer loan portfolio in Puerto Rico. Also, the increase reflected probable losses inherent in the loan portfolio as a result of economic conditions and deteriorating market trends in 2006, primarily in the subprime mortgage loan sectors and in the commercial portfolio, evidenced by an increase in non-performing assets from 2005 to 2006.

Refer to the Credit Risk Management and Loan Quality section for a detailed analysis of non-performing assets, allowance for loan losses and selected loan losses statistics. Also, refer to Table G and Note 9 to the consolidated financial statements for the composition of the loan portfolio.

Non-Interest Income

Refer to Table E for a breakdown on non-interest income by major categories for the past five years. Non-interest income accounted for 32% of total revenues in 2007, while it represented 36% of total revenues in the years 2006 and 2005.

Non-interest income for the year ended December 31, 2007, compared with the previous year, was mostly impacted by:

•

Higher other service fees, which are detailed by category in Table E.

	§		The favorable variance in credit card fees was due to higher merchant fees resulting from higher volume of purchases and late payment fees due to greater volume of credit card accounts billed at a higher average rate pursuant to a change in contract terms.

	§		The increase in debit card fees was mostly due to the change in the automatic teller machines’ interchange fees from a fixed rate to a variable rate, as well as higher transactional volume. Also, the increase is associated to higher surcharge revenues from non-BPPR users of the ATM terminals.

Table D

Net Interest Income — Taxable Equivalent Basis


Year ended December 31,
(Dollars in millions)																	(In thousands)
																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2007		2006		Variance			2007			2006			Variance				2007		2006		Variance			Rate			Volume

$	514	$	564		($50	)		5 .17	%		5.56	%		(0.39	%)	Money market investments	$	26,565	$	31,382		($4,817	)		($1,824	)		($2,993	)
	9,854		11,774		(1,920	)		5.19			5.14			0.05		Investment securities		511,208		605,588		(94,380	)		5,061			(99,441	)
	672		513		159			6.44			6.63			(0.19	)	Trading securities		43,306		34,004		9,302			(992	)		10,294

	11,040		12,851		(1,811	)		5.26			5.22			0.04				581,079		670,974		(89,895	)		2,245			(92,140	)

																Loans:
	15,082		13,613		1,469			7.72			7.63			0.09		Commercial and construction		1,164,918		1,038,497		126,421			11,693			114,728
	1,178		1,283		(105	)		7.89			7.57			0.32		Leasing		92,940		97,166		(4,226	)		3,950			(8,176	)
	10,954		12,113		(1,159	)		7.12			6.93			0.19		Mortgage		780,012		839,515		(59,503	)		22,472			(81,975	)
	5,536		5,070		466			10.82			10.53			0.29		Consumer		599,085		533,692		65,393			9,047			56,346

	32,750		32,079		671			8.05			7.82			0.23				2,636,955		2,508,870		128,085			47,162			80,923

$	43,790	$	44,930		($1,140	)		7.35	%		7.08	%		0.27	%	Total earning assets	$	3,218,034	$	3,179,844	$	38,190		$	49,407			($11,217	)

																Interest bearing deposits:
$	4,429	$	3,878	$	551			2 .60	%		2.06	%		0.54	%	NOW and money market*	$	115,047	$	79,820	$	35,227		$	17,963		$	17,264
	5,698		5,440		258			1.96			1.43			0.53		Savings		111,877		77,611		34,266			4,513			29,753
	11,399		9,977		1,422			4.73			4.24			0.49		Time deposits		538,869		422,663		116,206			46,221			69,985

	21,526		19,295		2,231			3.56			3.01			0.55				765,793		580,094		185,699			68,697			117,002

	8,685		10,677		(1,992	)		5.16			4.86			0.30		Short-term borrowings		448,172		518,960		(70,788	)		30,623			(101,411	)
	8,181		9,868		(1,687	)		5.68			5.45			0.23		Medium and long-term debt		464,816		537,477		(72,661	)		19,458			(92,119	)

	38,392		39,840		(1,448	)		4.37			4.11			0.26		Total interest bearing liabilities		1,678,781		1,636,531		42,250			118,778			(76,528	)
	4,043		3,970		73											Non-interest bearing demand deposits
	1,355		1,120		235											Other sources of funds

$	43,790	$	44,930		($1,140	)		3 .83	%		3.64	%		0.19	%

								3 .52	%		3.44	%		0.08	%	Net interest margin

																Net interest income on a taxable equivalent basis		1,539,253		1,543,313		(4,060	)	(	$69,371	)	$	65,311

								2 .98	%		2.97	%		0.01	%	Net interest spread

																Taxable equivalent adjustment		89,863		115,403		(25,540	)

																Net interest income	$	1,449,390	$	1,427,910	$	21,480


Notes:		The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

*		Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

The increase in mortgage servicing fees was related to higher servicing fees due to the growth in the portfolio of loans serviced for others, which rose by approximately $7.2 billion from December 31, 2006 to December 31, 2007 as well as, higher late payment fees derived from the serviced portfolio as a result of increased delinquencies primarily associated with the U.S. mainland. Also, the positive variance was impacted by the adoption of SFAS No. 156, in which the Corporation elected fair value measurement and, as a result, the residential mortgage servicing rights are no longer amortized in proportion to and over the period of estimated net servicing income. Refer to Note 22 to the consolidated financial statements for detailed information

Popular, Inc. | 2007 | Annual Report 23


(Dollars in millions)																		(In thousands)
																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2006		2005		Variance			2006			2005			Variance				2006		2005		Variance			Rate			Volume

$	564	$	797		($233	)		5.56	%		4.18	%		1.38	%	Money market investments	$	31,382	$	33,319		($1,937	)	$	8,592			($10,529	)
	11,774		12,230		(456	)		5.14			4.83			0.31		Investment securities		605,588		591,089		14,499			38,049			(23,550	)
	513		488		25			6.63			6.65			(0.02	)	Trading securities		34,004		32,427		1,577			(123	)		1,700

	12,851		13,515		(664	)		5.22			4.86			0.36				670,974		656,835		14,139			46,518			(32,379	)

																Loans:
	13,613		11,815		1,798			7.63			6.73			0.90		Commercial and construction		1,038,497		794,899		243,598			113,981			129,617
	1,283		1,303		(20	)		7.57			7.57			—		Leasing		97,166		98,618		(1,452	)		60			(1,512	)
	12,113		12,238		(125	)		6.93			6.53			0.40		Mortgage		839,515		799,332		40,183			48,421			(8,238	)
	5,070		4,375		695			10.53			10.12			0.41		Consumer		533,692		442,662		91,030			16,012			75,018

	32,079		29,731		2,348			7.82			7.18			0.64				2,508,870		2,135,511		373,359			178,474			194,885

$	44,930	$	43,246	$	1,684			7.08	%		6.46	%		0.62	%	Total earning assets	$	3,179,844	$	2,792,346	$	387,498		$	224,992		$	162,506

																Interest bearing deposits:
$	3,878	$	3,732	$	146			2.06	%		1.49	%		0.57	%	NOW and money market*	$	79,820	$	55,645	$	24,175		$	20,257		$	3,918
	5,440		5,677		(237	)		1.43			1.23			0.20		Savings		77,611		69,940		7,671			9,953			(2,282	)
	9,977		8,776		1,201			4.24			3.48			0.76		Time deposits		422,663		305,228		117,435			72,341			45,094

	19,295		18,185		1,110			3.01			2.37			0.64				580,094		430,813		149,281			102,551			46,730

	10,677		10,327		350			4.86			3.38			1.48		Short-term borrowings		518,960		349,203		169,757			162,016			7,741
	9,868		9,764		104			5.45			4.73			0.72		Medium and long-term debt		537,477		461,636		75,841			73,812			2,029

	39,840		38,276		1,564			4.11			3.24			0.87		Total interest bearing liabilities		1,636,531		1,241,652		394,879			338,379			56,500
	3,970		4,069		(99	)										Non-interest bearing demand deposits
	1,120		901		219											Other sources of funds

$	44,930	$	43,246	$	1,684			3.64	%		2.87	%		0.77	%

								3.44	%		3.59	%		(0.15	%)	Net interest margin

																Net interest income on a taxable equivalent basis		1,543,313		1,550,694		(7,381	)		($113,387	)	$	106,006

								2.97	%		3.22	%		(0.25	%)	Net interest spread

																Taxable equivalent adjustment		115,403		126,487		(11,084	)

																Net interest income	$	1,427,910	$	1,424,207	$	3,703

on the adoption of SFAS No. 156. Any fair value adjustment of MSRs is recorded in “other service fees” in the consolidated statements of operations together with the loan servicing fees charged to third-parties on the serviced portfolio. These favorable variances were partially offset by lower prepayment fees on loans serviced due to a slowdown in prepayments.

Other fees decreased mainly as a result of lower brokered loan fees on services provided to mortgage brokers on the origination of loans for their portfolio. This reduction in servicing fees was a result of the discontinuation of PFH’s broker-origination channel as part of the PFH Restructuring Plan.

Popular, Inc. | 2007 | Annual Report 25

Table E

Non-Interest Income


	Year ended December 31,
															Five-Year
(Dollars in thousands)	2007			2006			2005		2004			2003			C.G.R.^*

Service charges on deposit accounts	$	196,072		$	190,079		$	181,749	$	165,241		$	161,839			4.45	%

Other service fees:
Credit card fees and discounts		102,176			89,827			82,062		69,702			60,432			11.53
Debit card fees		76,573			61,643			52,675		51,256			45,811			12.52
Insurance fees		55,824			53,889			50,734		38,924			29,855			18.02
Processing fees		47,476			44,050			42,773		40,169			40,003			5.37
Sale and administration of investment products		30,453			27,873			28,419		22,386			21,174			7.12
Mortgage servicing fees, net of amortization and fair value adjustments		11,708			(2,750	)		6,226		7,412			6,853			(0.36	)
Trust fees		11,157			9,316			8,290		8,872			7,830			4.23
Check cashing fees		387			737			17,122		21,680			24,420			(55.07	)
Other fees		27,503			36,290			43,200		35,150			48,014			(6.99	)

Total other service fees		363,257			320,875			331,501		295,551			284,392			6.45

Net gain on sale and valuation adjustments of investment securities		55,159			4,359			52,113		15,254			71,094			—
Trading account (loss) profit		(2,464	)		35,288			30,051		(159	)		(10,214	)		25.11
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale		(38,970	)		117,421			83,297		44,168			53,572			—
Other operating income		121,262			141,463			106,564		88,716			65,327			10.89

Total non-interest income	$	694,316		$	809,485		$	785,275	$	608,771		$	626,010			5.01	%


*		C.G.R. refers to compound growth rate.

and higher revenues from services on the structuring of bond issues, among others. These favorable variances were partially offset by a decrease of $47.8 million in net gains on sale and unfavorable valuation adjustments of other-than-temporary impairments of investment securities available-for-sale, principally residual interests of PFH. Additionally, there were lower check cashing fees and other fees as a result of the lack of revenue originally produced by the Corporation’s check cashing operations in the U.S., which were sold during the fourth quarter of 2005.

Table F

Operating Expenses


	Year ended December 31,
																Five-Year
(Dollars in thousands)	2007			2006			2005			2004			2003			C.G.R.

Salaries	$	519,523		$	517,178		$	474,636		$	427,870		$	388,527			7.50	%
Pension, profit sharing and other benefits		148,666			151,493			148,053			143,148			137,917			3.24

Total personnel costs		668,189			668,671			622,689			571,018			526,444			6.45

Net occupancy expenses		123,621			116,742			108,386			89,821			83,630			9.51
Equipment expenses		127,472			135,877			124,276			108,823			104,821			5.16
Other taxes		50,111			44,543			39,197			40,260			37,904			6.17
Professional fees		149,854			141,534			119,281			95,084			82,325			12.10
Communications		66,877			68,283			63,395			60,965			58,038			4.41
Business promotion		115,388			129,965			100,434			75,708			73,277			13.43
Printing and supplies		17,438			17,741			18,378			17,938			19,111			(2.63	)
Impairment losses on long-lived assets		12,344			7,232			—			—			—			—
Other operating expenses:
Credit card processing, volume and interchange expenses		41,695			30,707			29,700			26,965			23,869			18.25
Transportation and travel		16,142			18,064			19,426			14,968			13,811			3.04
All other*		93,225			79,098			73,459			61,618			82,009			7.62
Goodwill and trademark impairment losses		211,750			14,239			—			—			—			—
Amortization of intangibles		10,445			12,377			9,579			7,844			7,844			2.79

Subtotal		1,036,362			816,402			705,511			599,994			586,639			13.92

Total	$	1,704,551		$	1,485,073		$	1,328,200		$	1,171,012		$	1,113,083			10.62	%

Efficiency ratio**		81.99	%		67.16	%		62.30	%		59.86	%		60.51	%
Personnel costs to average assets		1.42			1.38			1.34			1.43			1.52
Operating expenses to average assets		3.62			3.08			2.86			2.94			3.21
Employees (full-time equivalent)		12,303			12,508			13,210			12,139			11,474
Assets per employee (in millions)	$	3.61		$	3.79		$	3.68		$	3.66		$	3.18

Includes insurance, sundry losses, FDIC assessment and other real estate expenses, among others.

Non-interest expense divided by net interest income plus recurring non-interest income.

Popular, Inc. | 2007 | Annual Report 27

Operating Expenses

Refer to Table F for the detail of operating expenses by major categories along with various related ratios for the last five years. Operating expenses totaled $1.7 billion for the year ended December 31, 2007, an increase of $219.5 million, or 15%, compared with the same period in 2006. Included in operating expenses for 2007 are approximately $248.5 million in impairment charges and costs associated to the PFH Restructuring Plan, E-LOAN Restructuring Plan and PFH Branch Network Restructuring Plan described previously in this MD&A. In 2006, there were $21.4 million in impairment charges associated with the PFH Restructuring Plan. The table below segregates these 2007 costs by categories within operating expenses.



	PFH		E-LOAN		PFH Branch
	Restructuring		Restructuring		Network Restructuring
(in millions)	Plan		Plan		Plan		Total

Personnel costs (1)	$	7.8	$	4.6		—	$	12.4
Net occupancy expenses (2)		4.5		4.2		—		8.7
Equipment expenses		0.3		0.4		—		0.7
Professional fees (3)		1.8		0.4		—		2.2
Other operating expenses		0.3		—		—		0.3

Total restructuring expenses	$	14.7	$	9.6		—	$	24.3

Impairment of long-lived assets (4)		—		10.5		1.9		12.4
Impairment of trademark and goodwill (5)		—		211.8		—		211.8

Total restructuring and impairment charges	$	14.7	$	231.9	$	1.9	$	248.5


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

(2)		Lease terminations

(3)		Outplacement services and professional services contract termination

(4)		Impairment of leasehold improvements, equipment and intangible assets with definitive lives

(5)		Goodwill impairment of $164.4 million and trademark impairment of $47.4 million

Isolating the impact of the different charges associated to the restructuring plans named above, operating expenses increased (decreased) from 2006 to 2007 as follows:



			Charges		2007, excluding			2006,
			related to		charges related to			excluding
			restructuring		restructuring			impairment
(in millions)	2007		plans		plans			charges		Variance

Personnel costs	$	668.2	$	12.4	$	655.8		$	668.7	$	(12.9	)
Net occupancy expenses		123.6		8.7		114.9			116.7		(1.8	)
Equipment expenses		127.5		0.7		126.8			135.9		(9.1	)
Other taxes		50.1		—		50.1			44.5		5.6
Professional fees		149.9		2.2		147.7			141.5		6.2
Communications		66.9		—		66.9			68.3		(1.4	)
Business promotion		115.4		—		115.4			130.0		(14.6	)
Printing and supplies		17.4		—		17.4			17.7		(0.3	)
Impairment losses on long-lived assets (1)		12.3		12.4		(0.1	)		—		(0.1	)
Other operating expenses		151.1		0.3		150.8			118.1		32.7
Impact of change in fiscal period		—		—		—			9.7		(9.7	)
Goodwill and trademark impairment losses (1)		211.8		211.8		—			—		—
Amortization of intangibles		10.4		—		10.4			12.4		(2.0	)

Total	$	1,704.6	$	248.5	$	1,456.1		$	1,463.5	$	(7.4	)


(1)		For comparative purposes, this table excludes $7.2 million in impairment of long-lived assets and $14.2 million in goodwill impairment losses taken in 2006 that were associated to the PFH Restructuring Plan.

Excluding the severance costs associated with the restructuring plans, the decrease in personnel costs for 2007, compared to 2006, was principally the result of lower headcount resulting from the PFH Restructuring Plan which took effect in early 2007. The PFH reportable segment’s personnel expenses, excluding $7.8 million related to the PFH Restructuring Plan, decreased by $37.1 million during 2007, compared to the previous year. PFH was impacted by a reduction in headcount as described below. The reduction in the PFH reportable segment’s personnel costs was partly offset by increases in the Corporation’s other reportable segments, including the Puerto Rico and U.S. mainland operations. These increases were mostly associated to the impact of merit increases across the Corporation’s subsidiaries, increased headcount, higher commissions on certain businesses, medical insurance costs and savings plan expenses, among other factors, coupled with lower cost deferrals due to a lower volume of loan originations. At December 31, 2007, the Corporation’s full-time equivalent employees (“FTEs”) were 12,303, compared with 12,508 at December 31, 2006.

Other operating expenses categories reflecting greater variances in 2007 compared to 2006, excluding the impact of the restructuring plans, are described below.

•

Equipment expenses declined mostly as a result of lower electronic equipment depreciation, maintenance and repair expenses, and software package amortization, as well as

lower equipment requirements due to the streamlining of PFH’s operations.

	•		Other taxes increased mainly associated to higher municipal license taxes, personal property taxes, examination banking fees and the new sales tax implemented in Puerto Rico in the later part of 2006.

	•		Professional fees also increased principally due to higher business strategy consulting, computer service fees, credit collection, imaging services and programming services, among others.

	•		Business promotion expenses experienced a reduction mainly as a result of cost control measures on marketing expenditures on the U.S. mainland operations, primarily at E-LOAN, and lower expenditures at PFH due to the streamlining of operations in 2007. These reductions were partially offset by higher costs related to the loyalty reward program in the Puerto Rico operations.

	•		Other operating expenses rose primarily as a result of higher other real estate expenses associated with the increased administrative and foreclosure costs resulting from a higher number of repossessed units and additional write downs in the collateral value of repossessed real estate properties in the U.S. mainland. The increase in other operating expenses is also due to higher credit card processing and interchange expenses, primarily due to higher volume of transactions at a higher average rate.

	•		Impact of change in fiscal period of certain subsidiaries represents a net loss for the month of December 2005 in those subsidiaries that changed their fiscal year in 2006, as described in the Corporation’s 2006 Annual Report.

The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. As stated in the Glossary of Selected Financial Terms included in this 2007 Annual Report, in determining the efficiency ratio, the Corporation includes recurring non-interest income items, thus isolating income items that may be considered volatile in nature. Management believes that the exclusion of those items would permit greater comparability for analytical purposes. Amounts within non-interest income not considered recurring in nature by the Corporation amounted to $64.6 million during the year ended December 31, 2007, compared with $26.0 million in the same period of the previous year. Non-recurring gains during 2007 corresponded principally to net gains on sale and valuation adjustments of investment securities available-for-sale, whereas 2006 was mainly impacted by gains on the sale of real estate properties. The efficiency ratio was mainly unfavorably impacted by the impairment losses that resulted from the evaluation of the goodwill and trademark of E-LOAN and the restructuring charges related to the three restructuring plans previously discussed.

For the year 2006, total operating expenses increased $156.9 million, or 12%, from 2005, mainly resulting from E-LOAN’s operations, which had only impacted 2005 results since its acquisition in November 2005. E-LOAN’s share of the increase in operating expenses for 2006, compared to 2005, was approximately $133 million. Popular Cash Express (“PCE”), sold in late 2005, contributed with a reduction of $28 million in operating expenses for 2006, which represented the subsidiary’s costs for the year 2005. Isolating the above impact in operating expenses from E-LOAN and PCE, the Corporation’s operating expenses for the year ended December 31, 2006 increased $52 million, or 4%, compared with the previous year.

For the year ended December 31, 2006, personnel costs increased by $46.0 million, or 7%, compared with 2005. E-LOAN contributed with $46.4 million of this increase, while PCE contributed with a reduction of $10.1 million. The increase was mainly attributed to higher salaries and related taxes, bonuses, health insurance costs and savings plan expenses, partially offset by lower incentive compensation, training costs and profit sharing. All other operating expenses for the year 2006, excluding personnel costs, increased by $110.9 million, or 16%, compared with 2005. E-LOAN contributed with approximately $86.1 million of this increase, mostly in business promotion and professional fees. PCE represented a reduction of approximately $17.6 million, principally in net occupancy expenses. Excluding the impact of E-LOAN and PCE, the most significant variances were goodwill impairment losses during 2006 of $14.2 million at PFH, higher net occupancy expenses by $11.1 million resulting from business expansion in the U.S. mainland, the impact of a change in this fiscal year of certain of the Corporation’s subsidiaries amounting to a pre-tax loss of $9.7 million, and higher equipment expenses by $8.8 million driven by software maintenance and systems technology investments to support business processes. These variances were partially offset by a reduction of $14.9 million in business promotion expenses, excluding E-LOAN and PCE operations, resulting from lower expenses related to the loyalty rewards program as a result of a lower cost structure and changes in the redemption requirements, and by cost control measures.

Income Tax Expense

Income tax benefit for the year ended December 31, 2007 was $59.0 million, compared with an income tax expense of $106.9 million for 2006. This variance was primarily due to the pre-tax losses for 2007, in the Corporation’s U.S. operations, and to higher income subject to a preferential tax rate on capital gains in Puerto Rico when compared to 2006. In addition, income tax expense in the Puerto Rico operations decreased due to the expiration of the

Popular, Inc. | 2007 | Annual Report 29

transitory provision that increased the statutory tax rate for Puerto Rico corporations in 2006, as described earlier in the Net Interest Income section of this MD&A. The impact of these changes was partially offset by lower net tax-exempt interest income and by the reversal of several tax positions during 2006 upon the completion of various federal and Puerto Rico tax audits.

Income tax expense for the year ended December 31, 2006 was $106.9 million, compared with $148.9 million in 2005, a decrease of $42.0 million, or 28%. This decline was primarily due to lower pre-tax earnings, partially offset by a decrease in net tax-exempt interest income and by lower income subject to a preferential tax rate on capital gains in Puerto Rico. In addition, income tax expense reflected a change in the statutory tax rate from 41.5% to 43.5% in BPPR effective in 2006 and there was lower reversal of certain tax positions during 2006 as compared to 2005.

Refer to Note 27 to the consolidated financial statements for additional information on income taxes.

Fourth Quarter Results

Refer to the Statistical Summary 2006-2007 Quarterly Financial Data presented in this MD&A.

Net interest margin, on a taxable equivalent basis, was 3.53% for the fourth quarter of 2007, compared to 3.52% in the same period of 2006. Net interest income, on a taxable equivalent basis, declined by $3.1 million, or less than 1%, compared with the fourth quarter of 2006. The reduction was principally due to a lower taxable equivalent adjustment, as a result of the lower marginal tax rate in 2007 of 39%, which was discussed in the Net Interest Income section of this MD&A. The average volume of earning assets declined by $0.4 billion, primarily due to a $0.9 billion net reduction in money markets and securities, offset in part by an increase in average loans of $0.5 billion, mainly commercial and consumer loans, reduced in part by a lower average volume of mortgage loans. Earning assets were funded principally through interest bearing deposits, which on average rose by $3.0 billion, and non-interest bearing sources of funds, which rose on average by $0.3 billion. Borrowed funds decreased $3.7 billion. Refer to the Statement of Condition and Liquidity sections of this MD&A for explanations on changes in the mix of earning assets and funding sources.

The provision for loan losses for the fourth quarter of 2007 increased by $94.8 million, compared with the same quarter in 2006, principally due to higher net charge-offs and to higher delinquencies, a trend exhibited throughout the year due to weak economic conditions. The net charge-offs to average loans held-in-portfolio ratio deteriorated, increasing to 1.75% in the fourth quarter of 2007, from 0.93% for the same quarter in 2006. Net charge-offs for the quarter ended December 31, 2007 were $141.5 million, compared with $73.4 million in the same quarter of the previous year. The increase was experienced in mortgage loans by $37.2 million, consumer loans by $16.7 million and commercial loans by $16.1 million. The increase in net charge-offs on mortgage loans primarily reflects the continued credit problems in the U.S. mainland subprime mortgage market. Increases in net charge-offs in the commercial loan and consumer loan portfolios are principally due to higher delinquencies in Puerto Rico resulting from the slowdown in the economy. The commercial loan sector in the Corporation’s U.S. mainland operations also experienced higher charge-offs.

Non-interest income amounted to $71.8 million for the quarter ended December 31, 2007, compared with $205.3 million for the same quarter in 2006. This decline was mostly the result of the $90.1 million pre-tax loss resulting from the loan recharacterization transaction by PFH, and to higher losses on the valuation of PFH’s residual interest by $15.0 million for the fourth quarter of 2007, compared to the same period in 2006. Also, there were lower gains on the sale of real estate property in the fourth quarter of 2007 by approximately $10.5 million, compared to the same quarter in the previous year. These unfavorable variances were partially offset by higher other service fees that included debit and credit card fees, offset in part by an unfavorable change in the fair value of mortgage servicing rights during the fourth quarter of 2007 due to market conditions, including changes in delinquency curves and increased servicing costs.

Operating expenses for the fourth quarter of 2007 totaled $621.2 million, representing an increase of $242.3 million, compared with the same quarter in 2006. This increase was principally driven by $211.8 million in impairment losses related to E-LOAN’s goodwill and trademark, and to $20.1 million in other charges taken in the fourth quarter of 2007 associated to the E-LOAN Restructuring Plan. The fourth quarter of 2006 included $21.4 million in impairment charges related to goodwill and long-lived assets on the PFH Restructuring Plan. Other factors impacting the increase in other operating expenses for the fourth quarter of 2007, when compared to the same quarter in 2006, included higher salaries in part due to merit increases, additional headcount from the Puerto Rico acquisitions, lower expense deferrals due to lower loan origination volumes, higher other real estate expenses and credit collection expenses, partially offset by lower equipment and business promotion expenses, among other factors.

Income tax benefit amounted to $95.5 million in the fourth quarter of 2007, compared to income tax expense of $18.8 million in the same quarter of 2006. The main factors impacting this variance were the operating losses recorded in the U.S. operations primarily as a result of the loan recharacterization and the restructuring plans.

Reportable Segment Results

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico, EVERTEC, Banco Popular North America, and PFH. Also, a Corporate group supports the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the four reportable segments.

Prior to the fourth quarter of 2007, all U.S. operations were in a single segment referred to as Popular North America. Given the events and strategic moves commenced by management in the fourth quarter of 2007 with respect to selling or discontinuing PFH’s loan origination branch operations, including the prospective sale of a significant portion of its branch portfolio during the first quarter of 2008 and the sale or closure of its consumer branch network, management determined that the Popular North America (U.S. operations) would no longer be evaluated as a single reportable segment. As a result, commencing in the fourth quarter of 2007, the Corporation’s Popular North America reportable segment was segregated in two segments: Banco Popular North America, which includes the operations of E-LOAN; and PFH.

As a result of further disruptions in the subprime market, liquidity constraints with respect to financing the operations of PFH and further loan credit deterioration, the Corporation determined to exit this business and allow the existing loan portfolio that cannot be sold due to lack of market or to legal constraints (i.e. for the on-balance sheet securitization not recharacterized) to mature. As indicated in the Events Subsequent to Year-End 2007 section of this MD&A, management opted to account for a substantial portion of PFH’s maturing loans held-in-portfolio at fair value commencing on January 1, 2008. PFH will continue to operate its loan servicing unit.

For a more complete description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 32 to the consolidated financial statements.

The Corporate group had a net income of $44.2 million in 2007, compared with a net loss of $28.8 million in 2006 and a net income of $9.0 million in 2005. In 2007, the Corporation’s holding companies within the Corporate group realized net gains on the sale and valuation adjustment of investment securities, mainly marketable equity securities, approximating $95.5 million, mainly due to a gain on the sale of TELPRI shares in the first quarter of 2007, while in 2006 these gains amounted to $13.9 million.

Highlights on the earnings results for the reportable segments are discussed below.

Banco Popular de Puerto Rico

The Corporation’s core operations in Puerto Rico continued to perform well during 2007 despite a difficult economic environment which presented credit challenges, aggressive competition and an economy experiencing a greater slowdown than in the previous year. As indicated earlier, Banco Popular de Puerto Rico grew its retail banking business by acquiring Citibank’s retail banking operations, which added 17 branches prior to branch closings due to synergies. Also, Popular Securities, a subsidiary within the Banco Popular de Puerto Rico reportable segment, strengthened its brokerage sales force and assets under management by acquiring Smith Barney’s retail brokerage operations in Puerto Rico. Both of these acquisitions took place in the latter part of the fourth quarter of 2007.

Banco Popular de Puerto Rico reportable segment reported net income of $327.3 million in 2007, a decrease of $28.6 million, or 8%, when compared with the previous year. Net income amounted to $355.9 million for 2006 and $398.7 million for 2005. The main factors that contributed to the variance 2007 compared to 2006 included:

•		Higher net interest income by $42.9 million, or 5%, primarily related to the commercial banking business;

•		Higher provision for loan losses by $102.6 million, or 73%, primarily associated with higher net charge-offs mainly in the consumer and commercial loan portfolios due to higher delinquencies resulting from the slowdown in the economy. The provision for loan losses represented 127% of net charge-offs for 2007, compared with 124% in 2006. The net charge-offs to average loans held-in-portfolio for the Banco Popular de Puerto Rico operations was 1.22% for the year ended December 31, 2007, compared with 0.77% in the previous year. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco Popular de Puerto Rico reportable segment was 2.31% at December 31, 2007, compared with 2.09% at December 31, 2006;

•		Higher non-interest income by $53.6 million, or 12%, mainly due to higher other service fees by $42.0 million, primarily in debit and credit card fees and mortgage servicing fees. Also, there was a favorable variance in the caption of gains on sale of loans by $16.4 million because of a $20.1 million loss on the bulk sale of mortgage loans in the third quarter of 2006;

•		Higher operating expenses by $34.1 million, or 5%, primarily associated with higher professional fees, personnel costs, business promotion, other operating taxes and other operating expenses, which include credit card processing and interchange expenses. Despite the 5% increase in operating costs, this reportable segment managed costs through disciplined spending during 2007;

Popular, Inc. | 2007 | Annual Report 31

•

Lower income tax expense by $11.7 million, or 9%, primarily due to lower taxable income in 2007 than in the previous year.

EVERTEC

EVERTEC is the Corporation’s reportable segment dedicated to processing and technology outsourcing services, servicing customers in Puerto Rico, the Caribbean, Central America and the U.S. mainland. EVERTEC provides support internally to the Corporation’s subsidiaries, as well as to third parties. EVERTEC increased transaction volume, revenues and net income during 2007 in spite of a recession in its main market, Puerto Rico, and in spite of increased competition from larger competitors across all regions it serves. During 2007, EVERTEC focused on leveraging its existing product offering to achieve strong revenue growth, enhancing competitiveness of the automated teller machine network, continuously improving quality levels, and continuing to develop its technology infrastructure.

For the year ended December 31, 2007, net income for the reportable segment of EVERTEC totaled $31.3 million, an increase of $5.3 million, or 20%, compared with $26.0 million for 2006. Net income amounted to $24.7 million for 2005. Factors that contributed to the variance in results for 2007 when compared to 2006 included:

	•		Lower net interest loss by $1.1 million, or 57%, primarily due to increased revenues from funds invested in securities;

	•		Higher non-interest income by $12.4 million, or 5%, mostly as a result of higher electronic transactions processing fees related to point of sale and the automated teller machine network, other item processing fees associated with cash depot services and payment processing, and an increase in IT consulting services, among others;

	•		Higher operating expenses by $5.7 million, or 3%, primarily due to higher personnel costs, including impact of merit increases, higher headcount, commissions and medical costs, among other factors, and professional services primarily in programming services. These variances were partially offset by lower equipment expenses due to lower software package expenses and lower depreciation of electronic equipment.

	•		Higher income tax expense by $2.5 million, or 17%, primarily due to higher taxable income in 2007 compared to the previous year.

Banco Popular North America

For the year ended December 31, 2007, the reportable segment of Banco Popular North America, which includes the operations of E-LOAN, had a net loss of $195.4 million, compared to net income of $67.5 million for 2006 and $97.6 million for 2005. E-LOAN’s net loss for the year ended December 31, 2007 amounted to $245.7 million, compared to net losses of $33.0 million in 2006 and $1.6 million in 2005. E-LOAN was acquired by the Corporation in the fourth quarter of 2005.

The main factors that contributed to the variance in results for 2007 as compared to results a year earlier for the Banco Popular North America reportable segment included:

	•		Lower net interest income by $9.4 million, or less than 3%;

	•		Higher provision for loan losses by $49.0 million, or 105%, primarily due to higher net charge-offs in the mortgage and commercial loan portfolios. The provision for loan losses represented 166% of net charge-offs for 2007, compared with 116% of net charge-offs in 2006. The net charge-offs to average loans held-in-portfolio for the Banco Popular North America operations was 0.62% for the year ended December 31, 2007, compared with 0.45% in the previous year. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco Popular North America reportable segment was 1.26% at December 31, 2007, compared with 1.00% at December 31, 2006. The increase in the allowance for loan losses reflects potential losses inherent in the loan portfolio as a result of current economic conditions and deteriorating market trends, primarily in the subprime mortgage loan sector and in the commercial portfolio, evidenced by an increase in non-performing assets. Refer to the Overview of Mortgage Loan Exposure section in the Credit Risk Management and Loan Quality area of this MD&A for further information on the Corporation’s subprime mortgage loan exposure.

	•		Lower non-interest income by $32.6 million, or 15%, mainly due to an unfavorable variance in the caption of gain on sale of loans and valuation adjustments on loans held-for-sale by $25.7 million mainly due to lower loan volume originated and sold by E-LOAN, lower price margins due to market conditions, reduced gains on sale of SBA loans by BPNA due to lower volume, and unfavorable lower of cost or market adjustments on mortgage loans held-for-sale due to less liquidity in the secondary markets. Also, contributing to the unfavorable variance in non-interest income for this reportable segment were lower gains on the sale of real estate properties by $10.4 million. These unfavorable variances were partially offset by higher service charges on deposits by $5.3 million;

	•		Higher operating expenses by $238.7 million, or 53%, mainly due to the $211.8 million impairment losses related

			to E-LOAN’s goodwill and trademark. Also included in the increase for 2007 are the $9.6 million of restructuring charges and $10.5 million in impairment losses on long-lived assets as a result of the E-LOAN restructuring plan. Other increases in personnel costs, net occupancy and equipment expenses were partially offset by lower business promotion expenses; and

	•		Income tax benefit of $29.5 million in 2007, compared to income tax expense of $37.3 million in 2006. The variance is mainly attributed to higher losses in the operations of E-LOAN, as well as lower taxable income at BPNA.

Popular Financial Holdings

For the year ended December 31, 2007, net loss for the reportable segment of Popular Financial Holdings totaled $269.4 million, compared to a net loss of $61.7 million for 2006. Net income amounted to $10.5 million for 2005. The main factors that contributed to this variance in results for 2007 compared to 2006 included:

	•		Lower net interest income by $32.9 million, or 19%, mostly the result of margin compression, including the impact of higher cost of funds, and a reduction in earning assets due to the downsizing of the operation that took effect in 2007;

	•		Higher provision for loan losses by $121.2 million, or 121%, primarily due to higher net charge-offs in the mortgage loan portfolio due to the continued credit problems in the U.S. mainland subprime mortgage market. The provision for loan losses represented 129% of net charge-offs for 2007, compared with 131% of net charge-offs in 2006. The net charge-offs to average loans held-in-portfolio for the Popular Financial Holdings operations was 2.36% for the year ended December 31, 2007, compared with 0.99% for the year ended December 31, 2006. The ratio of allowance for loan losses to loans held-in-portfolio for the Popular Financial Holdings reportable segment was 2.41% at December 31, 2007, compared with 1.46% at December 31, 2006;

	•		Non-interest losses of $179.4 million in 2007, compared to non-interest income of $39.0 million in 2006. The variance was mainly due to the $90.1 million unfavorable impact of PFH’s loan recharacterization transaction, lower gains on the sale of loans resulting because of lower volume of loans originated and sold as a result of the exiting of the wholesale subprime mortgage business during 2007, and lower price margins. Also, the reduction in non-interest income includes the impact of the unfavorable valuation adjustments of PFH’s residual interests of $85.1 million in 2007, compared with $18.7 million in 2006;

	•		Lower operating expenses by $47.0 million, or 23%, mainly due to the impact of the downsizing of PFH’s operations during 2007 and the fact that the year 2006 included $14.2 million in goodwill impairment losses and $7.2 million in impairment losses on long-lived assets. This was in part offset by $16.6 million in restructuring charges and impairment losses on long-lived assets taken in 2007 as part of the PFH Restructuring Plan and PFH Branch Network Restructuring Plan described in the Operating Expenses section of this MD&A; and

	•		Income tax benefit of $150.5 million in 2007, compared to $32.8 million in 2006, mostly due to higher operating losses.

Statement of Condition Analysis

Assets

Refer to the consolidated financial statements included in this Annual Report for the Corporation’s consolidated statements of condition as of December 31, 2007 and 2006. Also, refer to the Statistical Summary 2003-2007 in this MD&A for condensed statements of condition for the past five years. Earning assets at calendar year-end 2007 totaled $40.9 billion, a decrease of 6%, when compared to $43.7 billion at December 31, 2006. This decline was principally due to the strategic decisions made with respect to PFH’s reportable segment, which included exiting the wholesale subprime mortgage origination business since early 2007 and a reduction in loans of approximately $3.2 billion that resulted from the loan recharacterization transaction discussed earlier, offset in part by growth in other loan portfolio categories.

The portfolio of investment securities, including trading and other securities, totaled $10.0 billion at December 31, 2007, compared with $10.6 billion at December 31, 2006, a decrease of 6%. Notes 6 and 7 to the consolidated financial statements provide additional information of the Corporation’s available-for-sale and held-to-maturity investment portfolios. Also, refer to the Market Risk section of this MD&A, which includes a table with the breakdown of the trading portfolio by major types of securities at December 31, 2007. The decline in the Corporation’s investment securities portfolio was mainly associated with the determination of not replacing securities that were maturing, in part because the interest spread was not favorable, and also as part of the Corporation’s strategy to deleverage the balance sheet and reduce lower yielding assets.

A breakdown of the Corporation’s loan portfolio, the principal category of earning assets, is presented in Table G.

The main challenge during 2007 for the Corporation’s commercial business sector was maintaining portfolio growth while curtailing delinquency. Commercial loans increased by $1.1 billion, or 8%, from December 31, 2006 to the same date in 2007, and included growth in commercial mortgage, participations, franchise, SBA and construction loans, among others. Commercial construction loans, which are included as part of commercial

Popular, Inc. | 2007 | Annual Report 33

Table G

Loans Ending Balances (including Loans Held-for-Sale)


	As of December 31,
											Five-Year
(Dollars in thousands)	2007		2006		2005		2004		2003		C.G.R.

Commercial*	$	15,627,163	$	14,536,837	$	12,757,886	$	10,897,747	$	8,571,165		13.96	%
Lease financing		1,164,439		1,226,490		1,308,091		1,164,606		1,053,821		5.60
Mortgage**		7,434,800		11,695,156		12,872,452		12,641,329		9,708,536		(0.09	)
Consumer		5,684,600		5,278,456		4,771,778		4,038,579		3,268,670		12.90

Total	$	29,911,002	$	32,736,939	$	31,710,207	$	28,742,261	$	22,602,192		8.84	%


*		Includes commercial construction.

**		Includes residential construction.

loans in Table G, totaled $1.9 billion at December 31, 2007, an increase of 37%, compared with $1.4 billion at December 31, 2006. The growth in the construction loan sector was focused on experienced developers, small condos, and the social interest market.

The decrease in the lease financing portfolio from December 31, 2006 to the end of 2007 was mostly reflected in the Puerto Rico operations, whose leasing portfolio decreased by approximately $74 million, or 8%, compared to December 31, 2006. As in the prior year, the Corporation’s lease financing subsidiary in Puerto Rico (“the Island”) was impacted by strong competition and slowdown in the Island’s economy. The Banco Popular North America reportable segment also reflected a decline in its lease financing portfolio, including the runoff of underperforming lease financings.

Mortgage loans at December 31, 2007 decreased by $4.3 billion, or 36%, from December 31, 2006. The PFH reportable segment’s mortgage loan portfolio was reduced by $4.5 billion. This decline at PFH was principally the result of the aforementioned strategies, which included exiting the wholesale mortgage loan origination channel and completing the loan recharacterization transaction. The latter strategy of converting on-balance sheet securitizations to sale transactions resulted in the removal of approximately $3.2 billion in mortgage loans from the Corporation’s books. Also, PFH completed one new off-balance sheet securitization transaction in 2007 involving approximately $461 million in unpaid principal balance of mortgage loans. The reduction in mortgage loans by PFH was partially offset by increases in the Banco Popular de Puerto Rico reportable segment. Despite the slowdown in the housing market, Popular Mortgage in Puerto Rico increased its loan production due to successful sales efforts and market share gained from past major competitors. Also, the Banco Popular North America reportable segment was impacted by growth in non-conventional mortgages. Refer to the Overview of Mortgage Loan Exposure section in the Credit Risk Management and Loan Quality area of this MD&A for further information on the Corporation’s mortgage loan exposure.

A breakdown of the Corporation’s consumer loan portfolio at December 31, 2007 and 2006 follows:


(In thousands)	2007		2006		Change			% Change

Personal	$	3,276,675	$	2,457,619	$	819,056			33	%
Credit cards		1,128,137		1,032,546		95,591			9
Auto		1,040,743		1,570,308		(529,565	)		(34	)
Other		239,045		217,983		21,062			10

Total	$	5,684,600	$	5,278,456	$	406,144			8	%

The increase in personal loans from December 31, 2006 to December 31, 2007 was principally attributed to higher volume of home equity lines of credit in the Banco Popular North America operations, particularly from loan originations by E-LOAN. Also, the increase in personal loans was associated to the Citibank acquisition in Puerto Rico, which contributed with over $180 million in personal loans at acquisition date. Credit cards also increased from December 31, 2006 to the same date in 2007, principally in the Banco Popular de Puerto Rico reportable segment, whose credit card portfolio grew 8% from the end of 2006, mostly as a result of higher sales volume, new credit cards launched, effective mailing campaigns that included convenience checks, and volume generated for benefits derived from the loyalty rewards program, among other factors. Banco Popular North America also contributed with a newly originated credit card portfolio of approximately $12 million, as a result of initiating the credit cards issuance business during 2007. Auto loans decreased from the end of 2006 to the same date in 2007 by $530 million, or 34%. There was a decline in the auto loan portfolio of the Banco Popular North America reportable segment by approximately $508 million. BPNA’s auto loan portfolio continues to runoff because of management’s decision to cease auto loan originations through dealer channels. Furthermore, the Corporation completed a sale of over $275 million in auto loans to a third-party buyer in December

2007, which had been originated by E-LOAN. Also contributing to the reduction in the Corporation’s auto loan portfolio was the economic slowdown in the Puerto Rico market, which reduced automobile sales and decreased the size of the overall auto loan market. The “other” category of consumer loans includes marine loans and revolving lines of credit. The increase in this category is principally due to reserve lines of credit by approximately $16 million from the Citibank portfolio acquired. Despite the growth in the consumer lending business, this business in Puerto Rico was negatively impacted by the economic downturn in the Island which has led to a deterioration of credit quality, as evidenced by the increase in consumer loan charge-offs, depicted later in the Credit Risk Management and Loan Quality section of this MD&A.

Servicing assets increased $32 million, or 19%, from December 31, 2006 to the same date in 2007. Refer to Note 22 to the consolidated financial statements for further information on the composition and accounting for servicing assets. The growth in servicing rights was mainly due to purchased mortgage servicing rights in the PFH operations, mortgage servicing rights derived from the off-balance sheet securitization executed by PFH in 2007 and the loan recharacterization transaction, and from sales and securitizations of originated loans by the Puerto Rico operations. Also, the increase was due in part to the adoption of SFAS No. 156 during 2007, pursuant to which the Corporation elected to account for residential mortgage servicing rights at fair value. These favorable impacts were offset in part by reductions in the servicing rights value, as a result of maturity run-off of the serviced portfolio.

The following table provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated statements of condition as of December 31, 2007 and 2006.


(In thousands)	2007		2006		Change

Net deferred tax assets	$	525,369	$	359,433	$	165,936
Bank-owned life insurance program		215,171		206,331		8,840
Prepaid expenses		188,237		168,717		19,520
Securitization advances and related assets		168,599		181,387		(12,788	)
Investments under the equity method		89,870		66,794		23,076
Derivative assets		76,958		55,413		21,545
Others		192,790		408,816		(216,026	)

Total	$	1,456,994	$	1,446,891		($10,103	)

Explanations for the most significant variances in other assets follow:

	•		The decrease in “others” was mainly due to trade receivables of $232 million outstanding at December 31, 2006 for mortgage-backed securities sold prior to year-end, with settlement date in January 2007.

	•		The increase in net deferred tax assets was mostly associated with PFH due to the impact of the loss on the loan recharacterization transaction and on the valuation of PFH’s residual interests since these losses were recognized for tax purposes in a different period causing a timing difference. Also, the increase is due to the net operating loss carryforwards in certain tax jurisdictions and to the reversal of a deferred tax liability due to the impairment of E-LOAN’s trademark. Transactions that were treated as on-balance sheet securitizations for accounting purposes were treated as sales for tax purposes since inception. Refer to Note 27 to the consolidated financial statements for the composition of deferred tax assets as of December 31, 2007, compared to the results at December 31, 2006.

Goodwill and other intangible assets at December 31, 2007 reflected a decline of $75 million, or 10%, when compared to December 31, 2006. This reduction was principally the result of the aforementioned write-down in E-LOAN’s goodwill and trademark for $211.8 million, partially offset by recorded goodwill and core deposit intangibles of $126 million and $21 million, respectively, that are related to the Citibank retail business acquisition and Smith Barney’s retail brokerage operations by the Banco Popular de Puerto Rico reportable segment in late 2007. After recording the estimated impairment charge, the full amount of E-LOAN’s goodwill of $164.4 million was eliminated while the balance in trademark remains at approximately $16.4 million, out of a total of $63.8 million prior to the impairment charge. Refer to Note 12 to the consolidated financial statements for further information on goodwill and the composition of other intangible assets by reportable business segments.

Deposits, Borrowings and Other Liabilities

The composition of the Corporation’s financing to total assets at December 31, 2007 and 2006 was as follows:


					% increase (decrease)			% of total assets
(Dollars in millions)	2007		2006		from 2006 to 2007			2007			2006

Non-interest bearing deposits	$	4,511	$	4,222		6.8	%		10.2	%		8.9	%
Interest-bearing core deposits		15,553		14,923		4.2			35.0			31.5
Other interest-bearing deposits		8,271		5,293		56.3			18.6			11.2
Federal funds and repurchase agreements		5,437		5,762		(5.6	)		12.2			12.2
Other short-term borrowings		1,502		4,034		(62.8	)		3.4			8.5
Notes payable		4,621		8,737		(47.1	)		10.4			18.4
Others		934		813		14.9			2.1			1.7
Stockholders’ equity		3,582		3,620		(1.1	)		8.1			7.6

Popular, Inc. | 2007 | Annual Report 35

Table H

Deposits Ending Balances


	As of December 31,
											Five-Year
(Dollars in thousands)	2007		2006		2005		2004		2003		C.G.R.

Demand deposits*	$	5,115,875	$	4,910,848	$	4,415,972	$	4,173,268	$	3,726,707		8.72	%
Savings, NOW and money market deposits		9,804,605		9,200,732		8,800,047		8,865,831		7,839,291		5.19
Time deposits		13,413,998		10,326,751		9,421,986		7,554,061		6,531,830		15.12

Total	$	28,334,478	$	24,438,331	$	22,638,005	$	20,593,160	$	18,097,828		9.97	%


*		Includes interest and non-interest bearing demand deposits.

The Corporation’s deposits by categories for 2007 and previous years are presented in Table H. Total deposits increased $3.9 billion, or 16%, from the end of 2006 to December 31, 2007. The acquisition of the Citibank retail branches in Puerto Rico in the fourth quarter of 2007 contributed with approximately $1 billion in deposits, principally in time deposits and savings accounts.

Time deposits totaled $13.4 billion at December 31, 2007. When compared to December 31, 2006, this category increased by $3.1 billion, or 30%. Brokered certificates of deposit reflected a significant increase of $2.3 billion. The increase in brokered certificates of deposit is directly related to the Corporation’s decision to substitute short-term borrowings with deposits as a result of continued instability in the global financial and capital markets during the second half of 2007. Refer to the Liquidity Risk section later in this MD&A for further information on the Corporation’s banking subsidiaries and holding companies liquidity position. Also, the increase in time deposits from December 31, 2006 to December 31, 2007 was due to time deposits from the Citibank retail branch acquisition, competitive interest rate campaigns by BPPR focused on certificates of deposit to individuals, growth in IRA deposits and increased volume of time deposits gathered through the E-LOAN Internet platform, among other factors. At December 31, 2007, $791 million in time deposits were gathered through the E-LOAN on-line platform, an increase of $365 million, or 86%, when compared to December 31, 2006.

Savings, NOW and money market deposits increased 7%, when compared to December 31, 2006. This growth was mainly derived from the acquisition of the Citibank branches in Puerto Rico.

Borrowed funds totaled $11.6 billion at December 31, 2007, a decrease of $7 billion, or 38%, compared to December 31, 2006. This decline was principally due to the loan recharacterization transaction discussed earlier, which reduced the balance of securitized debt in the form of bond certificates to investors by approximately $3.1 billion. Also, the Corporation placed greater reliance on deposits. Several strategies were put in place by the Corporation’s banking subsidiaries to mitigate the impact of current market conditions on liquidity risk. Among the strategies implemented was the utilization of unpledged liquid assets to raise financing in the repo markets, the proceeds of which were also used to pay off unsecured borrowings. Furthermore, the reduction in borrowed funds was also impacted by the strategy to deleverage the balance sheet and not reinvest proceeds obtained from maturing securities. Refer to Notes 14 through 18 to the consolidated financial statements for additional information on the Corporation’s borrowings at December 31, 2007 and 2006. Also, refer to the Liquidity Risk section of this MD&A for additional information on the Corporation’s funding sources at December 31, 2007.

Stockholders’ Equity

Total stockholders’ equity at December 31, 2007 and December 31, 2006 was $3.6 billion. The reduction in stockholders’ equity due to the net loss for the year 2007 and to the dividend payouts was partially offset by the net impact of unrealized gains in the valuation of available-for-sale securities at year-end 2007 of $21 million, compared to unrealized losses of $155 million in year-end 2006. Refer to the consolidated statements of condition and of stockholders’ equity included in the accompanying consolidated financial statements for further information on its composition. Also, the disclosures of accumulated other comprehensive income (loss), an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive income.

The Corporation offers a dividend reinvestment and stock purchase plan for its stockholders that allows them to reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of the issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments at prevailing market prices. During 2007, $20.2 million in additional capital was issued under the plan, compared to $16.5 million in 2006.

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. At December

Table I

Capital Adequacy Data


	As of December 31,
(Dollars in thousands)	2007			2006			2005			2004			2003

Risk-based capital:
Tier I capital	$	3,361,132		$	3,727,860		$	3,540,270		$	3,316,009		$	2,834,599
Supplementary (Tier II) capital		417,132			441,591			403,355			389,638			341,840

Total capital	$	3,778,264		$	4,169,451		$	3,943,625		$	3,705,647		$	3,176,439

Risk-weighted assets:
Balance sheet items	$	30,294,418		$	32,519,457		$	29,557,342		$	26,561,212		$	21,384,288
Off-balance sheet items		2,915,345			2,623,264			2,141,922			1,495,948			1,411,402

Total risk-weighted assets	$	33,209,763		$	35,142,721		$	31,699,264		$	28,057,160		$	22,795,690

Ratios:
Tier I capital (minimum required - 4.00%)		10.12	%		10.61	%		11.17	%		11.82	%		12.43	%
Total capital (minimum required - 8.00%)		11.38			11.86			12.44			13.21			13.93
Leverage ratio*		7.33			8.05			7.47			7.78			8.00
Equity to assets		8.20			7.75			7.06			7.28			7.34
Tangible equity to assets		6.64			6.25			5.86			6.59			6.76
Equity to loans		11.79			11.66			11.01			11.55			12.28
Internal capital generation rate		(6.61	)		4.48			10.93			10.82			12.84


*		All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification.

31, 2007 and 2006, BPPR, BPNA and Banco Popular, National Association (“BP, N.A.”) were all well-capitalized. Table I presents the Corporation’s capital adequacy information for the years 2003 to 2007. Note 21 to the consolidated financial statements presents further information on the Corporation’s regulatory capital requirements.

Included within surplus in stockholders’ equity at December 31, 2007 was $374 million corresponding to a statutory reserve fund applicable exclusively to Puerto Rico banking institutions. This statutory reserve fund totaled $346 million at December 31, 2006. 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. During 2007, $28 million were transferred to the statutory reserve. 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’s Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. At December 31, 2007 and 2006, BPPR was in compliance with the statutory reserve requirement. The more relevant capital requirements applicable to the Corporation are the federal banking agencies capital requirements included in Table I.

The average tangible equity amounted to $3.1 billion and $3.0 billion for the years ended December 31, 2007 and 2006, respectively. Total tangible equity was $2.9 billion at December 31, 2007 and $2.8 billion at the end of 2006. The average tangible equity to average tangible assets ratio for 2007 was 6.64%, compared with 6.25% in 2006.

Off-Balance Sheet Financing Entities

The Corporation, through certain subsidiaries of PFH, conducted a program of asset securitizations that involved the transfer of mortgage loans to a special purpose entity depositor, which in turn transferred those mortgage loans to different securitization trusts, thus isolating those loans from the Corporation’s assets. The securitization trusts that constituted “qualified special purpose entities” (“QSPEs”) under the provisions of SFAS No. 140 and are associated with securitizations that qualified for sale accounting under SFAS No. 140 are not consolidated in the Corporation’s financial statements. The investors in these off-balance sheet securitizations have no recourse to the Corporation’s assets or revenues. The Corporation’s creditors have no recourse to any assets or revenues of the special purpose entity depositor, or the securitization trust funds. As of December 31, 2007 and 2006, the Corporation had mortgage loans of approximately $5.4 billion and $2.3 billion, respectively, in securitization transactions that qualified for off-balance sheet treatment. These transactions had liabilities in the form of debt securities payable to investors from the assets inside each securitization trust of approximately $5.1 billion and $2.3 billion at the end of 2007 and 2006, respectively. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of residual interests. Their value is

Popular, Inc. | 2007 | Annual Report 37

subject to credit, prepayment and interest rate risks on the transferred financial assets. The servicing rights and residual interests retained by the Corporation are recorded in the statement of condition as of December 31, 2007 at fair value. Refer to the Significant U.S. Strategic Events and Critical Accounting Policies / Estimates sections in this MD&A for further information.

Risk Management

Risk identification and monitoring are key elements in overall risk management. The Corporation’s primary risk exposures are market, liquidity, credit and operational risks, all of which are discussed in the following sections.

Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments or other assets due to changes in interest rates, currency exchange rates or equity prices. The financial results and capital levels of Popular, Inc. are constantly exposed to market risk. It is a primary responsibility of the Corporation’s Board of Directors (“the Board”) and management to ensure that the level of market risk assumed throughout all of the subsidiaries of Popular as well as on a consolidated basis, is within policy guidelines approved by the Board. The Board delegates the monitoring of this risk to the Board’s Risk Management Committee, and its management to the Market Risk Committee (“the Committee”) of Popular, Inc., which is composed of certain executive officers, and senior officers from the business, treasury and finance areas. The Committee’s primary goal is to ensure that the market risk assumed by the Corporation remains within the parameters of the Board’s policies.

Interest Rate Risk

Interest rate risk represents the exposure of the Corporation’s profitability or market value to changes in interest rates. Management considers interest rate risk (IRR) a predominant market risk in terms of its potential impact on earnings.

The Corporation is subject to various categories of interest rate risk, including:

	•		Repricing or Term Structure Risk — this risk arises due to mismatches in the timing of rate changes and cash flows from the Corporation’s assets and liabilities. For example, if assets reprice or mature at a faster pace than liabilities and interest rates are generally declining, earnings could initially decline.

	•		Basis Risk — this risk involves changes in the spread relationship of the different rates that impact the Corporation’s balance sheet. This type of risk is present when assets and liabilities have similar repricing frequencies but are tied to different market interest rate indexes.

	•		Yield Curve Risk — short-term and long-term market interest rates may change by different amounts; for example, the shape of the yield curve may affect new loan yields and funding costs differently.

	•		Options Risk — changes in interest rates may shorten or lengthen the maturities of assets and liabilities. For example, prepayments, which tend to increase when market rates decline, may accelerate maturities for mortgage related products. In addition, call options in the Corporation’s investment portfolios may be exercised in a declining rate. Conversely, the opposite would occur in a rising interest rate scenario.

In addition to the risks detailed above, interest rates may have an indirect impact on loan demand, credit losses, loan origination volume, the value of the Corporation’s investment securities holdings, including residual interests, gains and losses on sales of securities and loans, the value of mortgage servicing rights, and other sources of earnings.

In limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives.

The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest income under varying interest rate environments.

The Committee implements the market risk policies approved by the Board as well as the risk management strategies reviewed and adopted in Committee meetings. The Committee measures and monitors the level of short and long-term IRR assumed by the Corporation and its subsidiaries. It uses simulation analysis and static gap estimates for measuring short-term IRR. Duration analysis is used to quantify the level of long-term IRR assumed, and focuses on the estimated economic value of the Corporation, that is, the difference between the estimated market value of financial assets less the estimated value of financial liabilities. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage-related products, estimates on the duration of the Corporation’s deposits and interest rate scenarios.

Static gap analysis measures the volume of assets and liabilities maturing or repricing at a future point in time. The repricing volumes typically include adjustments for anticipated future asset prepayments and for differences in sensitivity to market rates. The volume of assets and liabilities repricing during future periods, particularly within one year, is used as one short-term indicator of IRR. Table K presents the static gap estimate for the

Table J

Common Stock Performance


							Cash		Book
							Dividends		Value		Dividend						Price/			Market/
	Market Price						Declared		Per		Payout			Dividend			Earnings			Book
	High			Low			Per Share		Share		Ratio			Yield *			Ratio			Ratio

2007									$	12.12		(233.89	%)		4.38	%		(39.26x	)		87.46	%
4th quarter	$	12	¹/₂	$	8	²/₃	$	0.16
3rd quarter		16	¹/₆		11	³/₈		0.16
2nd quarter		17	¹/₂		15	⁵/₆		0.16
1st quarter		19			15	⁵/₆		0.16

2006										12.32		51.02			3.26			14.48			145.70
4th quarter	$	19	²/₃	$	17	²/₉	$	0.16
3rd quarter		20	¹/₈		17	²/₅		0.16
2nd quarter		22			18	¹/₂		0.16
1st quarter		21	¹/₅		19	¹/₂		0.16

2005										11.82		32.31			2.60			10.68			178.93
4th quarter	$	24		$	20	¹/₉	$	0.16
3rd quarter		27	¹/₂		24	²/₉		0.16
2nd quarter		25	²/₃		23			0.16
1st quarter		28			23	⁴/₅		0.16

2004										10.95		32.85			2.50			16.11			263.29
4th quarter	$	28	⁷/₈	$	24	¹/₂	$	0.16
3rd quarter		26	¹/₃		21	¹/₂		0.16
2nd quarter		22			20			0.16
1st quarter		24			21	¹/₂		0.14

2003										9.66		27.05			2.45			12.93			232.14
4th quarter	$	23	⁷/₉	$	19	⁸/₉	$	0.14
3rd quarter		20	³/₅		18	¹/₃		0.13
2nd quarter		20	²/₅		17			0.14
1st quarter		17	¹/₂		16			0.10


*		Based on the average high and low market price for the four quarters. Note: All per share data has been adjusted to reflect the two-for-one stock split effected in the form of a dividend on July 8, 2004.

Corporation as of December 31, 2007. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures. They do not incorporate possible action that could be taken to manage the Corporation’s IRR.

The interest rate sensitivity gap is defined as the difference between earning assets and interest bearing liabilities maturing or repricing within a given time period. At December 31, 2007, the Corporation’s one-year cumulative positive gap was $3.3 billion or 8.12% of total earning assets.

Net interest income simulation analysis performed by legal entity and on a consolidated basis is another tool used by the Corporation in estimating the potential change in future earnings resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to estimate how sensitive future net interest income is to changes in interest rates. The asset and liability management group also performs validation procedures on various assumptions used as part of the sensitivity analysis.

Popular, Inc. | 2007 | Annual Report 39

Table K

Interest Rate Sensitivity


	As of December 31, 2007
	By Repricing Dates
							After			After			After
				Within			three months			six months			nine months						Non-interest
	0-30			31-90			but within			but within			but within			After one			bearing
(Dollars in thousands)	days			days			six months			nine months			one year			year			funds		Total

Assets:
Money market investments	$	871,747		$	134,072		$	399		$	394					$	100				$	1,006,712
Investment and trading securities		1,837,550			867,905			204,831			499,261		$	998,672			5,575,921					9,984,140
Loans		10,700,337			2,473,069			1,447,674			1,495,593			1,017,525			12,776,804					29,911,002
Other assets																			$	3,509,583		3,509,583

Total		13,409,634			3,475,046			1,652,904			1,995,248			2,016,197			18,352,825			3,509,583		44,411,437

Liabilities and stockholders’ equity:
Savings, NOW, money market and other interest bearing demand accounts		2,054,835			13,595												8,341,261					10,409,691
Other time deposits		2,069,485			3,109,235			2,450,131			1,231,682			1,027,080			3,526,385					13,413,998
Federal funds purchased and assets sold under agreements to repurchase		2,704,165			1,306,568												1,426,532					5,437,265
Other short-term borrowings		1,201,067			120,100			180,812														1,501,979
Notes payable		736,410			85,827			549,453			43,060			605,763			2,600,839					4,621,352
Non-interest bearing deposits																				4,510,789		4,510,789
Other non-interest bearing liabilities and minority interest																				934,481		934,481
Stockholders’ equity																				3,581,882		3,581,882

Total	$	8,765,962		$	4,635,325		$	3,180,396		$	1,274,742		$	1,632,843		$	15,895,017		$	9,027,152	$	44,411,437

Interest rate swaps		385,315			189,925			(105,641	)		(4,728	)		(204,401	)		(260,470	)
Interest rate sensitive gap		5,028,987			(970,354	)		(1,633,133	)		715,778			178,953			2,197,338
Cumulative interest rate sensitive gap		5,028,987			4,058,633			2,425,500			3,141,278			3,320,231			5,517,569
Cumulative interest rate sensitive gap to earning assets		12.30	%		9.92	%		5.93	%		7.68	%		8.12	%		13.49	%

Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future.

Based on the results of the simulation analyses as of December 31, 2007, the Corporation’s net interest income for the next twelve months is estimated to increase by $50.4 million in a hypothetical 200 basis points parallel rising rate scenario, and the change for the same period, utilizing a similar size declining rate scenario, is an estimated decrease of $44.3 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period from the prevailing rates at December 31, 2007.

The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third party to repay debt obligations prior to maturity. At December 31, 2007 and 2006, net discount associated with loans acquired represented less than 1% of the total loan portfolio, while net premiums associated with portfolios of AFS and HTM securities approximated 2% of these investment securities portfolios. Prepayment risk also could have a significant impact on the duration of mortgage-backed securities and collateralized mortgage obligations, since prepayments could shorten the weighted average life of these portfolios. Table L, which presents the maturity distribution of earning assets, takes into consideration prepayment assumptions, as determined by management, based on the expected interest rate scenario.

Duration analysis measures longer-term IRR, in particular the duration of the market value of equity. It expresses in general terms the sensitivity of the market value of equity to changes in interest rates. The estimated market value of equity is obtained from the

market value of the cash flows from the Corporation’s financial assets and liabilities, which are primarily payments of interest and repayments of principal. Thus, the market value of equity incorporates all expected future cash flows from net interest income as well as principal repayments, whereas other measures of IRR focus primarily on short-term net interest income.

The duration of the market value of portfolio equity (“MVPE”) is a measure of its riskiness. The MVPE is equal to the estimated market value of the Corporation’s assets minus the estimated market value of the liabilities. The duration of MVPE is equal to the product of the market value of assets times its duration, minus the product of the market value of liabilities times its duration, divided by the market value of equity. In general, the longer the duration of MVPE, the more sensitive is its market value to changes in interest rates.

Duration measures the expected length of a financial asset or liability. In particular, it equals the weighted average maturity of the present value of all the cash flows of a financial asset or liability where the weights are equal to the present value of each cash flow. The present value of cash flows occurring in the future is the estimated market value as of a certain date. The sensitivity of the market value of a financial asset or liability to changes in interest rates is primarily a function of its duration. In general terms, the longer the duration of an asset or liability, the greater is the sensitivity of its market value to interest rate changes. Since duration measures the term of a financial asset or liability, it is usually expressed in terms of years or months.

Duration of equity is evaluated by management on a monthly basis. The duration of equity at December 31, 2007 was in compliance with the Corporation’s established MVPE policy limits in a most likely interest rate scenario.

Trading

The Corporation’s trading activities are another source of market risk and are subject to policies and risk guidelines approved by the Board of Directors to manage such risks. Most of the Corporation’s trading activities are limited to mortgage banking activities and the market-making activities of the Corporation’s broker-dealer business. In anticipation of customer demand, the Corporation carries an inventory of capital market instruments and maintains market liquidity by quoting bid and offer prices to and trading with other market makers and clients. Positions are also taken in interest rate sensitive instruments, based on expectations of future market conditions. These activities constitute the proprietary trading business and are conducted by the Corporation to provide customers with securities inventory and liquidity. Also, as indicated in the Critical Accounting Policies / Estimates in this MD&A, the Corporation had $40 million in residual interests derived from PFH’s off-balance sheet securitization transactions classified as trading securities.

Trading instruments are recognized at market value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period income. Further information on the Corporation’s risk management and trading activities is included in Note 30 to the consolidated financial statements.

In the opinion of management, the size and composition of the trading portfolio does not represent a potentially significant source of market risk for the Corporation.

At December 31, 2007, the trading portfolio of the Corporation amounted to $768 million and represented 2% of total assets, compared with $382 million and 1% a year earlier. Mortgage-backed securities represented 90% of the trading portfolio at the end of 2007, compared with 55% in 2006. The mortgage-backed securities are investment grade securities, all of which are rated AAA by at least one of the three major rating agencies at December 31, 2007. A significant portion of the trading portfolio is hedged against market risk by positions that offset the risk assumed. This portfolio was composed of the following at December 31, 2007:


			Weighted
(Dollars in thousands)	Amount		Average Yield*

Mortgage-backed securities	$	687,754		6.32	%
Commercial paper		6,331		5.69
U.S. Treasury and agencies		273		3.13
Puerto Rico and U.S. Government obligations		14,097		5.63
Interest-only strips		42,312		14.92
Other		17,188		4.47

	$	767,955		6.73	%


*		Not on a taxable equivalent basis.

At December 31, 2007, the trading portfolio of the Corporation had an estimated duration of 4.0 years and a one-month value at risk (VAR) of approximately $3.6 million, assuming a confidence level of 95%. VAR is a key measure of market risk for the Corporation. VAR represents the maximum amount that the Corporation can expect to lose with 95% confidence within one month in the course of its risk taking activities. Its purpose is to describe the amount of capital needed to absorb potential losses from adverse market volatility. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates.

The Corporation enters into forward contracts to sell mortgage-backed securities with terms lasting less than a month which are accounted for as trading derivatives. These contracts are recognized at fair value with changes directly reported in current period income. Refer to the Derivatives section that follows in this MD&A for additional information. At December 31, 2007, the fair value of these forward contracts was not significant.

Popular, Inc. | 2007 | Annual Report 41

The Corporation does not participate in any trading activities involving commodity contracts.

Derivatives

Derivatives are used by the Corporation to protect against changes in net interest income and cash flows as part of its overall interest rate risk management strategy. Derivative instruments that the Corporation may use include, among others, interest rate swaps and caps, index options, and forward contracts. The Corporation does not use highly leveraged derivative instruments in its interest rate risk management strategy. The Corporation also enters into foreign exchange contracts and interest rate swaps and caps for the benefit of commercial customers. The Corporation economically hedges its exposure related to these commercial customer derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies. Refer to Note 30 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities.

The Corporation’s derivatives activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The net effect on the market value of potential changes in interest rates of derivatives and other financial instruments is analyzed. The effectiveness of these hedges is monitored to ascertain that the Corporation is reducing market risk as expected. Derivatives transactions are generally executed with instruments with a high correlation to the hedged asset or liability. The underlying index or instrument of the derivatives used by the Corporation is selected based on its similarity to the asset or liability being hedged. As a result of interest rate fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Management will assess if circumstances warrant liquidating or replacing the derivatives position in the hypothetical event that high correlation is reduced. Based on the Corporation’s derivative instruments outstanding at December 31, 2007, it is not anticipated that such a scenario would have a material impact on the Corporation’s financial condition or results of operations.

Certain derivative contracts also present credit risk because the counterparties may not meet the terms of the contract. If a counterparty fails to perform, the Corporation’s credit risk is equal to the net fair value of the derivative contract. The Corporation minimizes credit risk through approvals, limits and monitoring procedures. The Corporation deals exclusively with counterparties that have high quality credit ratings. Further, as applicable under the terms of the master arrangements, the Corporation may obtain collateral, where appropriate, to reduce risk. The Corporation has not incurred losses from counterparty nonperformance on derivatives. Credit risk related to derivatives is not considered significant at December 31, 2007.

Cash Flow Hedges

In a cash flow hedging strategy, the Corporation manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives linked to hedged assets and liabilities. The notional amount of derivatives designated as cash flow hedges as of December 31, 2007 amounted to $343 million. The cash flow hedges outstanding related to forward contracts or “to be announced” (“TBA”) mortgage-backed securities that are sold and bought for future settlement to hedge the sale of mortgage-backed securities and loans prior to securitization, had a notional amount of $143 million at December 31, 2007. The seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. These securities are hedging a forecasted transaction and thus qualify for cash flow hedge accounting.

In conjunction with the issuance of medium-term notes, the Corporation entered into interest rate swaps to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to higher interest rates. At December 31, 2007, these contracts had a notional amount of $200 million. Refer to Note 30 to the consolidated financial statements for additional quantitative information on these derivative contracts.

Fair Value Hedges

The Corporation did not have any outstanding derivatives designated as fair value hedges at December 31, 2007.

Trading and Non-Hedging Derivative Activities

The Corporation takes derivatives positions based on market expectations or to benefit from price differentials between financial instruments and markets. However, these derivatives instruments are mostly utilized to economically hedge a related asset or liability. Also, to a lesser extent, the Corporation may also enter into various derivatives to provide these types of products to customers. These types of free-standing derivatives are carried at fair value with changes in fair value recorded as part of the results of operations for the period.

Following is a description of the most significant of the Corporation’s derivative activities that do not qualify for hedge accounting as defined in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (as amended). Refer to Note 30 to the consolidated financial statements for additional

quantitative and qualitative information on these derivative instruments.

During 2006 and most of 2007, the Corporation had interest rate caps in conjunction with a series of securitizations of mortgage loans in order to limit the interest rate payable to the security holders. These contracts were designated as non-hedging derivatives and were marked-to-market, thus impacting earnings. However, at the end of 2007, these caps were no longer required to be consolidated by the Corporation as a result of the recharacterization transaction described in the Significant U.S. Strategic Events section of this MD&A since they pertained to the bond certificates issued by the trust. During 2007, the Corporation recognized an increase in interest expense of $3.1 million due to unfavorable changes in fair value associated with interest rate caps, compared to $8.2 million in additional interest expense for 2006.

At December 31, 2007, the Corporation also had outstanding $2.0 billion in notional amount of interest rate swap agreements with a negative fair value (liability) of $4.0 million, which were not designated as accounting hedges, some of which had offsetting positions. The agreements seek various strategies, including among others:

	•		utilizing the instruments in the Corporation’s capacity as an intermediary on behalf of its customers;

	•		economically hedging the cost of short-term borrowings;

	•		economically hedging the payments on the bond certificates offered as part of an on-balance sheet securitization;

	•		economically converting to a fixed-rate the cost of funding a portion of the auto loans held-in-portfolio; and

	•		economically hedging the changes in fair value of loans acquired and originated prior to securitization.

For the year ended December 31, 2007, the impact of the mark-to-market of interest rate swaps not designated as accounting hedges was a net decrease in earnings of approximately $11.6 million, primarily in the interest expense category of the statement of operations, compared with an earnings reduction of approximately $1.8 million in 2006 mainly in the trading profit (loss) category of the income statement. Some of the strategies for which the derivatives held by the Corporation were utilized are not expected to be employed by the Corporation in the near term or are not expected to have a significant impact during 2008. The Corporation cancelled all swaps related to the auto loans because a substantial amount of that loan portfolio was sold in December 2007. Additionally, the Corporation is no longer entering into swaps to economically hedge changes in the fair value of loans prior to securitization because that strategy was related to the operations of PFH that were exited in 2007. The Corporation has $200 million remaining in swaps that are economically hedging the cost of short-term borrowing. These swaps will mature in December 2008. Additionally, at December 31, 2007, the Corporation continued to hold an interest swap with a notional amount of $185 million that is associated with hedging the payments of bond certificates offered as part of one on-balance sheet securitization that remained outstanding at year-end 2007 because it did not qualify for recharacterization as a result of the existence of the derivative instrument. The Corporation will account for the related bond certificate at fair value upon adoption of SFAS No. 159 in 2008.

The Corporation also enters into interest rate lock commitments (“IRLCs”) in connection with one of its subsidiary’s mortgage banking activities to fund mortgage loans at interest rates previously agreed (locked) by both the Corporation with the customer for specified periods of time. When the borrower locks its interest rate, the Corporation effectively extends a put option to the customer, whereby the customer is not obligated to enter into the loan agreement but the Corporation must honor the interest rate for the specified time period. The Corporation is exposed to interest rate risk during the period of the IRLC through the sale of the underlying loan due to changes in interest rates. These IRLCs are recognized at fair value with changes in fair value recorded in the consolidated statement of operations. Outstanding IRLCs expose the Corporation to the risk that the price of the loans associated with the commitments might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. To protect against this risk, the Corporation utilizes forward loan sales commitments to economically hedge the risk of potential changes in the value of the loans that would result from the commitments. The Corporation expects that the changes in the fair value of these derivative instruments will offset changes in the fair value of the IRLCs. At December 31, 2007, the Corporation had outstanding IRLCs with a notional amount of $149 million and a negative fair value (liability) of $128 thousand.

Additionally, at December 31, 2007, the Corporation had forward contracts with a notional amount of $693 million and a negative fair value (liability) of $3.2 million not designated as accounting hedges. These forward contracts are considered derivatives under SFAS No. 133 and are recorded at fair value. Subsequent changes in the value of these forward contracts are recorded in the statement of operations. These forward contracts are principally used to economically hedge the changes in fair value of mortgage loans held-for-sale and mortgage pipeline through both mandatory and best efforts forward sale agreements. These forward contracts are entered into in order to optimize the gain on sales of loans and / or mortgage-backed securities. For the year ended December 31, 2007, the impact of the mark-to-market of the forward contracts not designated as accounting hedges was a reduction to earnings of $11.2 million, which was included in the categories of trading account profit and gain on

Popular, Inc. | 2007 | Annual Report 43

sale of loans in the consolidated statement of operations. In 2006, the unfavorable impact to earnings was $1.9 million.

Furthermore, the Corporation has over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 or to certain other equity securities or commodity indexes. The Corporation, through its Puerto Rico banking subsidiary, BPPR, offers certificates of deposit with returns linked to these indexes to its retail customers, principally in connection with IRA accounts, and certificates of deposit sold through its broker-dealer subsidiary. At December 31, 2007, these deposits amounted to $187 million, or less than 1% of the Corporation’s total deposits. In these certificates, the customer’s principal is guaranteed by BPPR and insured by the FDIC to the maximum extent permitted by law. The instruments pay a return based on the increase of these indexes, as applicable, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested but allows the customer the potential to earn a return based on the performance of the indexes.

The risk of issuing certificates of deposit with returns tied to the applicable indexes is hedged by BPPR. BPPR purchases index options from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposit issued. By hedging the risk in this manner, the effective cost of the deposits raised by this product is fixed. The contracts have a maturity and an index equal to the terms of the pool of client’s deposits they are economically hedging.

The purchased option contracts are initially accounted for at cost (i.e., amount of premium paid) and recorded as a derivative asset. The derivative asset is marked-to-market on a monthly basis with changes in fair value charged to earnings. The deposits are hybrid instruments containing embedded options that must be bifurcated in accordance with SFAS No. 133. The initial value of the embedded option (component of the deposit contract that pays a return based on changes in the applicable indexes) is bifurcated from the related certificate of deposit and is initially recorded as a derivative liability and a corresponding discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and included as part of interest expense while the bifurcated option is marked-to-market with changes in fair value charged to earnings. The purchased option contracts are marked-to-market on a quarterly basis.

The purchased index options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify for hedge accounting in accordance with the provisions of SFAS No. 133 and therefore cannot be designated as accounting hedges. At December 31, 2007, the notional amount of the index options on deposits approximated $211 million with a fair value of $46 million (asset) while the embedded options had a notional value of $187 million with a fair value of $44 million (liability).

Refer to Note 30 to the consolidated financial statements for a description of other non-hedging derivative activities utilized by the Corporation during 2007 and 2006.

Foreign Exchange

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly-inflationary environments in which the effects are included in other operating income in the consolidated statements of operations.

During the year ended December 31, 2006, approximately $0.8 million in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive loss. In 2007, the Corporation ceased to consider the Dominican Republic as a “highly inflationary economy” and as such, the foreign currency translation adjustment was reported as part of other comprehensive loss. Refer to the consolidated statement of comprehensive income in the financial statements for related amounts corresponding to the year 2007.

At December 31, 2007, the Corporation had approximately $35 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, compared to unfavorable adjustments of $37 million at December 31, 2006 and $36 million at December 31, 2005.

Liquidity Risk

For a financial institution, liquidity risk may arise whenever the institution cannot generate enough cash from either assets or liabilities to meet its obligations when they become due, without incurring unacceptable losses. Cash requirements for a financial institution are primarily made up of deposit withdrawals, contractual loan funding, the repayment of borrowings as they mature and the ability to fund new and existing investments as opportunities arise. An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. An institution is also exposed to liquidity risk if markets on

which it depends are subject to loss of liquidity. The objective of effective liquidity management is to ensure that the Corporation remains sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal operating conditions and under unpredictable circumstances of industry or market stress.

To achieve this objective, the Board of Directors, through the Risk Management Committee, is responsible for approving policies regarding liquidity risk management as well as approving operating and contingency procedures, and supervising their implementation. Liquidity is managed at the level of the holding companies that own the banking and non-banking subsidiaries. Also, it is managed at the level of the banking and non-banking subsidiaries. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Risk Management Committee and for monitoring the liquidity position on an ongoing basis.

The Corporation has established policies and procedures to assist it in remaining sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal operating conditions and unsettled market environments.

Liquidity, Funding and Capital Resources

The U.S. credit markets have been marked by unprecedented instability and disruption since the beginning of the third quarter of 2007, making most funding activities much more challenging for financial institutions. Credit spreads have widened significantly and rapidly, as many investors allocated their funds to only the highest-quality financial assets such as U.S. government securities. The result of these actions by market participants made it more difficult for corporate borrowers to raise financing in the credit markets and reduced the value of most financial assets except the highest-quality obligations.

Several sectors have been significantly impacted, including the money markets, the corporate debt market and more recently, the municipal securities and student loan markets. A primary catalyst of the market disruptions has been an abrupt shift by investors away from non-government securities into U.S. Government obligations, and the unwillingness to assume many types of risk.

The Corporation has historically financed a portion of its business in the money and corporate bond markets, both of which have been affected by financial market developments since the beginning of the third quarter of 2007. As it became more challenging to raise financing in the capital markets, the Corporation’s management took actions to reduce the use of borrowings to finance its businesses and thus ensure access to stable sources of liquidity. These actions, which are explained below, included, for example, replacing short-term unsecured borrowings with deposits and increasing secured lines of credit.

The Corporation’s liquidity position is closely monitored on an ongoing basis. Management believes that its current sources of liquidity are adequate to meet the funding needs in the normal course of business. Sources of liquidity include both those available to the banking affiliates and to a lesser extent, those expected to be available with third party providers. The former include access to stable base of core deposits and secured sources of credit. The latter include credit lines and anticipated debt offerings in the capital markets. In addition to these, asset sales can be a source of liquidity to the Corporation. Even if some of these alternatives may not be available temporarily, it is expected that in the normal course of business, our funding sources are adequate.

The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. A more detailed description of the Corporation’s borrowings and available lines of credit, including its terms, is included in Notes 14 through 18 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

Banking Subsidiaries

Primary sources of funding for the Corporation’s banking subsidiaries (BPPR, BPNA and BP,N.A., or “the banking subsidiaries”) include retail and commercial deposits, purchased funds, institutional borrowings, and to a lesser extent, loan sales. The principal uses of funds for the banking subsidiaries include loan and investment portfolio growth, repayment of obligations as they become due, dividend payments to the holding company, and operational needs. In addition, the Corporation’s banking subsidiaries maintain borrowing facilities with the Federal Home Loan Banks (“FHLB”) and at the discount window of the Federal Reserve Bank of New York (“FED”), and have a considerable amount of collateral that can be used to raise funds under these facilities. Borrowings from the FHLB or the FED discount window require the Corporation to post securities or whole loans as collateral. The banking subsidiaries must maintain their FHLB memberships to continue accessing this source of funding.

To mitigate exposure to funding risk for the banking subsidiaries in the current environment, concrete steps have been taken by management to reduce the need to access the money markets for financing, including relying more on deposits than borrowings.

Deposits

Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to

Popular, Inc. | 2007 | Annual Report 45

changes in market rates. Core deposits are generated from a large base of consumer, corporate and institutional customers.

Total deposits at the Corporation increased from $24.4 billion at December 31, 2006 to $28.3 billion at December 31, 2007, an increase of $3.9 billion or 16%. As indicated previously in this MD&A, the growth in deposits was impacted by the acquisition of the Citibank retail branches in Puerto Rico and by measures taken in the fourth quarter of 2007 to raise brokered certificates of deposit in the U.S. national CD market.

Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. As indicated in the glossary, for purposes of defining core deposits, the Corporation excludes brokered certificates of deposits with denominations under $100,000.

Core deposits totaled $20.1 billion, or 71% of total deposits, at December 31, 2007, compared to $19.1 billion and 78% at December 31, 2006. Core deposits financed 49% of the Corporation’s earning assets at December 31, 2007 compared to 44% at December 31, 2006.

Certificates of deposit with denominations of $100,000 and over at December 31, 2007 totaled $5.3 billion, or 19% of total deposits. Their distribution by maturity was as follows:


(In thousands)

3 months or less	$	2,839,025
3 to 6 months		859,462
6 to 12 months		664,980
Over 12 months		914,223

	$	5,277,690

The Corporation had $3.1 billion in brokered certificates of deposit at December 31, 2007, which represented 11% of its total deposits, compared to $866 million and 4% at December 31, 2006. Approximately 2% of the brokered certificates of deposit outstanding at December 31, 2007 are callable, but only at the option of the Corporation. Brokered certificates of deposit, which are typically sold through an intermediary to small retail investors, provide access to longer-term funds that are available in the market area and provide the ability to raise additional funds without pressuring retail deposit pricing. In the event that any of the Corporation’s banking subsidiaries fall under the regulatory capital ratios of a well-capitalized institution, that banking subsidiary faces the risk of not being able to raise brokered deposits. Each of the Corporation’s banking subsidiaries were considered well-capitalized at December 31, 2007. One of the strategies followed by management in response to the unprecedented market disruptions described above, was the utilization of brokered certificates of deposit to replace uncommitted lines of credit.

Average deposits for the year ended December 31, 2007 represented 58% of average earning assets, compared with 52% and 51% for the years ended December 31, 2006 and 2005, respectively. Table M summarizes average deposits for the past five years.

The Corporation’s ability to compete successfully in the marketplace for deposits depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results and credit ratings (by nationally recognized credit rating agencies). Although a downgrade in the credit rating of the Corporation may impact its ability to raise deposits or the rate it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured and this is expected to mitigate the effect of a downgrade in credit ratings.

Borrowings

Liquidity on the liability side is also generated through the ability to obtain wholesale funding through a variety of sources, including advances from FHLB, federal funds purchased, repurchase agreements whereby investment securities and loans are pledged as collateral, and advances under lines of credit with correspondent banks, among other sources.

Borrowings at the banking subsidiaries, excluding intercompany balances between the three entities, amounted to $6.2 billion at December 31, 2007, compared with $8.1 billion at December 31, 2006.

The use of borrowings was decreased substantially at the banking subsidiaries during 2007. Management decided to eliminate the use of unsecured short-term borrowings, primarily by raising deposits. Another strategy implemented by management during the second half of 2007 included the utilization of unpledged liquid assets to raise financing in the repo markets, the proceeds of which were also used to pay off unsecured borrowings. Short-term unsecured borrowings at the banking subsidiaries excluding intercompany balances between the three entities were reduced from $3.8 billion at December 31, 2006 to $626 million at December 31, 2007, which represents a decrease of $3.2 billion or 84%. Outstanding repurchase agreements at the banking subsidiaries, also excluding the intercompany balances between the three entities, were $3.8 billion at December 31, 2007, an increase of $384 million or 11%, when compared to December 31, 2006.

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB at competitive prices. At December 31, 2007, the banking subsidiaries had short-term and long-term credit facilities authorized with the FHLB aggregating $2.6 billion based on assets pledged with the FHLB at that date. Outstanding borrowings under these credit facilities totaled $1.7 billion at December 31, 2007, compared with $781 million at year-end

2006. Such advances are collateralized by securities and mortgage loans and do not have restrictive covenants. Refer to Note 17 to the consolidated financial statements for additional information.

At December 31, 2007, the banking subsidiaries had a borrowing capacity at the FED discount window of approximately $3.0 billion, which remained unused, compared with $2.9 billion at December 31, 2006. This facility is a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under this line is dependent upon the balance of loans and securities pledged as collateral.

Bank Holding Companies

The principal sources of funding for the holding companies have included dividends received from its banking and non-banking subsidiaries and proceeds from the issuance of medium-term notes, commercial paper, junior subordinated debentures and equity. Banking laws place certain restrictions on the amount of dividends a bank may make to its parent company. Such restrictions have not had, and are not expected to have, any material effect on the Corporation’s ability to meet its cash obligations. The principal uses of these funds include the repayment of maturing debt, dividend payments to shareholders and subsidiary funding through capital or debt.

The Corporation’s bank holding companies (“BHCs”, Popular, Inc., Popular North America and Popular International Bank, Inc.) have borrowed in the money markets and the corporate debt market primarily to finance their non-banking subsidiaries. The recent restructuring and asset sales related to the Corporation’s U.S. non-banking business will substantially reduce the BHC’s need for capital markets borrowings in the future. However, it may pursue such transactions if market conditions are sufficiently favorable, to sell assets or refund maturing debt.

Current conditions have made market access more uncertain. As an alternative to capital markets financing, the Corporation worked on several initiatives to ensure that adequate funding sources are available, notwithstanding potential market conditions.

At December 31, 2007, the BHCs had borrowings (excluding intercompany balances) maturing as indicated in the table below:


(In thousands)

2008	$	1,736,802
2009		914,843
2010		2,000
2011		1,000
2012 and thereafter		1,123,305

	$	3,777,950

The BHCs renewed a revolving credit agreement in October 2007. This facility was used as backup for the Corporation’s commercial paper program, which was a source of short-term funding. Due to adverse market conditions, the size of the facility was reduced from $555 million at December 31, 2006 to $235 million in October 2007. In December 2007, the entire balance of commercial paper outstanding backed-up by this facility was repaid and the revolving credit facility was terminated.

During the fourth quarter of 2007, the Corporation successfully completed a capital markets-based financing and issued $275 million of its 6.85% senior notes maturing in December 2012. These funds were used to repay short-term borrowings. Also, the Corporation successfully negotiated a committed credit facility with a leading global banking institution, whereby the Corporation can borrow up to $500 million secured by PFH loans eligible per terms under the credit line agreement. This credit line is intended to serve as a contingent source of readily-available liquidity, and matures in November 2008.

The BHCs have additional sources of liquidity available, in the form of credit facilities available from affiliate banking subsidiaries and third party providers, as well as dividends that can be paid by the subsidiaries and assets that could be sold or financed.

Non-banking subsidiaries

The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, borrowed funds from the holding companies or their direct parent companies, wholesale funding and asset securitizations, loan sales repurchase agreements and warehousing lines of credit. The principal uses of funds for the non-banking subsidiaries include loan portfolio growth, repayment of maturing debt and operational needs.

The Corporation, as a result of previously announced U.S. restructuring initiatives and expected asset sales, has exited its PFH non-banking lending businesses. Consequently, what will remain is primarily a discontinued business line, principally with a portfolio of mortgage and consumer loans which is running off. The financing required for this remaining business is expected to be minimal.

Any operating cash needs that may be required by the discontinued business are expected to be provided by funding from affiliates. Additional sources of liquidity can be provided by asset sales and secured financings.

The Corporation, acting as servicer in certain securitization transactions, is required under certain servicing agreements to advance its own funds to meet contractual remittance requirements for investors, process foreclosures and pay property taxes and insurance premiums. Funds are also advanced to maintain and market real estate properties on behalf of investors. As the servicer, the Corporation is required to advance funds only to the extent that it believes the advances are recoverable. The advances have the highest standing in terms of repayment priority over payments made to bondholders of each securitization trust. Servicing advance requirements have increased in 2007 primarily as a result of slower prepayment rates and higher delinquency levels. The Corporation funds these advances from several internal and external funding sources.

Other Funding Sources

The Corporation may also raise funding through approved, but uncommitted revolving lines of credit or federal funds lines with authorized counterparties. These lines are available at the option of the counterparty.

The investment securities portfolio provides an additional source of liquidity, which may be created through either securities sales or repurchase agreements. The Corporation’s portfolio consists primarily of liquid U.S. Treasury and government

Popular, Inc. | 2007 | Annual Report 47

Table L
Maturity Distribution of Earning Assets


	As of December 31, 2007
	Maturities
			After one year
			through five years				After five years
			Fixed		Variable		Fixed		Variable
	One year		interest		interest		interest		interest
(In thousands)	or less		rates		rates		rates		rates		Total

Money market securities	$	1,006,712									$	1,006,712
Investment and trading securities		3,808,688	$	3,494,566	$	128,169	$	2,302,180				9,733,603
Loans:
Commercial		5,199,899		2,602,186		2,691,172		1,289,815	$	1,902,719		13,685,791
Construction		1,260,830		21,734		631,303		15,219		12,286		1,941,372
Lease financing		480,569		674,842				9,028				1,164,439
Consumer		3,033,168		1,710,400		398,694		200,086		342,252		5,684,600
Mortgage		2,830,252		1,721,474		339,714		2,217,324		326,036		7,434,800

Total	$	17,620,118	$	10,225,202	$	4,189,052	$	6,033,652	$	2,583,293	$	40,651,317


Notes:		Equity securities available-for-sale and other investment securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock held by the Corporation, are not included in this table.


		Loans held-for-sale have been allocated according to the expected sale date.

sponsored agency securities that can be used to raise funds in the repo markets. At December 31, 2007, the investment and trading securities portfolios, as shown in Table L, totaled $9.7 billion, of which $3.8 billion, or 39%, had maturities of one year or less. Mortgage-related investments in Table L are presented based on expected maturities, which may differ from contractual maturities, since they could be subject to prepayments. The availability of the repurchase agreement would be subject to having sufficient available un-pledged collateral at the time the transactions are to be consummated. The Corporation’s un-pledged investment and trading securities, excluding other investment securities, amounted to $1.9 billion as of December 31, 2007. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation may use. The maturity distribution of the loan portfolio as of December 31, 2007 is presented in Table L. As of that date, $12.8 billion or 43% of the loan portfolio was expected to mature within one year. The contractual maturities of loans have been adjusted to include prepayments based on historical data and prepayment trends.

Another potential source of funding is the issuance of shares of common or preferred stock, or hybrid securities.

Risks to Liquidity

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of an extended economic slowdown in Puerto Rico, the credit quality of the Corporation could be affected and, as a result of higher credit costs, profitability may decrease. The substantial integration of Puerto Rico with the U.S. economy may limit the probability of a prolonged recession in Puerto Rico, but a U.S. recession, concurrently with a slowdown in Puerto Rico, may make a recovery in the local economic cycle more challenging.

Factors that the Corporation does not control, such as the economic outlook of its principal markets and regulatory changes, could affect its ability to obtain funding. In order to prepare for the possibility of such a scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available, are temporarily unavailable. These plans call for using alternate funding mechanisms such as the pledging or securitization of certain asset classes and accessing committed credit lines and loan facilities put in place with the FHLB, leading commercial banks and the FED. The Corporation has a substantial amount of assets available for raising funds through these channels and is confident that it has adequate alternatives to rely on under a scenario where some primary funding sources are temporarily unavailable.

Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Certain of these

Table M
Average Total Deposits


	For the Year
											Five-Year
(Dollars in thousands)	2007		2006		2005		2004		2003		C.G.R.

Non-interest bearing demand deposits	$	4,043,427	$	3,969,740	$	4,068,397	$	3,918,452	$	3,495,099		4.62	%

Savings accounts		5,697,509		5,440,101		5,676,452		5,407,600		5,190,527		3.60
NOW, money market and other interest bearing demand accounts		4,429,448		3,877,678		3,731,905		2,965,941		2,550,480		12.10

Certificates of deposit:
Under $100,000		3,949,262		3,768,653		3,382,445		3,067,220		2,877,946		7.05
$100,000 and over		5,928,983		4,963,534		4,266,983		3,144,173		2,881,836		15.23

Certificates of deposit		9,878,245		8,732,187		7,649,428		6,211,393		5,759,782		11.52

Other time deposits		1,520,471		1,244,426		1,126,887		905,669		762,080		15.10

Total interest bearing deposits		21,525,673		19,294,392		18,184,672		15,490,603		14,262,869		9.37

Total deposits	$	25,569,100	$	23,264,132	$	22,253,069	$	19,409,055	$	17,757,968		8.53	%

lines could be subject to collateral requirements, standards of creditworthiness, leverage ratios and other regulatory requirements, among other factors.

Maintaining adequate credit ratings on Popular’s debt obligations is an important factor for liquidity, because the credit ratings influence the Corporation’s ability to borrow, the cost at which it can raise financing and access to funding sources. The credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors. Changes in the credit rating of the Corporation or any of its subsidiaries to a level below “investment grade” may affect the Corporation’s ability to raise funds in the capital markets. The Corporation’s counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing debt may be more difficult.

In December 2007, Moody’s Investor Service (“Moodys”) downgraded by one notch to “A3”, the senior debt rating of the Corporation and reduced the short-term rating to “P-2”. The ratings were put on “watch negative”, which implies that within a short period of time there was the possibility of an additional downgrade. The funding challenges at the bank holding company as well as the profitability of the U.S. business were given as the primary concerns underlying the downgrades.

In January 2008, Moodys upgraded the ratings outlook to “stable” and removed the ratings watch which had been in effect. Initiatives executed by management to address the bank holding companies’ funding challenges were cited as prompting the change, although the profitability of the U.S. business continues to be a ratings concern.

After the end of the third quarter of 2007, Fitch Ratings reduced the short-term credit rating of Popular, Inc. and Popular North America, Inc. to “F-2” from “F-1”, and placed their long-term senior debt rating of “A-” on negative rating watch. Fitch Ratings mentioned that the rating actions reflected credit quality pressures from our sub-prime loan exposure as well as a more difficult environment for bank holding company funding. In both cases, Fitch Ratings maintained that it believes that both situations are challenging but manageable.

In January 2008, Fitch Ratings announced that it was affirming the Corporation’s senior debt rating at “A-” as well as removing the rating from “watch negative”. The outlook was maintained “negative”. Management actions related to bank holding company liquidity were highlighted by the agency as underlying the removal of the “watch”, but U.S. business profitability concerns have kept the ratings outlook negative, until these challenges are resolved.

Standard & Poor’s Rating Services (“S&P”) currently rates our debt “BBB+” for long-term debt and “A-2” for short-term obligations, both with a stable outlook.

Credit ratings are an important factor in accessing the credit markets. Even though the Corporation is currently several notches above the investment-grade threshold with each of the rating agencies, the possibility of ratings downgrades can affect our ability to raise unsecured financing at competitive rates.

Popular, Inc. | 2007 | Annual Report 49

The Corporation and BPPR’s debt ratings at December 31, 2007 were as follows:

Popular, Inc.

BPPR

Short-term

Long-term

Short-term

Long-term

debt

Fitch

F-2

A-

F-1

A-

Moody’s

P-2

P-1

S&P

A-2

BBB+

A-2

A-

The ratings above are subject to revisions or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying obligations was $38 million at December 31, 2007.

In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and asset quality, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related obligations. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. At December 31, 2007, the Corporation had $215 million in outstanding obligations subject to covenants, including those which are subject to rating triggers. At December 31, 2007, one of the Corporation’s U.S. subsidiaries was not complying with a particular covenant with respect to one credit facility. A written waiver was obtained. Obligations outstanding under this credit facility approximated $87 million at December 31, 2007, and was paid in full in February 2008.

Contractual Obligations and Commercial Commitments

The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations.

At December 31, 2007, the aggregate contractual cash obligations including purchase obligations and borrowings maturities were:


	Payments Due by Period
	Less than		1 to 3		3 to 5		After 5
(In millions)	1 year		years		years		years		Total

Certificates of deposit	$	9,911	$	2,534	$	854	$	115	$	13,414
Fed funds and repurchase agreements		4,038		237		763		399		5,437
Other short-term borrowings		1,502								1,502
Long-term debt		1,490		1,302		654		1,175		4,621
Purchase obligations		170		67		29		9		275
Annual rental commitments under operating leases		49		74		55		203		381
Capital leases		1		3		3		19		26

Total contractual cash obligations	$	17,161	$	4,217	$	2,358	$	1,920	$	25,656

Purchase obligations include major legal and binding contractual obligations outstanding at the end of 2007, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases to secure favorable pricing concessions, the Corporation has committed to contracts that may extend for several years.

As of December 31, 2007, the Corporation’s liability on its pension and postretirement benefit plans amounted to $164.0 million. During 2008, the Corporation expects to contribute $5.7 million to the pension and benefit restoration plans, and $6.3 million to the postretirement benefit plan to fund current benefit payment requirements. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 24 to the consolidated financial statements for further information on these plans. Management believes the effect of the pension and postretirement plans on liquidity is not significant to the Corporation’s overall financial condition.

As of December 31, 2007, the liability for uncertain tax positions, excluding associated interest and penalties, was $22.2 million pursuant to FIN No. 48, which was described in the Critical Accounting Policies section. This liability represents an estimate of tax positions that the Corporation has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The ultimate amount

and timing of any future cash settlements cannot be predicted with reasonable certainty. Under the statute of limitation, the liability for uncertain tax positions expire as follows: 2008 - $2.3 million, 2009 - $4.2 million, 2010 - $4.4 million, 2011 - $5.9 million and 2012 - $5.4 million.

A number of business and asset acquisition agreements to which the Corporation is a party may require the Corporation to make contingent payments in future years if certain predetermined goals, such as revenue or loan origination targets, are achieved within a specified time. Management estimates that the maximum future payments under these agreements at December 31, 2007 approximated $5.8 million.

The Corporation also utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

At December 31, 2007 the contractual amounts related to the Corporation’s off-balance sheet lending and other activities were:


	Amount of Commitment – Expiration Period
	Less than		1 to 3		3 to 5		After 5
(In millions)	1 year		years		years		years		Total

Commitments to extend credit	$	6,240	$	1,149	$	370	$	151	$	7,910
Commercial letters of credit		25		1		—		—		26
Standby letters of credit		145		27		2		—		174
Commitments to originate mortgage loans		95		18		—		—		113
Unfunded investment obligations		—		7		—		32		39

Total	$	6,505	$	1,202	$	372	$	183	$	8,262

The Corporation also enters into derivative contracts under which it is required either to receive cash or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the consolidated statements of condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change.

The Corporation is a member of the Visa USA network through its subsidiary BPNA. On October 3, 2007, the Visa organization completed a series of restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa, Inc. As a result of Visa’s restructuring, the Corporation’s membership interest in Visa USA was exchanged for an approximately 0.00874% equity interest in Visa Inc. Class USA stock. On November 11, 2007, Visa Inc. filed a registration statement with the Securities and Exchange Commission for the offer and sale of its common stock to the public. Visa has disclosed that it plans to use the proceeds from its initial public offering to partially redeem Visa USA members’ equity interests and to fund the settlement of certain Visa USA related litigation.

Pursuant to the Visa USA bylaws, BPNA is obligated to indemnify Visa, Inc. for certain losses. On October 3, 2007, a Loss Sharing Agreement (“LSA”) became effective which reaffirmed the Corporation’s obligation to indemnify Visa, Inc. for potential future settlement of certain litigation. The Corporation’s indemnification obligation is limited to its 0.00874% proportionate equity interest in Visa USA. The Corporation recorded an estimated liability related to its obligation to indemnify Visa for covered litigation of $223 thousand as of December 31, 2007.

If the Visa initial public offering is successfully completed, the Corporation is expected to receive cash in partial redemption of its equity interest currently carried at zero value. Further, management expects that the indemnification obligation to Visa will be reduced when Visa either disburses funds for negotiated settlements, or funds an escrow account designated for settlement of covered litigation. Management expects that the gain to be realized from redemption of Visa shares will more than exceed the indemnification obligations recorded to date.

BPPR is a member of Visa International, as such is not impacted by the indemnification obligation.

Refer to the notes to the consolidated financial statements for further information on the Corporation’s contractual obligations, commercial commitments, and derivative contracts.

Credit Risk Management and Loan Quality

Credit risk represents the possibility of loss from the failure of a borrower or counterparty to perform according to the terms of a credit-related contract. Credit risk arises primarily from the Corporation’s lending activities, as well as from other on- and off-balance sheet credit instruments. Credit risk management is

Popular, Inc. | 2007 | Annual Report 51

based on analyzing the creditworthiness of the borrower, the adequacy of underlying collateral given current events and conditions, and the existence and strength of any guarantor support.

The Corporation manages credit risk by maintaining sound underwriting standards, monitoring and evaluating loan portfolio quality, its trends and collectibility, and assessing reserves and loan concentrations. Also, credit risk is mitigated by recruiting qualified and highly skilled credit officers, implementing and monitoring lending policies and collateral requirements, and instituting credit review procedures to ensure appropriate actions to comply with laws and regulations. The Corporation’s credit policies require prompt identification and quantification of asset quality deterioration or potential loss in order to ensure the adequacy of the allowance for loan losses. Included in these policies, primarily determined by the amount, type of loan and risk characteristics of the credit facility, are various approval levels and lending limit constraints, ranging from the branch or department level to those that are more centralized. When considered necessary, the Corporation requires collateral to support credit extensions and commitments, which is generally in the form of real estate and personal property, cash on deposit and other highly liquid instruments.

At December 31, 2007, the Corporation’s credit exposure was centered in its $29.9 billion total loan portfolio, which represented 73% of its earning assets. The portfolio composition for the last five years is presented in Table G.

The Corporation’s Credit Strategy Committee (“CRESCO”) oversees all credit-related activities and is responsible for managing the Corporation’s overall credit exposure and developing credit policies, standards and guidelines that define, quantify, and monitor credit risk. Through the CRESCO, management reviews asset quality ratios, trends and forecasts, problem loans, evaluates the provision for loan losses and assesses the methodology and adequacy of the allowance for loan losses on a monthly basis. The analysis of the allowance adequacy is presented to the Risk Management Committee of the Board of Directors for review, consideration and ratification on a quarterly basis.

The Corporation also has a Corporate Credit Risk Management Division (“CCRMD”), which is centralized and independent of the lending function. It oversees the credit risk rating system and reviews the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles (“GAAP”) and regulatory standards. In addition, there is a Credit Risk Management (“CRM”) function at the Corporation’s Puerto Rico and U.S. mainland operations. The CCRMD’s functions include managing and controlling the Corporation’s credit risk, which is accomplished through various techniques applied at different stages of the credit-granting process. A CRM representative, who is a permanent member of the Executive Credit Committee, oversees adherence to policies and procedures established for the initial underwriting of the credit portfolio. Also, the CRM performs ongoing monitoring of the portfolio, including potential areas of concern for specific borrowers and / or geographic regions. The CRM strives to identify problem loans early and has specialized workout officers, who are independent of the originating unit, that handle substantially all commercial loans which are past due over 90 days, have filed bankruptcy, or are considered problem loans based on their risk profile.

The Corporation also has a Credit Process Review Group within the CRM, which performs annual comprehensive credit process reviews of several middle markets, construction, asset-based and corporate banking lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, the Credit Process Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. CCRMD has contracted an outside loan review firm to perform the credit process reviews in the U.S. mainland operations. The CCRMD and CRM participate in defining the review plan with the outside loan review firm and actively participate in the discussions of the results of the loan reviews with the business units. The CRM may periodically review the work performed by the outside loan review firm. CRM reports the results of the loan process reviews to the Audit Committee of the Corporation’s Board of Directors. Beginning in 2008, the loan review function for the U.S. mainland operations will have an internal officer in charge of this process. The loan review plan for 2008 will be conducted by this internal resource in a joint effort with the outside loan review firm.

The Corporation issues certain credit-related off-balance sheet financial instruments including commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For these financial instruments, the contract amount represents the credit risk associated with failure of the counterparty to perform in accordance with the terms and conditions of the contract, and the decline in value of the underlying collateral. The credit risk associated with these financial instruments varies depending on the counterparty’s creditworthiness and the value of any collateral held. Refer to Note 28 to the consolidated financial statements and to the Contractual Obligations and Commercial Commitments section of this MD&A

for the Corporation’s involvement in these credit-related activities.

The Corporation is also exposed to credit risk by using derivative instruments, but manages the level of risk by only dealing with counterparties of good credit standing, entering into master netting agreements whenever possible and, when appropriate, obtaining collateral. Refer to Note 30 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities.

The Corporation manages the exposure to a single borrower, industry or product type through participations and loan sales. The Corporation maintains a diversified portfolio intended to spread its risk and reduce its exposure to economic downturns, which may occur in different segments of the economy or in particular industries. Industry and loan type diversification is reviewed quarterly.

The Corporation’s credit risk exposure is spread among individual consumers, small and medium businesses, as well as corporate borrowers engaged in a wide variety of industries. Only 327 of these commercial lending relationships have credit relations with an aggregate exposure of $10 million or more. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal, and there are no loans to less developed countries. The Corporation limits its exposure to concentrations of credit risk by the nature of its lending limits.

The Corporation has made a substantial number of loans to subprime borrowers mainly through its subsidiary PFH. The actual rates of delinquencies, foreclosures and losses on these loans could be higher during economic slowdowns. Rising unemployment, higher interest rates or declines in housing prices tend to have a greater negative effect on the ability of such borrowers to repay their mortgage loans. All the factors mentioned above also impact the value of residual interests created as a result of off-balance sheet securitizations conducted through PFH. Refer to the Overview of Mortgage Loan Exposure section for further information.

Geographical and Government Risk

The Corporation is also exposed to geographical and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment is presented in Note 32 to the consolidated financial statements.

A significant portion of the Corporation’s financial activities and credit exposure is concentrated in Puerto Rico. Consequently, its financial condition and results of operations are dependent on the Island’s economic conditions. An extended economic slowdown or recessionary cycle, adverse political or economic developments in Puerto Rico or natural disasters, such as hurricanes affecting the Island, could result in a downturn in loan originations, an increase in the level of non-performing assets, an increase in the rate of foreclosure loss on mortgage loans and a reduction in the value of the Corporation’s loans and loan servicing portfolio, all of which would adversely affect the Corporation’s profitability and financial condition.

The economy of Puerto Rico continued deteriorating during 2007. The weak fiscal position of the P.R. Government and strained consumer finances, which were impacted by the effects of rising unemployment rates, oil prices, utilities and taxes, among others, affected the P.R. economy considerably. The current state of the economy and uncertainty in the private and public sectors has had an adverse effect on the credit quality of the Corporation’s loan portfolios. A prolonged economic slowdown, which has led to a recessionary cycle could cause those adverse effects to continue, as delinquency rates may continue to increase in the short-term until more sustainable growth resumes.

Even though Puerto Rico’s Government and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets, the current fiscal situation of the Puerto Rico (“P.R. Government”) led nationally recognized rating agencies to downgrade the credit rating of the P.R. Government’s debt obligations during 2006. In November 2007, Moody’s changed the outlook of the P.R. Government’s credit ratings to “stable” from “negative”. In justifying its change in outlook, Moody’s recognized the progress the P.R. Government has made in addressing the fiscal challenges it has faced in recent years. In particular, it mentioned the controls imposed on public spending and the implementation of the sales tax as two favorable developments. The rating agencies have maintained the negative outlook for the Puerto Rico obligation bonds. Factors, such as the government’s ability to implement meaningful steps to curb operating expenditures, improve managerial and budgetary controls, and eliminate the government’s reliance on loans from the Government Development Bank of Puerto Rico to cover budget deficits, will be key determinants of future rating changes.

At December 31, 2007, the Corporation had $1.0 billion of credit facilities granted to or guaranteed by the P.R. Government and its political subdivisions, of which $150 million were uncommitted lines of credit. Of these total credit facilities granted, $914 million in loans were outstanding at December 31, 2007. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico are either collateralized loans or obligations that have a specific source of income or revenues identified for its repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain

Popular, Inc. | 2007 | Annual Report 53

revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the Central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities. The good faith and credit obligations of the municipalities have a first lien on the basic property taxes.

Furthermore, as of December 31, 2007, the Corporation had outstanding $178 million in Obligations of Puerto Rico, States and Political Subdivisions as part of its investment portfolio. Refer to Notes 6 and 7 to the consolidated financial statements for additional information. Of that total, $155 million was exposed to the creditworthiness of the P.R. Government and its municipalities. Of that portfolio, $55 million was in the form of Puerto Rico Commonwealth Appropriation Bonds, which are currently rated Ba1, one notch below investment grade, by Moody’s, while Standard & Poor’s Rating Services (“S&P”) rates them as investment grade. At December 31, 2007, the Appropriation Bonds represented approximately $1.8 million in unrealized losses in the Corporation’s portfolio of investment securities available-for-sale. The Corporation is closely monitoring the political and economic situation of the Island and evaluates the portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time or up to maturity for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

As further detailed in Notes 6 and 7 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government sponsored entities. In addition, $134 million of residential mortgages and $352 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2007.

Overview of Mortgage Loan Exposure

Deteriorating conditions in the U.S. mainland housing market and, to a lesser extent, in Puerto Rico accelerated throughout 2007. As many lenders have been forced out of business or have severely curtailed their operations and most remaining lenders have increased nonconforming mortgage interest rates and tightened underwriting standards, many borrowers, particularly subprime borrowers and borrowers in markets with declining housing prices, have been unable to refinance existing loans. Borrowers in markets with declining housing prices may find themselves unable to refinance their loans, as a result of diminished equity in their homes.

In a stressed housing market with increasing delinquencies and declining housing prices, such as currently exists, the adequacy of collateral securing the loan becomes a much more important factor in determining future loan performance, as a borrower with more equity in the property has a greater vested interest in keeping the loan current than a borrower with little to no equity in the property. Also, in the event that the Corporation has to foreclose on a property, the extent to which the outstanding balance on the loan exceeds the collateral value will determine the severity of loss.

The residential mortgage loan origination business has historically been cyclical, with periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Because the Corporation made loans to borrowers that have FICO^® scores of 660 or below, the actual rates of delinquencies, foreclosures and losses on these loans could be higher during economic slowdowns. Rising unemployment, higher interest rates, declines in housing prices and an overall tightening of credit standards by lenders tend to have a greater negative effect on the ability of such borrowers to repay their mortgage loans.

The following table provides information on the Corporation’s mortgage loan exposure for loans held-in-portfolio, (thus excluding loans held-for-sale) at December 31, 2007. Subprime mortgage loans refer to mortgage loans made to individuals with a FICO^® score of 660 or below. FICO^® scores are used as an indicator of the probability of default for loans.


	Prime		Subprime
(In billions)	loans		loans		Total

Banco Popular de Puerto Rico	$	1,119	$	1,236	$	2,355
Banco Popular North America		510		1,199		1,709
Popular Financial Holdings:
- Owned-in-trust		57		229		286
- Owned — originated through wholesale channels (“centralized”)		199		716		915
- Owned — originated through consumer branches		74		69		143

Sub-total	$	1,959	$	3,449		5,408
Other not classified as prime or subprime loans						663

Total Popular, Inc.					$	6,071

Mortgage loans held-in-portfolio that are considered subprime under the above definition for the Banco Popular de Puerto Rico reportable segment approximated 42% of its total mortgage loans held-in-portfolio as of December 31, 2007. The Corporation, however, believes that the particular characteristics of BPPR’s subprime portfolio limit its exposure under current market conditions. BPPR’s loans are fixed-rate fully amortizing, full-

documentation loans that do not have the level of layered risk associated with subprime loans offered by certain major U.S. mortgage loan originators. Deteriorating economic conditions have impacted the mortgage delinquency rates in Puerto Rico increasing the levels of non-accruing mortgage loans. However, BPPR has not to date experienced significant increases in losses. The annualized ratio of mortgage loans net charge-offs to average mortgage loans held-in-portfolio for this subprime portfolio was 0.04% for the year ended December 31, 2007.

BPNA’s mortgage loans held-in-portfolio considered subprime under the above definition, isolating E-LOAN, approximated 71% of its total mortgage loans held-in-portfolio as of December 31, 2007. This portfolio has principally two products - either 7/1 ARMs (fixed-rate interest until end of year seven in which interest rate begins to reset annually until maturity) or 30 years fixed-rate mortgages that do not have the level of layered risk associated with subprime loans offered by certain major U.S. mortgage loan originators. For example, BPNA’s subprime mortgage loan portfolio has minimal California market exposure, loans are underwritten to the fully indexed rate, and there are no interest-only, piggybacks or option ARM loans (Refer to Glossary for general descriptions of these loan types). Furthermore, the loans are 100% owner occupied. Also, the first interest rate reset on the 7/1 ARMs is not until 2012. Deteriorating economic conditions in the U.S. mainland housing market have impacted the mortgage industry delinquency rates; however, the levels of non-accruing mortgage loans in BPNA’s subprime mortgage portfolio have been lower than PFH’s subprime mortgage portfolio. The non-accruing loans to loans held-in-portfolio ratio for BPNA’s subprime mortgage loans was 3.67% at December 31, 2007. The annualized ratio of mortgage loans net charge-offs to average mortgage loans held-in-portfolio for this subprime portfolio was 1.28% for the year ended December 31, 2007. As a result of higher delinquency and net charge-offs experience, BPNA recorded a higher provision for loan losses in the fourth quarter of 2007 to cover for inherent losses in this portfolio. The average loan to value (“LTV”) at December 31, 2007 in BPNA’s portfolio was 89.36%. Effective late December 2007, BPNA launched several initiatives designed to reduce the overall credit exposure in the portfolio that involve the purchase, by either the borrower or BPNA, of private mortgage insurance.

Mortgage loans held-in-portfolio for PFH, excluding Popular FS, that are considered subprime approximated 73% of its total mortgage loans held-in-portfolio as of December 31, 2007. In the past, PFH originated mortgage loans through various channels including bulk acquisitions, mortgage loan brokers and its retail branch network. As part of the PFH Restructuring Plan, PFH ceased originating loans through all channels except for loans originated directly through its consumer finance branches and the customer loan center. This resulted in a significant reduction in total originations of mortgage loans at PFH during 2007. Also, as a result of the loan recharacterization transaction discussed previously, the Corporation reduced its exposure to subprime mortgage loans by the end of 2007. The loan recharacterization transaction contributed with a reduction of approximately $2.4 billion in subprime mortgages based on portfolio data reported in the Corporation’s Form 10-Q as of September 30, 2007. Also, as indicated in the Events Subsequent to Year-End 2007 section of this MD&A, during December 2007, the Corporation reclassified approximately $1.4 billion carrying amount in mortgage and consumer loans originated through PFH’s consumer branches from loans held-in-portfolio to loans held-for-sale with the intent to sell these loans by the end of the first quarter of 2008. Since the exposure in this held-for-sale portfolio is short-term and a sales price was set with the prospective buyer, these loans are excluded from the previous tabular presentation which segregates prime and subprime mortgage loans. The prospective sale of this consumer branch portfolio is expected to reduced the Corporation’s subprime mortgage loan exposure in its portfolio of loans to be held until maturity by over $700 million.

Approximately $287 million of the loans held-in-portfolio by PFH as of December 31, 2007 were identified as “owned-in-trust” for purposes of these disclosures. These loans were pledged as collateral for asset-backed securities issued by the Corporation (in the form of bond certificates) as a financing vehicle through on-balance sheet securitization transactions. Because these loan securitizations did not meet the sale criteria under SFAS No. 140, the transactions were treated as on-balance sheet securitizations for accounting purposes. These “owned-in-trust” loans do not pose the same magnitude of risk to the Corporation as those loans owned outright because the potential losses related to “owned-in-trust” loans above overcollaterization levels will be borne by the holders of the bonds and not by the Corporation. Overcollateralization is defined as a type of credit enhancement by which an issuer of bond certificates pledges mortgage loans as collateral in excess of the principal amount of bond certificates issued to cover possible losses. As of December 31, 2007, the collateral balance on the five securitizations deals accounted as “on-balance sheet securitizations” approximated $308 million, which exceeded the outstanding balance of the bond certificates by $24 million. The allowance for loan losses recorded for these “owned-in-trust” loans amounted to approximately $5.3 million at December 31, 2007.

An additional risk factor related to the residential mortgage loan sector is the repricing of adjustable rate mortgage loans (“ARMs”). In the U.S. mortgage market, a substantial amount of ARMs were originated in recent years. These loans typically have a low fixed rate for an initial period (two or three years) and afterwards the rate “floats” or adjusts periodically based on a market

Popular, Inc. | 2007 | Annual Report 55

Table N
Non-Performing Assets


	As of December 31,
(Dollars in thousands)	2007			2006			2005			2004			2003

Non-accrual loans:
Commercial (including construction)	$	362,019		$	158,214		$	133,746		$	122,593		$	168,266
Lease financing		10,182			11,898			2,562			3,665			7,494
Mortgage		349,381			499,402			371,885			395,749			344,916
Consumer		49,090			48,074			39,316			32,010			36,350

Total non-performing loans		770,672			717,588			547,509			554,017			557,026
Other real estate		81,410			84,816			79,008			59,717			53,898

Total non-performing assets	$	852,082		$	802,404		$	626,517		$	613,734		$	610,924

Accruing loans past-due 90 days or more	$	109,569		$	99,996		$	86,662		$	79,091		$	75,557

Non-performing assets to loans held-in-portfolio		3.04	%		2.51	%		2.02	%		2.19	%		2.74	%
Non-performing loans to loans held-in-portfolio		2.75			2.24			1.77			1.98			2.49
Non-performing assets to assets		1.92			1.69			1.29			1.38			1.68
Interest lost	$	71,037		$	58,223		$	46,198		$	45,089		$	45,541

rate of interest, such as LIBOR. Of PFH’s subprime mortage loans held-in-portfolio at December 31, 2007, $320 million or 32% were ARMs. Many of the ARMs currently outstanding are schedule to reset before the end of 2008. It is possible that in some of these loans, when rates adjust, there will be a substantial increase in the underlying loan payment, possibly enough to pressure the cash flow of the underlying debtor and increase the likehood of delinquency.

The table below provides information on PFH’s mortgage loans held-in-portfolio segregated between owned and “owned-in-trust” loans.


	Owned (a)						Owned-in-Trust (b)
($ in millions)	12-31-07			12-31-06			12-31-07			12-31-06

Current Balance (c) ($ in millions)	$	1,063		$	2,191		$	286		$	4,543
First Liens	$	925		$	1,868		$	284		$	4,511
Second Liens	$	138		$	323		$	2		$	32
Weighted-average coupon (WAC)		8.76	%		8.87	%		8.76	%		7.55	%
Avg. Loan-to-Value (LTV) (d)		85.59	%		82.66	%		81.45	%		83.39	%
Avg. Loan Balance ($ in thousands)	$	91		$	69		$	112		$	140
Avg. FICO score (e)		606			607			596			620
Bankruptcy (% of $)		3.81	%		2.95	%		4.31	%		2.18	%
Total Delinquency		18.52	%		8.66	%		21.35	%		10.93	%
30 Days (% of $)		4.78	%		2.54	%		6.20	%		3.48	%
60 Days (% of $)		2.41	%		0.89	%		2.38	%		1.30	%
90+ Days (% of $)		4.80	%		2.48	%		3.88	%		1.84	%
Foreclosure (% of $)		6.53	%		2.75	%		8.89	%		4.31	%
Business Channel
Broker		29	%		22	%		53	%		17	%
Asset Acquisition		24	%		17	%		10	%		72	%
Retail Mortgage (call centers)		7	%		5	%		16	%		6	%
Customer Loan Center (“CLC”) (f)		23	%		6	%		19	%		4	%
Decentralized (branches)		14	%		47	%		—			—
Other		3	%		3	%		2	%		1	%
Product Type
Fixed-rate ARM		62	%		69	%		35	%		60	%
(Adjustable rate mortgage)		21	%		20	%		51	%		29	%
Balloon		16	%		10	%		13	%		4	%
Interest only — Fixed		—			—			—			1	%
Interest only — ARM		1	%		1	%		1	%		6	%


(a)		Owned portfolio — represents mortgage loans originated / acquired, but not sold / securitized

(b)		Owned-in-trust — represents mortgage loans securitized in on-balance sheet securitizations, as such, are part of PFH’s portfolio under SFAS No. 140.

(c)		Excluding deferred fees, origination costs, net premiums and other items.

(d)		LTV – a lending risk ratio calculated by dividing the total amount of the mortgage or loan by the fair value of the property. The LTV presented is based on amounts at loan origination date.

(e)		FICO^® — the Corporation uses external credit scores as a useful measure for assessing the credit quality of a borrower. These scores are numbers supplied by credit information providers, based on statistical models that summarize an individual’s credit record. FICO^® scores, developed by Fair Isaac Corporation, are the most commonly used credit scores.

(f)		CLC — unit that anticipates possible refinancing needs of the customer and makes efforts to retain the customer by offering the company’s products.

The level of non-performing loans has been mostly impacted by the effects of a continuing downturn in the economy of Puerto Rico and a slowdown in the U.S. economy, which has affected both the commercial and consumer sectors. The Puerto Rico economy continued to contract during 2007 as it has been impacted by consumers’ finances under stress, unemployment rates at high levels, rising operational costs which pressure businesses, caution on capital spending, slowdown in the housing market, among other factors. The growth of the U.S. economy also fell in the latter part of 2007, in part, as a result of the credit crunch that took effect in the second half of 2007. The slowdown was triggered by a slump in building activity as housing prices significantly declined. Also, the U.S. economy faced the threats of lower consumer spending while, at the same time, addressing inflation as oil and other commodity costs were rising. With the aim of boosting the economy and avoiding a recession in the U.S. mainland, the U.S. Government approved an economic stimulus package during early 2008, which includes a series of tax rebates. The economic stimulus package, which is also applicable to Puerto Rico, is anticipated to also have a positive impact on the economy of Puerto Rico. Also, as indicated in the Net Interest Income section of this MD&A, the FED reduced its key interest rate to 3% as it tries to stimulate economic momentum.

Popular, Inc. | 2007 | Annual Report 57

in home equity lines of credit which is mostly a relatively newly originated portfolio from the 2007 vintage. The increase in this ratio from 2005 to 2006 resulted from higher delinquency levels, partially offset by portfolio growth.

Non-performing mortgage loans, which decreased by $150 million, or 30%, since December 31, 2006, represented 41% of total non-performing assets and 5.75% of total mortgage loans held-in-portfolio at December 31, 2007, compared with 62% and 4.51%, respectively, at December 31, 2006, and 59% and 3.02%, respectively, at December 31, 2005. The decline was directly related to the PFH loan recharacterization transaction which resulted in a reduction in non-performing mortgage loans of approximately $316 million, which was partially offset by increases in non-performing mortgage loans in PFH’s remaining owned portfolio, the Puerto Rico operations and BPNA in the amount of $167 million. The increase at these reportable segments was mainly due to the continued deterioration in the subprime market in the U.S. mainland, as well as higher delinquencies triggered by deteriorating economic conditions in Puerto Rico. The increase in non-performing mortgage loans since December 31, 2005 to 2006 was also due to similar factors, which were already being experienced to a lesser extent during 2006. Ratios of mortgage loans net charge-offs as a percentage of the average mortgage loans held-in-portfolio are presented later in the Allowance for Loan Losses section of this MD&A.

Non-performing financing leases represented 0.93% of the lease financing portfolio at December 31, 2007, compared with 0.97% at the end of 2006, remaining at a relatively stable level. Non-performing financing leases represented 0.20% of the lease financing portfolio at December 31, 2005. The increase in non-performing leases for 2006, compared to the earlier year, was mainly the impact of a system conversion. The new lease system identifies non-accruing leases at actual days past due instead of installments past due, which was the previous system parameter. The impact in interest reversals or charge-offs, as a result of this system conversion, was not significant.

Other real estate owned, representing real estate property acquired through foreclosure, at December 31, 2007 reflected a decrease of $3 million, or 4%, compared with December 31, 2006. This decline resulted because of the elimination of $68 million in other real estate property, as a result of PFH’s loan recharacterization transaction since the properties belong to the trust and had to be excluded from the Corporation’s accounting records at the time the securitization was recharacterized as a sale transaction. This decline was offset by increases in other of the Corporation’s reportable segments. With the slowdown in the housing market, there is a continued economic deterioration in certain geographic areas, which also has a softening effect on the market for resale of repossessed real estate properties. Defaulted loans have increased, and these loans move through the default process to the other real estate classification. The combination of increased flow of defaulted loans from the loan portfolio to other real estate owned and the slowing of the liquidation market has resulted in an increase in the number of units on hand.

Under the standard industry practice, closed-end consumer loans are not customarily placed on non-accrual status prior to being charged-off. Excluding the closed-end consumer loans from non-accruing at December 31, 2007, adjusted non-performing assets would have been $803 million, or 2.87%, of loans held-in-portfolio, compared with $754 million or 2.36%, respectively, at December 31, 2006. The allowance to non-performing loans ratio at December 31, 2007 and 2006 would have been 76.06% and 78.00%, respectively. The decline in this ratio reflects a higher proportion of real estate secured loans in non-performing status. Given the change in policy in 2004 for placing commercial loans on non-accrual status as previously discussed, and excluding the closed-end consumer loans from non-accruing at December 31, 2005, adjusted non-performing assets would have been $587 million, or 1.89%, of loans held-in-portfolio, and the allowance to non-performing loans ratio would have been 90.85% at December 31, 2005.

Once a loan is placed in non-accrual status, the interest previously accrued and uncollected is charged against current earnings and thereafter income is recorded only to the extent of any interest collected. Refer to Table N for information on the interest income that would have been realized had these loans been performing in accordance with their original terms.

In addition to the non-performing loans discussed earlier, there were $50 million of commercial loans at December 31, 2007, which in management’s opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired for purposes of the analysis under SFAS No. 114. At December 31, 2006 and 2005, these potential problem loans approximated $103 million and $30 million, respectively. The decline from December 31, 2006 to the same date in 2007 was mainly due to a particular commercial lending relationship in the Corporation’s Puerto Rico banking operations.

Table O
Allowance for Loan Losses and Selected Loan Losses Statistics


(Dollars in thousands)	2007			2006			2005			2004			2003

Balance at beginning of year	$	522,232		$	461,707		$	437,081		$	408,542		$	372,797
Allowances acquired		7,290			—			6,291			27,185			13,697
Provision for loan losses		562,650			287,760			195,272			178,657			195,939
Impact of change in reporting period*		—			2,510			1,586			—			—

		1,092,172			751,977			640,230			614,384			582,433

Charge-offs:
Commercial (including construction)		98,542			55,605			64,559			64,931			80,069
Lease financing		23,722			24,526			20,568			37,125			22,995
Mortgage		144,654			59,613			48,212			33,032			29,495
Consumer		222,155			149,776			108,110			103,393			100,040

		489,073			289,520			241,449			238,481			232,599

Recoveries:
Commercial (including construction)		19,985			17,283			22,067			19,778			20,594
Lease financing		8,695			10,643			10,939			11,385			11,477
Mortgage		1,314			979			775			1,440			467
Consumer		35,982			30,870			29,145			28,575			26,170

		65,976			59,775			62,926			61,178			58,708

Net loans charged-off:
Commercial		78,557			38,322			42,492			45,153			59,475
Lease financing		15,027			13,883			9,629			25,740			11,518
Mortgage		143,340			58,634			47,437			31,592			29,028
Consumer		186,173			118,906			78,965			74,818			73,870

		423,097			229,745			178,523			177,303			173,891

Write-downs related to loans transferred to loans held-for-sale		120,243			—			—			—			—

Balance at end of year	$	548,832		$	522,232		$	461,707		$	437,081		$	408,542

Loans held-in-portfolio:
Outstanding at year end	$	28,021,456		$	32,017,017		$	31,011,026		$	27,991,533		$	22,330,600
Average		32,181,596			31,246,079			28,830,965			24,881,341			20,258,913
Ratios:
Allowance for loan losses to year end loans held-in-portfolio		1.96	%		1.63	%		1.49	%		1.56	%		1.83	%
Recoveries to charge-offs		13.49			20.65			26.06			25.65			25.24
Net charge-offs to average loans held-in-portfolio		1.31			0.74			0.62			0.71			0.86
Net charge-offs earnings coverage		1.04	x		3.27	x		4.94	x		4.59	x		4.59	x
Allowance for loan losses to net charge-offs		1.30			2.27			2.59			2.47			2.35
Provision for loan losses to:
Net charge-offs		1.33			1.25			1.09			1.01			1.13
Average loans held-in-portfolio		1.75	%		0.92	%		0.68	%		0.72	%		0.97	%
Allowance to non-performing assets		64.41			65.08			73.69			71.22			66.87
Allowance to non-performing loans		71.21			72.78			84.33			78.89			73.34


*		Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in fiscal period at certain subsidiaries described in the overview section (change from fiscal to calendar reporting year for non-banking subsidiaries).

Popular, Inc. | 2007 | Annual Report 59

Table P
Allocation of the Allowance for Loan Losses


As of December,
(Dollars in millions)	2007					2006					2005					2004					2003
			Percentage of					Percentage of					Percentage of					Percentage of					Percentage of
	Allowance		Loans in Each			Allowance		Loans in Each			Allowance		Loans in Each			Allowance		Loans in Each			Allowance		Loans in Each
	for		Category to			for		Category to			for		Category to			for		Category to			for		Category to
	Loan Losses		Total Loans*			Loan Losses		Total Loans*			Loan Losses		Total Loans*			Loan Losses		Total Loans*			Loan Losses		Total Loans*

Commercial	$	222.7		55.7	%	$	204.0		45.3	%	$	184.4		40.7	%	$	179.0		38.9	%	$	171.5		38.4	%
Lease financing		25.6		3.9			24.8		3.8			27.6		4.2			28.7		4.2			29.8		4.7
Mortgage		70.0		21.7			92.2		34.6			72.7		39.7			67.7		42.5			55.5		42.3
Consumer		230.5		18.7			201.2		16.3			177.0		15.4			161.7		14.4			151.7		14.6

Total	$	548.8		100.0	%	$	522.2		100.0	%	$	461.7		100.0	%	$	437.1		100.0	%	$	408.5		100.0	%


*		Note: For purposes of this table, the term loans refers to loans held-in-portfolio (excludes loans held-for-sale)

Another key measure used to evaluate and monitor the Corporation’s asset quality is loan delinquencies. Loans delinquent 30 days or more and delinquencies as a percentage of their related portfolio category at December 31, 2007 and 2006 are presented below.


(Dollars in millions)	2007			2006

Loans delinquent 30 days or more	$	2,011		$	1,917

Total delinquencies as a percentage of total loans:
Commercial		4.97	%		2.93	%
Lease financing		4.36			9.30
Mortgage		12.28			9.97
Consumer		4.75			4.00

Total		6.72	%		5.86	%

Accruing loans past due 90 days or more are composed primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Under SFAS No. 140, servicers of loans underlying Ginnie Mae mortgage-backed securities must report as their own assets the defaulted loans that they have the option to purchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from other financial institutions that, although delinquent, the Corporation has received timely payment from the sellers / servicers, and, in some instances, have partial guarantees under recourse agreements.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluations of inherent risks in the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis. Some of the factors that management considers in determining the allowance are current economic conditions and the resulting impact on Popular’s loan portfolio, the composition of the portfolio by loan types and risk profiles, historical loss experience, the current level of the allowance in relation to total loans and to historical loss levels, results of periodic credit reviews of individual loans, collateral values of properties securing certain loans, regulatory requirements and loan impairment measurement, among others.

The Corporation’s methodology to determine its allowance for loan losses follows the guidance in SFAS No. 114 (as amended by SFAS No. 118) and SFAS No. 5. Under SFAS No. 114, commercial loans over a predetermined amount are identified for impairment evaluation on an individual basis and specific impairment reserves are calculated. SFAS No. 5 provides for the recognition of a loss contingency for a group of homogeneous loans, which are not individually evaluated under SFAS No. 114, when it is probable that a loss has been incurred and the amount can be reasonably estimated. To determine the allowance for loan losses under SFAS No. 5, the Corporation applies a historic loss and volatility factor to specific loan balances segregated by loan type and legal entity.

The result of the exercise described above is compared to stress-tested levels of historic losses over a period of time, recent tendencies of losses and industry trends. Management considers all indicators derived from the process described herein, along with qualitative factors that may cause estimated credit losses associated with the loan portfolios to differ from historical loss experience. The final outcome of the provision for loan losses and the appropriate level of the allowance for loan losses for each subsidiary and the Corporation is a determination made by the CRESCO, which actively reviews the Corporation’s allowance for loan losses.

Management’s evaluation of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic conditions, portfolio composition, delinquency trends, etc.), results in the final determination of the provision for loan losses to maintain a level of allowance for loan losses which is deemed to be adequate. Since the determination of the allowance for loans losses considers projections and assumptions, actual losses can vary from the estimated amounts.

Refer to Table O for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the past 5 years.

Table P details the breakdown of the allowance for loan losses by loan categories. The breakdown is made for analytical purposes, and it is not necessarily indicative of the categories in which future loan losses may occur.

Also, the following table presents net charge-offs to average loans held-in-portfolio by loan category for the years ended December 31, 2007, 2006 and 2005:


	2007			2006			2005

Commercial (including construction)		0.52	%		0.28	%		0.36	%
Lease financing		1.28			1.08			0.74
Mortgage		1.37			0.51			0.42
Consumer		3.41			2.38			1.81

Total		1.31	%		0.74	%		0.62	%

The increase in the ratio of commercial loans net charge-offs to average loans held-in-portfolio for the year ended December 31, 2007 was mostly associated with deterioration in the economic conditions in Puerto Rico and in the U.S. mainland. The ratio of commercial loans net charge-offs to average commercial loans held-in-portfolio in the Banco Popular de Puerto Rico reportable segment was 0.62% for the year ended December 31, 2007, compared to 0.33% for the previous year. Also, an increase was experienced in the Banco Popular North America reportable segment, whose ratio was 0.31% for 2007, compared with 0.21% for 2006. The allowance for loan losses corresponding to commercial loans held-in-portfolio represented 1.43% of that portfolio at December 31, 2007, compared with 1.41% in 2006 and 1.46% in 2005. The ratio of allowance to non-performing loans in the commercial loan category was 61.50% at the end of 2007, compared with 129.0% in 2006 and 137.9% in 2005. The decrease in this ratio from 2006 to 2007 was related to the significant increase in commercial non-performing loans which are mostly secured by real estate and other collateral and for which no specific reserves were considered necessary as part of the SFAS No. 114 impairment analysis. The portion of the allowance for loan losses related to impaired loans at December 31, 2007, 2006 and 2005 was $54 million, $37 million and $20 million, respectively. Further disclosures with respect to impaired loans are included in Note 7 to the consolidated financial statements.

The increase in net charge-offs to average loans held-in-portfolio in the lease financing portfolio from 2006 to 2007 was the result of higher delinquencies in the Banco Popular de Puerto Rico reportable segment. This was partially offset by a decrease in net charge-offs to average loans held-in-portfolio in the lease financing portfolio of the Banco Popular North America operations. There was a large amount of charge-offs in the U.S. leasing subsidiary during 2006 related to a particular customer lending relationship. The allowance for loan losses to the lease financing portfolio was 2.34% at December 31, 2007, compared with 2.03% at the same date in 2006 and 2.11% in 2005.

Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio increased primarily due to the slowdown in the housing sector and higher delinquency levels, primarily in the Corporation’s U.S. subprime mortgage loan portfolio. This increase also reflects the impact of the reduction in the mortgage loan portfolio at PFH. The increase in net charge-offs on mortgage loans for 2007, when compared to 2006, included an increase of $34 million in net charge-offs on second liens mortgages at PFH. The mortgage loans net charge-offs to average mortgage loans held-in-portfolio ratio at PFH, excluding Popular FS, for 2007 was 2.10%, compared with 0.77% in 2006 and 0.62% in 2005. Refer to the Overview of Mortgage Loan Exposure section in this MD&A for information on PFH’s mortgage loan portfolio, including credit statistics. Deteriorating economic conditions have also impacted the mortgage delinquency rates in Puerto Rico, thus increasing the levels of non-accruing mortgage loans. However, no significant increase in losses has occurred. The mortgage loans net charge-off to average mortgage loans held-in-portfolio ratio in the Banco Popular de Puerto Rico reportable segment was 0.04% for the year ended December 31, 2007. Historically, the Corporation has experienced a low level of losses in its Puerto Rico mortgage loan portfolio. The Corporation’s allowance for loan losses for mortgage loans held-in-portfolio represented 1.15% of that portfolio at December 31, 2007, compared with 0.83% in 2006 and 0.59% in 2005. The increase in this ratio from 2006 to 2007 was the result of higher trend of net charge-offs, the inherent losses in the subprime portfolio due to economic conditions and the slowdown in that sector’s housing market, which has affected home values and thus, impacts the initial write-downs to fair value at the time of a property foreclosure.

Consumer loans net-charge offs for 2007 reflected an increase of 57%, when compared to 2006, and also as a percentage of the average consumer loan portfolio. The increase in this ratio was associated with higher delinquencies in Puerto Rico and growth in unsecured consumer loans, primarily personal loans and credit

Popular, Inc. | 2007 | Annual Report 61

cards. The allowance for loan losses for consumer loans held-in-portfolio represented 4.39% of that portfolio at December 31, 2007, compared with 3.86% in 2006 and 3.71% in 2005. The increase in this ratio was the result of increased levels of delinquencies and charge-offs coupled with higher loan volumes.

Included in Table O as part of the reconciliation of the allowance for loan losses as of December 31, 2007 was $120 million of write-downs in value due to credit considerations arising from loan transfers to held-for-sale. This amount principally consisted of $74 million pertaining to the loans recharacterized in December 2007 and $43 million related to the $1.5 billion portfolio that will be sold by PFH in the first quarter of 2008. The loans were reclassified from held-in-portfolio to held-for-sale at the lower of cost or fair value at the time the decision to sell was made. The charge-off ratios included in Table O does not consider the removal of the allowance for loan losses upon the transfer of loans to held-for-sale.

Operational Risk Management

Operational risk can manifest itself in various ways, including errors, fraud, business interruptions, inappropriate behavior of employees, and failure to perform in a timely manner, among others. These events can potentially result in financial losses and other damages to the Corporation, including reputational harm. The successful management of operational risk is particularly important to a diversified financial services company like Popular because of the nature, volume and complexity of its various businesses.

To monitor and control operational risk and mitigate related losses, the Corporation maintains a system of comprehensive policies and controls. The Corporation’s Operational Risk Committee (“ORCO”), which is composed of senior level representatives from the business lines and corporate functions, provides executive oversight to facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the Corporation. The Operational Risk Management Division, within the Corporation’s Risk Management Group, serves as ORCO’s operating arm and is responsible for establishing baseline processes to measure, monitor, limit and manage operational risk. In addition, the Internal Audit Division provides oversight about policy compliance and ensures adequate attention is paid to correct the identified issues.

Operational risks fall into two major categories: business specific and corporate-wide affecting all business lines. The primary responsibility for the day-to-day management of business specific risks relies on business unit managers. Accordingly, business unit managers are responsible of ensuring that appropriate risk containment measures, including corporate-wide business segment specific policies and procedures, controls and monitoring tools, are in place to minimize risk occurrence and loss exposures. Examples of these include personnel management practices, data reconciliation processes, transaction processing monitoring and analysis and contingency plans for systems interruptions. To manage corporate-wide risks, specialized groups such as Legal, Information Security, Business Continuity, Finance and Compliance, assist the business units in the development and implementation of risk management practices specific to the needs of the individual businesses.

Operational risk management plays a different role in each category. For business specific risks, the Operational Risk Management Group works with the segments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, business continuity, legal and compliance, the risks are assessed and a consolidated corporate view is developed and communicated to the business level.

Loss Mitigation For Securitized Mortgage Loans

Loan Modification Program

In October 2007, in response to market conditions and guidance issued by the American Securitization Forum (“ASF”) and the SEC’s Office of Chief Accountant (the “OCA”), PFH instituted a loan modification program (the “Modification Program”) for its securitized U.S. subprime residential adjustable-rate mortgage loans (“Subprime ARM Loans”). In addition to having to comply with parameters set forth in the transaction documents governing the securitized loans, a concern was raised by the industry that modifying a Subprime ARM Loan owned by a QSPE could result in disqualification of that QSPE, thereby disallowing the related securitization transaction from being accounted for using off-balance sheet accounting treatment. The OCA, in a July 18, 2007 Memorandum to SEC Chairman Christopher Cox regarding “Accounting for Loan Modifications,” concluded that, subject to certain limitations, modifying a Subprime ARM Loan when default is “reasonably foreseeable” does not preclude continued off-balance sheet treatment for the related QSPE under SFAS No. 140.

Consistent with the above-referenced guidance and the transaction documents governing the securitization transactions, the Modification Program permitted PFH, as servicer, to modify a Subprime ARM Loan if, among other things, the modification:

	•		would be consistent with generally accepted servicing practices;

	•		would be in the collective best interest of the holders of the related asset-backed securities;

	•		would be in response to a default or a “reasonably foreseeable” default; and

•

would provide the borrower with a long term and sustainable solution.

Permissible modifications to a Subprime ARM Loan under the Modification Program included the postponement of the loan’s interest rate reset date, conversion to a fixed-rate loan and reduction of the loan’s interest rate cap on reset.

The ASF Framework and Subprime ARM Loans

On December 6, 2007, the ASF, working with various constituency groups as well as representatives of U.S. federal government agencies, issued the Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans (the “ASF Framework”). The ASF Framework provides guidance for servicers to streamline borrower evaluation procedures and to facilitate the use of foreclosure and loss prevention efforts in an attempt to reduce the number of U.S. subprime residential mortgage borrowers who might default in the coming year because the borrowers cannot afford to pay the increased loan interest rate after their Subprime ARM Loan interest rate resets.

The ASF Framework is focused on Subprime ARM Loans that have an initial fixed interest rate period of 36 months or less, are included in securitized pools, were originated between January 1, 2005 and July 31, 2007, and have an initial interest rate reset date between January 1, 2008 and July 31, 2010. The ASF Framework directs servicers to categorize Subprime ARM Loans into one of three segments:

	•		Segment 1: Current Subprime ARM Loans (under the ASF Framework, “current” means a Subprime ARM Loan that is not more than 30 days delinquent, and has not been more than 1 x 60 days delinquent in the last 12 months, both determined under the OTS method) where the borrower is likely to be able to refinance into any available mortgage product, including FHA, FHA Secure or other readily available mortgage industry products.

	•		Segment 2: Current Subprime ARM Loans where the borrower is unlikely to be able to refinance into any readily available mortgage industry product.

Subprime ARM Loans belong in Segment 2 (a “Segment 2 Subprime ARM Loan”), if

	§		they have a current loan-to-value ratio (based on the first lien Subprime ARM Loan only) greater than 97%, or

	§		they do not satisfy the other FHA Secure requirements, including that program’s delinquency history, debt-to-income ratio at origination and loan amount standards, and the servicer cannot determine whether they are eligible for another mortgage industry product without conducting an underwriting analysis.

	§		Subject to certain limitations, Segment 2 Subprime ARM loans are eligible for a fast track loan modification under which the interest rate will be kept at the existing initial rate, generally for five years following the upcoming reset date.

•

Segment 3: Subprime ARM Loans where the borrower is not Current and is demonstrating difficulty meeting the introductory rate on the Subprime ARM Loan.

Since its issuance on December 6, 2007, PFH, in its capacity as servicer and in conjunction with its Modification Program, has followed the guidance provided by the ASF Framework with respect to Subprime ARM Loans. While a uniform industry definition of what constitutes a “subprime loan” does not exist, PFH generally considers a loan to be a Subprime ARM Loan if its FICO score is less than 660.

The following supplemental information regarding PFH’s implementation of the ASF Framework with respect to Subprime ARM Loans securitized by PFH is provided as of December 31, 2007:

•

Segment 1:

	§		Amount of Subprime ARM Loans that fall within this category: $398 million

	§		During 2007, $996.3 thousand worth of loans in this segment were subject to a loan modification.

•

Segment 2:

	§		Amount of Subprime ARM Loans that fall within this category: $62.4 million

	§		During 2007, $175.9 thousand worth of loans in this segment were subject to a loan modification.

•

Segment 3:

	§		Amount of Subprime ARM Loans that fall within this category: $128.3 million

	§		During 2007, $1.92 million worth of loans in this segment were subject to loss mitigation activities.

On January 8, 2008, the OCA issued a letter (the “OCA Letter”) addressing accounting issues that may be raised by the ASF Framework. Specifically, the OCA Letter expressed the view that if a Segment 2 Subprime ARM Loan is modified pursuant to the ASF Framework and that loan could legally be modified, the OCA will not object to continued status of the transferee as a QSPE under SFAS No. 140. In reaching its ultimate conclusion, the OCA noted that the ASF Framework indicated that for a Segment 2 Subprime ARM Loan, the servicer could presume that the borrower would be unable to pay pursuant to the original terms of the loan after the interest rate reset, and thus, a default on the loan would

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be “reasonably foreseeable” in the absence of a modification. Concurrent with the issuance of the OCA Letter, the OCA requested the FASB to immediately address the issues that have arisen in the application of the QSPE guidance in SFAS No. 140. Any loan modifications we make in accordance with the ASF Framework will not have an impact on our off-balance sheet accounting treatment of the Subprime ARM Loans securitized by PFH and currently owned by QSPEs and will not have a material effect on our accounting treatment of our retained interests in those securitizations of Subprime ARM Loans.

The following supplemental information regarding QSPE’s that own Subprime ARM Loans that were securitized by PFH is provided as of December 31, 2007:


Total assets		$5.34 billion
Subprime ARM Loan		$1.51 billion
Other assets (including real estate owned)		$0.15 billion
Total beneficial interest issued		$5.05 billion
Held by third-party investors		$5.01 billion
Retained by the Corporation		$0.04 billion

As of December 31, 2007 and 2006 the amount of loans classified as real estate owned in QSPE’s that owned Subprime ARM Loans totaled $153.6 million and $13.3 million respectively. The $140.3 million increase was due to a $39.5 million increase in defaults and the progression of delinquent loans into real estate owned status and the addition of $100.7 million of loans in real estate owned status owned by securitization trusts that prior to December 31, 2007 did not qualify as QSPE’s.

Recently Issued Accounting Pronouncements and Interpretations

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB decided to issue a final staff position that defers for one year the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The staff position also amends SFAS No. 157 to exclude SFAS No. 13 “Accounting for Leases” and its related interpretive accounting pronouncements that address leasing transactions. The Corporation adopted the provisions of SFAS No. 157 that were not deferred, commencing in the first quarter of 2008. The provisions of SFAS 157 are to be applied prospectively. The Corporation is currently assessing the impact of SFAS No. 157 on its consolidated financial statements, including disclosures.

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

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. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, “Fair Value Measurements,” and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The Corporation adopted the provisions of SFAS No. 159 in January 2008. Refer to the Events Subsequent to Year-End 2007 section for a discussion of the estimated impact of the adoption of SFAS No. 159.

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

for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 in 2008 did not have a material impact on the Corporation’s consolidated financial statements.

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 07-1 (“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 was to be effective for fiscal years beginning on or after December 15, 2007. On February of 2008, the FASB issued a final staff position that indefinitely defers 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 FASB decision was in response to several implementation issues that arose after SOP 07-1 was issued. 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 on 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). Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements and disclosures. As indicated under the guidance of SOP 07-01, which was previously described, the implementation of FSP FIN No. 46(R) - 7 is indefinitely delayed until further notification by the FASB.

SFAS No. 141-R “Statement of Financial Accounting Standards No. 141(R), Business Combinations (a revision of SFAS No. 141)” In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this statement include the following: the acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Corporation will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented on the consolidated financial statements.

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

In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity in the consolidated financial statements and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure

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any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted. Management will be evaluating the effects, if any, that the adoption of this statement will have on its consolidated financial statements.

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

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109 (SAB 109), which requires that the fair value of a written loan commitment that is marked to market through earnings should include the future cash flows related to the loan’s servicing rights. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets).

SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans that will be held-for-sale when funded that are marked to market as derivatives under FAS 133 (derivative loan commitments); and (2) other written loan commitments that are accounted for at fair value through earnings under Statement 159’s fair-value election.

SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the expected future cash flows related to the associated servicing of the loan to be recognized only after the servicing asset had been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB 109 will be applied prospectively to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.

The Corporation is currently evaluating the potential impact of adopting this SAB 109.

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

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

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

Glossary of Selected Financial Terms

Allowance for Loan Losses - The reserve established to cover credit losses inherent in loans held-in-portfolio.

Asset Securitization - The process of converting receivables and other assets that are not readily marketable into securities that can be placed and traded in capital markets.

Basis Point - Equals to one-hundredth of one percent. Used to express changes or differences in interest yields and rates.

Book Value Per Common Share - Total common shareholders’ equity divided by the total number of common shares outstanding.

Brokered Certificate of Deposit - Deposit purchased from a broker acting as an agent for depositors. The broker, often a securities broker-dealer, pools CDs from many small investors and markets them to financial institutions and negotiates a higher rate for CDs placed with the purchaser.

Cash Flow Hedge - A derivative designated as hedging the exposure to variable cash flows of a forecasted transaction.

Common Shares Outstanding - Total number of shares of common stock issued less common shares held in treasury.

Core Deposits - A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding brokered certificates of deposit with denominations under $100,000. These deposits are considered a stable source of funds.

Cumulative Total Return to Common Stockholders - Was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment since the measurement point December 31, 2001 plus (ii) the change in the per share price since the measurement date, by the share price at the measurement date.

Derivative - A contractual agreement between two parties to exchange cash or other assets in response to changes in an external factor, such as an interest rate or a foreign exchange rate.

Dividend Payout Ratio - Dividends paid on common shares divided by net income applicable to shares of common stock.

Duration - Expected life of a financial instrument taking into account its coupon yield / cost, interest payments, maturity and call features. Duration attempts to measure actual maturity, as opposed to final maturity. Duration measures the time required to recover a dollar of price in present value terms (including principal and interest), whereas average life computes the average time needed to collect one dollar of principal.

Earning Assets - Assets that earn interest, such as loans, investment securities, money market investments and trading account securities.

Efficiency Ratio - Non-interest expense divided by net interest income plus recurring non-interest income.

Effective Tax Rate - Income tax expense divided by income before taxes.

Fair Value Hedge - A derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment.

Gap - The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities.

Goodwill - The excess of the purchase price of net assets over the fair value of net assets acquired in a business combination.

Interest-only Loan - A non-amortized loan in which interest is due at regular intervals until maturity, when the entire balance is due.

Interest-only Strip - The holder receives interest payments based on the current value of the loan collateral. High prepayments can return less to the holder than the dollar amount invested.

Interest Rate Caps / Floors - An interest rate cap is a contractual agreement between two counterparties in which the buyer, in return for paying a fee, will receive cash payments from the seller at specified dates if rates go above a specified interest rate level known as the strike rate (cap). An interest rate floor is a contractual agreement between two counterparties in which the buyer, in return for paying a fee, will receive cash payments from the seller at specified dates if interest rates go below the strike rate.

Interest Rate Swap – Financial transactions in which two counterparties agree to exchange streams of payments over time according to a predetermined formula. Swaps are normally used to transform the market exposure associated with a loan or bond borrowing from one interest rate base (fixed-term or floating rate).

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Interest-Sensitive Assets / Liabilities - Interest-earning assets / liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements.

Net Charge - Offs - The amount of loans written-off as uncollectible, net of the recovery of loans previously written-off.

Net Income Applicable to Common Stock - Net income less dividends paid on the Corporation’s preferred stock.

Net Income Per Common Share - Basic - Net income applicable to common stock divided by the number of weighted-average common shares outstanding.

Net Income Per Common Share - Diluted - Net income applicable to common stock divided by the sum of weighted-average common shares outstanding plus the effect of common stock equivalents that have the potential to be converted into common shares.

Net Interest Income - The difference between the revenue generated on earning assets, less the interest cost of funding those assets.

Net Interest Margin - Net interest income divided by total average earning assets.

Net Interest Spread - Difference between the average yield on earning assets and the average rate paid on interest bearing liabilities, and the contribution of non-interest bearing funds supporting earning assets (primarily demand deposits and stockholders’ equity).

Non-Performing Assets - Includes loans on which the accrual of interest income has been discontinued due to default on interest and / or principal payments or other factors indicative of doubtful collection, loans for which the interest rates or terms of repayment have been renegotiated, and real estate which has been acquired through foreclosure.

Options Adjustable Rate Mortgage - is an adjustable rate mortgage (“ARM”) which consists of taking an index (i.e 12-month Treasury Average, Cost of Deposit Index, etc.), then adding a margin to total the final interest rate. Unlike other ARM’s where the principal and interest or simple interest payment is calculated from the total of the index and margin, the Options ARM may offer 4 monthly payment options every month depending on the loan program, giving the borrower the opportunity to choose which payment gets made based on the borrower’s economic condition at the time the payment is due. Four basic payment options that exist are the minimum payment option, interest-only payment, 30-year payment and 15-year payment.

Option Contract - Conveys a right, but not an obligation, to buy or sell a specified number of units of a financial instrument at a specific price per unit within a specified time period. The instrument underlying the option may be a security, a futures contract (for example, an interest rate option), a commodity, a currency, or a cash instrument. Options may be bought or sold on organized exchanges or over the counter on a principal-to-principal basis or may be individually negotiated. A call option gives the holder the right, but not the obligation, to buy the underlying instrument. A put option gives the holder the right, but not the obligation, to sell the underlying instrument.

Overcollaterization - A type of credit enhancement by which an issuer of securities pledged collateral in excess of what is needed to adequately cover the repayment of the securities plus a reserve. By pledging collateral with a higher face value than the securities being offered for sale, an issuer of mortgage-backed bonds can get a more favorable rating from a rating agency and also guard against the possibility that the bonds may be called before maturity because of mortgage prepayments.

Overhead Ratio - Operating expenses less non-interest income divided by net interest income.

Piggyback Loan - is a home financing option in which a property is purchased using more than one mortgage from two or more lenders. As compared with standard home mortgage programs, combined rates for piggyback loans are often higher than standard loans. This is because of the risk amounts that each lender is assuming. Also, many piggyback loans attach a large balloon payment at the end of a loan that is substantially larger than the standard mortgage payments.

Provision For Loan Losses - The periodic expense needed to maintain the level of the allowance for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends, and taking into account loan impairment and net charge-offs.

Return on Assets - Net income as a percentage of average total assets.

Return on Equity - Net income applicable to common stock as a percentage of average common stockholders’ equity.

Servicing Right - A contractual agreement to provide certain billing, bookkeeping and collection services with respect to a pool of loans.

Tangible Equity - Consists of stockholders’ equity less goodwill and other intangible assets.

Tier 1 Leverage Ratio - Tier 1 Risk-Based Capital divided by average adjusted quarterly total assets. Average adjusted quarterly assets are adjusted to exclude non-qualifying intangible assets and disallowed deferred tax assets.

Tier 1 Risk - Based Capital - Consists of common stockholders’ equity (including the related surplus, retained earnings and capital reserves), qualifying noncumulative perpetual preferred stock, qualifying trust preferred securities and minority interest in the equity accounts of consolidated subsidiaries, less goodwill and other disallowed intangible assets, disallowed portion of deferred tax assets and the deduction for nonfinancial equity investments.

Total Risk-Adjusted Assets - The sum of assets and credit equivalent off-balance sheet amounts that have been adjusted according to assigned regulatory risk weights, excluding the non-qualifying portion of allowance for loan and lease losses, goodwill and other intangible assets.

Total Risk-Based Capital - Consists of Tier 1 Capital plus the allowance for loan losses, qualifying subordinated debt and the allowed portion of the net unrealized gains on available-for-sale equity securities.

Treasury Stock - Common stock repurchased and held by the issuing corporation for possible future issuance.

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Statistical Summary 2003-2007

Statements of Condition


	As of December 31,
(In thousands)	2007			2006			2005			2004			2003

Assets
Cash and due from banks	$	818,825		$	950,158		$	906,397		$	716,459		$	688,090
Money market investments:
Federal funds sold and securities purchased under agreements to resell		883,686			286,531			740,770			879,321			764,780
Time deposits with other banks		123,026			15,177			8,653			319			8,046
Bankers’ acceptances		—			—			—			—			67

		1,006,712			301,708			749,423			879,640			772,893

Trading securities, at fair value		767,955			382,325			519,338			385,139			605,119
Investment securities available-for-sale, at fair value		8,515,135			9,850,862			11,716,586			11,162,145			10,051,579
Investment securities held-to-maturity, at amortized cost		484,466			91,340			153,104			340,850			186,821
Other investment securities, at lower of cost or realizable value		216,584			297,394			319,103			302,440			233,144
Loans held-for-sale, at lower of cost or market		1,889,546			719,922			699,181			750,728			271,592

Loans held-in-portfolio:		28,203,566			32,325,364			31,308,639			28,253,923			22,613,879
Less — Unearned income		182,110			308,347			297,613			262,390			283,279
Allowance for loan losses		548,832			522,232			461,707			437,081			408,542

		27,472,624			31,494,785			30,549,319			27,554,452			21,922,058

Premises and equipment, net		588,163			595,140			596,571			545,681			485,452
Other real estate		81,410			84,816			79,008			59,717			53,898
Accrued income receivable		216,114			248,240			245,646			207,542			176,152
Servicing Assets		196,645			164,999			141,489			57,183			56,792
Other assets		1,456,994			1,446,891			1,184,311			989,191			712,245
Goodwill		630,761			667,853			653,984			411,308			191,490
Other intangible assets		69,503			107,554			110,208			39,101			27,390

	$	44,411,437		$	47,403,987		$	48,623,668		$	44,401,576		$	36,434,715

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	4,510,789		$	4,222,133		$	3,958,392		$	4,173,268		$	3,726,707
Interest bearing		23,823,689			20,216,198			18,679,613			16,419,892			14,371,121

		28,334,478			24,438,331			22,638,005			20,593,160			18,097,828

Federal funds purchased and assets sold under agreements to repurchase		5,437,265			5,762,445			8,702,461			6,436,853			5,835,587
Other short-term borrowings		1,501,979			4,034,125			2,700,261			3,139,639			1,996,624
Notes payable		4,621,352			8,737,246			9,893,577			10,180,710			6,992,025
Subordinated notes		—			—			—			125,000			125,000
Other liabilities		934,372			811,424			1,240,002			821,491			633,129

		40,829,446			43,783,571			45,174,306			41,296,853			33,680,193

Minority interest in consolidated subsidiaries		109			110			115			102			105

Stockholders’ equity:
Preferred stock		186,875			186,875			186,875			186,875			186,875
Common stock		1,761,908			1,753,146			1,736,443			1,680,096			837,566
Surplus		568,184			526,856			452,398			278,840			314,638
Retained earnings		1,319,467			1,594,144			1,456,612			1,129,793			1,601,851
Treasury stock — at cost		(207,740	)		(206,987	)		(207,081	)		(206,437	)		(205,527	)
Accumulated other comprehensive (loss) income, net of tax		(46,812	)		(233,728	)		(176,000	)		35,454			19,014

		3,581,882			3,620,306			3,449,247			3,104,621			2,754,417

	$	44,411,437		$	47,403,987		$	48,623,668		$	44,401,576		$	36,434,715

Statistical Summary 2003-2007

Statements of Operations


	For the year ended December 31,
(In thousands, except per
common share information)	2007			2006		2005		2004			2003

Interest Income:
Loans	$	2,615,314		$	2,486,453	$	2,116,299	$	1,751,150		$	1,550,036
Money market investments		25,190			29,626		30,736		25,660			25,881
Investment securities		445,769			516,237		488,814		413,492			422,295
Trading securities		41,898			32,125		30,010		25,963			36,026

Total interest income		3,128,171			3,064,441		2,665,859		2,216,265			2,034,238
Less — Interest expense		1,678,781			1,636,531		1,241,652		840,754			749,550

Net interest income		1,449,390			1,427,910		1,424,207		1,375,511			1,284,688
Provision for loan losses		562,650			287,760		195,272		178,657			195,939

Net interest income after provision for loan losses		886,740			1,140,150		1,228,935		1,196,854			1,088,749
Net gain on sale and valuation adjustment of investment securities		55,159			4,359		52,113		15,254			71,094
Trading account (loss) profit		(2,464	)		35,288		30,051		(159	)		(10,214	)
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale		(38,970	)		117,421		83,297		44,168			53,572
All other operating income		680,591			652,417		619,814		549,508			511,558

		1,581,056			1,949,635		2,014,210		1,805,625			1,714,759


Operating Expenses:
Personnel costs		668,189			668,671		622,689		571,018			526,444
All other operating expenses		1,036,362			816,402		705,511		599,994			586,639

		1,704,551			1,485,073		1,328,200		1,171,012			1,113,083

(Loss) income before tax, minority interest and cumulative effect of accounting change		(123,495	)		464,562		686,010		634,613			601,676
Income tax (benefit) expense		(59,002	)		106,886		148,915		144,705			130,326
Net gain of minority interest		—			—		—		—			(435	)

(Loss) income before cumulative effect of accounting change		(64,493	)		357,676		537,095		489,908			470,915
Cumulative effect of accounting change, net of tax		—			—		3,607		—			—

Net (Loss) Income		($64,493	)	$	357,676	$	540,702	$	489,908		$	470,915

Net (Loss) Income Applicable to Common Stock		($76,406	)	$	345,763	$	528,789	$	477,995		$	460,996

Basic EPS Before Cumulative Effect of Accounting Change*		($0.27	)	$	1.24	$	1.97	$	1.79		$	1.74

Diluted EPS Before Cumulative Effect of Accounting Change*		($0.27	)	$	1.24	$	1.96	$	1.79		$	1.74

Basic EPS After Cumulative Effect of Accounting Change*		($0.27	)	$	1.24	$	1.98	$	1.79		$	1.74

Diluted EPS After Cumulative Effect of Accounting Change*		($0.27	)	$	1.24	$	1.97	$	1.79		$	1.74

Dividends Declared per Common Share	$	0.64		$	0.64	$	0.64	$	0.62		$	0.51


*		The average common shares used in the computation of basic earnings (losses) per common share were 279,494,150 for 2007; 278,468,552 for 2006; 267,334,606 for 2005; 266,302,105 for 2004 and 265,481,840 for 2003. The average common shares used in the computation of diluted earnings (losses) per common share were 279,494,150 for 2007; 278,703,924 for 2006; 267,839,018 for 2005; 266,674,856 for 2004 and 265,595,832 for 2003.

Popular, Inc. | 2007 | Annual Report 71

Statistical Summary 2006-2007

Quarterly Financial Data


	2007												2006
(In thousands, except per	Fourth			Third			Second			First			Fourth			Third			Second			First
common share information)	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter

Summary of Operations
Interest income	$	779,439		$	790,226		$	784,911		$	773,595		$	778,863		$	781,331		$	762,037		$	742,210
Interest expense		416,564			430,110			413,494			418,613			418,534			439,293			396,258			382,446

Net interest income		362,875			360,116			371,417			354,982			360,329			342,038			365,779			359,764
Provision for loan losses		203,044			148,093			115,167			96,346			108,272			63,445			67,096			48,947
Net (loss) gain on sale and valuation adjustment of investment securities		(24,698	)		(3,089	)		1,175			81,771			(680	)		7,123			(14,424	)		12,340
Other non-interest income		96,458			170,094			202,200			170,405			205,997			184,226			198,410			216,493
Operating expenses		621,197			346,973			361,053			375,328			378,916			359,923			362,980			383,254

(Loss) income before income tax		(389,606	)		32,055			98,572			135,484			78,458			110,019			119,689			156,396
Income tax (benefit) expense		(95,513	)		(3,948	)		23,622			16,837			18,826			27,859			22,308			37,893

Net (loss) income		($294,093	)	$	36,003		$	74,950		$	118,647		$	59,632		$	82,160		$	97,381		$	118,503

Net (loss) income applicable to common stock		($297,071	)	$	33,024		$	71,972		$	115,669		$	56,654		$	79,181		$	94,403		$	115,525
Net (loss) income per common share:
(basic and diluted)		($1.06	)	$	0.12		$	0.26		$	0.41		$	0.20		$	0.28		$	0.34		$	0.42

Selected Average Balances
(In millions)
Total assets	$	46,918		$	47,057		$	47,140		$	47,310		$	47,299		$	48,376		$	48,565		$	48,957
Loans		32,700			32,875			32,766			32,658			32,171			32,273			31,941			31,924
Interest earning assets		43,630			43,728			43,828			43,978			43,992			44,948			45,196			45,604
Deposits		27,339			25,646			24,924			24,333			24,204			23,217			22,976			22,644
Interest bearing liabilities		38,099			38,391			38,422			38,663			38,732			39,841			40,094			40,714

Selected Ratios
Return on assets		(2.49	%)		0.30	%		0.64	%		1.02	%		0.50	%		0.67	%		0.80	%		1.02	%
Return on equity		(32.32	)		3.52			7.80			12.91			6.20			8.75			10.72			14.04

Statistical Summary 2003-2007
Average Balance Sheet and
Summary of Net Interest Income

On a Taxable Equivalent Basis*


(Dollars in thousands)	2007							2006
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Interest earning assets:
Money market investments	$	513,704		26,565		5.17	%	$	564,423	$	31,382		5.56	%

U.S. Treasury securities		498,232		21,164		4.25			521,917		22,930		4.39
Obligations of U.S. Government entities		6,294,489		310,632		4.93			7,527,841		368,738		4.90
Obligations of Puerto Rico, States and political subdivisions		185,035		12,546		6.78			188,690		13,249		7.02
Collateralized mortgage obligations and mortgage-backed securities		2,575,941		148,620		5.77			3,063,097		177,206		5.79
Other		299,894		18,246		6.08			472,746		23,465		4.96

Total investment securities		9,853,591		511,208		5.19			11,774,291		605,588		5.14

Trading account securities		672,405		43,307		6.44			512,960		34,004		6.63

Loans (net of unearned income)		32,749,993		2,636,954		8.05			32,078,716		2,508,870		7.82

Total interest earning assets/ Interest income		43,789,693		3,218,034		7.35	%		44,930,390	$	3,179,844		7.08	%

Total non-interest earning assets		3,315,242							3,364,176

Total assets	$	47,104,935						$	48,294,566

Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Savings, NOW, money market and other interest bearing demand accounts	$	10,126,956	$	226,924		2.24	%	$	9,317,779	$	157,431		1.69	%
Time deposits		11,398,715		538,869		4.73			9,976,613		422,663		4.24
Short-term borrowings		8,685,663		448,172		5.16			10,677,161		518,960		4.86
Notes payable		8,181,089		464,816		5.68			9,868,385		537,477		5.45
Subordinated notes
Preferred beneficial interest in junior subordinated deferrable interest debentures guaranteed by the Corporation

Total interest bearing liabilities/ Interest expense		38,392,423		1,678,781		4.37			39,839,938		1,636,531		4.11

Total non-interest bearing liabilities		4,851,086							4,713,355

Total liabilities		43,243,509							44,553,293

Stockholders’ equity		3,861,426							3,741,273

Total liabilities and stockholders’ equity	$	47,104,935						$	48,294,566

Net interest income on a taxable equivalent basis			$	1,539,253						$	1,543,313

Cost of funding earning assets						3.83	%						3.64	%

Net interest margin						3.52	%						3.44	%

Effect of the taxable equivalent adjustment				89,863							115,403

Net interest income per books			$	1,449,390						$	1,427,910


*		Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.

Note:		Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.

Popular, Inc. | 2007 | Annual Report 73


2005								2004							2003
	Average				Average			Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate



	$	797,166	$	33,319		4.18	%	$	835,139	$	25,660		3.07	%	$	833,237	$	25,881		3.11	%

		551,328		25,613		4.65			550,997		26,600		4.83			472,114		24,615		5.21

		7,574,297		364,081		4.81			6,720,329		322,854		4.80			6,451,157		356,008		5.52

		247,220		14,954		6.05			255,244		13,504		5.29			201,505		13,570		6.73

		3,338,925		163,853		4.91			3,233,378		128,421		3.97			3,062,564		118,097		3.86
		518,516		22,588		4.36			402,112		15,406		3.83			407,105		16,267		4.00

		12,230,286		591,089		4.83			11,162,060		506,785		4.54			10,594,445		528,557		4.99

		487,319		32,427		6.65			480,890		27,387		5.70			623,632		37,887		6.08

		29,730,913		2,135,511		7.18			25,143,559		1,765,290		7.02			20,730,041		1,562,083		7.54


		43,245,684	$	2,792,346		6.46	%		37,621,648	$	2,325,122		6.18	%		32,781,355	$	2,154,408		6.57	%


		3,116,645							2,277,127							1,893,406

	$	46,362,329						$	39,898,775						$	34,674,761





	$	9,408,358	$	125,585		1.33	%	$	8,373,541	$	92,026		1.10	%	$	7,741,007	$	102,293		1.32	%
		8,776,314		305,228		3.48			7,117,062		238,325		3.35			6,521,861		240,598		3.69
		10,327,417		349,203		3.38			8,782,042		165,425		1.88			8,390,874		147,456		1.76
		9,644,925		453,489		4.70			8,047,867		336,415		4.18			5,124,604		234,776		4.58
		119,178		8,147		6.84			125,000		8,563		6.85			125,000		8,539		6.83



																194,959		15,888		8.15



		38,276,192		1,241,652		3.24			32,445,512		840,754		2.59			28,098,305		749,550		2.67


		4,811,329							4,550,126							4,031,343

		43,087,521							36,995,638							32,129,648

		3,274,808							2,903,137							2,545,113


	$	46,362,329						$	39,898,775						$	34,674,761


			$	1,550,694						$	1,484,368						$	1,404,858

						2.87	%						2.23	%						2.29	%

						3.59	%						3.95	%						4.28	%


				126,487							108,857							120,170

			$	1,424,207						$	1,375,511						$	1,284,688

Management’s Report to
Stockholders

To Our Stockholders:

Management ’s Assessment of Internal Control Over Financial Reporting

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

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

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

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

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

The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our assessment, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2007 based on the criteria referred to above.

The Corporation’s independent registered public accounting firm, PricewaterhouseCoopers, LLP, has audited the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007, as stated in their report dated February 29, 2008 which appears herein.



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

Popular, Inc. | 2007 | Annual Report 75

Report of Independent Registered
Public Accounting Firm

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

In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report to Stockholders. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

Popular, Inc. | 2007 | Annual Report 77

Consolidated Statements of Condition


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

Assets
Cash and due from banks	$	818,825		$	950,158

Money market investments:
Federal funds sold		737,815			84,350
Securities purchased under agreements to resell		145,871			202,181
Time deposits with other banks		123,026			15,177

		1,006,712			301,708

Trading securities, at fair value:
Pledged securities with creditors’ right to repledge		673,958			193,619
Other trading securities		93,997			188,706
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		4,249,295			3,743,924
Other securities available-for-sale		4,265,840			6,106,938
Investment securities held-to-maturity, at amortized cost (market value 2007 - $486,139; 2006 - $92,764)		484,466			91,340
Other investment securities, at lower of cost or realizable value (fair value 2007 - $216,819; 2006 - $412,593)		216,584			297,394
Loans held-for-sale, at lower of cost or market value		1,889,546			719,922

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		149,610			306,320
Other loans held-in-portfolio		28,053,956			32,019,044
Less — Unearned income		182,110			308,347
Allowance for loan losses		548,832			522,232

		27,472,624			31,494,785

Premises and equipment, net		588,163			595,140
Other real estate		81,410			84,816
Accrued income receivable		216,114			248,240
Servicing assets (2007 - $191,624 at fair value)		196,645			164,999
Other assets		1,456,994			1,446,891
Goodwill		630,761			667,853
Other intangible assets		69,503			107,554

	$	44,411,437		$	47,403,987

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	4,510,789		$	4,222,133
Interest bearing		23,823,689			20,216,198

		28,334,478			24,438,331
Federal funds purchased and assets sold under agreements to repurchase		5,437,265			5,762,445
Other short-term borrowings		1,501,979			4,034,125
Notes payable		4,621,352			8,737,246
Other liabilities		934,372			811,424

		40,829,446			43,783,571

Commitments and contingencies (See Notes 26, 28, 30, 33, 34)

Minority interest in consolidated subsidiaries		109			110

Stockholders’ Equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 issued and outstanding in both periods presented		186,875			186,875
Common stock, $6 par value; 470,000,000 shares authorized in both periods presented; 293,651,398 shares issued (2006 - 292,190,924) and 280,029,215 shares outstanding (2006 - 278,741,547)		1,761,908			1,753,146
Surplus		568,184			526,856
Retained earnings		1,319,467			1,594,144
Treasury stock-at cost, 13,622,183 shares (2006 - 13,449,377)		(207,740	)		(206,987	)
Accumulated other comprehensive loss, net of tax of ($15,438) (2006 - ($84,143))		(46,812	)		(233,728	)

		3,581,882			3,620,306

	$	44,411,437		$	47,403,987

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

Consolidated Statements of Operations


	Year ended December 31,
(In thousands, except per share information)	2007			2006		2005

Interest Income:
Loans	$	2,615,314		$	2,486,453	$	2,116,299
Money market investments		25,190			29,626		30,736
Investment securities		445,769			516,237		488,814
Trading securities		41,898			32,125		30,010

		3,128,171			3,064,441		2,665,859

Interest Expense:
Deposits		765,793			580,094		430,813
Short-term borrowings		448,172			518,960		349,203
Long-term debt		464,816			537,477		461,636

		1,678,781			1,636,531		1,241,652

Net interest income		1,449,390			1,427,910		1,424,207
Provision for loan losses		562,650			287,760		195,272

Net interest income after provision for loan losses		886,740			1,140,150		1,228,935
Service charges on deposit accounts		196,072			190,079		181,749
Other service fees (Note 35)		363,257			320,875		331,501
Net gain on sale and valuation adjustment of investment securities		55,159			4,359		52,113
Trading account (loss) profit		(2,464	)		35,288		30,051
(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale		(38,970	)		117,421		83,297
Other operating income		121,262			141,463		106,564

		1,581,056			1,949,635		2,014,210

Operating Expenses:
Personnel costs:
Salaries		519,523			517,178		474,636
Pension, profit sharing and other benefits		148,666			151,493		148,053

		668,189			668,671		622,689
Net occupancy expenses		123,621			116,742		108,386
Equipment expenses		127,472			135,877		124,276
Other taxes		50,111			44,543		39,197
Professional fees		149,854			141,534		119,281
Communications		66,877			68,283		63,395
Business promotion		115,388			129,965		100,434
Printing and supplies		17,438			17,741		18,378
Impairment losses on long-lived assets		12,344			7,232		—
Other operating expenses		151,062			118,128		122,585
Impact of change in fiscal period at certain subsidiaries		—			9,741		—
Goodwill and trademark impairment losses		211,750			14,239		—
Amortization of intangibles		10,445			12,377		9,579

		1,704,551			1,485,073		1,328,200

(Loss) income before income tax and cumulative effect of accounting change		(123,495	)		464,562		686,010
Income tax (benefit) expense		(59,002	)		106,886		148,915

(Loss) income before cumulative effect of accounting change		(64,493	)		357,676		537,095
Cumulative effect of accounting change, net of tax		—			—		3,607

Net (Loss) Income	$	(64,493	)	$	357,676	$	540,702

Net (Loss) Income Applicable to Common Stock	$	(76,406	)	$	345,763	$	528,789

Basic (Loss) Earnings per Common Share (EPS)
Before Cumulative Effect of Accounting Change	$	(0.27	)	$	1.24	$	1.97

Diluted EPS Before Cumulative Effect of Accounting Change	$	(0.27	)	$	1.24	$	1.96

Basic EPS After Cumulative Effect of Accounting Change	$	(0.27	)	$	1.24	$	1.98

Diluted EPS After Cumulative Effect of Accounting Change	$	(0.27	)	$	1.24	$	1.97

Dividends Declared per Common Share	$	0.64		$	0.64	$	0.64

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

Popular, Inc. | 2007 | Annual Report 79

Consolidated Statements of Cash Flows


	Year ended December 31,
(In thousands)	2007			2006			2005

Cash Flows from Operating Activities:
Net (loss) income	$	(64,493	)	$	357,676		$	540,702
Less: Cumulative effect of accounting change, net of tax		—			—			3,607
Less: Impact of change in fiscal period of certain subsidiaries, net of tax		—			(6,129	)		—

Net (loss) income before cumulative effect of accounting change and change in fiscal period		(64,493	)		363,805			537,095

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		78,563			84,388			81,947
Provision for loan losses		562,650			287,760			195,272
Goodwill and trademark impairment losses		211,750			14,239			—
Impairment losses on long-lived assets		12,344			7,232			—
Amortization of intangibles		10,445			12,377			9,579
Amortization and fair value adjustment of servicing assets		61,110			62,819			25,766
Net gain on sale and valuation adjustment of investment securities		(55,159	)		(4,359	)		(52,113	)
Net gain on disposition of premises and equipment		(12,296	)		(25,929	)		(29,079	)
Loss (gain) on sale of loans and valuation adjustments on loans held-for-sale		38,970			(117,421	)		(83,297	)
Net amortization of premiums and accretion of discounts on investments		20,238			23,918			35,288
Net amortization of premiums on loans and deferred loan origination fees and costs		90,511			130,091			127,235
Earnings from investments under the equity method		(21,347	)		(12,270	)		(10,982	)
Stock options expense		1,763			3,006			5,226
Net disbursements on loans held-for-sale		(4,803,927	)		(6,580,246	)		(4,321,658	)
Acquisitions of loans held-for-sale		(550,392	)		(1,503,017	)		(733,536	)
Proceeds from sale of loans held-for-sale		4,127,794			6,782,081			4,127,381
Net decrease in trading securities		1,222,585			1,368,975			1,160,980
Net decrease (increase) in accrued income receivable		11,832			(4,209	)		(30,808	)
Net (increase) decrease in other assets		(94,215	)		49,708			(172,879	)
Net increase in interest payable		5,013			32,477			35,218
Deferred income taxes		(223,740	)		(26,208	)		(3,679	)
Net increase in postretirement benefit obligation		2,388			4,112			5,451
Net increase (decrease) in other liabilities		71,575			(83,544	)		20,431

Total adjustments		768,455			505,980			391,743

Net cash provided by operating activities		703,962			869,785			928,838

Cash Flows from Investing Activities:
Net (increase) decrease in money market investments		(638,568	)		381,421			160,061
Purchases of investment securities:
Available-for-sale		(160,712	)		(254,930	)		(4,243,162	)
Held-to-maturity		(29,320,286	)		(20,863,367	)		(33,579,802	)
Other		(112,108	)		(66,026	)		(77,716	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,608,677			1,876,458			3,317,198
Held-to-maturity		28,935,561			20,925,847			33,787,268
Other		44,185			88,314			61,053
Proceeds from sales of investment securities available-for-sale		58,167			208,802			388,596
Proceeds from sale of other investment securities		246,352			—			—
Net disbursements on loans		(1,457,925	)		(1,587,326	)		(343,093	)
Proceeds from sale of loans		415,256			938,862			297,805
Acquisition of loan portfolios		(22,312	)		(448,708	)		(2,650,540	)
Net liabilities assumed (assets acquired), net of cash		719,604			(3,034	)		(411,782	)
Mortgage servicing rights purchased		(26,507	)		(23,769	)		(5,039	)
Acquisition of premises and equipment		(104,866	)		(104,593	)		(159,166	)
Proceeds from sale of premises and equipment		63,455			87,913			71,053
Proceeds from sale of foreclosed assets		175,974			138,703			117,159

Net cash provided by (used in) investing activities		423,947			1,294,567			(3,270,107	)

Cash Flows from Financing Activities:
Net increase in deposits		2,889,524			1,789,662			1,371,668
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(325,180	)		(3,053,167	)		2,227,888
Net (decrease) increase in other short-term borrowings		(2,612,801	)		1,226,973			(766,277	)
Payments of notes payable		(2,463,277	)		(3,469,429	)		(2,650,972	)
Proceeds from issuance of notes payable		1,425,220			1,506,298			2,341,011
Dividends paid		(190,617	)		(188,321	)		(182,751	)
Proceeds from issuance of common stock		20,414			55,846			193,679
Treasury stock acquired		(2,525	)		(367	)		(1,467	)

Net cash (used in) provided by financing activities		(1,259,242	)		(2,132,505	)		2,532,779

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

Net (decrease) increase in cash and due from banks		(131,333	)		43,761			189,938
Cash and due from banks at beginning of period		950,158			906,397			716,459

Cash and due from banks at end of period	$	818,825		$	950,158		$	906,397

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

Consolidated Statements of Changes in Stockholders’ Equity


	Year ended December 31,
(In thousands, except share information)	2007			2006			2005

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

Common Stock:
Balance at beginning of year		1,753,146			1,736,443			1,680,096
Common stock issued under Dividend Reinvestment Plan		8,702			5,154			4,372
Issuance of common stock		—			11,312			51,688
Options exercised		60			237			287

Balance at end of year		1,761,908			1,753,146			1,736,443

Surplus:
Balance at beginning of year		526,856			452,398			278,840
Common stock issued under Dividend Reinvestment Plan		11,466			11,323			13,263
Issuance of common stock		—			28,281			129,219
Issuance cost of common stock		—			1,462			(5,636	)
Stock options expense on unexercised options, net of forfeitures		1,713			2,826			5,003
Options exercised		149			566			709
Transfer from retained earnings		28,000			30,000			31,000

Balance at end of year		568,184			526,856			452,398

Retained Earnings:
Balance at beginning of year		1,594,144			1,456,612			1,129,793
Net (loss) income		(64,493	)		357,676			540,702
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)		8,667			—			—
Cash dividends declared on common stock		(178,938	)		(178,231	)		(170,970	)
Cash dividends declared on preferred stock		(11,913	)		(11,913	)		(11,913	)
Transfer to surplus		(28,000	)		(30,000	)		(31,000	)

Balance at end of year		1,319,467			1,594,144			1,456,612

Treasury Stock — At Cost:
Balance at beginning of year		(206,987	)		(207,081	)		(206,437	)
Purchase of common stock		(2,525	)		(367	)		(1,467	)
Reissuance of common stock		1,772			461			823

Balance at end of year		(207,740	)		(206,987	)		(207,081	)

Accumulated Other Comprehensive
Loss:
Balance at beginning of year		(233,728	)		(176,000	)		35,454
Other comprehensive income (loss), net of tax		186,916			(17,877	)		(211,454	)
Adoption of SFAS No. 158		—			(39,851	)		—

Balance at end of year		(46,812	)		(233,728	)		(176,000	)

Total stockholders’ equity	$	3,581,882		$	3,620,306		$	3,449,247

Disclosure of changes in number of shares:


	Year ended December 31,
	2007			2006			2005

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


Common Stock — Issued:
Balance at beginning of year		292,190,924			289,407,190			280,016,007
Issued under the Dividend Reinvestment Plan		1,450,410			858,905			728,705
Issuance of common stock		—			1,885,380			8,614,620
Options exercised		10,064			39,449			47,858

Balance at end of year		293,651,398			292,190,924			289,407,190

Treasury stock		(13,622,183	)		(13,449,377	)		(13,451,799	)

Common Stock — Outstanding		280,029,215			278,741,547			275,955,391

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

Popular, Inc. | 2007 | Annual Report 81

Consolidated Statements of Comprehensive Income


	Year ended December 31,
(In thousands)	2007			2006			2005

Net (loss) income	$	(64,493	)	$	357,676		$	540,702


Other comprehensive income (loss), before tax:
Foreign currency translation adjustment		2,113			(386	)		(785	)
Adjustment of pension and postretirement benefit plans		18,121			(1,539	)		(2,354	)
Unrealized holding gains (losses) on securities available-for-sale arising during the period		239,390			(12,194	)		(222,604	)
Reclassification adjustment for gains included in net income		(55	)		(4,359	)		(51,591	)
Unrealized net losses on cash flow hedges		(4,782	)		(1,573	)		(3,316	)
Reclassification adjustment for losses included in net income		1,077			1,839			4,247
Cumulative effect of accounting change		(243	)		—			(103	)
Reclassification adjustment for gains included in net income		—			—			(20	)

		255,621			(18,212	)		(276,526	)
Income tax (expense) benefit		(68,705	)		335			65,072

Total other comprehensive income (loss), net of tax		186,916			(17,877	)		(211,454	)

Comprehensive income, net of tax	$	122,423		$	339,799		$	329,248

Tax Effects Allocated to Each Component of Other Comprehensive Income:


	Year ended December 31,
(In thousands)	2007			2006			2005

Underfunding of pension and postretirement benefit plans	$	(6,926	)	$	600			$	918
Unrealized holding gains (losses) on securities available-for-sale arising during the period		(63,104	)		2,747				62,225
Reclassification adjustment for gains included in net income		8			(2,898	)			2,270
Unrealized net losses on cash flow hedges		1,723			630				1,916
Reclassification adjustment for losses included in net income		(406	)		(744	)			(2,257	)

Income tax (expense) benefit	$	(68,705	)	$	335			$	65,072

Disclosure of accumulated other comprehensive (loss) income:


	Year ended December 31,
(In thousands)	2007			2006			2005

Foreign currency translation adjustment	$	(34,588	)	$	(36,701	)	$	(36,315	)


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		(51,139	)		(69,260	)		—
Tax effect		20,108			27,034			—

Net of tax amount		(31,031	)		(42,226	)		—


Unrealized gains (losses) on securities available-for-sale		27,092			(212,243	)		(195,690	)
Tax effect		(5,950	)		57,146			57,297

Net of tax amount		21,142			(155,097	)		(138,393	)


Unrealized (losses) gains on cash flow hedges		(3,615	)		90			(176	)
Tax effect		1,280			(37	)		77

Net of tax amount		(2,335	)		53			(99	)


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

Accumulated other comprehensive loss	$	(46,812	)	$	(233,728	)	$	(176,000	)

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

Popular, Inc. | 2007 | Annual Report 83

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

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

Nature of operations

The Corporation is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. As described in Note 2 to the consolidated financial statements, E-LOAN is currently in a restructuring process of its operations. PFH, after certain restructuring events discussed in Note 2 to the consolidated financial statements, is in the process of exiting the loan origination business, but continues to carry a maturing loan portfolio and operates a mortgage loan servicing unit. 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 32 to the consolidated financial statements presents further information about the Corporation’s business segments.

Business combinations

During the fourth quarter of 2007, the Corporation acquired Citibank’s retail banking operations in Puerto Rico, which added 17 branches to BPPR’s retail branch network prior to branch closings due to synergies, and contributed with approximately $997,000,000 in deposits and $220,000,000 in loans. The purchase price paid was approximately $123,540,000. Also, Popular Securities, a subsidiary within the Banco Popular de Puerto Rico reportable segment, strengthened its brokerage sales force and increased its assets under management by acquiring Smith Barney’s retail brokerage operations in Puerto Rico. This acquisition added approximately $1,200,000,000 in assets under its management (thus, are not included in the Corporation’s consolidated financial statements). As part of these acquisitions, which were accounted as business combinations, the Corporation recorded approximately $125,893,000 in goodwill and $21,325,000 in other intangibles assets. The later consisted primarily of core deposit intangibles.

Business combinations are accounted for under the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition.

Principles of consolidation

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

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

Limited partnerships are accounted for by the equity method as required by EITF D-46 “Accounting for Limited Partnership Investments” (“EITF D-46”). EITF D-46 requires that all limited partnerships are accounted for by the equity method pursuant to paragraph 8 of AICPA Statement of Position 78-9 “Accounting for

Investments in Real Estate Ventures”, which requires the use of the equity method unless the investor’s interest is so “minor” that the limited partner may have virtually no influence over partnership operating and financial policies.

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

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

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment securities

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

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

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

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

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

The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on the interest method over the outstanding period of the related securities, except for a small portfolio of mortgage-backed securities for which the Corporation utilizes a method which approximates the interest method, but which incorporates factors such as actual prepayments. The results of the alternative method do not differ materially from those obtained using the interest method. The cost of securities sold is determined by specific identification. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale, held-to-maturity

Popular, Inc. | 2007 | Annual Report 85

and other investment securities are determined using the specific identification method and are reported separately in the consolidated statements of operations. Purchases and sales of securities are recognized on a trade-date basis.

Derivative financial instruments

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

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

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

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

Loans

Loans are classified as loans held-in-portfolio when management has the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. The foreseeable future is a management judgment which is determined based upon the type of loan, business strategies, current market conditions, balance sheet management and liquidity needs. Management’s view of the foreseeable future may change based on changes in these conditions. When a decision is made to sell or securitize a loan that was not originated or initially acquired with the intent to sell or securitize, the loan is reclassified from held-in-portfolio into held-for-sale. Due to changing market conditions or other strategic initiatives, management’s intent with respect to the disposition of the loan may change, and accordingly, loans previously classified as held-for-sale may be reclassified into held-in-portfolio. Loans transferred between loans held-for-sale and held-in-portfolio classifications are recorded at the lower of cost or market at the date of transfer.

Loans held-for-sale include residential mortgages, and to a lesser extent consumer and commercial loans. Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair value determined, generally in the aggregate. Fair value is measured based on current market prices for similar loans, outstanding investor commitments, bids received from potential purchasers, prices of recent sales or securitizations or discounted cash flow analyses which utilizes inputs and assumptions which are believed to be consistent with market participants’ views. The cost basis also includes consideration of deferred origination fees and costs, which are recognized in earnings at the time of sale. The amount, by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income (loss) for the period in which the change occurs. At December 31, 2007, the lower of cost or market valuation allowance for outstanding loans held-for-sale amounted to $652,000. As of December 31, 2006, the fair value of loans held-for-sale substantially exceeded their cost.

Loans held-in-portfolio are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and

premiums or discounts on purchased loans. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method or a method which approximates the interest method over the term of the loan as an adjustment to interest yield.

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

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

Lease financing

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

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

Allowance for loan losses

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

The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis. The Corporation has defined as impaired loans those commercial loans that amount to $250,000 or more and with interest and /or principal 90 days or more past due. Also, specific commercial loans over $500,000 are deemed impaired when, based on current information and events, management considers that it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. A specific allowance for loan impairment is recognized to the extent that the carrying value of an impaired commercial loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate; the observable market price of the loan; or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired commercial loans is part of the Corporation’s overall allowance for loan losses. Meanwhile, SFAS No. 5 provides for the recognition of a loss allowance for groups of homogeneous loans. To determine the allowance for loan losses under SFAS No. 5, the Corporation applies a historic loss and volatility factor to specific loan balances segregated by loan type and legal entity.

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

Transfers and servicing of financial assets and extinguishment of liabilities

The transfer of financial assets in which the Corporation surrenders control over the assets is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of SFAS No. 125” sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes, amongst others: (1) the assets must be isolated from creditors of the transferor, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income

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tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under SFAS No. 140, as sales, recognizing a deferred tax asset or liability on the transaction.

Upon completion of a transfer of financial assets that satisfies the conditions to be accounted for as a sale, the Corporation derecognizes all assets sold; recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale.

SFAS No. 140 requires a true sale analysis of the treatment of the transfer under state law as if the Corporation was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met under SFAS 140, other factors concerning the nature and extent of the transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted, including whether the special purpose entity (“SPE”) has complied with rules concerning qualifying special-purpose entities (“QSPEs”).

Paragraphs 35-55 of SFAS No. 140, as interpreted by the FASB Staff Implementation Guide: A Guide to Implementation of Statement 140 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“Statement 140 Guide”), provides numerous conditions that must be met for a transferee to meet the QSPE exception in paragraph 9(b) of SFAS No. 140. The basic underlying principle in this guidance is that assets transferred to a securitization trust should be accounted for as a sale, and recorded off-balance sheet, only when the transferor has given up control, including decision-making ability, over those assets. If the servicer maintains effective control over the transferred financial assets, off-balance sheet accounting by the transferor is not appropriate. Paragraphs 35(b) and 35(d) of SFAS No. 140 and the related interpretative guidance in SFAS No. 140 and the Statement 140 Guide discuss the permitted activities of a QSPE. The objective is to significantly limit the permitted activities so that it is clear that the transferor does not maintain effective control over the transferred financial assets.

The Corporation, through its subsidiary PFH, conducted asset securitizations that involved the transfer of mortgage loans to QSPEs, which in turn transferred these assets and their titles to different trusts, thus isolating those loans from the Corporation’s assets. These off-balance sheet securitizations completed by PFH consisted primarily of subprime mortgage loans, which PFH continues to service. The Corporation’s defines subprime loans as those loans with a current FICO score of 660 or below. A uniform industry definition of what constitutes a subprime loan does not exist.

As part of the initiatives taken by the government and the mortgage industry, in late 2007, the American Securitization Forum (“ASF”) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “ASF Framework”). This ASF Framework provides recommended guidance for servicers to streamline borrower evaluation procedures and to facilitate the effective use of all forms of foreclosure and loss prevention efforts for securitized subprime ARMs. Segment 2 includes current loans where the borrower is unlikely to be able to refinance into any readily available mortgage industry product. The ASF Framework indicates that for Segment 2 subprime ARM loans, the servicer can presume that the borrower would be unable to pay pursuant to the original terms of the loan after the interest rate reset, and thus, the loan is “reasonable foreseeable” of default in absence of a modification.

The PFH off-balance sheet QSPE’s have limitations on permitted activities. The permitted activities include the ability of the servicer to modify subprime mortgages when default is “reasonably foreseeable.” The Corporation adopted the screening criteria in Segment 2 of the ASF Framework for purposes of determining the subprime adjustable rate mortgage (“ARM”) loans where default is “reasonably foreseeable.”

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

Servicing assets

The Corporation periodically sells or securitizes loans while retaining the obligation to perform the servicing of such loans. In addition, the Corporation may purchase or assume the right to service loans originated by others. Whenever the Corporation undertakes an obligation to service a loan, management assesses whether a servicing asset or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate the servicer for performing the servicing.

Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Corporation for its expected cost. Servicing assets are separately presented on the consolidated statement of condition. Upon adoption of SFAS No. 156 “Accounting for Servicing of Financial Assets — an Amendment of FASB No. 140” in January 2007, the Corporation no longer records mortgage servicing rights on securitizations accounted for as secured borrowings.

Commencing in January 2007, all separately recognized servicing assets are initially recognized at fair value. For subsequent measurement of servicing rights, the Corporation has elected the fair value method for mortgage servicing rights (“MSRs”) while all other servicing assets, particularly related to Small Business Administration (“SBA”) commercial loans, follow the amortization method. Under the fair value measurement method, MSRs are recorded at fair value each reporting period, and changes in fair value are reported in other service fees in the consolidated statement of operations. Under the amortization method, servicing assets are amortized in proportion to, and over the period of, estimated servicing income and assessed for impairment based on fair value at each reporting period. Contractual servicing fees including ancillary income and late fees, as well as fair value adjustments, and impairment losses, if any, are reported in other service fees in the consolidated statement of operations. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.

For purposes of evaluating and measuring impairment of capitalized servicing assets that are accounted under the amortization method, the amount of impairment recognized, if any, is the amount by which the capitalized servicing assets per stratum exceed their estimated fair value. Temporary impairment is recognized through a valuation allowance with changes included in net income for the period in which the change occurs. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular stratum, the valuation allowance is reduced through a recovery in earnings. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Servicing rights subsequently accounted under the amortization method are also reviewed for other-than-temporary impairment. When the recoverability of an impaired servicing asset accounted under the amortization method is determined to be remote, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the servicing rights, precluding subsequent recoveries.

Refer to Note 22 to the consolidated financial statements for information on the classes of servicing assets defined by the Corporation and the impact of adopting SFAS No. 156 in January 2007.

Residual interests

The Corporation sells residential mortgage loans to QSPEs, which in turn issue asset-backed securities to investors. The Corporation retains an interest in the loans sold in the form of mortgage servicing rights and residual interests. The residual interest represents the present value of future excess cash flows resulting from the difference between the interest received from the obligors on the loans and the interest paid to the investors on the asset-backed securities, net of credit losses, servicing fees and other expenses. The assets and liabilities of the QSPEs are not included in the Corporation’s consolidated statements of condition, except for the retained interests previously described. The residual interests related with securitizations performed prior to 2006 are classified as available-for-sale securities and are measured at fair value. The residual interests derived from securitizations performed in 2006 and thereafter, including those residual interests derived from the recharacterization transaction that is described in Note 23 to the consolidated financial statements, are accounted as trading securities and are also measured at fair value. Refer to Note 23 for additional information on the residual interests classifications. The classification of the residual interests as trading securities was driven by accounting considerations as permitted under SFAS No. 115 and the interpretative guidance. It is not management’s intention to actively trade these residual interests.

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

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

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change in estimate, with the amount of periodic accretion adjusted over the remaining life of the beneficial interest.

On a quarterly basis, management performs a fair value analysis of the residual interests that are classified as available-for-sale and evaluates whether any unfavorable change in fair value is other-than-temporary as required under SFAS No 115 “Accounting for Certain Investments in Debt and Equity Securities”. The Corporation follows the accounting guidance in EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets” to evaluate when a decline in fair value of a beneficial interest that results from an adverse change in estimated cash flows should be considered an other-than-temporary impairment. Whenever the current fair value of the residual interest classified as available-for-sale is lower than its current amortized cost, management evaluates to see if an impairment charge for the deficiency is required to be taken through earnings. If there has been an adverse change in estimated cash flows (considering both the timing and amount of flows), then the residual interest is written-down to fair value, which becomes the new amortized cost basis. To determine whether a change is adverse, the present value of the remaining estimated cash flows as estimated on the last revision are compared against the present value of the estimated cash flows at the current reporting date. If the present value of the cash flows estimated at the last revision is greater than the present value of the current estimated cash flows, the change is considered other-than-temporary. During 2006 and 2007, all declines in fair value in residual interests classified as available-for-sale were considered other-than-temporary.

For residual interests classified as trading securities, the fair value determinations are also performed on a quarterly basis. SFAS No. 115 provides that changes in fair value in those securities are reflected in earnings as they occur. For residual interests held in the trading category, there is no need to evaluate them for other-than-temporary impairments.

The methodology for determining other-than-temporary impairment is different from the periodic adjustment of accretable yield because the periodic adjustment of accretable yield is used to determine the appropriate interest income to be recognized in the residual interest and the other-than-temporary assessment is used to determine whether the recorded value of the residual interest is impaired. For both, the estimate of cash flows is a critical component. For the adjustment to accretable yield when there is a favorable or an adverse change in estimated cash flows from the cash flows previously projected, the amount of accretable yield should be recalculated as the excess of the estimated cash flows over a reference amount. The reference amount is the initial investment less cash received to date less other-than-temporary impairments recognized to date plus the yield accreted to date. This is based on the accounting guidance prescribed by EITF 99-20.

Premises and equipment

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

The Corporation capitalizes interest cost incurred in the construction of significant real estate projects, which consist primarily of facilities for its own use or intended for lease. The amount of interest cost capitalized is to be an allocation of the interest cost incurred during the period required to substantially complete the asset. The interest rate for capitalization purposes is to be based on a weighted average rate on the Corporation’s outstanding borrowings, unless there is a specific new borrowing associated with the asset. Interest cost capitalized for the years ended December 31, 2007, 2006 and 2005 was not significant.

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

Impairment on long-lived assets

The Corporation evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable under the provision of SFAS No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets”. In the event of an asset retirement, the Corporation recognizes a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value of such liability can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

Other real estate

Other real estate, received in satisfaction of debt, is recorded at the lower of cost (carrying value of the loan) or the appraised value

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

Goodwill and other intangible assets

The Corporation accounts for goodwill and identifiable intangible assets under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill is recognized when the purchase price is higher than the fair value of net assets acquired in business combinations under the purchase method of accounting. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or circumstances indicate possible impairment using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, which include market price multiples of comparable companies and the discounted cash flow analysis. Goodwill impairment losses are recorded as part of operating expenses in the consolidated statement of operations.

Other intangible assets deemed to have an indefinite life are not amortized, but are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset. In determining that an intangible asset has an indefinite life, the Corporation considers expected cash inflows and legal, regulatory, contractual, competitive, economic and other factors, which could limit the intangible asset’s useful life. The evaluation of E-LOAN’s trademark, an indefinite life intangible asset, was performed using a valuation approach called the “relief-from-royalty” method. The basis of the “relief-from-royalty” method is that, by virtue of having ownership of the trademark, the Corporation is relieved from having to pay a royalty, usually expressed as a percentage of revenue, for the use of the trademark. The main estimates involved in the valuation of this intangible asset included the determination of an appropriate royalty rate; the revenue projections that benefit from the use of this intangible; the after-tax royalty savings derived from the ownership of the intangible; and the discount rate to apply to the projected benefits to arrive at the present value of this intangible. Since estimates are an integral part of this trademark impairment analysis, changes in these estimates could have a significant impact on the calculated fair value. Trademark impairment losses are recorded as part of operating expenses in the consolidated statements of operations.

Other identifiable intangible assets with a finite useful life, mainly core deposits, are amortized using various methods over the periods benefited, which range from 3 to 11 years. These intangibles are evaluated periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments on intangible assets with a finite useful life are evaluated as long-lived assets under the guidance of SFAS No. 144 and are included as part of “impairments on long-lived assets” in the category of operating expenses in the consolidated statements of operations.

For further disclosures required by SFAS No. 142, refer to Note 12 to the consolidated financial statements.

Bank-Owned Life Insurance

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

The cash surrender value and any additional amounts provided by the contractual terms of the bank-owned insurance policy that are realizable at the balance sheet date are considered in determining the amount that could be realized, and any amounts that are not immediately payable to the policyholder in cash are discounted to their present value. In determining “the amount that could be realized,” it is assumed that policies will be surrendered on an individual-by-individual basis. This accounting policy follows the guidance in 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”), which became effective in 2007. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $907,000 cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.

Assets sold/purchased under agreements to repurchase/resell

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

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

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

Guarantees, including indirect guarantees of indebtedness of others

The Corporation, as a guarantor, recognizes at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Refer to Note 34 to the consolidated financial statements for further disclosures.

Treasury stock

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

Income and expense recognition — Processing business

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

Income Recognition — Insurance agency business

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

Income Recognition — Investment banking revenues

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

Foreign exchange

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

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

During 2007, the foreign currency translation adjustment from operations in the Dominican Republic were reported in accumulated other comprehensive income (loss). Since June 2004 through December 31, 2006, the Corporation’s interests in the Dominican Republic were remeasured into the U.S. dollar because the economy was considered highly inflationary under the test prescribed by SFAS No. 52. During the year ended December 31, 2006, approximately $765,000 in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive (loss) income (2005 — $568,000). These net

gains relate to improvement in the Dominican peso’s exchange rate to the U.S. dollar from $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, to $33.35 at the end of 2006. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $31,787,000.

Refer to the disclosure of accumulated comprehensive income included in the accompanying consolidated statements of comprehensive income (loss) for the outstanding balances of unfavorable foreign currency translation adjustments at December 31, 2007, 2006 and 2005.

Income taxes

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

Positions taken in the Corporation’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest on income tax uncertainties is classified within income tax expense in the statement of operations, while the penalties, if any, are accounted for as other operating expenses.

The Corporation accounts for the taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues).

During the first quarter of 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”). 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. 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 27 to the consolidated financial statements for further information on the impact of FIN 48.

Employees’ retirement and other postretirement benefit plans

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

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

SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” requires the recognition of the funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans on the statement of condition. The Corporation adopted SFAS No. 158 as of December 31, 2006. See Note 24 for disclosures on the impact of this accounting pronouncement.

Stock-based compensation

In 2002, the Corporation opted to use the fair value method of recording stock-based compensation as described in SFAS No. 123 “Accounting for Stock Based Compensation”. The Corporation adopted SFAS No. 123-R “Share-Based Payment” on January 1, 2006 using the modified prospective transition method.

Comprehensive income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments

Popular, Inc. | 2007 | Annual Report 93

by owners and distributions to owners. The presentation of comprehensive income is included in separate consolidated statements of comprehensive income (loss).

Earnings (losses) per common share

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

Statement of cash flows

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

Reclassifications

Certain reclassifications have been made to the 2006 and 2005 consolidated financial statements to conform with the 2007 presentation.

Recently issued accounting pronouncements and interpretations

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB decided to issue a final staff position that defers for one year the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The staff position also amends SFAS No. 157 to exclude SFAS No. 13 “Accounting for Leases” and its related interpretive accounting pronouncements that address leasing transactions. The Corporation adopted the provisions of SFAS No. 157 that were not deferred, commencing in the first quarter of 2008. The provisions of SFAS 157 are to be applied prospectively. The Corporation is currently assessing the impact of SFAS No. 157 on its consolidated financial statements, including disclosures.

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

Management adopted the fair value option for approximately $287 million of loans and $287 million of bond certificates associated to PFH’s on-balance sheet securitizations that were outstanding at December 31, 2007 (transactions excluded from the recharacterization transaction described in Note 23 to the consolidated financial statements). These loans serve as collateral for the bond certificates. Due to accounting constraints, the Corporation is unable to recharacterize these loan securitizations as sales. Additionally, the Corporation plans to elect the fair value option for approximately $1.2 billion of whole loans held-in-portfolio by PFH. These whole loans consist principally of mortgage loans and second-liens that were originated through the exited business of PFH and home equity lines of credit that had been originated by E-LOAN prior to the 2007 U.S. Reorganization, which is described in Note 2 to the consolidated financial statements. Due to their subprime characteristics and current market disruptions, these loans are being held-in-portfolio as potential buyers have withdrawn from the market, given heightened concerns over credit quality of borrowers and continued deterioration in the housing markets. Management understands that accounting for these loans at fair value provides a more relevant and transparent measurement of the realizable value of the assets and differentiates the PFH portfolio from that loan portfolio that the Corporation will continue to originate through other channels

outside PFH. The measurement of the bond certificates at fair value reflects the actual liability of the Corporation, after considering the credit risk to be borne by the certificateholders on the on-balance sheet securitization. Management understands that the adoption of the fair value option for the financial assets and liabilities selected better reflects the inherent risks of these instruments and reflects the intention of the Corporation to discontinue most of the businesses previously conducted at PFH.

The Corporation expects to recognize a negative pre-tax adjustment that could range between $280 million and $300 million ($158 million and $169 million after tax) due to the transitional adjustment for electing the fair value option on the previously described financial instruments. That amount represents the difference between the fair value and the carrying value of the loans at date of adoption. This negative adjustment would not impact earnings but instead be reflected as a reduction of beginning retained earnings as of January 1, 2008. Subsequent increases or decreases in the fair value of the assets and liabilities accounted under SFAS No. 159 provisions will be recorded as valuation adjustments through earnings in the consolidated statement of income. The fair value adjustments from the adoption of SFAS No. 159 disclosed here are only estimates as management is in the process of validating the methodologies used to value the assets and liabilities and the results of such valuations. Also, management continues to evaluate the impact that SFAS No. 159 will have on the consolidated financial statements, including disclosures.

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

In April 2007, the FASB issued Staff Position FSP FIN No. 39-1, which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 in 2008 did not have a material impact on the Corporation’s 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 on 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). Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements and disclosures. As indicated under the guidance of SOP 07-01, which was previously described, the implementation of FSP FIN No. 46(R) — 7 is indefinitely delayed until further notification by the FASB.

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

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this statement include the following: the acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date at fair value only if it is more

Popular, Inc. | 2007 | Annual Report 95

likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Corporation will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented on the consolidated financial statements.

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

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

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

The Corporation is currently evaluating the potential impact of adopting this SAB 109.

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

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

maturity of the financial asset. The scope of this FSP is limited to transfers and subsequent repurchase financings that are entered into contemporaneously or in contemplation of one another.

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

Note 2 — Restructuring plans:

PFH Restructuring Plan

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

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

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

	•		Integrating PFH’s existing commercial lending businesses into BPNA’s business lending groups;

	•		Focusing on the core Equity One (subsidiary of PFH) network of consumer finance branches;

	•		Growing the third party mortgage servicing business operated by Popular Mortgage Servicing Inc., a subsidiary of PFH (“PMSI”); and

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

Refer to the PFH Branch Network Restructuring Plan section presented in this Note 2 to the consolidated financial statements for information on additional actions at PFH in January 2008.

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

The PFH Restructuring Plan resulted in charges between the fourth quarter of 2006 and the year ended December 31, 2007 as follows:


	December 31,			December 31,
(In millions)	2007			2006

Personnel costs	$	7.8	(a)		—
Net occupancy expenses		4.5	(b)		—
Equipment expenses		0.3			—
Professional fees		1.8	(c)		—
Other operating expenses		0.3			—

Total restructuring charges	$	14.7			—
Impairment of long-lived assets		—		$	7.2	(d)
Impairment of goodwill		—			14.2	(e)

Total	$	14.7		$	21.4


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

(b)		Lease terminations

(c)		Outplacement and professional services contract terminations

(d)		Consists mostly of software and leasehold improvements

(e)		Attributable to businesses exited at PFH

Of the above restructuring costs, approximately $3.2 million was recognized as a liability as of December 31, 2007.

The Corporation does not expect to incur additional significant restructuring costs related to the PFH Restructuring Plan.

As part of the PFH Restructuring Plan, during early 2007, the Corporation actively worked in an internal corporate reorganization of its U.S. subsidiaries (the “Reorganization”). After notifying the Board of Governors of the Federal Reserve System and obtaining approval of the Corporation’s Board of Directors in January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. Reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH.

E-LOAN Restructuring Plan

In November 2007, the Board of Directors of the Corporation adopted a restructuring plan for its Internet financial services subsidiary E-LOAN (the “E-LOAN Restructuring Plan”). Considering E-LOAN’s operating losses in light of current market conditions and other factors, the Board of Directors approved a substantial reduction of marketing and personnel costs at E-LOAN and changes in E-LOAN’s business model to align it with revenue expectations. The changes include concentrating marketing investment toward the Internet and the origination of first mortgage loans that qualify for sale to government sponsored entities (“GSEs”). Also, as a result of escalating credit costs in the current economic environment and lower liquidity in the secondary markets for mortgage related products, the Corporation determined to hold back the origination by E-LOAN of home equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN Restructuring Plan continues to promote the Internet deposit gathering initiative with BPNA.

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As part of the E-LOAN Restructuring Plan, the Corporation evaluated the value of E-LOAN’s recorded goodwill and trademark by considering the changes in E-LOAN’s business model and the unprecedented conditions in the mortgage loan business.

The E-LOAN Restructuring Plan costs were as follows:


	Year ended
	December 31,
(In millions)	2007

Personnel costs	$	4.6	(a)
Net occupancy expenses		4.2	(b)
Equipment expenses		0.4	(c)
Professional fees		0.4	(c)

Total restructuring charges	$	9.6
Impairment of long-lived assets		10.5	(d)
Impairment of goodwill and trademark		211.8	(e)

Total	$	231.9


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

(b)		Lease terminations

(c)		Service contract terminations

(d)		Consists mostly of leasehold improvements, equipment and intangible assets with definitive lives

(e)		Goodwill impairment of $164.4 million and trademark impairment of $47.4 million

The above restructuring costs were recognized as a liability as of December 31, 2007.

PFH Branch Network Restructuring Plan

Given the unforeseen disruption in the capital markets since the summer of 2007 and its impact on funding, management of the Corporation concluded during the fourth quarter of 2007 that it would be difficult to generate an adequate return on the capital invested at Equity One’s consumer service branches.

In January 2008, the Corporation announced the signing of an Asset Purchase Agreement (the “Agreement”) to sell certain assets of Equity One to American General Finance, Inc., a member of American International Group. The closing of the Agreement with effective date of March 1, 2008 resulted in the sale of a significant portion of Equity One’s mortgage loan and consumer loan portfolio approximating $1.4 billion. This portfolio was reclassified by the Corporation from loans held-in-portfolio to loans held-for-sale in December 2007. American General Finance, Inc. will hire certain Equity One’s consumer services employees and will retain certain branch locations. Equity One will close all remaining consumer branches not purchased by American General. Workforce reductions at Equity One will result in the loss of employment for those employees at the consumer services branches not hired by American General, as well as for other related support functions. The individuals whose jobs will be eliminated will receive from Equity One a transitional severance package, professional counseling, outplacement and support during this process.


	Fourth
	Quarter
(In millions)	2007		2008		Total

Personnel costs		—	$	8.1	$	8.1	(a)
Net occupancy expenses		—		5.6		5.6	(b)
Other		—		2.1		2.1	(c)

Total restructuring charges		—		15.8		15.8
Impairment of long-lived assets	$	1.9		—		1.9	(d)
Other costs		—		1.8		1.8	(e)

Total combined estimated costs	$	1.9	$	17.6	$	19.5


(a)		Severance, retention bonuses and other benefits

(b)		Lease terminations

(c)		Contract cancellations and branch closing costs

(d)		Leasehold improvements, furniture and equipment

(e)		Bonuses and other benefits for retained employees

These estimates are preliminary and may vary as Popular’s management implements the PFH Branch Network Restructuring Plan. The estimates do not incorporate the final outcome of the number of employees and branches retained by American General under the final agreement.

Note 3 — Subsequent events:

In January 2008, the Corporation signed the Agreement to sell certain assets of Equity One to American General Finance, Inc. Refer to Note 2 to the consolidated financial statements for additional information.

On January 10, 2008, the Corporation completed the sale of six Houston branches of BPNA to Prosperity Bank. Prosperity Bank paid a premium of 10.10% for approximately $125,340,000 in deposits, as well as purchased certain loans and other assets attributable to the branches. The purchase price approximated $104,287,000. Prosperity retained all branch-based employees. 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.

Note 4 — 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 $678,473,000 at December 31, 2007 (2006 - $621,387,000). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, at December 31, 2007, the Corporation had securities with a market value of $273,000 (2006 — $445,000) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Law, at December 31, 2007 and 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600,000 in time deposits, equally split for the two IBEs, which were considered restricted assets.

As part of a line of credit facility with a financial institution, at December 31, 2007 and 2006, the Corporation maintained restricted cash of $1,860,000 as collateral for the line of credit. The cash is being held in certificates of deposit, which mature in less than 90 days. The line of credit is used to support letters of credit.

At December 31, 2007, the Corporation had restricted cash of $3,500,000 to support a letter of credit related to a service settlement agreement.

Note 5 — Securities purchased under agreements to resell:

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

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


(In thousands)	2007		2006

Repledged	$	146,712	$	179,303
Not repledged		14,193		103,124

Total	$	160,905	$	282,427

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

Popular, Inc.| 2007 | Annual Report 99

Note 6 — Investment securities available-for-sale:

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2007 and 2006 (2005 — only market value is presented) were as follows:


	2007
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average
	cost		gains		losses		value		yield
	(Dollars in thousands)
U.S. Treasury securities
Within 1 year	$	9,993	$	3		—	$	9,996		3.57	%
After 5 to 10 years		466,111		—	$	5,011		461,100		3.83

		476,104		3		5,011		471,096		3.82

Obligations of U.S. government sponsored entities
Within 1 year		1,315,128		113		4,642		1,310,599		3.75
After 1 to 5 years		3,593,239		49,022		487		3,641,774		4.45
After 5 to 10 years		470,357		2,669		756		472,270		4.24
After 10 years		71,304		1,167		—		72,471		5.96

		5,450,028		52,971		5,885		5,497,114		4.28

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		12,429		56		54		12,431		4.94
After 1 to 5 years		7,889		96		25		7,960		5.69
After 5 to 10 years		23,947		255		88		24,114		4.44
After 10 years		58,941		63		2,017		56,987		4.98

		103,206		470		2,184		101,492		4.90

Collateralized mortgage obligations
Within 1 year		190		—		—		190		6.06
After 1 to 5 years		7,491		3		34		7,460		5.25
After 5 to 10 years		127,490		370		609		127,251		5.00
After 10 years		1,268,121		3,381		9,863		1,261,639		5.15

		1,403,292		3,754		10,506		1,396,540		5.14

Mortgage-backed securities
Within 1 year		27,318		1		203		27,116		2.97
After 1 to 5 years		94,119		104		872		93,351		3.94
After 5 to 10 years		69,223		206		523		68,906		4.60
After 10 years		826,642		4,379		10,266		820,755		5.33

		1,017,302		4,690		11,864		1,010,128		5.08

Equity securities (without contractual maturity)		33,299		690		36		33,953		4.53

Other
After 1 to 5 years		23		—		—		23
After 5 to 10 years		68		—		—		68
After 10 years		4,721		—		—		4,721

		4,812		—		—		4,812		13.27

	$	8,488,043	$	62,578	$	35,486	$	8,515,135		4.51	%


	2006											2005
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average			Market
	cost		gains		losses		value		yield			value
	(Dollars in thousands)
U.S. Treasury securities
Within 1 year		—		—		—		—		—		$	14,792
After 1 to 5 years	$	29,343		—	$	271	$	29,072		3.99	%		29,108
After 5 to 10 years		475,310		—		29,547		445,763		3.82			—
After 10 years		—		—		—		—		—			460,425

		504,653		—		29,818		474,835		3.83			504,325

Obligations of U.S. government sponsored entities
Within 1 year		902,898		—		5,711		897,187		3.63			1,194,359
After 1 to 5 years		2,234,285	$	57		43,896		2,190,446		4.03			2,929,326
After 5 to 10 years		3,393,190		—		96,794		3,296,396		4.45			3,513,737
After 10 years		72,879		—		1,123		71,756		5.93			73,254

		6,603,252		57		147,524		6,455,785		4.21			7,710,676

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		6,695		18		10		6,703		5.44			451
After 1 to 5 years		19,688		105		179		19,614		5.32			26,971
After 5 to 10 years		18,227		20		164		18,083		5.10			12,793
After 10 years		73,604		122		3,184		70,542		5.04			66,439

		118,214		265		3,537		114,942		5.12			106,654

Collateralized mortgage obligations
After 1 to 5 years		10,040		—		105		9,935		5.75			12,707
After 5 to 10 years		134,487		343		1,890		132,940		5.01			41,236
After 10 years		1,513,086		4,561		15,196		1,502,451		5.34			1,794,820

		1,657,613		4,904		17,191		1,645,326		5.32			1,848,763

Mortgage-backed securities
After 1 to 5 years		150,884		54		3,661		147,277		4.37			209,991
After 5 to 10 years		74,668		46		2,288		72,426		4.43			109,688
After 10 years		836,298		1,358		20,543		817,113		5.35			1,054,063

		1,061,850		1,458		26,492		1,036,816		5.15			1,373,742

Equity securities (without contractual maturity)		70,954		6,692		3,901		73,745		1.85			82,534

Other
Within 1 year		—		—		—		—					6,655
After 1 to 5 years		121		27		—		148					11,892
After 5 to 10 years		307		329		—		636					1,265
After 10 years		45,898		2,731		—		48,629					70,080

		46,326		3,087		—		49,413		14.06			89,892

	$	10,062,862	$	16,463	$	228,463	$	9,850,862		4.51	%	$	11,716,586

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

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

100

The “other” category is composed substantially of residual interests derived from off-balance sheet mortgage loan securitizations by PFH.

The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 2007, by contractual maturity, are shown below:


(In thousands)	Amortized cost		Market value

Within 1 year	$	1,365,058	$	1,360,332
After 1 to 5 years		3,702,761		3,750,568
After 5 to 10 years		1,157,196		1,153,709
After 10 years		2,229,729		2,216,573

Total	$	8,454,744	$	8,481,182
Equity securities		33,299		33,953

Total investment securities available-for-sale	$	8,488,043	$	8,515,135

Proceeds from the sale of investment securities available-for-sale during 2007 were $58,167,000 (2006 — $208,802,000; 2005 - $388,596,000). Gross realized gains and losses on securities available-for-sale during 2007 were $8,036,000 and $4,299,000, respectively (2006 — $22,924,000 and $691,000; 2005 — $68,946,000 and $1,529,000).

The following table shows the Corporation’s gross unrealized losses and fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006:


December 31, 2007
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. government sponsored entities	$	67,107	$	185	$	66,922
Obligations of Puerto Rico, States and political subdivisions		2,600		2		2,598
Collateralized mortgage obligations		349,084		2,453		346,631
Mortgage-backed securities		99,328		667		98,661
Equity securities		28		10		18

	$	518,147	$	3,317	$	514,830


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

U.S. Treasury securities	$	466,111	$	5,011	$	461,100
Obligations of U.S. government sponsored entities		1,807,457		5,700		1,801,757
Obligations of Puerto Rico, States and political subdivisions		65,642		2,182		63,460
Collateralized mortgage obligations		430,034		8,053		421,981
Mortgage-backed securities		656,879		11,197		645,682
Equity securities		300		26		274

	$	3,426,423	$	32,169	$	3,394,254


			Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	466,111	$	5,011	$	461,100
Obligations of U.S. government sponsored entities		1,874,564		5,885		1,868,679
Obligations of Puerto Rico, States and political subdivisions		68,242		2,184		66,058
Collateralized mortgage obligations		779,118		10,506		768,612
Mortgage-backed securities		756,207		11,864		744,343
Equity securities		328		36		292

	$	3,944,570	$	35,486	$	3,909,084


December 31, 2006
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	19,421	$	134	$	19,287
Obligations of U.S. government sponsored entities		425,076		4,345		420,731
Obligations of Puerto Rico, States and political subdivisions		21,426		259		21,167
Collateralized mortgage obligations		501,705		4,299		497,406
Mortgage-backed securities		28,958		484		28,474
Equity securities		11,180		3,699		7,481

	$	1,007,766	$	13,220	$	994,546


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

U.S. Treasury securities	$	485,232	$	29,684	$	455,548
Obligations of U.S. government sponsored entities		6,097,274		143,179		5,954,095
Obligations of Puerto Rico, States and political subdivisions		55,238		3,278		51,960
Collateralized mortgage obligations		564,217		12,892		551,325
Mortgage-backed securities		954,293		26,008		928,285
Equity securities		300		202		98

	$	8,156,554	$	215,243	$	7,941,311


			Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	504,653	$	29,818	$	474,835
Obligations of U.S. government sponsored entities		6,522,350		147,524		6,374,826
Obligations of Puerto Rico, States and political subdivisions		76,664		3,537		73,127
Collateralized mortgage obligations		1,065,922		17,191		1,048,731
Mortgage-backed securities		983,251		26,492		956,759
Equity securities		11,480		3,901		7,579

	$	9,164,320	$	228,463	$	8,935,857

At December 31, 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 these bonds by Moody’s Investors Service (“Moody’s”) is Ba1, one notch below investment grade, while Standard & Poor’s (“S&P”) rates them as investment grade. As of December 31, 2007, the Appropriation Bonds indicated above represented approximately $1.8 million in

Popular, Inc. | 2007 | Annual Report 101

unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island and evaluates its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the year ended December 31, 2007, the Corporation recognized through earnings approximately $65,169,000 in losses in the investment securities available-for-sale portfolio that management considered to be other-than-temporarily impaired. These realized losses were associated with interest-only strips and equity securities.

The unrealized loss positions of available-for-sale securities at December 31, 2007 are primarily associated with U.S. agency-issued collateralized mortgage obligations, mortgage-backed securities, and to a lesser extent, U.S. Government-sponsored entities and Treasury 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 the available-for-sale portfolio at December 31, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

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


	2007				2006
	Amortized		Market		Amortized		Market
(In thousands)	cost		Value		cost		Value

FNMA	$	1,132,834	$	1,128,544	$	1,539,651	$	1,517,525
FHLB		5,649,729		5,693,170		6,230,841		6,086,885
Freddie Mac		918,976		913,609		1,149,185		1,134,853

Note 7 — Investment securities held-to-maturity:

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2007 and 2006 (2005 — only amortized cost is presented) were as follows:


	2007
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average
	cost		gains		losses		value		yield
			(Dollars in thousands)

Obligations of U.S. goverment sponsored entities Within 1 year	$	395,974	$	15	$	1,497	$	394,492		4.11	%

Obligations of Puerto Rico States and political subdivisions
Within 1 year		1,785		2		1		1,786		5.59
After 1 to 5 years		11,745		197		—		11,942		4.84
After 5 to 10 years		12,754		690		25		13,419		5.92
After 10 years		50,180		2,219		—		52,399		6.00

		76,464		3,108		26		79,546		5.80

Collateralized mortgage obligations
After 10 years		310		—		17		293		5.45

Other
Within 1 year		6,228		25		2		6,251		6.47
After 1 to 5 years		5,490		69		2		5,557		5.71

		11,718		94		4		11,808		6.12

	$	484,466	$	3,217	$	1,544	$	486,139		4.43	%

102


					2006							2005
			Gross		Gross				Weighted
	Amortized		unrealized		unrealized		Market		average			Amortized
	cost		gains		losses		value		yield			cost
			(Dollars in thousands)
Obligations of U.S. government sponsored entities
Within 1 year	$	3,017		—		—	$	3,017		5.19	%	$	42,011

Obligations of Puerto Rico, States and political subdivisions
Within 1 year		1,360		—		—		1,360		4.94			5,270
After 1 to 5 years		7,002	$	28	$	53		6,977		5.47			6,918
After 5 to 10 years		10,515		213		3		10,725		5.93			9,870
After 10 years		53,275		1,318		105		54,488		6.06			56,190

		72,152		1,559		161		73,550		5.96			78,248

Collateralized mortgage obligations
After 10 years		381		—		21		360		5.45			497

Other
Within 1 year		6,570		16		—		6,586		5.52			29,928
After 1 to 5 years		9,220		44		13		9,251		5.65			1,420
After 5 to 10 years		—		—		—		—		—			1,000

		15,790		60		13		15,837		5.59			32,348

	$	91,340	$	1,619	$	195	$	92,764		5.87	%	$	153,104

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

The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 2007, by contractual maturity, are shown below:


(In thousands)	Amortized cost		Market value

Within 1 year	$	403,987	$	402,529
After 1 to 5 years		17,235		17,499
After 5 to 10 years		12,754		13,419
After 10 years		50,490		52,692

Total investment securities held-to-maturity	$	484,466	$	486,139

The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006:


December 31, 2007
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. government sponsored entities	$	196,129	$	1,497	$	194,632
Obligations of Puerto Rico, States and political subdivisions		1,883		26		1,857
Other		1,250		1		1,249

	$	199,262	$	1,524	$	197,738


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

Collateralized mortgage obligations	$	310	$	17	$	293
Other		1,250		3		1,247

	$	1,560	$	20	$	1,540


			Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. government sponsored entities	$	196,129	$	1,497	$	194,632
Obligations of Puerto Rico, States and political subdivisions		1,883		26		1,857
Collateralized mortgage obligations		310		17		293
Other		2,500		4		2,496

	$	200,822	$	1,544	$	199,278


December 31, 2006
	12 months or more and Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	26,623	$	161	$	26,462
Collaterized mortgage obligations		381		21		360
Other		1,250		13		1,237

	$	28,254	$	195	$	28,059

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

Popular, Inc. | 2007 | Annual Report 103

Note 8 — Pledged assets:

At December 31, 2007 and 2006, certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge the collateral, at December 31, were as follows:


(In thousands)	2007		2006

Investment securities available-for-sale	$	2,944,643	$	2,644,027
Investment securities held-to-maturity		339		658
Loans held-for-sale		42,428		332,058
Loans held-in-portfolio		8,489,814		10,260,198

	$	11,477,224	$	13,236,941

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

Note 9 — Loans and allowance for loan losses:

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


(In thousands)	2007		2006

Loans secured by real estate:
Insured or guaranteed by the U.S. Government or its agencies	$	134,116	$	94,125
Guaranteed by the Commonwealth of Puerto Rico		138,823		125,600
Commercial loans secured by real estate		7,497,731		7,185,965
Residential conventional mortgages		5,731,809		10,739,777
Construction and land development		2,301,254		1,664,592
Consumer loans secured by real estate		1,426,800		701,934

		17,230,533		20,511,993
Depository institutions		10,209		11,267
Commercial, industrial and agricultural		4,842,500		4,741,862
Lease financing		1,270,484		1,410,728
Consumer for household, credit cards and other consumer expenditures		3,820,457		4,636,398
Obligations of states and political subdivisions		582,310		510,844
Other		447,073		502,272

	$	28,203,566	$	32,325,364

As of December 31, 2007, loans on which the accrual of interest income had been discontinued amounted to $770,672,000 (2006 — $717,588,000; 2005 — $547,509,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $71,037,000 (2006 — $58,223,000; 2005 — $46,198,000). Non-accruing loans as of December 31, 2007 include $49,090,000 (2006 — $48,074,000; 2005 — $39,316,000) in consumer loans.

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


	December 31,
(In thousands)	2007		2006

Impaired loans with a related allowance	$	174,029	$	125,728
Impaired loans that do not require allowance		147,653		82,462

Total impaired loans	$	321,682	$	208,190

Allowance for impaired loans	$	53,959	$	36,998

Average balance of impaired loans during the year	$	288,374	$	156,951

Interest income recognized on impaired loans during the year	$	9,484	$	3,858

Note 1 to the consolidated financial statements, under the heading of “Allowance for Loan Losses,” describes the characteristics of those loans that the Corporation considers impaired loans for evaluation under the SFAS No. 114 accounting framework. As prescribed by SFAS No. 114, when a loan is impaired, the measurement of the impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan, or (3) the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The loans classified as “Impaired loans that do not require an allowance” in the previous table were collateral dependent commercial loans. The Corporation performed a detailed analysis based on the fair value of the individual loans’ collateral less estimated costs to sell and determined it to be adequate to cover any losses. Management monitors on a quarterly basis if there have been any significant changes (increases or decreases) in the fair value of the collateral of a collateral dependent impaired loan and adjusts their specific credit reserves to the extent necessary.

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


(In thousands)	2007			2006			2005

Balance at beginning of year	$	522,232		$	461,707		$	437,081
Net allowances acquired		7,290			—			6,291
Provision for loan losses		562,650			287,760			195,272
Impact of change in reporting period		—			2,510			1,586
Recoveries		65,976			59,775			62,926
Charge-offs		(489,073	)		(289,520	)		(241,449	)
Write-downs related to loans transferred to loans held-for-sale		(120,243	)		—			—

Balance at end of year	$	548,832		$	522,232		$	461,707

104

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


(In thousands)	2007		2006

Total minimum lease payments	$	1,050,011	$	1,168,685
Estimated residual value of leased property		211,473		237,235
Deferred origination costs, net of fees		9,000		4,808
Less — Unearned financing income		172,680		184,238

Net minimum lease payments		1,097,804		1,226,490
Less — Allowance for loan losses		25,648		24,842

	$	1,072,156	$	1,201,648

At December 31, 2007, future minimum lease payments are expected to be received as follows:


(In thousands)

2008	$	334,803
2009		277,753
2010		217,003
2011		136,983
2012 and thereafter		83,469

	$	1,050,011

Note 10 — Related party transactions:

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


	Executive
(In thousands)	Officers			Directors			Total

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

Balance at December 31, 2006	$	3,961		$	25,103		$	29,064
New loans		2,781			34,897			37,678
Payments		(2,199	)		(25,886	)		(28,085	)
Other changes		54			(1,295	)		(1,241	)

Balance at December 31, 2007	$	4,597		$	32,819		$	37,416

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

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

At December 31, 2007, the Corporation’s banking subsidiaries held deposits from related parties amounting to $38,149,000 (2006 — $32,760,000).

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

During 2007, the Corporation engaged, in the ordinary course of business, the legal services of certain law firms in Puerto Rico, in which the Secretary of the Board of Directors of Popular, Inc. and immediate family members of an executive officer of the Corporation acted as Senior Counsel or as partners. The fees paid to these law firms for fiscal year 2007 amounted to approximately $2,004,000 (2006 — $1,622,000). These fees included $507,000 (2006 — $93,000) paid by the Corporation’s clients in connection with commercial loan transactions and $50,000 (2006 — $23,000) paid by mutual funds managed by the Bank. In addition, one of these law firms leases office space in the Corporation’s headquarters building, which is owned by BPPR. During 2007, this law firm made lease payments of approximately $889,000. It also engages BPPR as trustee of its retirement plan and paid approximately $50,000 for these services.

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

During 2006, the Corporation made payments of approximately $1,163,000 under construction contracts granted to a special partnership whose officer and partner is considered a related party. These contracts were granted on the basis of competitive bids or approved by the Audit Committee, as required by the Corporation’s policy.

For the year ended December 31, 2007, the Corporation made contributions of approximately $2,097,000 to non-profit organizations, principally Banco Popular Foundations dedicated to philanthropic work (2006 — $2,508,000).

Popular, Inc. | 2007 | Annual Report 105

Note 11 — Premises and equipment:

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


	Useful life
(In thousands)	in years		2007		2006

Land			$	80,254	$	84,753

Buildings		10-50		400,808		397,863
Equipment		3-10		579,842		586,001
Leasehold improvements		2-10		107,497		111,794

				1,088,147		1,095,658
Less — Accumulated depreciation and amortization				624,959		610,267

				463,188		485,391

Construction in progress				44,721		24,996

			$	588,163	$	595,140

Depreciation and amortization of premises and equipment for the year 2007 was $78,563,000 (2006 — $84,388,000; 2005 — $81,947,000), of which $26,913,000 (2006 — $26,398,000; 2005 — $23,979,000) was charged to occupancy expense and $51,650,000 (2006 — $57,990,000; 2005 — $57,968,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $29,521,000 (2006 — $28,374,000; 2005 — $23,100,000).

Note 12 — Goodwill and other intangible assets:

The changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2006, allocated by reportable segment, and in the case of Banco Popular de Puerto Rico, as an additional disclosure, by business area, were as follows (refer to Note 32 for a discussion of the Corporation’s reportable segments):


2007
	Balance at				Purchase					Balance at
	January 1,		Goodwill		accounting					December 31,
(In thousands)	2007		acquired		adjustments		Other			2007

Banco Popular de Puerto Rico:
Commercial Banking	$	14,674	$	20,697		—		—		$	35,371
Consumer and Retail Banking		34,999		101,408		—		—			136,407
Other Financial Services		4,391		3,788	$	442		—			8,621
Banco Popular North America:
Banco Popular North America		404,237		—		—		—			404,237
E-LOAN		164,410		—		—	$	(164,410	)		—
Popular Financial Holdings		—		—		—		—			—
EVERTEC		45,142		837		329		(183	)		46,125

Total Popular, Inc.	$	667,853	$	126,730	$	771	$	(164,593	)	$	630,761


2006
	Balance at				Purchase					Balance at
	January 1,		Goodwill		accounting					December 31,
(In thousands)	2006		acquired		adjustments		Other			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		—	$	281		—			4,391
Banco Popular North America:
Banco Popular North America		404,447		—		—	$	(210	)		404,237
E-LOAN		138,387		—		26,023		—			164,410
Popular Financial Holdings		14,236		—		3		(14,239	)		—
EVERTEC		43,131	$	1,511		500		—			45,142

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

In 2007, the goodwill acquired was related to the acquisitions of Citibank’s retail branch network in Puerto Rico and Smith Barney’s retail brokerage operations in Puerto Rico. These acquisitions were described in Note 1 to the consolidated financial statements. The amount included in the “other” category was related mostly to goodwill impairment losses of $164,410,000 in the Banco Popular North America reportable segment that were associated with the write-off of E-LOAN’s goodwill as a result of E-LOAN’s Restructuring Plan described in Note 2 to the consolidated financial statements. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and the discounted cash flow analysis. The valuation technique used to evaluate E-LOAN at the time of the goodwill impairment determination considered both of these approaches. Refer to Note 1 to the consolidated financial statements for the Corporation’s accounting policy with respect to goodwill and other intangible assets.

In 2006, the amount included in the “other” category was mainly related to goodwill impairment losses of $14,239,000 in the Popular Financial Holdings reportable segment. These losses were associated with the updated goodwill impairment evaluation during the fourth quarter of 2006 due to the exited operations of PFH as part of the PFH Restructuring Plan. Refer to Note 2 to the consolidated financial statements for information on this plan. The Banco Popular North America reportable segment also included an amount in the “other” category related to the sale of the remaining retail outlets of Popular Cash Express (“PCE”) to PLS Financial during the first quarter of 2006.

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 for 2006 at the Banco Popular North America reportable segment were mostly related to E-LOAN’s acquisition.

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At December 31, 2007, other than goodwill, the Corporation had $17,270,000 of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (2006 -$64,555,000; 2005 — $58,919,000). During the fourth quarter of 2007, the Corporation recognized impairment losses of $47,341,000 related to E-LOAN’s trademark, as a result of the E-LOAN’s Restructuring Plan described in Note 2 to the consolidated financial statements. There were no impairment losses recognized in 2006 and 2005 related to other intangible assets with indefinitive lives.

The valuation of the E-LOAN trademark was performed using a valuation approach called the “relief-from-royalty” method. The basis of the “relief-from-royalty” method is that, by virtue of having ownership of the trademark, the Corporation is relieved from having to pay a royalty, usually expressed as a percentage of revenue, for the use of trademark. The main attributes involved in the valuation of this intangible asset include the royalty rate, revenue projections that benefit from the use of this intangible, after-tax royalty savings derived from the ownership of the intangible, and the discount rate to apply to the projected benefits to arrive at the present value of this intangible.

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


	2007				2006
	Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization

Core deposits	$	66,381	$	23,171	$	76,708	$	48,367
Other customer relationships		10,375		4,131		11,156		2,171
Other intangibles		8,164		5,385		9,099		3,426

Total	$	84,920	$	32,687	$	96,963	$	53,964

During the year ended December 31, 2007, the Corporation recognized $10,445,000 in amortization expense related to other intangible assets with definite lives (2006 — $12,377,000; 2005 -$9,579,000). During the fourth quater of 2007, core deposits intangibles with a gross amount of $21,068,000 were acquired as a result of the acquisition of the retail branches of Citibank in Puerto Rico based on a preliminary estimate prepared by management. On the other hand, certain core deposits with a gross amount of $31,395,000 became fully amortized during 2007 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above. Also in December 2007, the Corporation recorded impairment losses of $846,000 and $725,000 associated with the write-off of a customer relationship and other intangibles, respectively, as a result of the E-LOAN Restructuring Plan. The other intangibles were principally related to lease contracts and proprietary technology intangibles that were recorded when E-LOAN was acquired in 2005. This amount is included in the caption of impairment losses on long-lived assets on the consolidated statement of operations. In December 2006, the Corporation recorded an impairment loss of $654,000 associated with the write-off of a customer relationship intangible asset due to the exited operations at PFH, also included in the caption of impairment losses on long-lived assets.

The following table presents the estimated aggregate amortization expense of the intangible assets with definite lives that the Corporation has at December 31, 2007, for each of the next five years:


(In thousands)

2008	$	9,728
2009		8,370
2010		7,518
2011		6,163
2012		5,154

Note 13 — Deposits:

Total interest bearing deposits at December 31, consisted of:


(In thousands)	2007		2006

Savings accounts	$	5,638,862	$	5,811,192
NOW, money market and other interest bearing demand		4,770,829		4,078,255

		10,409,691		9,889,447

Certificates of deposit:
Under $100,000		8,136,308		5,774,438
$100,000 and over		5,277,690		4,552,313

		13,413,998		10,326,751

	$	23,823,689	$	20,216,198

A summary of certificates of deposit by maturity at December 31, 2007, follows:


(In thousands)

2008	$	9,911,475
2009		1,645,847
2010		887,574
2011		359,820
2012		494,256
2013 and thereafter		115,026

	$	13,413,998

At December 31, 2007, the Corporation had brokered certificates of deposit amounting to $3,116,274,000 (2006 -$865,685,000). Brokered certificates of deposit amounting to $2,992,897,000 acquired in denominations of $1,000 under a

Popular, Inc. | 2007 | Annual Report 107

master certificate of deposit have been classified in the “under $100,000” category at December 31, 2007 (2006 — $740,746,000).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $144,000,000 as of December 31, 2007 (2006 — $135,764,000).

Note 14 — Federal funds purchased and assets sold under agreements to repurchase:

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


(Dollars in thousands)	2007			2006			2005

Federal funds purchased	$	303,492		$	1,276,818		$	1,500,575
Assets sold under agreements to repurchase		5,133,773			4,485,627			7,201,886

Total amount outstanding	$	5,437,265		$	5,762,445		$	8,702,461

Maximum aggregate balance outstanding at any month-end	$	6,942,722		$	8,963,244		$	8,883,733

Average monthly aggregate balance outstanding	$	5,644,863		$	7,290,853		$	7,430,174

Weighted average interest rate:
For the year		5.24	%		5.03	%		3.61	%
At December 31		4.40			5.12			4.22

The following table presents the liability associated with the repurchase transactions (including accrued interest), their maturities and weighted average interest rates. Also, it includes the carrying value and approximate market value of the collateral (including accrued interest) as of December 31, 2007 and 2006. The information excludes repurchase agreement transactions which were collateralized with securities or other assets held-for-trading purposes or which have been obtained under agreements to resell:


	2007
							Weighted
	Repurchase		Carrying value		Market value		average
	liability		of collateral		of collateral		interest rate
			(Dollars in thousands)
U.S. Treasury securities
After 30 to 90 days	$	173,924	$	173,826	$	173,826		4.31	%

		173,924		173,826		173,826		4.31

Obligations of U.S. government sponsored entities
Overnight		79		558		558		3.84
Within 30 days		844,189		866,577		866,577		4.69
After 30 to 90 days		716,972		736,239		736,239		4.58
After 90 days		632,460		717,494		717,494		4.34

		2,193,700		2,320,868		2,320,868		4.55

Mortgage-backed securities
Overnight		17,257		15,568		15,568		3.84
Within 30 days		51,225		54,844		54,844		4.97
After 30 to 90 days		60,069		43,442		43,442		2.75
After 90 days		538,440		523,265		523,265		4.19

		666,991		637,119		637,119		4.11

Collateralized mortgage obligations
Overnight		57,747		61,080		61,080		3.84
Within 30 days		611,385		641,017		641,017		4.99
After 30 to 90 days		304,416		305,086		305,086		5.33
After 90 days		175,099		200,535		200,535		4.37

		1,148,647		1,207,718		1,207,718		4.93

Loans Within 30 days		216,311		331,131		331,131		5.54

		216,311		331,131		331,131		5.54

	$	4,399,573	$	4,670,662	$	4,670,662		4.62	%

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

		427,890		419,340		419,340		5.21

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

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

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

		592,714		566,505		566,505		4.03

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

		566,430		594,888		594,888		4.85

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

		257,600		333,762		333,762		5.84

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

Note 15 — Other short-term borrowings:

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


(Dollars in thousands)	2007		2006

Advances with FHLB paying interest monthly at a fixed rate of 4.63% (2006 - 5.39% to 5.40%)	$	72,000	$	230,000
Advances with FHLB paying interest at maturity at fixed rates ranging from 4.38% to 4.58%		570,000		—
Advances under credit facilities with other institutions at:
- fixed rates ranging from 4.59% to 5.50% (2006 - 5.38% to 5.65%)		487,000		386,000
- floating rates ranging from 0.45% to 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%)		—		481,062
- a floating rate of 0.20% over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2006 was 5.36%)		—		10,000
Commercial paper at rates ranging from 4.25% to 5.00% (2006 - 4.80% to 5.44%)		7,329		193,383
Term funds purchased at:
- fixed rates of 4.92% (2006 - 5.30% to 5.38%)		280,000		2,140,900
- floating rates ranging from 0.06% to 0.08% over the fed funds rate (Fed funds rate at December 31, 2006 was 5.38%)		—		500,000
Others		85,650		92,780

	$	1,501,979	$	4,034,125

The weighted average interest rate of other short-term borrowings at December 31, 2007 was 4.74% (2006 — 5.36%; 2005 — 4.31%). The maximum aggregate balance outstanding at any month-end was approximately $3,797,270,000 (2006 -$4,034,125,000; 2005 — $3,370,943,000). The average aggregate balance outstanding during the year was approximately $3,040,801,000 (2006 — $3,386,308,000; 2005 -$2,897,243,000). The weighted average interest rate during the year was 5.00% (2006 — 4.50%; 2005 - 2.89%).

Note 17 presents additional information with respect to available credit facilities.

Popular, Inc. | 2007 | Annual Report 109

Note 16 — Notes payable:

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


(Dollars in thousands)	2007		2006

Advances with FHLB:
- with maturities ranging from 2008 through 2018 paying interest at fixed rates ranging from 2.51% to 6.98% (2006 - 2.44% to 6.98%)	$	813,958	$	289,881
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04% (3-month LIBOR rate at December 31, 2006 was 5.36%)		—		6,000
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02% (1-month LIBOR rate at December 31, 2006 was 5.32%)		—		5,000
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2007 was 4.60%; 2006 - 5.32%)		250,000		250,000
Advances under revolving lines of credit maturing in 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2006 was 5.32%)		—		426,687
Advances under revolving lines of credit with maturities ranging form 2008 through 2009 paying interest quarterly at floating rates ranging from of 0.20% to 0.35% (0.35% - December 31, 2006) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2007 was 4.70%; 2006 - 5.36%)		110,000		69,994
Term notes with maturities ranging from 2008 through 2012 paying interest semiannually at fixed rates ranging from 3.60% to 6.85% (2006 - 3.25% to 5.65%)		2,038,259		2,014,928
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%		3,100		3,100
Term notes with maturities ranging from 2008 through 2013 paying interest monthly at floating rates of 3.00% over the 10-year US treasury notes rate (10-year US treasury notes rate at December 31, 2007 was 4.03%; 2006 - 4.70%)		6,805		10,428
Term notes with maturities until 2009 paying interest quarterly at a floating rate of 0.40% (2006 - 0.35% to 0.40%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2007 was 4.70%; 2006 - 5.36%)		199,706		349,295
Secured borrowings with maturities ranging from 2009 through 2032 paying interest monthly at fixed rates ranging from 6.04% to 7.04% (2006 - 3.52% to 7.12%)		59,241		2,695,916
Secured borrowings with maturities ranging from 2008 through 2046 paying interest monthly at rates ranging from 0.32% to 3.12% (2006 - 0.10% to 3.50%) over the 1-month LIBOR rate(1-month LIBOR rate at December 31, 2007 was 4.60%; 2006 - 5.32%)		227,743		1,708,650
Notes linked to the S&P500 Index maturing in 2008		36,498		36,112
Junior subordinated deferrable interest debentures with maturities ranging from 2027 through 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 18)		849,672		849,672
Other		26,370		21,583

	$	4,621,352	$	8,737,246

The aggregate amounts of maturities of notes payable at December 31, 2007 were as follows:


	Notes
Year	Payable
	(In thousands)
2008	$	1,490,227
2009		1,037,361
2010		264,748
2011		154,197
2012		500,249
Later years		1,174,570

Total	$	4,621,352

Note 17 — Unused lines of credit and other funding sources:

At December 31, 2007, the Corporation had borrowing facilities available with the Federal Home Loan Banks (FHLB) whereby the Corporation could borrow up to approximately $2,569,498,000 based on the assets pledged with the FHLB at that date (2006 -$897,269,000). Refer to Notes 15 and 16 for the amounts of FHLB advances outstanding under these facilities at December 31, 2007 and 2006.

The FHLB advances are collateralized with investment securities and mortgage loans, do not have restrictive covenants and do not have callable features. The maximum borrowing potential with the FHLB is dependent on certain restrictive computations determined by the FHLB and which are dependent on the amount and type of assets available for collateral, among the principal factors. The available lines of credit with the FHLB included in this note are based on the assets pledged as collateral with the FHLB as of the end of the years presented. At December 31, 2007 and 2006, the FHLB advances had no callable features. Also, at December 31, 2007, there were $35,000,000 in putable advances with fixed rates ranging from 5.34% to 6.55% and maturities extending up to 2010 (2006 — $35,000,000). The FHLB has the option to convert the putable advances before maturity on any given conversion date to an adjustable rate advance of predetermined index for the remaining term to maturity, at the FHLB’s discretion.

At December 31, 2007, the Corporation maintained a committed line of credit with an unaffiliated bank under formal agreement that provide for financing of consumer loans. The maximum committed amount under this credit facility amounted to $86,500,000 at December 31, 2007. The full amount was drawn under the credit facility at December 31, 2007 and is included in Note 14 to the consolidated financial statements in the category of repurchase agreements. The interest rate charged on these borrowings is based on LIBOR plus a spread. This credit facility requires

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compliance with certain financial and non-financial covenants. As of December 31, 2007, the Corporation was in breach of a tangible net worth covenant, but received a written waiver for the covenant violation. This collateralized credit facility was paid in full in early 2008.

In 2007, the Corporation entered into a master repurchase agreement to finance the loan portfolio of PFH. This agreement provides a maximum committed amount of $500,000,000 as of December 31, 2007. The full amount, subject to collateralization requirements under the credit line, was available for use as of such date. The Corporation paid a commitment fee of $5,000,000 during 2007, which is being amortized to interest expense during the term of the agreement. This agreement has a termination date in November 2008. The interest rate charged is based on LIBOR plus a spread. This credit facility requires compliance with certain financial and non-financial covenants. As of December 31, 2007, the Corporation was in compliance with all financial covenants. Popular, Inc. and Popular North America holding companies serve as guarantors under the agreement.

As of December 31, 2006, the Corporation maintained committed lines of credit under formal agreements for the financing of auto, mortgage and consumer loans. As of such date, the maximum committed amount available under these lines of credit approximated $1,810,000,000, of which $1,022,847,000 was outstanding. At December 31, 2006, the amount outstanding was distributed in the statement of condition within the categories of repurchase agreements (Note 14), advances under credit facilities with other institutions (Note 15) and advances under revolving lines of credit (Note 16). Borrowings under these facilities are collateralized by the related mortgage, consumer or auto loans being financed or their security interests. These committed lines of credit expired or had renewal dates in 2007.

The Corporation has established a borrowing facility at the discount window of the Federal Reserve Bank of New York. At December 31, 2007, the borrowing capacity at the discount window approximated $3,004,752,000, which remained unused at December 31, 2007 (2006 - $2,935,472,000). The facility is a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under this line is dependent upon the balance of loans and securities pledged as collateral.

At December 31, 2006, the Corporation and its subsidiary Popular North America had obtained a committed credit facility from a syndicate of institutions (the lenders). Under this credit facility, which required the payment of facility and utilization fees, the Corporation could have requested the lenders to extend credit in the form of revolving loans, in an aggregate principal amount at any time outstanding not in excess of $555,000,000. This facility could had been used for general corporate purposes and also served as a backup facility to the Corporation’s commercial paper program. As of December 31, 2007, this short-term credit facility had been terminated.

Note 18 – Trust preferred securities:

At December 31, 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 FIN No. 46 (R).

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition. The Corporation also recorded in the caption of other investment securities in the consolidated statements of condition, the common securities issued by the issuer trusts. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.

Popular, Inc. | 2007 | Annual Report 111

Financial data pertaining to the trusts follows:

(Dollars in thousands, including reference notes)


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

Issuance date	February 1997			October 2003			September 2004			November 2004
Capital securities	$	144,000		$	300,000		$	250,000		$	130,000
Distribution rate		8.327	%		6.700	%		6.564	%		6.125	%
Common securities	$	4,640		$	9,279		$	7,732		$	4,021
Junior subordinated
debentures aggregate
liquidation amount	$	148,640		$	309,279		$	257,732		$	134,021
Stated maturity date	February 2027			November 2033			September 2034			December 2034
Reference notes		(a),(c),(e),(f),	(g)		(b),(d),	(f)		(a),(c),	(f)		(b),(d),	(f)


(a)		Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.

(b)		Statutory business trust that is wholly-owned by the Corporation.

(c)		The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

(d)		These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

(e)		The original issuance was for $150,000. The Corporation had reacquired $6,000 of the 8.327% capital securities.

(f)		The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46(R).

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

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

Note 19 — (Loss) earnings per common share:

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


(In thousands, except share information)	2007			2006		2005

Net (loss) income	($	64,493	)	$	357,676	$	540,702
Less: Preferred stock dividends		11,913			11,913		11,913

Net (loss) income applicable to common stock after cumulative effect of accounting change	($	76,406	)	$	345,763	$	528,789

Net (loss) income applicable to common stock before cumulative effect of accounting change	($	76,406	)	$	345,763	$	525,182

Average common shares outstanding		279,494,150			278,468,552		267,334,606
Average potential common shares		—			235,372		504,412

Average common shares outstanding — assuming dilution		279,494,150			278,703,924		267,839,018

Basic EPS before cumulative effect of accounting change	($	0.27	)	$	1.24	$	1.97

Diluted EPS before cumulative effect of accounting change	($	0.27	)	$	1.24	$	1.96

Basic EPS after cumulative effect of accounting change	($	0.27	)	$	1.24	$	1.98

Diluted EPS after cumulative effect of accounting change	($	0.27	)	$	1.24	$	1.97

Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards, using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share.

For year 2007, there were 2,431,830 weighted average antidilutive stock options outstanding (2006 — 1,896,057; 2005 — 1,511,877).

Note 20 — 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 $216,326,000 in additional capital, of which $175,271,000 impacted stockholders’ equity at December 31, 2005 and the remainder impacted the Corporation’s financial condition in the

112

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.

During the year 2007, cash dividends of $0.64 (2006 — $0.64; 2005 — $0.64) per common share outstanding amounting to $178,938,000 (2006 — $178,231,000; 2005 — $170,970,000) were declared. In addition, dividends declared on preferred stock amounted to $11,913,000 (2006 — $11,913,000; 2005 —$11,913,000). Dividends payable to shareholders of common stock at December 31, 2007 was $44,849,000 (2006 — $44,614,000; 2005 — $42,791,000).

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $374,192,000 at December 31, 2007 (2006 —$346,192,000; 2005 — $316,192,000). During 2007, $28,000,000 (2006 — $30,000,000; 2005 — $31,000,000) was transferred to the statutory reserve account. At December 31, 2007, 2006 and 2005, BPPR was in compliance with the statutory reserve requirement.

Note 21 — Regulatory capital requirements:

The Corporation and its banking subsidiaries are subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Federal Reserve Bank and the other bank regulators have adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements. The regulations define well-capitalized levels of Tier I, total capital and Tier I leverage of 6%, 10% and 5%, respectively. Management has determined that as of December 31, 2007 and 2006, the Corporation exceeded all capital adequacy requirements to which it is subject.

At December 31, 2007 and 2006, BPPR, BPNA and Banco Popular, National Association (BP, N.A.) were well-capitalized under the regulatory framework for prompt corrective action, and there are no conditions or events since December 31, 2007 that management believes have changed the institutions’ category.

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

The Corporation has been designated by the Federal Reserve Board as a Financial Holding Company (“FHC”) and is eligible to engage in certain financial activities permitted under the Gramm-Leach-Bliley Act of 1999. FHC status is subject to certain requirements including maintenance of the Corporation’s banking subsidiaries’ status as being well-capitalized and well managed and maintaining satisfactory CRA (“Community Reinvestment Act”) ratings. There are no conditions or events since December 31, 2006 that management believes have changed the Corporation’s FHC status.

Popular, Inc. | 2007 | Annual Report 113

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


	Actual					Capital adequacy minimum
						requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
	2007

Total Capital (to Risk-Weighted Assets):
Corporation	$	3,778,264		11.38	%	$	2,656,781		8	%
BPPR		2,173,648		11.15			1,559,039		8
BPNA		1,103,117		10.32			855,338		8

Tier I Capital (to Risk-Weighted Assets):
Corporation	$	3,361,132		10.12	%	$	1,328,391		4	%
BPPR		1,498,030		7.69			779,519		4
BPNA		976,878		9.14			427,669		4

Tier I Capital (to Average Assets):
Corporation	$	3,361,132		7.33	%	$	1,375,270		3	%
							1,833,694		4

BPPR		1,498,030		5.82			772,414		3
							1,029,886		4

BPNA		976,878		7.55			388,233		3
							517,644		4


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

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

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

Tier I Capital (to Average Assets):
Corporation	$	3,727,860		8.05	%	$	1,389,915		3	%
							1,853,220		4

BPPR		1,700,583		6.90			739,850		3
							986,467		4

BPNA		944,506		7.91			358,115		3
							477,486		4

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



(Dollars in thousands)	2007					2006
	Amount		Ratio			Amount		Ratio

Total Capital (to Risk-Weighted Assets):
BPPR	$	1,948,798		10	%	$	1,844,325		10	%
BPNA		1,069,173		10			935,412		10

Tier I Capital (to Risk-Weighted Assets):
BPPR	$	1,169,279		6	%	$	1,106,595		6	%
BPNA		641,504		6			561,247		6

Tier I Capital (to Average Assets):
BPPR	$	1,287,357		5	%	$	1,233,083		5	%
BPNA		647,055		5			596,858		5

Note 22 — Servicing assets:

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).

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

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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 $15,330,000, which resulted in a $9,574,000, 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
(In thousands)	Residential MSRs		Residential MSRs		Total

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, contractural 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 23 to the consolidated financial statements for information on assumptions used in the valuation model of MSRs as of December 31, 2007.

The changes in mortgage servicing assets for the year ended December 31, 2007 were as follows:


	Banking subsidiaries			PFH
(In thousands)	Residential MSRs			Residential MSRs			Total

Fair value at January 1, 2007	$	91,431		$	84,038		$	175,469
Purchases		4,256			22,251			26,507
Servicing from securitizations or asset transfers		22,817			26,048			48,865
Changes due to payments on loans (1)		(9,117	)		(35,516	)		(44,633	)
Changes in fair value due to changes in valuation model inputs or assumptions		1,213			(15,743	)		(14,530	)
Other changes		12			(66	)		(54	)

Fair value at December 31, 2007	$	110,612		$	81,012		$	191,624

(1)

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

Residential mortgage loans serviced for others were $20,509,655,000 at December 31, 2007 (2006 —$13,267,700,000; 2005 — $9,164,361,000).

The changes in amortized MSR’s for the years ended December 31, 2006 and 2005 were as follows:


(In thousands)	2006			2005

Balance at beginning of year	$	137,701		$	54,326
Rights originated		62,877			103,092
Rights purchased		23,769			5,039
Amortization		(63,202	)		(24,756	)

Balance at end of year		161,145			137,701
Less: Valuation allowance		1,006			951

Balance at end of year, net of valuation allowance	$	160,139		$	136,750

Fair value at end of year	$	175,469		$	150,627

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

The activity in the valuation allowance for impairment of recognized servicing assets for the years ended December 31, 2006 and 2005 was as follows:


(In thousands)	2006			2005

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

Balance at end of year	$	1,006		$	951

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 flow. Prior to the adoption of SFAS No. 156, the Corporation carried residential MSRs at the lower cost of market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net mortgage servicing fees.

Popular, Inc. | 2007 | Annual Report 115

The changes in 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 as follows:


(In thousands)	2007			2006			2005

Balance at beginning of year	$	4,860		$	4,739		$	3,777
Rights originated		2,051			2,534			1,972
Rights purchased		3			—			—
Amortization		(1,893	)		(2,413	)		(1,010	)

Balance at end of year	$	5,021		$	4,860		$	4,739
Less: Valuation allowance		—			—			—

Balance at end of year, net of valuation allowance	$	5,021		$	4,860		$	4,739

Fair value at end of year	$	7,324		$	7,705		$	7,200

SBA loans serviced for others were $527,241,000 at December 31, 2007 (2006-$477,869,000; 2005-$367,352,000).

Note 23 — Retained interests on transfers of financial assets:

During the years ended December 31, 2007 and 2006, the Corporation retained servicing responsibilities and other residual interests on various securitization transactions and whole loan sales of residential mortgage and commercial loans performed by various subsidiaries. Valuation methodologies used in determining the fair value of the retained interests, including servicing assets and residual assets, are disclosed in Note 1 to the consolidated financial statements.

Popular Financial Holdings

During 2007 and 2006, the Corporation, through its subsidiary PFH, retained mortgage servicing rights (“MSRs”) and residual interests on mortgage loan securitizations.

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 different trusts, thus isolating those loans from the Corporation’s assets. Approximately $460,767,000 in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH during 2007 as part of this off-balance sheet asset securitization and PFH realized a gain on sale of approximately $13,466,000. As part of this transaction, the Corporation initially recognized MSRs of $8,040,000 and residual interests of $4,667,000. Also, in December 2007, the Corporation completed the recharacterization of certain on-balance sheet securitizations that allowed the Corporation to recognize the transactions as sales under SFAS No. 140.

From 2001 through 2006, the Corporation conducted 21 mortgage loan securitizations that were sales for legal purposes but did not qualify for sale accounting treatment at the time of inception because the securitization trusts did not meet the criteria for QSPEs contained in SFAS No. 140. As a result, the transfers of the mortgage loans pursuant to these securitizations were initially accounted for as secured borrowings with the mortgage loans continuing to be reflected as assets on the Corporation’s consolidated statement of financial condition with appropriate footnote disclosure indicating that the mortgage loans were, for legal purposes, sold to the securitization trusts.

As part of the Corporation’s strategy of exiting the subprime business at PFH and improving the Corporation’s capital ratios, on December 19, 2007, PFH and the trustee for each of the related securitization trusts amended the provisions of the related pooling and servicing agreements to delete the discretionary provisions that prevented the Corporation from removing the loans from its accounting books. These changes in the primary discretionary provisions included:

	•		deleting the provision that grants the servicer “sole discretion” to have the right to purchase for its own account or for resale from the trust fund any loan which is 91 days or more delinquent;

	•		deleting the provision that grants the servicer (PFH) “sole discretion” to sell loans with respect to which it believes default is imminent;

	•		deleting the provision that grants the servicer “sole discretion” to determine whether an immediate sale of a real estate owned (“REO”) property or continued management of such REO property is in the best interest of the certificateholders; and

	•		deleting the provision that grants the residual holder (PFH) to direct the trustee to acquire derivatives post closing.

The Corporation obtained a legal opinion which among other considerations indicated that each amendment (a) is authorized or permitted under the pooling and servicing agreement related to such amendment, and (b) will not adversely affect in any material respect the interests of any certificateholders covered by the related pooling and servicing agreement.

The amendments to the provisions of the pooling and servicing agreement allowed the Corporation to recognize 16 out of the 21 transactions as sales under SFAS No. 140. When accounting for the transfers as sales, the Corporation (i) reclassified the loans as held-for-sale with the corresponding lower of cost or market adjustment as of the date of the transfer, (ii) removed from the Corporation’s books approximately $3,221,003,000 in mortgage loans and $3,083,259,000 in related liabilities representing secured borrowings, (iii) recognized assets referred to as residual interests, which represent the fair value of residual interest certificates that were issued by the securitization trusts and retained by PFH, and (iv) recognized mortgage servicing rights, which represent the fair value of PFH’s right to continue to service the mortgage loans transferred to the securitization trusts. As part of the recharacterization, the Corporation recognized residual

116

interests of $38,308,000 and MSRs of $18,008,000. The Corporation had previously recorded MSRs in several of these securitization transactions and their outstanding fair value approximated $17,505,000 at December 31, 2007. The impact of the recharacterization transaction was a pre-tax loss of $90,143,000, which is included in the caption “(Loss) gain on sale of loans and valuation adjustments on loans held-for-sale” in the consolidated statement of income.

During 2006, the Corporation conducted three off-balance sheet asset securitizations that involved the transfer of mortgage loans to QSPEs. Approximately $1,024,633,000 in ARM and fixed-rate loans were securitized and sold by PFH during 2006, with a gain on sale of approximately $18,849,000. As part of these transactions, the Corporation initially recognized MSRs of $18,542,000 and residual interests of $36,927,000.

When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing (“on-balance sheet securitization”). The loans are included in Note 8 as pledged loans held-in-portfolio.

The Corporation did not execute any on-balance sheet securitization during 2007. During 2006, the Corporation completed three on-balance sheet securitizations consisting of approximately $1,163,619,000 in adjustable and fixed-rate nonprime mortgage loans. As part of these transactions, the Corporation recognized MSRs of $16,521,000.

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.

Residual interests retained as part of off-balance sheet securitizations of subprime mortgage loans prior to 2006 had been classified as investment securities available-for-sale and are presented at fair value in the consolidated statements of condition. PFH’s residual interests classified as available-for-sale as of December 31, 2007 amounted to $4,812,000 (2006 —$49,413,000). The Corporation reviews the residual interests for potential impairment on a quarterly basis and records impairment in accordance with SFAS No. 115 and EITF 99-20. Management’s basis in determining when these securities must be written down to fair value due to other-than-temporary impairment is based on EITF 99-20. Whenever the current fair value of the residual interests classified as available-for-sale is lower than its current amortized cost, management evaluates to see if an impairment charge for the deficiency is required to be taken through earnings. If there has been an adverse change in estimated cash flows (considering both the timing and amount of flows), then residual interest security is written down to fair value, which becomes the new amortized cost basis. The Corporation recognized other-than-temporary impairment losses on these residual interests of $45,379,000 for the year ended December 31, 2007 (2006 — $17,761,000) and are classified as part of net gain (loss) on sale and valuation adjustment of investment securities in the consolidated statement of income. During 2007, all declines in fair value in residual interests classified as available-for-sale have been considered other-than-temporary.

Commencing in January 2006 and as permitted by accounting guidance, the residual interests derived from newly-issued PFH’s off-balance sheet securitizations and from the recharacterization previously described, were accounted as trading securities. Management’s determination to prospectively classify the residual interests as trading securities was driven by accounting considerations and not by intent to actively trade these assets. Trading securities are marked-to-market through earnings (favorable and unfavorable value changes) as opposed to available-for-sale securities in which the changes in value are recorded as unrealized gains (losses) through equity, unless unfavorable changes are considered other-than-temporary. The fair value determinations for residual interests classified as trading securities are also performed on a quarterly basis. Any valuation adjustment related to these particular residual interests is reflected in earnings as it occurs and is recorded as part of trading account profit (loss) in the consolidated statements of operations. Residual interests from PFH’s securitizations and recharacterization accounted for as trading securities amounted to $40,197,000 at December 31, 2007 (2006 — $36,552,000). The Corporation recognized trading losses on these residual interests of $39,661,000 for the year ended December 31, 2007 (2006 — $970,000).

PFH receives average annual servicing fees based on a percentage of the outstanding loan balance. In 2007, those average fees were 0.50% for mortgage loans (2006 - 0.50%).

Popular, Inc. | 2007 | Annual Report 117

Key economic assumptions used in measuring the retained interests at the date of the securitization and recharacterization transactions completed during the year ended December 31, 2007 were:


			MSRs
	Residual	Fixed-rate				ARM
	interests	loans				loans

Average prepayment speed	20.7% to 28% (Fixed-rate loans) 30% to 35% (ARM loans)		20.7% to 28%			30% to 35%
Weighted average life of collateral (in years)	6.8 years		4.2 years			2.6 years
Cumulative credit losses	4.21% to 13.13%			—		—
Discount rate (annual rate)	25% to 40%			17	%		17	%

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


(In thousands)	2007		2006

Residual interests	$	45,009	$	85,965
MSRs		58,578		67,855
Servicing advances		167,610		42,617

At December 31, 2007 and 2006, key economic assumptions used to estimate the fair value of the 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:


	December 31, 2007
				MSRs
	Residual			Fixed-rate			ARM
(Dollars in thousands)	interests			loans			loans

Carrying amount of retained interests	$	45,009		$	47,243		$	11,335
Fair value of retained interests	$	45,009		$	47,243		$	11,335
Weighted average collateral life (in years)	7.6 years			4.3 years			2.6 years
Weighted average prepayment speed (annual rate)	20.7% (Fixed-rate loans)				20.7	%		30.0	%
	30% (ARM loans)
Impact on fair value of 10% adverse change	$	5,031		$	(192	)	$	272
Impact on fair value of 20% adverse change	$	6,766		$	(886	)	$	688
Weighted average discount rate (annual rate)		40.0	%		17.0	%		17.0	%
Impact on fair value of 10% adverse change	$	(2,884	)	$	(1,466	)	$	(225	)
Impact on fair value of 20% adverse change	$	(5,427	)	$	(2,846	)	$	(441	)
Cumulative credit losses	3.35% to 11.03		%		—			—
Impact on fair value of 10% adverse change	$	(8,829	)		—			—
Impact on fair value of 20% adverse change	$	(15,950	)		—			—

118


December 31, 2006
				MSRs
	Residual			Fixed-rate			ARM
(Dollars in thousands)	interests			loans			loans

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

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

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

Cumulative credit losses	1.28% to 3.19%				—			—
Impact on fair value of 10% adverse change	$	(4,792	)		—			—
Impact on fair value of 20% adverse change	$	(9,558	)		—			—

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

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

Certain cash flows received from and paid to securitization trusts for the years ended December 31, 2007 and 2006, included:



(In thousands)	2007		2006

Servicing fees received	$	18,115	$	20,440
Servicing advances, net of repayments		124,993		8,726
Other cash flows received on retained interests		19,899		25,250

Banking subsidiaries

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

Gains of $21,092,000 and $42,672,000 were realized by the banking subsidiaries on the securitization transactions that met the sale criteria under SFAS No. 140 and the whole loan sales involving retained interests, which took place in 2007 and 2006, respectively.

The banking subsidiaries receive average annual servicing fees based on a percentage of the outstanding loan balance. In 2007, those weighted average fees were 0.26% for mortgage loans (2006 — 0.27%) and 1.07% for SBA loans (2006 — 1.10%).

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



	Residential Mortgage						SBA
	Loans						Loans
	2007			2006			2007			2006

Prepayment speed		9.5	%		13.9	%		18.3	%		17.0	%
Weighted average life (in years)	10.6 years			8.3 years			3.0 years			3.3 years
Discount rate (annual rate)		10.7	%		10.2	%		13.0	%		13.0	%

At December 31, 2007 and 2006, key economic assumptions used to estimate the fair value of servicing rights derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


December 31, 2007
	Residential
(Dollars in thousands)	Mortgage Loans			SBA Loans

Carrying amount of retained interests	$	86,453		$	5,021
Fair value of retained interests	$	86,453		$	7,324
Weighted average life (in years)	12.5 years			3.0 years
Weighted average prepayment speed (annual rate)		8.0	%		18.3	%
Impact on fair value of 10% adverse change		($1,983	)		($348	)
Impact on fair value of 20% adverse change		($3,902	)		($706	)
Weighted average discount rate (annual rate)		10.83	%		13.00	%
Impact on fair value of 10% adverse change		($2,980	)		($209	)
Impact on fair value of 20% adverse change		($5,795	)		($427	)


December 31, 2006
	Residential
(Dollars in thousands)	Mortgage Loans			SBA Loans

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

Popular, Inc. | 2007 | Annual Report 119

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

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

The sensitivity analyses presented in the tables above for residual interests and servicing rights of PFH and the banking subsidiaries are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation for the years ended December 31, 2007 and 2006, were as follows:


2007
	Total principal			Principal amount
	amount of loans,			60 days or more			Net credit
(In thousands)	net of unearned			past due			losses

Loans (owned and managed):
Commercial	$	15,746,646		$	478,067		$	78,557
Lease financing		1,164,439			18,653			15,027
Mortgage		16,026,827			1,325,228			160,319
Consumer		5,684,600			141,142			186,173
Less:
Loans securitized / sold		(8,711,510	)		(760,931	)		(16,979	)
Loans held-for-sale		(1,889,546	)		—			—

Loans held-in-portfolio	$	28,021,456		$	1,202,159		$	423,097


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

Loans (owned and managed):
Commercial $	$	14,599,245		$	186,257		$	38,322
Lease financing		1,226,490			35,083			13,883
Mortgage		17,083,839			927,036			67,478
Consumer		5,278,456			117,976			118,906
Less:
Loans securitized / sold		(5,451,091	)		(204,701	)		(8,844	)
Loans held-for-sale		(719,922	)		—			—

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

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase, at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans. At December 31, 2007, the Corporation had recorded $41,564,000 in mortgage loans under this buy-back option program (2006 — $24,822,000).

Note 24 — Employee benefits:

Pension and benefit restoration plans

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

BPPR’s non-contributory, defined benefit retirement plan is currently closed to new hires and to employees who as of December 31, 2005 were under 30 years of age or were credited with less than 10 years of benefit service. The retirement plan’s benefit formula is based on a percentage of average final compensation and years of service. Normal retirement age under the retirement plans is age 65 with 5 years of service. Pension costs are funded in accordance with minimum funding standards under the Employee Retirement Income Security Act of 1974 (“ERISA”). Benefits under the BPPR retirement plan are subject to the U.S. Internal Revenue Code limits on compensation and benefits. Benefits under restoration plans restore benefits to selected employees that are limited under the retirement plan due to U.S. Internal Revenue Code limits and a compensation definition that excludes amounts deferred pursuant to nonqualified arrangements.

Effective April 1, 2007, the Corporation froze its non-contributory, defined benefit retirement plan, which covered substantially all salaried employees of BPNA hired before June 30, 2004. This plan was in the process of termination on December 31, 2007. These actions were also applicable to the related plan that restored benefits to select employees that were limited under the retirement plan.

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

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

120

investments in domestic and international equities and fixed income.

Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee, with the assistance of an external consultant, periodically reviews the performance of the pension plans’ investments and assets allocation. The Trustee and the money managers are allowed to exercise investment discretion, subject to limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee.

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

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


	2007			2006

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

		100	%		100	%

The plans’ target allocation for 2007 and 2006, by asset category, approximated 70% in equity securities and 30% in debt securities.

At December 31, 2007, these plans included 2,745,720 shares (2006 — 2,745,720) of the Corporation’s common stock with a market value of approximately $29,105,000 (2006 -$49,286,000). Dividends paid on shares of the Corporation’s common stock held by the plan during 2007 amounted to $1,757,000 (2006 — $1,757,000).

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


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

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


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

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

Popular, Inc. | 2007 | Annual Report 121

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


				Benefit
	Pension Plans			Restoration Plans			Total
(In thousands)				2007

Change in benefit obligation:
Benefit obligation at beginning of year	$	569,457		$	29,619		$	599,076
Service cost		11,023			898			11,921
Interest cost		31,850			1,677			33,527
Curtailment gain		(1,291	)		(334	)		(1,625	)
Actuarial (gain) loss		(30,314	)		(2,511	)		(32,825	)
Benefits paid		(25,392	)		(284	)		(25,676	)

Benefit obligations at end of year	$	555,333		$	29,065		$	584,398

Change in plan assets:
Fair value of plan assets at beginning of year	$	536,856		$	17,477		$	554,333
Actual return on plan assets		13,624			2,053			15,677
Employer contributions		1,002			1,154			2,156
Benefits paid		(25,392	)		(284	)		(25,676	)

Fair value of plan assets at end of year	$	526,090		$	20,400		$	546,490

Amounts recognized in accumulated other comprehensive loss under SFAS No. 158:
Net prior service cost	$	1,130			($356	)	$	774
Net loss		44,879			8,709			53,588

Accumulated other comprehensive loss (AOCL)	$	46,009		$	8,353		$	54,362

Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning of year		($32,602	)		($12,141	)		($44,743	)
Amount recognized in AOCL at beginning of year, pre-tax		49,078			12,457			61,535

(Accrual) / prepaid at beginning of year		16,476			316			16,792
Net periodic benefit (cost) / income		(959	)		(2,040	)		(2,999	)
Additional benefit (cost) / income		247			258			505
Contributions		1,002			1,154			2,156

(Accrual) / prepaid at end of year		16,766			(312	)		16,454
Amount recognized in AOCL		(46,009	)		(8,353	)		(54,362	)

Net (liability) / asset at end of year		($29,243	)		($8,665	)		($37,908	)

Accumulated benefit obligation	$	512,238		$	24,438		$	536,676


				Benefit
	Pension Plans			Restoration Plans			Total
(In thousands)				2006

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

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

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

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

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

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

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

Net (liability) asset at end of year		($32,602	)		($12,141	)		($44,743	)

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


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

Of the total liabilities of the pension plans and benefit restoration plans as of December 31, 2007, approximately $3,459,000 and $294,000, respectively, were considered current liabilities.

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The change in accumulated other comprehensive loss (“AOCL”), pre-tax for the plans was as follows:


(In thousands)	Pension Plans				Benefit Restoration Plans			Total

Accumulated other comprehensive loss at January 1, 2007	$	49,078		$	12,457		$	61,535
Increase (decrease) in AOCL:
Recognized during the year:
Prior service (cost) / credit		(210	)		56			(154	)
Actuarial (losses) / gains		250			(736	)		(486	)
Ocurring during the year:
Net actuarial losses / (gains)		(3,109	)		(3,424	)		(6,533	)

Total decrease in AOCL		(3,069	)		(4,104	)		(7,173	)

Accumulated other comprehensive loss at December 31, 2007	$	46,009		$	8,353		$	54,362

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (credit) during 2008 are as follows:


(In thousands)	Pension Plans				Benefit Restoration Plans

Net prior service cost (credit)		$	266			($53	)
Net loss			(250	)		686

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


					Benefit
(In thousands)		Pension Plans				Restoration Plans

	2007		2006		2007		2006

Projected benefit obligation	$	13,075	$	13,721	$	29,065	$	29,619
Accumulated benefit obligation		13,075		9,318		24,438		20,801
Fair value of plan assets		9,616		8,075		20,400		17,477

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


	Pension Plans
(In thousands)	2007		2006

Projected benefit obligation	$	542,258	$	555,736
Accumulated benefit obligation		499,163		495,658
Fair value of plan assets		516,474		528,781

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


	2007			2006

Discount rate	6.40% (P.R. Plan)				5.75	%
	4.50% (U.S. Plan)*
Rate of compensation increase — weighted average		4.60	%		4.20	%


*		A discount rate of 4.50% was used to remeasure liabilities under the U.S. retirement plan as of January 31, 2007 to reflect plan freeze as of April 1, 2007 and pending plan termination.

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


											Benefit
		Pension Plans									Restoration Plans
	2007			2006			2005			2007			2006			2005

Discount rate	5.75% (P.R. Plan)				5.50	%		5.75	%		5.75	%		5.50	%		5.75	%
	4.50% (U.S. Plan)
Expected return on plan assets		8.00	%		8.00	%		8.00	%		8.00	%		8.00	%		8.00	%
Rate of compensation increase — weighted average		4.80	%		4.20	%		5.10	%		4.80	%		4.20	%		5.10	%

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


										Benefit
	Pension Plans									Restoration Plans
(In thousands)	2007			2006			2005			2007			2006			2005

Components of net periodic pension cost:
Service cost	$	11,023		$	12,509		$	15,274		$	898		$	1,047		$	967
Interest cost		31,850			30,558			29,873			1,677			1,601			1,330
Expected return on plan assets		(42,121	)		(39,901	)		(40,674	)		(1,473	)		(1,056	)		(843	)
Amortization of asset obligation		—			—			(862	)		—			—			—
Amortization of prior service cost		207			177			345			(53	)		(55	)		(93	)
Amortization of net loss		—			1,946			271			991			1,100			719

Net periodic cost (benefit)		959			5,289			4,227			2,040			2,637			2,080
Curtailment loss (gain)		(247	)		—			1,982			(258	)		—			(338	)

Total cost	$	712		$	5,289		$	6,209		$	1,782		$	2,637		$	1,742

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

During 2008, the Corporation expects to contribute $3,359,000 to the pension plans and $2,302,000 to the benefit restoration plans.

Popular, Inc. | 2007 | Annual Report 123

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


			Benefit
(In thousands)	Pension		Restoration Plans

2008	$	39,854	$	842
2009		28,075		781
2010		29,436		1,019
2011		30,847		1,253
2012		32,336		1,467
2013 - 2017		185,002		10,749

Postretirement health care benefits

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

The adoption of SFAS No. 158 also impacted the accounting for the postretirement health care benefits plan. The following table summarizes the impact of the initial adoption of SFAS No. 158 on December 31, 2006.


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

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

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost for the postretirement health care benefit plan during 2008 are as follows:


(In thousands)

Net prior service cost (credit)	$	(1,046	)

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


(In thousands)	2007			2006

Change in benefit obligation:
Benefit obligation at beginning of the year	$	134,606		$	143,183
Service cost		2,312			2,797
Interest cost		7,556			7,707
Benefits paid		(6,434	)		(6,304	)
Actuarial gain		(11,994	)		(12,777	)

Benefit obligation at end of year	$	126,046		$	134,606

Funded status at end of year:
Benefit obligation at end of year	$	(126,046	)	$	(134,606	)
Fair value of plan assets		—			—

Funded status at end of year	$	(126,046	)	$	(134,606	)

Amounts recognized in accumulated other comprehensive loss under SFAS No. 158:
Net prior service cost	$	(4,299	)	$	(5,345	)
Net loss		1,076			13,070

Accumulated other comprehensive (income) loss	$	(3,223	)	$	7,725

Reconciliation of net (liability) / asset:
Net (liability) / asset at beginning of year	$	(134,606	)	$	(122,769	)
Amount recognized in accumulated other comprehensive loss at beginning of year, pre-tax		7,725			—

(Accrual) / prepaid at beginning of year		(126,881	)		(122,769	)
Net periodic benefit (cost) / income		(8,822	)		(10,416	)
Contributions		6,434			6,304

(Accrual) / prepaid at end of year		(129,269	)		(126,881	)
Amount recognized in accumulated other comprehensive income (loss)		3,223			(7,725	)

Net (liability) / asset at end of year	$	(126,046	)	$	(134,606	)

Of the total postretirement liabilities as of December 31, 2007, approximately $6,284,000 were considered current liabilities.

The change in accumulated other comprehensive income, pre-tax for the postretirement plan was as follows:


(In thousands)

Accumulated other comprehensive loss at January 1, 2007	$	7,725
Increase (decrease) in accumulated other comprehensive income (loss):
Recognized during the year:
Prior service (cost) / credit		1,046
Ocurring during the year:
Net actuarial losses (gains)		(11,994	)

Total decrease in accumulated other comprehensive loss	$	(10,948	)

Accumulated other comprehensive income at December 31, 2007	$	(3,223	)

The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 2007 was 6.40% (2006 - 5.75%).

124

The weighted average discount rate used to determine the components of net periodic postretirement benefit cost for the year ended December 31, 2007 was 5.75% (2006 — 5.50%; 2005 - 5.75%).

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


(In thousands)	2007			2006			2005

Service cost	$	2,312		$	2,797		$	2,713
Interest cost		7,556			7,707			8,267
Amortization of prior service benefit		(1,046	)		(1,046	)		(1,046	)
Amortization of net loss		—			958			1,691

Total net periodic benefit cost	$	8,822		$	10,416		$	11,625

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

To determine postretirement benefit obligation:


	2007			2006

Initial health care cost trend rate		8.00	%		9.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%
Year that the ultimate trend rate is reached		2011			2011

To determine net periodic benefit cost:


	2007			2006

Initial health care cost trend rate		9.00	%		10.00	%
Ultimate health care cost trend rate		5.00	%		5.00	%
Year that the ultimate trend rate is reached		2011			2011

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

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


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

Effect on total service cost and interest cost components	$	436	$	(379	)
Effect on postretirement benefit obligation		6,100		(5,300	)

The Corporation expects to contribute $6,284,000 to the postretirement benefit plan in 2008 to fund current benefit payment requirements.

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


(In thousands)

2008			$6,284
2009			6,628
2010			6,939
2011			7,223
2012			7,458
2013 - 2017			41,915

Savings plans

The Corporation also provides contributory savings plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant-directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in 2007 was $17,383,000 (2006 — $27,306,000; 2005 - $32,975,000).

The plans held 14,972,919 (2006 — 14,483,925; 2005 -15,950,027) shares of common stock of the Corporation with a market value of approximately $158,713,000 at December 31, 2007 (2006 - $259,986,000; 2005 — $337,343,000).

Note 25 — 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 December 31, 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.

Popular, Inc. | 2007 | Annual Report 125

The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

The following table presents information on stock options as of December 31, 2007:



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

$14.39 - $18.50		1,511,613	$	15.81		4.73		1,394,068	$	15.73
$19.25 - $27.20		1,580,579	$	25.27		6.50		1,008,413	$	25.02

$14.39 - $27.20		3,092,192	$	20.64		5.63		2,402,481	$	19.63

The aggregate intrinsic value of options outstanding as of December 31, 2007 was $7,311,000 (2006 — $24,097,000). There was no intrinsic value of options exercisable as of December 31, 2007 (2006 — $2,642,000).

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


	Options			Weighted-Average
	Outstanding			Exercise Price

Outstanding at January 1, 2005		2,584,620		$	18.76
Granted		707,342			27.20
Exercised		(47,858	)		16.14
Forfeited		(20,401	)		22.18

Outstanding at December 31, 2005		3,223,703		$	20.63
Granted		—			—
Exercised		(39,449	)		15.78
Forfeited		(37,818	)		23.75
Expired		(1,637	)		24.05

Outstanding at December 31, 2006		3,144,799		$	20.65
Granted		—			—
Exercised		(10,064	)		15.83
Forfeited		(19,063	)		25.50
Expired		(23,480	)		20.08

Outstanding at December 31, 2007		3,092,192		$	20.64

The stock options exercisable at December 31, 2007 totaled 2,402,481 (2006 — 1,949,522; 2005 - 1,501,447). The cash received from the stock options exercised during the year ended December 31, 2007 amounted to $159,000. The total intrinsic value of options exercised during the year ended December 31, 2007 was $28,000 (2006 — $86,000; 2005 — $247,000).

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


	2005

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

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2007 and 2006.

During the year ended December 31, 2007, the Corporation recognized $1,763,000 in stock options expense, with a tax benefit of $700,000 (2006 — $3,006,000, with a tax benefit of $1,221,000; 2005 — $5,226,000, with a tax benefit of $2,095,000). The total unrecognized compensation cost at December 31, 2007 related to non-vested stock option awards was $1,674,000 and is expected to be recognized over a weighted-average period of 1.3 years.

Incentive Plan

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

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

Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under a

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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 December 31, 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
	Stock			Grant Date Fair Value

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

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

Nonvested at December 31, 2006		611,470		$	22.55
Granted		—			—
Vested		(304,003	)		22.76
Forfeited		(3,781	)		19.95

Nonvested at December 31, 2007		303,686		$	22.37

During the year ended December 31, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (2006 — 444,036; 2005 — 172,622).

During the year ended December 31, 2007, the Corporation recognized $2,432,000 of restricted stock expense related to management incentive awards, with an income tax benefit of $944,000 (2006 — $2,296,000, with a tax benefit of $898,000; 2005 — $3,998,000, with a tax benefit of $1,524,000). The fair market value of the restricted stock was $1,538,000 at grant date and $1,286,000 at vesting date. This difference triggers a shortfall of $252,000 that was recorded as an additional income tax expense since the Corporation does not have any pool of windfall tax benefit. The fair market value at grant date of the restricted stocks earned was $5,383,000. The total unrecognized compensation cost related to non-vested restricted stock awards was $3,984,000 and is expected to be recognized over a weighted-average period of 2.8 years.

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


	Restricted			Weighted-Average
	Stock			Grant Date Fair Value

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

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

Nonvested at December 31, 2006		76,614		$	22.02
Granted		38,427			15.89
Vested		(115,041	)		19.97
Forfeited		—			—

Nonvested at December 31, 2007		—			—

During the year ended December 31, 2007, the Corporation granted 38,427 (2006 — 32,267; 2005 — 29,208) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date. During this period, the Corporation recognized $538,000 of restricted stock expense related to these restricted stock grants, with a tax benefit of $210,000 (2006 — $570,000, with a tax benefit of $222,000; 2005 — $635,000, with a tax benefit of $247,000). The fair value of all restricted stocks outstanding as of December 31, 2007 was $2,196,000.

Note 26 — Rental expense and commitments:

At December 31, 2007, the Corporation was obligated under a number of noncancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:


	Minimum		Sublease
	payments		rentals		Net
Year	(In thousands)

2008	$	49,018	$	2,169	$	46,849
2009		40,231		1,842		38,389
2010		33,957		1,331		32,626
2011		28,785		1,260		27,525
2012		26,205		997		25,208
Later years		202,742		4,452		198,290

	$	380,938	$	12,051	$	368,887

Total rental expense for the year ended December 31, 2007 was $84,515,000 (2006 — $70,562,000; 2005 — $62,395,000), which is included in net occupancy, equipment and communication expenses, according to their nature.

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Note 27 — Income tax:

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


(In thousands)	2007			2006			2005

Current income tax expense:
Puerto Rico	$	157,436		$	131,687		$	113,888
Federal and States		7,302			2,848			38,162

Subtotal		164,738			134,535			152,050

Deferred income tax (benefit) expense:
Puerto Rico		(11,982	)		(6,596	)		(10,986	)
Federal and States		(211,758	)		(21,053	)		7,851

Subtotal		(223,740	)		(27,649	)		(3,135	)

Total income tax (benefit) expense	$	(59,002	)	$	106,886		$	148,915

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


	2007						2006						2005

				% of						% of						% of
				pre-tax						pre-tax						pre-tax
(Dollars in thousands)	Amount			loss			Amount			income			Amount			income

Computed income tax at statutory rates	$	(48,163	)		39	%	$	202,084			43.5	%	$	284,694			41.5	%
Benefits of net tax exempt interest income		(60,304	)		49			(70,250	)		(15	)		(78,216	)		(11	)
Effect of income subject to capital gain tax rate		(24,555	)		20			(2,426	)		(1	)		(24,612	)		(4	)
Non deductible goodwill impairment		57,544			(47	)
Difference in tax rates due to multiple jurisdictions		27,038			(22	)		(12,549	)		(3	)		(14,886	)		(2	)
States taxes and other		(10,562	)		9			(9,973	)		(2	)		(18,065	)		(3	)

Income tax (benefit) expense	$	(59,002	)		48	%	$	106,886			22.5	%	$	148,915			21.5	%

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


(In thousands)	2007		2006

Deferred tax assets:
Tax credits available for carryforward	$	20,132	$	23,568
Net operating loss and donation carryforward available		175,349		35,327
Deferred compensation		4,993		4,452
Postretirement and pension benefits		62,548		71,277
Unrealized net loss on trading and available-for-sale securities		—		51,417
Deferred loan origination fees		8,333		5,766
Allowance for loan losses		214,544		200,155
Amortization of intangibles		—		168
Unearned income		1,488		1,218
Deferred gains		16,355		—
Unrealized loss on derivatives		932		—
Basis difference related to securitizations treated as sales for tax and borrowings for books		66,105		7,588
Intercompany deferred gains		17,017		16,369
Other temporary differences		14,204		19,725

Total gross deferred tax assets		602,000		437,030

Deferred tax liabilities:
Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations		17,254		38,546
Unrealized net gain on trading and available for sale securities		19,367		—
Deferred loan origination costs		9,938		24,112
Accelerated depreciation		10,346		12,037
Amortization of intangibles		8,819		—
Unrealized gain on derivatives		—		258
Other temporary differences		16,266		2,628

Total gross deferred tax liabilities		81,990		77,581

Valuation allowance		39		39

Net deferred tax asset	$	519,971	$	359,410

The net deferred tax asset shown in the table above at December 31, 2007 is reflected in the consolidated statements of condition as $525,369,000 in deferred tax assets (in the “other assets” caption) (2006 — $359,433,000) and $5,398,000 in deferred tax liabilities (in the “other liabilities” caption) (2006 - $23,000), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

At December 31, 2007, the Corporation had total credits of $20,132,000 that will reduce the regular income tax liability in future years expiring in annual installments through the year 2016.

A valuation allowance of $39,000 is reflected in 2007 and 2006, related to deferred tax assets arising from temporary differences for which the Corporation could not determine the

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likelihood of its realization. Based on the information available, the Corporation expects to fully realize all other items comprising the net deferred tax asset as of December 31, 2007.

The net operating loss carryforwards (“NOLs”) outstanding at December 31, 2007 expire as follows:


(In thousands)

2013	$	1,573
2014		1,832
2016		7,263
2017		8,542
2018		14,640
2019		1
2021		76
2022		971
2023		1,248
2026		495
2027		138,708

	$	175,349

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

The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation’s U.S. subsidiaries (which are considered foreign under Puerto Rico income tax law) have never remitted retained earnings. The Corporation considers the reinvestment of such earnings permanent. The Corporation’s subsidiaries in the United States file a consolidated return. As of December 31, 2007, the Corporation had no current or accumulated earnings and profits on its combined U.S. subsidiaries’ operations and, accordingly, the recognition of a deferred tax liability was not considered necessary.

The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The Corporation’s federal income tax (benefit) provision for 2007 was ($196,462,000) (2006 — $26,994,000; 2005 — $34,571,000). The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis.

The transitory provision approved by the Government of Puerto Rico which increased the statutory tax rate for corporations expired in year 2007, accordingly, the maximum rate is 39%.

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

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


(In millions)	Total

Balance as of January 1, 2007	$	20.4
Additions for tax positions related to the current year		5.9
Additions for tax positions of prior years		0.2
Reductions for tax positions of prior years		(4.3	)

Balance as of December 31, 2007	$	22.2

As of December 31, 2007, the related accrued interest approximated $2,900,000. Management determined that as of December 31, 2007 there was 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 operations.

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 $20,900,000 as of December 31, 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 December 31, 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 first quarter of 2008. As of December 31, 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

Popular, Inc. | 2007 | Annual Report 129

total amount of unrecognized tax benefits within the next 12 months.

Note 28 — Off-balance sheet activities and concentration of credit risk:

Off-balance sheet risk

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

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

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


(In thousands)	2007		2006

Commitments to extend credit:
Credit card lines	$	3,143,717	$	2,896,090
Commercial lines of credit		4,259,851		4,329,664
Other unused credit commitments		506,680		508,815
Commercial letters of credit		25,584		20,689
Standby letters of credit		174,080		180,869
Commitments to originate mortgage loans		112,704		547,695

Commitments to extend credit

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

Letters of credit

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

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

Standby letters of credit are issued by the Corporation to disburse funds to a third party beneficiary if the Corporation’s customer fails to perform under the terms of an agreement with the beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon.

Other commitments

At December 31, 2007, the Corporation also maintained other non-credit commitments for $38,750,000, primarily for the acquisition of other investments (2006 — $43,378,000).

Geographic concentration

As of December 31, 2007, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. Note 32 provides further information on the asset composition of the Corporation by geographical area as of December 31, 2007 and 2006.

Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $5,397,104,000 and $5,439,152,000 in 2007 and 2006, respectively.

Note 29 — Disclosures about fair value of financial instruments:

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

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

Derivatives are considered financial instruments and their carrying value equals fair value. For disclosures about the fair

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value of derivative instruments refer to Note 30 to the consolidated financial statements.

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

The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 2007 and 2006, respectively. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2007 and 2006:

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

Trading and investment securities, except for investments classified as other investment securities in the consolidated statement of condition, are financial instruments that regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to-market for accounting purposes. These instruments are detailed in the consolidated statements of condition and in Notes 4, 5 and 30.

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

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

Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments at December 31, 2007 and 2006, respectively.

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

Popular, Inc. | 2007 | Annual Report 131

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


	2007				2006
	Carrying		Fair		Carrying		Fair
(In thousands)	amount		value		amount		value

Financial Assets:
Cash and money market investments	$	1,825,537	$	1,825,537	$	1,251,866	$	1,251,866
Trading securities		767,955		767,955		382,325		382,325
Investment securities available-for-sale		8,515,135		8,515,135		9,850,862		9,850,862
Investment securities held-to-maturity		484,466		486,139		91,340		92,764
Other investment securities		216,585		216,819		297,394		412,593
Loans held-for-sale		1,889,546		1,983,502		719,922		737,439
Loans held-in-portfolio, net		27,472,624		27,511,573		31,494,785		31,448,328
Financial Liabilities:
Deposits	$	28,334,478	$	28,432,009	$	24,438,331	$	24,416,523
Federal funds purchased		303,492		303,492		1,276,818		1,276,818
Assets sold under agreements to repurchase		5,133,773		5,149,571		4,485,627		4,474,171
Short-term borrowings		1,501,979		1,501,979		4,034,125		4,034,125
Notes payable		4,621,352		4,536,434		8,737,246		8,647,942


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

Commitments to extend credit and letters of credit:
Commitments to extend credit	$	7,910,248	$	17,199	$	7,734,569	$	19,110
Letters of credit		199,664		1,960		201,558		1,935

Note 30 — Derivative instruments and hedging activities:

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

By using derivative instruments, the Corporation exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Corporation, thus creating a repayment risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, assumes no repayment risk. To manage the level of credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Credit risk related to derivatives was not significant at December 31, 2007 and 2006. The Corporation has not incurred any losses from counterparty nonperformance on derivatives.

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

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

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges for the years ended December 31, 2007, and 2006 are presented below:


2007
	Notional		Derivative		Derivative		Equity
(In thousands)	Amount		Assets		Liabilities		OCI			Ineffectiveness

Asset Hedges
Forward commitments	$	142,700	$	169	$	509		($207	)		—

Liability Hedges
Interest rate swaps	$	200,000		—	$	3,179		($2,066	)		—

Total	$	342,700	$	169	$	3,688		($2,273	)		—

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

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

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

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

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forwards are contracts for the delayed delivery of securities, which the seller agrees to deliver on a specified future date at a specified price or yield. These securities are hedging a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. These contracts have a maximum remaining maturity of 78 days.

During 2006, the Corporation entered into interest rate swap contracts to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to changes in interest rates. These interest rate swaps have a maximum remaining maturity of 1.3 years.

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

Fair Value Hedges

At December 31, 2007 and 2006, there were no derivatives designated as fair value hedges.

Trading and Non-Hedging Activities

The fair value and notional amounts of non-hedging derivatives at December 31, 2007, and 2006 were:


December 31, 2007
			Fair Values
(In thousands)	Notional Amount		Derivative Assets		Derivative Liabilities

Forward contracts	$	693,096	$	74	$	3,232
Interest rate swaps associated with:
- short-term borrowings		200,000		—		1,129
- bond certificates offered in an on-balance sheet securitization		185,315		—		2,918
- swaps with corporate clients		802,008		—		24,593
- swaps offsetting position of corporate client swaps		802,008		24,593		—
Credit default swap		33,463		—		—
Foreign currency and exchange rate commitments w/clients		146		—		1
Foreign currency and exchange rate commitments w/counterparty		146		2		—
Interest rate caps		150,000		27		—
Interest rate caps for benefit of corporate clients		50,000		—		18
Index options on deposits		211,267		45,954		—
Index options on S&P notes		31,152		5,962		—
Bifurcated embedded options		218,327		—		50,227
Mortgage rate lock commitments		148,501		258		386

Total	$	3,525,429	$	76,870	$	82,504

Popular, Inc. | 2007 | Annual Report 133


December 31, 2006
			Fair Values
(In thousands)	Notional Amount		Derivative Assets		Derivative Liabilities

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

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

Forward Contracts

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

Call Options and Put Options

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

Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments

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

The Corporation also has an interest rate swap to economically hedge the payments of bond certificates offered as part of an on-balance sheet securitization. The swap contract is marked-to-market and the resulting impact is recognized as part of interest expense.

At the end of 2007, the Corporation canceled certain amortizing swap contracts that economically converted to a fixed rate the cost of funds associated with certain auto loans held-in-portfolio as a result of selling most of the auto loan portfolio. In 2006 and most of 2007, these amortizing swaps economically hedged the interest rate changes in auto loan approvals. Changes in fair value were recognized as part of interest expense.

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

Credit Default Swaps

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

The CDS outstanding at December 31, 2006 and 2007 to which the Corporation is a party is associated to net settlement payments on interest rate swaps, not principal bond payments. The payment obligation is the net spread between two rates. A number of firms participated in the economics of the CDS transaction and the Corporation was allocated a percentage of the total notional amount of the underlying interest rate swaps. Under the CDS, the Corporation guarantees the third-party entity’s (“the third-party entity”) performance under a series of interest rate swaps that the third-party entity has with the counterparty to the CDS (“the counterparty”). The nature of the specific credit default event that will trigger a payment obligation by the Corporation under the CDS consists of the failure by the third-party entity to pay any one of the periodic payments due under the underlying swaps or a termination payment with the

134

counterparty. Also, although not a third-party entity credit event under the terms of the CDS, the interest rate swaps agreement between the third-party entity and the counterparty has an additional termination event which is the withdrawal, suspension or ratings downgrade of the third-party entity to a rating below BBB- by any of the three major agencies. The termination event will only trigger the Corporation’s performance if the third-party entity fails to pay its obligation under the interest rate swaps. Neither of these events is expected to occur because of the third-party entity’s credit standing. The underlying interest rate swaps are in the money in favor of the third-party entity. The CDS matures in April 2008, which also reduces the Corporation’s exposure to losses. Under the CDS, the counterparty has no obligation to the Corporation other than having made the initial premium payment, which amounted to $104,000. As a result, the Corporation is not subject to the credit risk of the counterparty.

Interest Rate Caps

During 2007, the Corporation entered into a $100,000,000 interest rate cap to mitigate its exposure to rising interest rates on short-term borrowings. The Corporation also entered into interest rate caps as an intermediary on behalf of its customers and simultaneously took offsetting positions under the same terms and conditions thus minimizing its market and credit risks.

As a result of the recharacterization transactions in 2007, the interest rate caps that the Corporation had in conjunction with a series of mortgage loans under securitization were no longer required to be consolidated under the Corporation’s statement of condition. Changes in fair value of these caps were recognized in the consolidated statement of operations as part of interest expense, while the derivative contract value was included as other assets.

Index and Embedded Options

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

Mortgage Rate Lock Commitments

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

Note 31 — Supplemental disclosure on the consolidated statements of cash flows:

As previously mentioned in Note 1 in 2005, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period. The impact of this change corresponded to the financial results for the month of December 2004 of those non-banking subsidiaries which implemented the change in the first reporting period of 2005 and the month of December 2005 for those which implemented the change in the first reporting period of 2006 .

The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above for the year ended December 31:


(In thousands)	2006			2005

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

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

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

Popular, Inc. | 2007 | Annual Report 135

activities. As of December 31, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.

Additional disclosures on cash flow information as well as non-cash activities are listed in the following table:


(In thousands)	2007			2006			2005

Income taxes paid	$	160,271		$	194,423		$	196,028
Interest paid		1,673,768			1,604,054			1,206,434

Non-cash activities:
Loans transferred to other real estate		203,965			116,250			113,840
Loans transferred to other property		36,337			34,340			24,395

Total loans transferred to foreclosed assets		240,302			150,590			138,235
Assets and liabilities removed as part of the recharacterization of on-balance sheet securitizations:
Mortgage loans		3,221,003			—			—
Secured borrowings		(3,083,259	)		—			—
Other assets		111,446			—			—
Other liabilities		(13,513	)		—			—
Transfers from loans held-in-portfolio to loans held-for-sale (a)		1,580,821			23,634			—
Transfers from loans held-for-sale to loans held-in-portfolio		244,675			591,365			668,591
Loans securitized into trading securities (b)		1,321,655			1,398,342			1,304,749
Available-for-sale securities transferred to loans held-in-portfolio		—			—			42,174
Recognition of mortgage servicing rights on securitizations or asset transfers		48,865			62,877			103,092
Recognition of residual interests on securitizations		42,975			36,927			61,126
Business acquisitions:
Fair value of loans and other assets acquired		225,972			—			1,491,521
Goodwill and other intangible assets acquired		149,123			4,005			337,180
Deposits and other liabilities assumed		(1,094,699	)		(971	)		(1,416,919	)

(a)

In 2007 it excludes the $3.2 billion in mortgage loans from the recharacterization that were reclassified to loans held-for-sale and immediately removed from the Corporation’s books. In 2006 it excludes $589 million in individual mortgage loans transferred to held-for-sale and sold as well as $613 million (2005-$552 million) securitized into trading securities and immediately sold.

(b)

Includes loans securitized into trading securities and subsequently sold before year end.

Note 32 — Segment reporting:

The Corporation’s corporate structure consists of four reportable segments – Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate group has been defined to support the reportable segments.

In early 2007, the Corporation changed its basis of presentation by combining the operations of Banco Popular North America and Popular Financial Holdings segments into a single reportable segment named Popular North America. This was the result of a restructuring plan of the Popular Financial Holdings operations and the Corporation’s U.S. Reorganization described in Note 2 to the consolidated financial statements. At that time, the Corporation decided to continue the operations of Equity One and its subsidiaries (“Equity One”), which are principally dedicated to direct subprime loan origination, consumer finance and mortgage servicing. However, given the unforeseen disruption in the capital markets since the summer of 2007 and its impact on funding, management now believes that it will be difficult to generate an adequate return on the capital invested at Equity One. As such, commencing in late fourth quarter of 2007, the Corporation redefined its Popular North America reportable segment by segregating it in two separate reportable segments: Banco Popular North America and Popular Financial Holdings.

Management re-defined its plans and allocation of resources with respect to the Corporation’s U.S. operations and is taking steps to exit the PFH business, except for its mortgage servicing unit. Part of these steps included the recharacterization of a substantial portion of PFH’s on-balance sheet mortgage loan securitization as sales, the signing in early 2008 of an Asset Purchase Agreement to sell certain assets of Equity One and the expected closure of its remaining consumer branch network during 2008. The remaining loan portfolio that will remain in PFH’s books will decline as it runs off. Due to the expected discontinuance of the business, management has redefined how to allocate resources for future growth potential in the U.S. operations.

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

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets as of December 31, 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

136

at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

	•		Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

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

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a branch network with presence in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. As indicated in Note 2 to the consolidated financial statements, E-LOAN is in the process of restructuring its operations, which include refocusing its loan origination efforts toward a reduced mix of loan product offerings. 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.

Due to the significant losses in the E-LOAN operations, impacted in part by the restructuring charges and impairment losses as described in Note 2 to the consolidated financial statements, management has determined to provide as additional disclosure the results of E-LOAN apart from the other BPNA subsidiaries.

Popular Financial Holdings:

PFH’s clientele is primarily subprime borrowers. After considering the restructuring events discussed in Note 2 to the consolidated financial statements, PFH continues to carry a maturing loan portfolio that approximated $3.3 billion at December 31, 2007, of which $1.4 billion was classified as held-for-sale. Also, PFH continues to provide mortgage loan services for others. As previously indicated, PFH is in the process of exiting the mortgage loan and consumer loan origination business.

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 LATINOAMERICA, SOCIEDAD ANONIMA and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in Consorcio de Tarjetas Dominicanas, S.A. and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.

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

The Corporation may periodically reclassify reportable segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.

The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

Popular, Inc. | 2007 | Annual Report 137


2007
At December 31, 2007
Popular, Inc.
	Banco Popular		Banco Popular			Popular Financial						Intersegment
(In thousands)	de Puerto Rico		North America			Holdings			EVERTEC			Eliminations

Net interest income (loss)	$	957,822	$	370,605		$	140,670		$	(823	)	$	3,301
Provision for loan losses		243,727		95,486			221,431
Non-interest income (loss)		485,548		185,962			(179,379	)		241,627			(150,390	)
Goodwill and trademark impairment losses				211,750
Amortization of intangibles		1,909		7,602						934
Depreciation expense		41,684		16,069			2,352			16,162			(72	)
Other operating expenses		714,457		450,576			157,476			174,877			(137,688	)
Income tax expense (benefit)		114,311		(29,477	)		(150,520	)		17,547			(2,086	)

Net income (loss)	$	327,282	$	(195,439	)	$	(269,448	)	$	31,284		$	(7,243	)

Segment assets	$	27,102,493	$	13,364,306		$	3,905,279		$	228,746		$	(417,828	)


At December 31, 2007
	Total
	Reportable									Total
(In thousands)	Segments			Corporate			Eliminations			Popular, Inc.

Net interest income (loss)	$	1,471,575		$	(23,382	)	$	1,197		$	1,449,390
Provision for loan losses		560,644			2,006						562,650
Non-interest income		583,368			117,981			(7,033	)		694,316
Goodwill and trademark impairment losses		211,750									211,750
Amortization of intangibles		10,445									10,445
Depreciation expense		76,195			2,368						78,563
Other operating expenses		1,359,698			55,205			(11,110	)		1,403,793
Income tax benefit		(50,225	)		(9,215	)		438			(59,002	)

Net (loss) income	$	(113,564	)	$	44,235		$	4,836		$	(64,493	)

Segment assets	$	44,182,996		$	6,550,752		$	(6,322,311	)	$	44,411,437


2006
At December 31, 2006
Popular, Inc.
	Banco Popular			Banco Popular		Popular Financial						Intersegment
(In thousands)	de Puerto Rico			North America		Holdings			EVERTEC			Eliminations

Net interest income (loss)	$	914,907		$	379,977	$	173,532		$	(1,894	)
Provision for loan losses		141,083			46,472		100,205
Non-interest income		431,940			218,590		38,977			229,237		$	(141,096	)
Goodwill and trademark impairment losses							14,239
Amortization of intangibles		2,540			8,881		357			599
Depreciation expense		43,556			15,811		6,159			16,599			(72	)
Other operating expenses		679,892			422,640		179,907			169,117			(140,392	)
Impact of change in fiscal period		(2,072	)				6,181
Income tax expense (benefit)		125,985			37,280		(32,809	)		15,052			(367	)

Net income (loss)	$	355,863		$	67,483	$	(61,730	)	$	25,976		$	(265	)

Segment assets	$	25,501,522		$	13,565,992	$	8,396,926		$	223,384		$	(588,707	)


At December 31, 2006
	Total
	Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (loss)	$	1,466,522	$	(39,741	)	$	1,129		$	1,427,910
Provision for loan losses		287,760								287,760
Non-interest income		777,648		36,642			(4,805	)		809,485
Goodwill and trademark impairment losses		14,239								14,239
Amortization of intangibles		12,377								12,377
Depreciation expense		82,053		2,335						84,388
Other operating expenses		1,311,164		57,342			(4,178	)		1,364,328
Impact of change in fiscal period		4,109		3,495			2,137			9,741
Income tax expense (benefit)		145,141		(37,515	)		(740	)		106,886

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

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


2005
At December 31, 2005
Popular, Inc.
	Banco Popular		Banco Popular			Popular Financial					Intersegment
(In thousands)	de Puerto Rico		North America			Holdings		EVERTEC			Eliminations

Net interest income (loss)	$	897,007	$	359,836		$	201,349	$	(404	)
Provision for loan losses		98,732		23,238			73,288
Non-interest income		428,249		149,604			52,664		221,369		$	(139,633	)
Amortization of intangibles		2,522		6,783			30		244
Depreciation expense		42,508		15,678			4,916		17,405			(71	)
Other operating expenses		681,133		309,151			159,087		166,929			(139,502	)
Income tax expense		104,907		56,796			6,205		12,149			(57	)

Net income before cumulative effect of accounting change	$	395,454	$	97,794		$	10,487	$	24,238		$	(3	)
Cumulative effect of accounting change		3,221		(209	)				412			(247	)

Net income after cumulative effect of accounting change	$	398,675	$	97,585		$	10,487	$	24,650		$	(250	)

Segment assets	$	26,522,983	$	12,593,434		$	9,411,263	$	250,749		$	(509,764	)


At December 31, 2005
	Total
	Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

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

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

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

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

During the year ended December 31, 2007, the Corporation’s holding companies realized net gains on sale of securities, mainly marketable equity securities, of approximately $114,944,000 (2006 — $14,000,000; 2005 — $59,706,000). These gains are included as part of “non-interest income” within the Corporate group.

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


2007
At December 31, 2007
Banco Popular de Puerto Rico
			Consumer							Total
	Commercial		and Retail		Other Financial					Banco Popular
(In thousands)	Banking		Banking		Services		Eliminations			de Puerto Rico

Net interest income	$	379,673	$	566,635	$	10,909	$	605		$	957,822
Provision for loan losses		79,810		163,917							243,727
Non-interest income		91,596		303,945		90,969		(962	)		485,548
Amortization of intangibles		565		860		484					1,909
Depreciation expense		14,457		26,001		1,226					41,684
Other operating expenses		178,193		470,184		66,466		(386	)		714,457
Impact of change in fiscal period
Income tax expense		56,613		46,812		10,860		26			114,311

Net income	$	141,631	$	162,806	$	22,842	$	3		$	327,282

Segment assets	$	11,601,186	$	19,407,327	$	478,252	$	(4,384,272	)	$	27,102,493


2006
At December 31, 2006
Banco Popular de Puerto Rico
			Consumer								Total
	Commercial		and Retail		Other Financial						Banco Popular
(In thousands)	Banking		Banking		Services			Eliminations			de Puerto Rico

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

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

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


2005
At December 31, 2005
Banco Popular de Puerto Rico
			Consumer							Total
	Commercial		and Retail		Other Financial					Banco Popular
(In thousands)	Banking		Banking		Services		Eliminations			de Puerto Rico

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

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

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

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

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


2007
At December 31, 2007
Banco Popular North America
									Total
	Banco Popular								Banco Popular
(In thousands)	North America		E-LOAN			Eliminations			North America

Net interest income	$	348,728	$	20,925		$	952		$	370,605
Provision for loan losses		77,832		17,654						95,486
Non-interest income		112,954		74,270			(1,262	)		185,962
Goodwill and trademark impairment losses				211,750						211,750
Amortization of intangibles		4,810		2,792						7,602
Depreciation expense		12,835		3,234						16,069
Other operating expenses		287,831		162,706			39			450,576
Impact of change in fiscal period
Income tax expense (benefit)		27,863		(57,218	)		(122	)		(29,477	)

Net income (loss)	$	50,511	$	(245,723	)	$	(227	)	$	(195,439	)

Segment assets	$	13,965,898	$	1,178,438		$	(1,780,030	)	$	13,364,306


2006
At December 31, 2006
Banco Popular North America
									Total
	Banco Popular								Banco Popular
(In thousands)	North America		E-LOAN			Eliminations			North America

Net interest income	$	363,249	$	16,601		$	127		$	379,977
Provision for loan losses		37,834		8,638						46,472
Non-interest income		127,697		92,188			(1,295	)		218,590
Amortization of intangibles		6,041		2,840						8,881
Depreciation expense		12,917		2,894						15,811
Other operating expenses		272,158		150,482						422,640
Income tax expense (benefit)		60,707		(23,018	)		(409	)		37,280

Net income	$	101,289	$	(33,047	)	$	(759	)	$	67,483

Segment assets	$	12,259,704	$	1,308,263		$	(1,975	)	$	13,565,992


2005
At December 31, 2005
Banco Popular North America
							Total
	Banco Popular						Banco Popular
(In thousands)	North America			E-LOAN			North America

Net interest income	$	357,256		$	2,580		$	359,836
Provision for loan losses		22,871			367			23,238
Non-interest income		130,538			19,066			149,604
Amortization of intangibles		6,368			415			6,783
Depreciation expense		15,156			522			15,678
Other operating expenses		286,374			22,777			309,151
Income tax expense (benefit)		57,617			(821	)		56,796

Net income (loss) before cumulative effect of accounting change		99,408			(1,614	)		97,794
Cumulative effect of accounting change		(209	)					(209	)

Net income (loss) after cumulative effect of accounting change	$	99,199		$	(1,614	)	$	97,585

Segment assets	$	12,037,377		$	556,057		$	12,593,434

Popular, Inc. | 2007 | Annual Report 139

Intersegment revenues*


(In thousands)	2007			2006			2005

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	1,519		$	(619	)	$	(2,437	)
P.R. Consumer and Retail Banking		3,311			(1,409	)		(5,743	)
P.R. Other Financial Services		(449	)		(326	)		(399	)
EVERTEC		(140,949	)		(138,172	)		(139,100	)
Banco Popular North America:
Banco Popular North America		(8,597	)		(1,212	)		1,563
E-LOAN		(8,220	)		(608	)		(24	)
Popular Financial Holdings		6,296			1,250			6,507

Total intersegment revenues	$	(147,089	)	$	(141,096	)	$	(139,633	)


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

Geographic Information


(In thousands)	2007		2006		2005

Revenues*:
Puerto Rico	$	1,567,276	$	1,396,714	$	1,252,906
United States		488,038		762,313		891,820
Other		88,392		78,368		64,756

Total consolidated revenues	$	2,143,706	$	2,237,395	$	2,209,482


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

Selected Balance Sheet Information:


(In thousands)	2007		2006		2005

Puerto Rico
Total assets	$	26,017,716	$	24,621,684	$	25,759,437
Loans		15,679,181		14,735,092		14,130,645
Deposits		17,341,601		13,504,860		13,093,540
United States
Total assets	$	17,093,929	$	21,570,276	$	21,780,226
Loans		13,517,728		17,363,382		17,023,443
Deposits		9,737,996		9,735,264		8,370,150
Other
Total assets	$	1,299,792	$	1,212,027	$	1,084,005
Loans		714,093		638,465		556,119
Deposits		1,254,881		1,198,207		1,174,315

Note 33 — Contingent liabilities:

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

Note 34 — Guarantees:

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

The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by other financial institutions, in each case to guarantee the performance of various customers to third parties. If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN No. 45, at December 31, 2007 and 2006, the Corporation recorded a liability of $636,000 and $658,000, respectively, which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contract amounts in standby letters of credit outstanding at December 31, 2007 and 2006, shown in Note 28, represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.

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

At December 31, 2007, the Corporation serviced $3,386,885,000 (2006 — $3,054,325,000) in residential mortgage loans with credit recourse or other servicer-provided credit enhancement. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to reimburse the third party investor. The maximum potential amount of future payments that the Corporation would be required to make under the agreement in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced. In the event of nonperformance, the Corporation has rights to the underlying

140

collateral securing the mortgage loan, thus, historically the losses associated to these guarantees had not been significant. At December 31, 2007, the Corporation had reserves of approximately $4,731,000 (2006 — $3,066,000) to cover the estimated credit loss exposure. At December 31, 2007, the Corporation also serviced $17,122,770,000 (2006 — $10,213,375,000) in mortgage loans without recourse or other servicer-provided credit enhancement. Although the Corporation may, from time to time, be required to make advances to maintain a regular flow of scheduled interest and principal payments to investors, including special purpose entities, this does not represent an insurance against losses. These loans serviced are mostly insured by FHA, VA, and others, or the certificates arising in securitization transactions may be covered by a funds guaranty insurance policy.

Also, in the ordinary course of business, the Corporation sold SBA loans with recourse, in which servicing was retained. At December 31, 2007, SBA loans serviced with recourse amounted to $119,483,000 (2006 - $62,408,000). Due to the guaranteed nature of the SBA loans sold, the Corporation’s exposure to loss under these agreements should not be significant.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $2,877,794,000 at December 31, 2007 (2006 — $3,278,827,000). In addition, at December 31, 2007 and 2006, PIHC fully and unconditionally guaranteed $824,000,000 of Capital Securities issued by four wholly-owned issuing trust entities that have been deconsolidated based on FIN No. 46R. Refer to Note 18 to the consolidated financial statements for further information.

A number of the acquisition agreements to which the Corporation is a party and under which it has purchased various types of assets, including the purchase of entire businesses, require the Corporation to make additional payments in future years if certain predetermined goals, such as revenue targets, are achieved or certain specific events occur within a specified time. Management’s estimated maximum future payments at December 31, 2007 approximated $5,829,000 (2006 -$4,606,000). Due to the nature and size of the operations acquired, management does not anticipate that these additional payments will have a material impact on the Corporation’s financial condition or results of future operations.

Note 35 — Other service fees:

The caption of other service fees in the consolidated statements of income consists of the following major categories as of December 31,


(In thousands)	2007		2006			2005

Credit card fees and discounts	$	102,176	$	89,827		$	82,062
Debit card fees		76,573		61,643			52,675
Insurance fees		55,824		53,889			50,734
Processing fees		47,476		44,050			42,773
Mortgage servicing fees, net of amortization and fair value adjustments		11,708		(2,750	)		6,226
Other		69,500		74,216			97,031

Total	$	363,257	$	320,875		$	331,501

Popular, Inc. | 2007 | Annual Report 141

Note 36 — Popular, Inc. (Holding Company only) financial information:

The following condensed financial information presents the financial position of Holding Company only as of December 31, 2007 and 2006, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2007.

Statements of Condition


	December 31,
(In thousands)	2007		2006

Assets
Cash	$	1,391	$	2
Money market investments		46,400		8,700
Investments securities held-to-maturity, at amortized cost		626,129		430,000
Other investment securities, at lower of cost or realizable value		14,425		143,469
Investment in BPPR and subsidiaries, at equity		1,817,354		1,690,968
Investment in Popular International Bank and subsidiaries, at equity		767,608		1,257,748
Investment in other subsidiaries, at equity		232,972		228,655
Advances to subsidiaries		712,500		452,400
Loans to affiliates		10,000		10,000
Loans		2,926		5,249
Less — Allowance for loan losses		60		40
Premises and equipment		23,772		25,628
Other assets		42,969		62,042

Total assets	$	4,298,386	$	4,314,821


Liabilities and Stockholders’ Equity
Other short-term borrowings	$	165,000	$	150,787
Notes payable		480,117		484,406
Accrued expenses and other liabilities		71,387		59,322
Stockholders’ equity		3,581,882		3,620,306

Total liabilities and stockholders’ equity	$	4,298,386	$	4,314,821

Statements of Operations


	Year ended December 31,
(In thousands)	2007			2006		2005

Income:
Dividends from subsidiaries	$	383,100		$	247,899	$	171,000
Interest on money market and investment securities		38,555			39,286		34,259
Other operating income		9,862			17,518		11,771
Gain on sale and valuation adjustment of investment securities		115,567			290		50,469
Interest on advances to subsidiaries		19,114			6,069		416
Interest on loans to affiliates		1,144			1,256		1,176
Interest on loans		382			457		530

Total income		567,724			312,775		269,621

Expenses:
Interest expense		37,095			36,154		43,850
Provision for loan losses		2,007					14
Operating expenses		2,226			1,057		1,380

Total expenses		41,328			37,211		45,244

Income before income taxes and equity in undistributed earnings of subsidiaries		526,396			275,564		224,377
Income taxes		30,288			1,648		3,155

Income before equity in undistributed earnings of subsidiaries		496,108			273,916		221,222
Equity in undistributed (losses) earnings of subsidiaries		(560,601	)		83,760		319,480

Net (loss) income	$	(64,493	)	$	357,676	$	540,702

142

Statements of Cash Flows


	Year ended December 31,
(In thousands)	2007			2006			2005

Cash flows from operating activities:
Net (loss) income	$	(64,493	)	$	357,676		$	540,702

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Equity in undistributed losses (earnings) of subsidiaries and dividends from subsidiaries		177,501			(331,659	)		(490,480	)
Provision for loan losses		2,007						14
Net gain on sale and valuation adjustment of investment securities		(115,567	)		(290	)		(50,469	)
Net amortization of premiums and accretion of discounts on investments		(8,244	)		(427	)		(546	)
Net amortization of premiums and deferred loan origination fees and costs					(54	)		(99	)
Earnings from investments under the equity method		(4,612	)		(2,507	)		(3,097	)
Stock options expense		568			684			305
Net decrease (increase) in other assets		28,340			(9,192	)		6,941
Deferred income taxes		1,156			(569	)		(182	)
Net increase in interest payable		1,508			647			1,349
Net increase in other liabilities		4,354			10,158			5,722

Total adjustments		87,011			(333,209	)		(530,542	)

Net cash provided by operating activities		22,518			24,467			10,160

Cash flows from investing activities:
Net (increase) decrease in money market investments		(37,700	)		221,300			(181,500	)
Purchases of investment securities:
Available-for-sale		(6,808	)					(127,628	)
Held-to-maturity		(4,087,972	)		(269,683	)
Other								(445	)
Proceeds from maturities and redemptions of investment securities:
Available-for-sale								110,432
Held-to-maturity		3,900,087			269,683			150,000
Other					2,646			500
Proceeds from sales of investment securities available-for-sale		5,783			17,781			57,458
Proceeds from sale of other investment securities		245,484
Capital contribution to subsidiaries					(36,000	)		(75,000	)
Net change in advances to subsidiaries and affiliates		(260,100	)		(442,400	)		15,569
Net repayments on loans		337			459			216
Acquisition of premises and equipment		(522	)		(4,939	)		(3	)
Proceeds from sale of premises and equipment		11
Proceeds from sale of foreclosed assets					99			297
Dividends received from subsidiaries		383,100			247,899			171,000

Net cash provided by investing activities		141,700			6,845			120,896

Cash flows from financing activities:
Net decrease in assets sold under agreements to repurchase								(6,690	)
Net decrease in commercial paper								(4,501	)
Net increase in other short-term borrowings		14,213			150,787
Payments of notes payable		(5,000	)		(50,450	)		(135,763	)
Proceeds from issuance of notes payable		397			393			5,383
Cash dividends paid		(190,617	)		(188,321	)		(182,751	)
Proceeds from issuance of common stock		20,414			55,678			193,679
Treasury stock acquired		(2,236	)		(93	)

Net cash used in financing activities		(162,829	)		(32,006	)		(130,643	)

Net increase (decrease) in cash		1,389			(694	)		413
Cash at beginning of year		2			696			283

Cash at end of year	$	1,391		$	2		$	696

The principal source of income for the Holding Company consists of dividends from BPPR. As members 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 each entity during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels described in Note 21. At December 31, 2007, BPPR could have declared a dividend of approximately $44,954,000 (2006 — $208,109,000; 2005 — $230,685,000) without the approval of the Federal Reserve Board. At December 31, 2007, BPNA was required to obtain the approval of the Federal Reserve Board to declare a dividend. The Corporation has never received dividend payments from its U.S. subsidiaries.

Note 37 — Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities:

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”) and all other subsidiaries of the Corporation as of December 31, 2007 and 2006, and the results of their operations and cash flows for each of the years ended December 31, 2007, 2006 and 2005, respectively.

In 2005, the Corporation commenced a two-year plan to change its non-banking subsidiaries to a calendar reporting year-end. As of December 31, 2005, Popular Securities, Inc., Popular North America (holding company), Popular FS, LLC and Popular Financial Holdings, Inc. (“PFH”), including its wholly-owned subsidiaries, except E-LOAN, which already had a December 31^styear-end since its acquisition, continued to have a fiscal year that ended on November 30. Accordingly, their financial information as of November 30, 2005 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of December 31, 2005. As of December 31, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.

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

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA (formerly named EVERTEC, Centroamérica Sociedad Anónima), 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:

144

Condensed Consolidating Statement of Condition


	At December 31, 2007
	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	$	1,391		$	376		$	400		$	910,303		$	(93,645	)	$	818,825
Money market investments		46,400			300			151			1,281,206			(321,345	)		1,006,712
Trading account securities, at fair value											769,698			(1,743	)		767,955
Investment securities available-for-sale, at fair value					31,705						8,483,430						8,515,135
Investment securities held-to-maturity, at amortized cost		626,129			1,250						287,087			(430,000	)		484,466
Other investment securities, at lower of cost or realizable value		14,425			1			12,392			189,766						216,584
Investment in subsidiaries		2,817,934			648,720			1,717,823			413,566			(5,598,043	)
Loans held-for-sale, at lower of cost or market value											1,889,546						1,889,546

Loans held-in-portfolio		725,426			25,150			2,978,528			32,737,346			(8,262,884	)		28,203,566
Less — Unearned income											182,110						182,110
Allowance for loan losses		60									548,772						548,832

		725,366			25,150			2,978,528			32,006,464			(8,262,884	)		27,472,624

Premises and equipment, net		23,772						131			564,393			(133	)		588,163
Other real estate											81,410						81,410
Accrued income receivable		1,675			62			14,271			233,010			(32,904	)		216,114
Servicing assets											196,645						196,645
Other assets		40,740			60,814			47,210			1,349,916			(41,686	)		1,456,994
Goodwill											630,761						630,761
Other intangible assets		554									68,949						69,503

	$	4,298,386		$	768,378		$	4,770,906		$	49,356,150		$	(14,782,383	)	$	44,411,437


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,604,376		$	(93,587	)	$	4,510,789
Interest bearing											24,015,437			(191,748	)		23,823,689

											28,619,813			(285,335	)		28,334,478
Federal funds purchased and assets sold under agreements to repurchase							$	168,892			5,391,273			(122,900	)		5,437,265
Other short-term borrowings	$	165,000						1,155,773			2,494,090			(2,312,884	)		1,501,979
Notes payable		480,117						2,754,339			7,303,782			(5,916,886	)		4,621,352
Subordinated notes											430,000			(430,000	)
Other liabilities		71,387		$	116			62,059			884,859			(84,049	)		934,372

		716,504			116			4,141,063			45,123,817			(9,152,054	)		40,829,446

Minority interest in consolidated subsidiaries											109						109

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,761,908			3,961			2			70,421			(74,384	)		1,761,908
Surplus		563,183			851,193			734,964			3,404,586			(4,985,742	)		568,184
Retained earnings (deficit)		1,324,468			(46,897	)		(99,806	)		770,339			(628,637	)		1,319,467
Treasury stock, at cost		(207,740	)								(664	)		664			(207,740	)
Accumulated other comprehensive loss, net of tax		(46,812	)		(39,995	)		(5,317	)		(12,458	)		57,770			(46,812	)

		3,581,882			768,262			629,843			4,232,224			(5,630,329	)		3,581,882

	$	4,298,386		$	768,378		$	4,770,906		$	49,356,150		$	(14,782,383	)	$	44,411,437

Popular, Inc. | 2007 | Annual Report 145

Condensed Consolidating Statement of Condition


	At December 31, 2006
	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

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

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

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

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

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


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

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

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

Minority interest in consolidated subsidiaries											110						110

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

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

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

146

Condensed Consolidating Statement of Operations


	Year ended December 31, 2007
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	20,640		$	343		$	158,510		$	2,803,356		$	(367,535	)	$	2,615,314
Money market investments		1,147			370			52			36,833			(13,212	)		25,190
Investment securities		37,408			1,800			894			434,406			(28,739	)		445,769
Trading securities											41,898						41,898

		59,195			2,513			159,456			3,316,493			(409,486	)		3,128,171


INTEREST EXPENSE:
Deposits											774,840			(9,047	)		765,793
Short-term borrowings		3,644						59,801			502,115			(117,388	)		448,172
Long-term debt		33,451						149,461			577,406			(295,502	)		464,816

		37,095						209,262			1,854,361			(421,937	)		1,678,781

Net interest income (loss)		22,100			2,513			(49,806	)		1,462,132			12,451			1,449,390
Provision for loan losses		2,007									560,643						562,650

Net interest income (loss) after provision for loan losses		20,093			2,513			(49,806	)		901,489			12,451			886,740
Service charges on deposit accounts											196,072						196,072
Other service fees											475,510			(112,253	)		363,257
Net gain (loss) on sale and valuation adjustment of investment securities		115,567			(20,083	)					(40,325	)					55,159
Trading account loss											(2,343	)		(121	)		(2,464	)
Loss on sale of loans and valuation adjustments on loans held-for-sale											(30,823	)		(8,147	)		(38,970	)
Other operating income (loss)		9,862			15,410			(1,592	)		137,025			(39,443	)		121,262

		145,522			(2,160	)		(51,398	)		1,636,605			(147,513	)		1,581,056


OPERATING EXPENSES:
Personnel costs:
Salaries		21,062			389						500,709			(2,637	)		519,523
Pension, profit sharing and other benefits		5,878			69						143,464			(745	)		148,666

		26,940			458						644,173			(3,382	)		668,189
Net occupancy expenses		2,327			29			3			121,262						123,621
Equipment expenses		1,755						3			125,914			(200	)		127,472
Other taxes		1,557									48,554						50,111
Professional fees		12,103			20			47			281,537			(143,853	)		149,854
Communications		518									66,517			(158	)		66,877
Business promotion		2,768									113,319			(699	)		115,388
Printing and supplies		75						1			17,362						17,438
Impairment losses on long-lived assets											12,344						12,344
Other operating expenses		(45,817	)		(400	)		446			198,038			(1,205	)		151,062
Impact of change in fiscal period at certain subsidiaries Goodwill and trademark impairment losses											211,750						211,750
Amortization of intangibles											10,445						10,445

		2,226			107			500			1,851,215			(149,497	)		1,704,551

Income (loss) before income tax and equity in earnings (losses) of subsidiaries		143,296			(2,267	)		(51,898	)		(214,610	)		1,984			(123,495	)
Income tax expense (benefit)		30,288						(18,164	)		(71,315	)		189			(59,002	)

Income (loss) before equity in earnings (losses) of subsidiaries		113,008			(2,267	)		(33,734	)		(143,295	)		1,795			(64,493	)
Equity in (losses) earnings of subsidiaries		(177,501	)		(504,146	)		(473,478	)		(499,018	)		1,654,143

NET (LOSS) INCOME	$	(64,493	)	$	(506,413	)	$	(507,212	)	$	(642,313	)	$	1,655,938		$	(64,493	)

Popular, Inc. | 2007 | Annual Report 147

Condensed Consolidating Statement of Operations


	Year ended December 31, 2006
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	7,782					$	149,166		$	2,615,635		$	(286,130	)	$	2,486,453
Money market investments		2,199		$	143			520			38,785			(12,021	)		29,626
Investment securities		37,087			1,397			1,403			504,376			(28,026	)		516,237
Trading securities											32,125						32,125

		47,068			1,540			151,089			3,190,921			(326,177	)		3,064,441

INTEREST EXPENSE:
Deposits											583,850			(3,756	)		580,094
Short-term borrowings		537			1,238			26,806			559,750			(69,371	)		518,960
Long-term debt		35,617						177,061			585,618			(260,819	)		537,477

		36,154			1,238			203,867			1,729,218			(333,946	)		1,636,531

Net interest income (loss)		10,914			302			(52,778	)		1,461,703			7,769			1,427,910
Provision for loan losses											287,760						287,760

Net interest income (loss) after provision for loan losses		10,914			302			(52,778	)		1,173,943			7,769			1,140,150
Service charges on deposit accounts											190,079						190,079
Other service fees											429,805			(108,930	)		320,875
Net gain (loss) on sale and valuation adjustment of investment securities		290			13,598						(16,253	)		6,724			4,359
Trading account profit											18,346			16,942			35,288
Gain on sale of loans and valuation adjustments on loans held-for-sale											122,853			(5,432	)		117,421
Other operating income (loss)		17,518			7,006			(271	)		157,896			(40,686	)		141,463

		28,722			20,906			(53,049	)		2,076,669			(123,613	)		1,949,635

OPERATING EXPENSES:
Personnel costs:
Salaries		19,812			379						500,209			(3,222	)		517,178
Pension, profit sharing and other benefits		5,487			66						146,832			(892	)		151,493

		25,299			445						647,041			(4,114	)		668,671
Net occupancy expenses		2,341			14			2			114,385						116,742
Equipment expenses		1,820			8			12			134,150			(113	)		135,877
Other taxes		1,218									43,325						44,543
Professional fees		14,631			46			225			264,672			(138,040	)		141,534
Communications		621									67,764			(102	)		68,283
Business promotion		4,590									126,604			(1,229	)		129,965
Printing and supplies		70						1			17,670						17,741
Impairment losses on long-lived assets											7,232						7,232
Other operating expenses		(49,533	)		(399	)		436			169,125			(1,501	)		118,128
Impact of change in fiscal period at certain subsidiaries								3,495			4,109			2,137			9,741
Goodwill impairment losses											14,239						14,239
Amortization of intangibles											12,377						12,377

		1,057			114			4,171			1,622,693			(142,962	)		1,485,073

Income (loss) before income tax and equity in earnings (losses) of subsidiaries		27,665			20,792			(57,220	)		453,976			19,349			464,562
Income tax expense (benefit)		1,648						(15,363	)		116,867			3,734			106,886

Income (loss) before equity in earnings (losses) of subsidiaries		26,017			20,792			(41,857	)		337,109			15,615			357,676
Equity in earnings (losses) of subsidiaries		331,659			(42,410	)		(2,602	)		(46,768	)		(239,879	)

NET INCOME (LOSS)	$	357,676		$	(21,618	)	$	(44,459	)	$	290,341		$	(224,264	)	$	357,676

148

Condensed Consolidating Statement of Operations


	Year ended December 31, 2005
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	2,122					$	142,050		$	2,207,183		$	(235,056	)	$	2,116,299
Money market investments		3,955		$	8			90			45,350			(18,667	)		30,736
Investment securities		30,304			598			1,264			484,345			(27,697	)		488,814
Trading securities											30,010						30,010

		36,381			606			143,404			2,766,888			(281,420	)		2,665,859

INTEREST EXPENSE:
Deposits											439,269			(8,456	)		430,813
Short-term borrowings		256			988			17,488			387,362			(56,891	)		349,203
Long-term debt		43,594						154,508			488,839			(225,305	)		461,636

		43,850			988			171,996			1,315,470			(290,652	)		1,241,652

Net interest (loss) income		(7,469	)		(382	)		(28,592	)		1,451,418			9,232			1,424,207
Provision for loan losses		14									195,258						195,272

Net interest (loss) income after provision for loan losses		(7,483	)		(382	)		(28,592	)		1,256,160			9,232			1,228,935
Service charges on deposit accounts											181,749						181,749
Other service fees											435,505			(104,004	)		331,501
Net gain (loss) on sale and valuation adjustment of investment securities		50,469			9,236						(6,694	)		(898	)		52,113
Trading account profit											16,625			13,426			30,051
Gain on sale of loans and valuation adjustment on loans held-for-sale											106,598			(23,301	)		83,297
Other operating income		11,771			5,971						127,680			(38,858	)		106,564

		54,757			14,825			(28,592	)		2,117,623			(144,403	)		2,014,210

OPERATING EXPENSES:
Personnel costs:
Salaries					367						478,118			(3,849	)		474,636
Pension, profit sharing and other benefits					58						149,092			(1,097	)		148,053

					425						627,210			(4,946	)		622,689
Net occupancy expenses					14						108,372						108,386
Equipment expenses		31			2			10			124,294			(61	)		124,276
Other taxes		1,021									38,176						39,197
Professional fees		4,536			16			80			249,558			(134,909	)		119,281
Communications		56									63,412			(73	)		63,395
Business promotion		6,292									94,142						100,434
Printing and supplies											18,378						18,378
Other operating expenses		(10,556	)		32			486			134,136			(1,513	)		122,585
Amortization of intangibles											9,579						9,579

		1,380			489			576			1,467,257			(141,502	)		1,328,200

Income (loss) before income tax, cumulative effect of accounting change and equity in earnings of subsidiaries		53,377			14,336			(29,168	)		650,366			(2,901	)		686,010
Income tax expense (benefit)		3,155						(10,266	)		156,797			(771	)		148,915

Income (loss) before cumulative effect of accounting change and equity in earnings of subsidiaries		50,222			14,336			(18,902	)		493,569			(2,130	)		537,095
Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Income (loss) before equity in earnings of subsidiaries		50,222			15,027			(18,902	)		498,063			(3,708	)		540,702
Equity in earnings of subsidiaries		490,480			84,018			101,512			62,055			(738,065	)

NET INCOME	$	540,702		$	99,045		$	82,610		$	560,118		$	(741,773	)	$	540,702

Popular, Inc. | 2007 | Annual Report 149

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2007
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net loss	$	(64,493	)	$	(506,413	)	$	(507,212	)	$	(642,313	)	$	1,655,938		$	(64,493	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in undistributed losses of subsidiaries		177,501			504,146			473,478			499,018			(1,654,143	)
Depreciation and amortization of premises and equipment		2,365						3			76,271			(76	)		78,563
Provision for loan losses		2,007									560,643						562,650
Goodwill and trademark impairment losses											211,750						211,750
Impairment losses on long-lived assets											12,344						12,344
Amortization of intangibles											10,445						10,445
Amortization and fair value adjustment of servicing assets											61,110						61,110
Net (gain) loss on sale and valuation adjustment of investment securities		(115,567	)		20,083						40,325						(55,159	)
Net loss (gain) on disposition of premises and equipment		1									(12,297	)					(12,296	)
Loss on sale of loans and valuation adjustments on loans held-for-sale											30,823			8,147			38,970
Net amortization of premiums and accretion of discounts on investments		(8,244	)		7						28,508			(33	)		20,238
Net amortization of premiums on loans and deferred loan origination fees and costs											100,153			(9,642	)		90,511
Earnings from investments under the equity method		(4,612	)		(15,410	)		1,592			(1,293	)		(1,624	)		(21,347	)
Stock options expense		568									1,195						1,763
Net disbursements on loans held-for-sale											(4,803,927	)					(4,803,927	)
Acquisitions of loans held-for-sale											(550,392	)					(550,392	)
Proceeds from sale of loans held-for-sale											4,127,794						4,127,794
Net decrease in trading securities											1,220,842			1,743			1,222,585
Net (increase) decrease in accrued income receivable		(617	)		(51	)		(2,690	)		10,786			4,404			11,832
Net decrease (increase) in other assets		26,591			4,005			(8,339	)		(123,355	)		6,883			(94,215	)
Net increase (decrease) in interest payable		1,508						(7,762	)		15,617			(4,350	)		5,013
Deferred income taxes		1,156						(18,164	)		(237,455	)		30,723			(223,740	)
Net increase in postretirement benefit obligation											2,388						2,388
Net increase in other liabilities		4,354			55			8,180			95,369			(36,383	)		71,575

Total adjustments		87,011			512,835			446,298			1,376,662			(1,654,351	)		768,455

Net cash provided by (used in) operating activities		22,518			6,422			(60,914	)		734,349			1,587			703,962

Cash flows from investing activities:
Net (increase) decrease in money market investments		(37,700	)		775			2,402			(706,347	)		102,302			(638,568	)
Purchases of investment securities:
Available-for-sale		(6,808	)		(2	)					(886,267	)		732,365			(160,712	)
Held-to-maturity		(4,087,972	)								(25,232,314	)					(29,320,286	)
Other								(928	)		(111,180	)					(112,108	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											2,344,225			(735,548	)		1,608,677
Held-to-maturity		3,900,087			900						25,034,574						28,935,561
Other											44,185						44,185
Proceeds from sales of investment securities available-for-sale		5,783			17,572						34,812						58,167
Proceeds from sale of other investment securities		245,484			2			865			1						246,352
Net disbursements on loans		(259,763	)		(25,150	)		(129,969	)		(2,904,713	)		1,861,670			(1,457,925	)
Proceeds from sale of loans											415,256						415,256
Acquisition of loan portfolios											(22,312	)					(22,312	)
Capital contribution to subsidiary					(300	)					(111,025	)		111,325
Net liabilities assumed, net of cash											719,604						719,604
Mortgage servicing rights purchased											(26,507	)					(26,507	)
Acquisition of premises and equipment		(522	)								(104,386	)		42			(104,866	)
Proceeds from sale of premises and equipment		11									63,444						63,455
Proceeds from sale of foreclosed assets											175,974						175,974
Dividends received from subsidiary		383,100												(383,100	)

Net cash provided by (used in) investing activities		141,700			(6,203	)		(127,630	)		(1,272,976	)		1,689,056			423,947

Cash flows from financing activities:
Net increase in deposits											3,041,881			(152,357	)		2,889,524
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase								9,063			(348,143	)		13,900			(325,180	)
Net increase (decrease) in other short-term borrowings		14,213						260,815			(2,292,160	)		(595,669	)		(2,612,801	)
Payments of notes payable		(5,000	)					(444,583	)		(3,913,642	)		1,899,948			(2,463,277	)
Proceeds from issuance of notes payable		397						363,327			4,217,588			(3,156,092	)		1,425,220
Dividends paid to parent company											(383,100	)		383,100
Dividends paid		(190,617	)														(190,617	)
Proceeds from issuance of common stock		20,414															20,414
Treasury stock acquired		(2,236	)								(289	)					(2,525	)
Capital contribution from parent											111,325			(111,325	)

Net cash (used in) provided by financing activities		(162,829	)					188,622			433,460			(1,718,495	)		(1,259,242	)

Net increase (decrease) in cash and due from banks		1,389			219			78			(105,167	)		(27,852	)		(131,333	)
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	$	1,391		$	376		$	400		$	910,303		$	(93,645	)	$	818,825

150

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2006
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net income (loss)	$	357,676		$	(21,618	)	$	(44,459	)	$	290,341		$	(224,264	)	$	357,676
Less: Impact of change in fiscal period of certain subsidiaries, net of tax								(2,271	)		(2,638	)		(1,220	)		(6,129	)

Net income (loss) before impact of change in fiscal period		357,676			(21,618	)		(42,188	)		292,979			(223,044	)		363,805

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed (earnings) losses of subsidiaries		(331,659	)		42,410			2,602			46,768			239,879
Depreciation and amortization of premises and equipment		2,333						2			82,126			(73	)		84,388
Provision for loan losses											287,760						287,760
Goodwill and trademark impairment losses											14,239						14,239
Amortization of intangibles											12,377						12,377
Impairment losses on long-lived assets											7,232						7,232
Amortization of servicing assets											62,849			(30	)		62,819
Net (gain) loss on sale and valuation adjustment of investment securities		(290	)		(13,598	)					16,253			(6,724	)		(4,359	)
Net loss (gain) on disposition of premises and equipment		4									(25,933	)					(25,929	)
Net gain on sale of loans											(122,853	)		5,432			(117,421	)
Net amortization of premiums and accretion of discounts on investments		(427	)		14			(118	)		24,648			(199	)		23,918
Net amortization of premiums on loans and deferred loan origination fees and costs		(54	)								135,974			(5,829	)		130,091
Earnings from investments under the equity method		(2,507	)		(6,995	)					(1,286	)		(1,482	)		(12,270	)
Stock options expense		684									2,322						3,006
Net disbursements on loans held-for-sale											(6,580,246	)					(6,580,246	)
Acquisitions of loans held-for-sale											(1,547,800	)		44,783			(1,503,017	)
Proceeds from sale of loans held-for-sale											6,826,864			(44,783	)		6,782,081
Net decrease in trading securities											1,369,462			(487	)		1,368,975
Net (increase) decrease in accrued income receivable		(527	)		21			963			(11,612	)		6,946			(4,209	)
Net (increase) decrease in other assets		(11,002	)		4,636			24,566			25,715			5,793			49,708
Net increase (decrease) in interest payable		647			(23	)		2,828			35,984			(6,959	)		32,477
Deferred income taxes		(569	)					(15,471	)		(48,800	)		38,632			(26,208	)
Net increase in postretirement benefit obligation											4,112						4,112
Net increase (decrease) in other liabilities		10,158			6			30,341			(86,169	)		(37,880	)		(83,544	)

Total adjustments		(333,209	)		26,471			45,713			529,986			237,019			505,980

Net cash provided by operating activities		24,467			4,853			3,525			822,965			13,975			869,785

Cash flows from investing activities:
Net decrease (increase) in money market investments		221,300			(775	)		(2,407	)		485,269			(321,966	)		381,421
Purchases of investment securities:
Available-for-sale					(20,574	)					(708,142	)		473,786			(254,930	)
Held-to-maturity		(269,683	)								(20,593,684	)					(20,863,367	)
Other								(13,010	)		(53,016	)					(66,026	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale								10,360			2,338,309			(472,211	)		1,876,458
Held-to-maturity		269,683									20,656,164						20,925,847
Other		2,646									85,668						88,314
Proceeds from sales of investment securities available-for-sale		17,781			28,662						154,426			7,933			208,802
Net disbursements on loans		(441,941	)					(127,083	)		(1,881,055	)		862,753			(1,587,326	)
Proceeds from sale of loans											938,862						938,862
Acquisition of loan portfolios											(448,708	)					(448,708	)
Capital contribution to subsidiary		(36,000	)		(4,000	)		(4,127	)		(30,084	)		74,211
Assets acquired, net of cash											(3,034	)					(3,034	)
Mortgage servicing rights purchased											(23,769	)					(23,769	)
Acquisition of premises and equipment		(4,939	)								(102,971	)		3,317			(104,593	)
Proceeds from sale of premises and equipment											91,230			(3,317	)		87,913
Proceeds from sale of foreclosed assets		99									138,604						138,703
Dividends received from subsidiary		247,899									60,763			(308,662	)

Net cash provided by (used in) investing activities		6,845			3,313			(136,267	)		1,104,832			315,844			1,294,567

Cash flows from financing activities:
Net increase in deposits											1,724,205			65,457			1,789,662
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase								18,129			(3,328,993	)		257,697			(3,053,167	)
Net increase (decrease) in other short-term borrowings		150,787			(46,112	)		535,857			1,128,136			(541,695	)		1,226,973
Payments of notes payable		(50,450	)					(907,062	)		(3,464,344	)		952,427			(3,469,429	)
Proceeds from issuance of notes payable		393						485,614			2,318,236			(1,297,945	)		1,506,298
Dividends paid to parent company											(308,662	)		308,662
Dividends paid		(188,321	)														(188,321	)
Proceeds from issuance of common stock		55,678									3,300			(3,132	)		55,846
Treasury stock acquired		(93	)								(274	)					(367	)
Capital contribution from parent					36,000						34,104			(70,104	)

Net cash (used in) provided by financing activities		(32,006	)		(10,112	)		132,538			(1,894,292	)		(328,633	)		(2,132,505	)

Cash effect of change in fiscal period								78			19,570			(7,734	)		11,914

Net (decrease) increase in cash and due from banks		(694	)		(1,946	)		(126	)		53,075			(6,548	)		43,761
Cash and due from banks at beginning of period		696			2,103			448			962,395			(59,245	)		906,397

Cash and due from banks at end of period	$	2		$	157		$	322		$	1,015,470		$	(65,793	)	$	950,158

Popular, Inc. | 2007 | Annual Report 151

Condensed Consolidating Statement of Cash Flows


	Year ended December 31, 2005
	Popular, Inc.			PIBI			PNA			Other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:
Net income	$	540,702		$	99,045		$	82,610		$	560,118		$	(741,773	)	$	540,702
Less: Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Net income before cumulative effect of accounting change		540,702			98,354			82,610			555,624			(740,195	)		537,095

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(490,480	)		(84,018	)		(101,512	)		(62,055	)		738,065
Depreciation and amortization of premises and equipment		1,511									80,508			(72	)		81,947
Provision for loan losses		14									195,258						195,272
Amortization of intangibles											9,579						9,579
Amortization of servicing assets											25,813			(47	)		25,766
Net (gain) loss on sale and valuation adjustment of investment securities		(50,469	)		(9,236	)					6,694			898			(52,113	)
Net gain on disposition of premises and equipment											(29,079	)					(29,079	)
Net gain on sale of loans											(106,598	)		23,301			(83,297	)
Net amortization of premiums and accretion of discounts on investments		(546	)		10						36,518			(694	)		35,288
Net amortization of premiums on loans and deferred loan origination fees and costs		(99	)								134,452			(7,118	)		127,235
Earnings from investments under the equity method		(3,097	)		(5,518	)					(790	)		(1,577	)		(10,982	)
Stock options expense		305									4,887			34			5,226
Net disbursements on loans held-for-sale											(4,321,658	)					(4,321,658	)
Acquisitions of loans held-for-sale											(733,536	)					(733,536	)
Proceeds from sale of loans held-for-sale											4,127,381						4,127,381
Net decrease in trading securities											1,161,956			(976	)		1,160,980
Net increase in accrued income receivable		(347	)		(33	)		(1,146	)		(32,159	)		2,877			(30,808	)
Net decrease (increase) in other assets		5,777			2,613			2,856			(159,492	)		(24,633	)		(172,879	)
Net increase in interest payable		1,349			3			323			36,421			(2,878	)		35,218
Deferred income taxes		(182	)					(10,266	)		7,097			(328	)		(3,679	)
Net increase in postretirement benefit obligation											5,451						5,451
Net increase (decrease) in other liabilities		5,722			(21	)		7,010			7,627			93			20,431

Total adjustments		(530,542	)		(96,200	)		(102,735	)		394,275			726,945			391,743

Net cash provided by (used in) operating activities		10,160			2,154			(20,125	)		949,899			(13,250	)		928,838

Cash flows from investing activities:
Net ( increase) decrease in money market investments		(181,500	)					(31	)		209,122			132,470			160,061
Purchases of investment securities:
Available-for-sale		(127,628	)		(71,293	)					(4,954,363	)		910,122			(4,243,162	)
Held-to-maturity					(2,431	)					(33,577,371	)					(33,579,802	)
Other		(445	)					(770	)		(76,501	)					(77,716	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		110,432						4,978			4,115,508			(913,720	)		3,317,198
Held-to-maturity		150,000			250						33,637,018						33,787,268
Other		500									60,553						61,053
Proceeds from sales of investment securities available-for-sale		57,458			32,111						299,027						388,596
Net repayments (disbursements) on loans		15,785						(156,327	)		(568,155	)		365,604			(343,093	)
Proceeds from sale of loans											297,805						297,805
Acquisition of loan portfolios											(2,650,540	)					(2,650,540	)
Capital contribution to subsidiary		(75,000	)		(75,000	)		(478,510	)		(306,868	)		935,378
Assets acquired, net of cash											(411,782	)					(411,782	)
Mortgage servicing rights purchased											(5,039	)					(5,039	)
Acquisition of premises and equipment		(3	)								(159,163	)					(159,166	)
Proceeds from sale of premises and equipment											71,053						71,053
Proceeds from sale of foreclosed assets		297									116,862						117,159
Dividends received from subsidiary		171,000						150,000			52,500			(373,500	)

Net cash provided by (used in) investing activities		120,896			(116,363	)		(480,660	)		(3,850,334	)		1,056,354			(3,270,107	)

Cash flows from financing activities:
Net increase in deposits											1,261,945			109,723			1,371,668
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(6,690	)					45,926			2,438,448			(249,796	)		2,227,888
Net (decrease) increase in other short-term borrowings		(4,501	)		41,286			382,213			(817,323	)		(367,952	)		(766,277	)
Payments of notes payable		(135,763	)					(15,808	)		(3,558,141	)		1,058,740			(2,650,972	)
Proceeds from issuance of notes payable		5,383						13,518			3,362,405			(1,040,295	)		2,341,011
Dividends paid to parent company											(373,500	)		373,500
Dividends paid		(182,751	)														(182,751	)
Proceeds from issuance of common stock		193,679															193,679
Treasury stock acquired											(1,467	)					(1,467	)
Capital contribution from parent					75,000			75,000			784,915			(934,915	)

Net cash (used in) provided by financing activities		(130,643	)		116,286			500,849			3,097,282			(1,050,995	)		2,532,779

Cash effect of change in accounting principle					(28	)					(1,544	)					(1,572	)

Net increase in cash and due from banks		413			2,049			64			195,303			(7,891	)		189,938
Cash and due from banks at beginning of period		283			54			384			767,092			(51,354	)		716,459

Cash and due from banks at end of period	$	696		$	2,103		$	448		$	962,395		$	(59,245	)	$	906,397


	Year ended December 31,
(In thousands)	2007			2006			$ Variance

Net gain on sale of investment securities	$	120,328		$	22,233		$	98,095

Valuation adjustments of investment securities		(65,169	)		(17,874	)		(47,295	)

Total	$	55,159		$	4,359		$	50,800


Management’s Discussion and Analysis of Financial Condition and Results of Operations			3

Statistical Summaries			69

Financial Statements

Management’s Report to Stockholders			74

Report of Independent Registered Public Accounting Firm			75

Consolidated Statements of Condition as of December 31, 2007 and 2006			77

Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005			78

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005			79

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005			80

Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005			81

Notes to Consolidated Financial Statements			82


Forward-Looking Statements			3

Overview			3

Significant U.S. Strategic Events			8

Events Subsequent to Year-End 2007			10

Critical Accounting Policies / Estimates			11

Statement of Operations Analysis
Net Interest Income			19
Provision for Loan Losses			21
Non-Interest Income			21
Operating Expenses			27
Income Tax Expense			28
Fourth Quarter Results			29

Reportable Segment Results			30

Statement of Condition Analysis
Assets			32
Deposits, Borrowings and Other Liabilities			34
Stockholders’ Equity			35

Off-Balance Sheet Financing Entities			36

Risk Management			37
Market Risk			37
Liquidity Risk			43
Credit Risk Management and Loan Quality			50
Operational Risk Management			61

Loss Mitigation for Securitized Mortgage Loans			61

Recently Issued Accounting Pronouncements and Interpretations			63

Glossary of Selected Financial Terms			66

Statistical Summaries
Statements of Condition			69
Statements of Operations			70
Quarterly Financial Data			71
Average Balance Sheet and Summary of Net Interest Income			72


Note 1 - Nature of operations and summary of significant accounting policies			83
Note 2 - Restructuring plans			96
Note 3 - Subsequent events			97
Note 4 - Restrictions on cash and due from banks and highly liquid securities			98
Note 5 - Securities purchased under agreements to resell			98
Note 6 - Investment securities available-for-sale			99
Note 7 - Investment securities held-to-maturity			101
Note 8 - Pledged assets			103
Note 9 - Loans and allowance for loan losses			103
Note 10 - Related party transactions			104
Note 11 - Premises and equipment			105
Note 12 - Goodwill and other intangible assets			105
Note 13 - Deposits			106
Note 14 - Federal funds purchased and assets sold under agreements to repurchase			107
Note 15 - Other short-term borrowings			108
Note 16 - Notes payable			109
Note 17 - Unused lines of credit and other funding sources			109
Note 18 - Trust preferred securities			110
Note 19 - (Loss) earnings per common share			111
Note 20 - Stockholders’ equity			111
Note 21 - Regulatory capital requirements			112
Note 22 - Servicing assets			113
Note 23 - Retained interests on transfers of financial assets			115
Note 24 - Employee benefits			119
Note 25 - Stock-based compensation			124
Note 26 - Rental expense and commitments			126
Note 27 - Income tax			127
Note 28 - Off-balance sheet activities and concentration of credit risk			129
Note 29 - Disclosures about fair value of financial instruments			129
Note 30 - Derivative instruments and hedging activities			131
Note 31 - Supplemental disclosure on the consolidated statements of cash flows			134
Note 32 - Segment reporting			135
Note 33 - Contingent liabilities			139
Note 34 - Guarantees			139
Note 35 - Other service fees			140
Note 36 - Popular, Inc. (Holding Company only) financial information			141
Note 37 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities			142

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

	•		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;

	•		BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc.; and

	•		EVERTEC USA, Inc.