POPULAR, INC.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2007
Commission File Number: 000-13818
POPULAR, INC.
(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0667416
     
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer Identification Number)
     
Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
   
San Juan, Puerto Rico   00918
     
(Address of principal executive offices)   (Zip code)
(787) 765-9800
 
(Registrant’s telephone number, including area code)
NOT APPLICABLE
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ          Accelerated filer o           Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 279,629,000 shares outstanding as of August 3, 2007.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page
Part I — Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    60  
 
       
    93  
 
       
    96  
 
       
       
 
       
    97  
 
       
    97  
 
       
    99  
 
       
    100  
 
       
    100  
 
       
    101  
 EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

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

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ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
                         
    June 30,   December 31,   June 30,
(In thousands, except share information)   2007   2006   2006
 
ASSETS
                       
Cash and due from banks
  $ 762,085     $ 950,158     $ 848,892  
 
Money market investments:
                       
Federal funds sold
    345,400       84,350       245,500  
Securities purchased under agreements to resell
    212,138       202,181       366,143  
Time deposits with other banks
    17,449       15,177       8,879  
 
 
    574,987       301,708       620,522  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    3,421,716       3,743,924       6,112,628  
Other investment securities available-for-sale
    5,552,752       6,106,938       4,776,670  
Investment securities held-to-maturity, at amortized cost (market value at June 30,
2007 - $429,536; December 31, 2006 - $92,764; June 30, 2006 – $420,172)
    429,479       91,340       420,398  
Other investment securities, at lower of cost or realizable value (realizable value at June 30, 2007 - $160,372; December 31, 2006 - $412,593; June 30, 2006 – $422,163)
    160,150       297,394       312,042  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    355,484       193,619       212,637  
Other trading securities
    321,374       188,706       163,633  
Loans held-for-sale, at lower of cost or market value
    605,990       719,922       606,620  
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
    195,661       306,320       67,381  
Other loans held-in-portfolio
    32,274,058       32,019,044       31,847,625  
Less – Unearned income
    323,864       308,347       304,994  
Allowance for loan losses
    564,847       522,232       483,815  
 
 
    31,581,008       31,494,785       31,126,197  
 
Premises and equipment, net
    587,505       595,140       592,704  
Other real estate
    112,858       84,816       83,658  
Accrued income receivable
    249,746       248,240       245,998  
Other assets
    1,499,461       1,611,890       1,515,682  
Goodwill
    668,469       667,853       656,189  
Other intangible assets
    102,299       107,554       105,044  
 
 
  $ 46,985,363     $ 47,403,987     $ 48,399,514  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,280,195     $ 4,222,133     $ 4,370,437  
Interest bearing
    21,105,800       20,216,198       19,079,083  
 
 
    25,385,995       24,438,331       23,449,520  
Federal funds purchased and assets sold under agreements to repurchase
    5,655,936       5,762,445       7,926,731  
Other short-term borrowings
    3,384,105       4,034,125       2,656,936  
Notes payable
    8,068,638       8,737,246       10,198,675  
Other liabilities
    793,500       811,424       704,547  
 
 
    43,288,174       43,783,571       44,936,409  
 
Commitments and contingencies (See Note 12)
                       
 
Minority interest in consolidated subsidiaries
    109       110       112  
 
Stockholders’ equity:
                       
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented
    186,875       186,875       186,875  
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 292,722,761 shares issued (December 31, 2006 – 292,190,924; June 30, 2006 – 291,718,358) and 279,326,816 outstanding (December 31, 2006 – 278,741,547; June 30, 2006 – 278,293,561)
    1,756,337       1,753,146       1,750,310  
Surplus
    533,152       526,856       490,631  
Retained earnings
    1,701,100       1,594,144       1,576,499  
Accumulated other comprehensive loss, net of tax of ($96,065) (December 31, 2006 – ($84,143); June 30, 2006 – ($110,267))
    (274,817 )     (233,728 )     (334,789 )
Treasury stock – at cost, 13,395,945 shares (December 31, 2006 – 13,449,377; June 30, 2006 – 13,424,797)
    (205,567 )     (206,987 )     (206,533 )
 
 
    3,697,080       3,620,306       3,462,993  
 
 
  $ 46,985,363     $ 47,403,987     $ 48,399,514  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands, except per share information)   2007   2006   2007   2006
 
INTEREST INCOME:
                               
Loans
  $ 656,485     $ 613,792     $ 1,300,599     $ 1,205,627  
Money market investments
    5,752       7,906       10,361       15,888  
Investment securities
    113,063       133,274       228,554       266,807  
Trading account securities
    9,611       7,065       18,992       15,925  
 
 
    784,911       762,037       1,558,506       1,504,247  
 
INTEREST EXPENSE:
                               
Deposits
    182,730       135,961       355,832       260,372  
Short-term borrowings
    119,466       127,074       244,275       251,877  
Long-term debt
    111,298       133,223       232,000       266,455  
 
 
    413,494       396,258       832,107       778,704  
 
Net interest income
    371,417       365,779       726,399       725,543  
Provision for loan losses
    115,167       67,096       211,513       116,043  
 
Net interest income after provision for loan losses
    256,250       298,683       514,886       609,500  
Service charges on deposit accounts
    48,392       47,324       96,863       94,793  
Other service fees (See Note 13)
    89,590       80,017       177,439       160,363  
Net gain (loss) on sale and valuation adjustments of investment securities
    1,175       (14,424 )     82,946       (2,084 )
Trading account profit (loss)
    10,377       1,830       (3,787 )     13,305  
Gain on sale of loans and valuation adjustments on loans held-for-sale
    28,294       29,054       31,728       76,315  
Other operating income
    25,547       40,185       70,362       70,127  
 
 
    459,625       482,669       970,437       1,022,319  
 
OPERATING EXPENSES:
                               
Personnel costs:
                               
Salaries
    126,950       126,700       263,429       262,232  
Pension, profit sharing and other benefits
    37,338       39,783       79,234       82,303  
 
 
    164,288       166,483       342,663       344,535  
Net occupancy expenses
    26,501       28,629       58,515       57,267  
Equipment expenses
    32,245       33,973       64,641       67,170  
Other taxes
    11,835       10,929       23,682       21,170  
Professional fees
    38,642       38,488       74,629       75,566  
Communications
    16,973       17,293       34,035       34,593  
Business promotion
    30,369       31,991       58,741       64,814  
Printing and supplies
    4,549       4,291       8,825       8,923  
Other operating expenses
    32,838       28,072       64,854       56,903  
Impact of change in fiscal period of certain subsidiaries
                      9,741  
Amortization of intangibles
    2,813       2,831       5,796       5,552  
 
 
    361,053       362,980       736,381       746,234  
 
Income before income tax
    98,572       119,689       234,056       276,085  
Income tax
    23,622       22,308       40,459       60,201  
 
NET INCOME
  $ 74,950     $ 97,381     $ 193,597     $ 215,884  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 71,972     $ 94,403     $ 187,641     $ 209,928  
 
BASIC EARNINGS PER COMMON SHARE (EPS)
  $ 0.26     $ 0.34     $ 0.67     $ 0.75  
 
DILUTED EPS
  $ 0.26     $ 0.34     $ 0.67     $ 0.75  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16     $ 0.32     $ 0.32  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Six months ended
    June 30,
(In thousands)   2007   2006
 
Preferred stock:
               
Balance at beginning and end of year
  $ 186,875     $ 186,875  
 
Common stock:
               
Balance at beginning of year
    1,753,146       1,736,443  
Common stock issued under the Dividend Reinvestment Plan
    3,131       2,475  
Issuance of common stock
          11,312  
Stock options exercised
    60       80  
 
Balance at end of period
    1,756,337       1,750,310  
 
Surplus:
               
Balance at beginning of year
    526,856       452,398  
Common stock issued under the Dividend Reinvestment Plan
    5,290       5,733  
Issuance of common stock
          28,281  
Issuance cost of common stock
          1,502  
Stock options expense on unexercised options, net of forfeitures
    857       1,525  
Stock options exercised
    149       192  
Transfer from retained earnings
          1,000  
 
Balance at end of period
    533,152       490,631  
 
Retained earnings:
               
Balance at beginning of year
    1,594,144       1,456,612  
Net income
    193,597       215,884  
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)
    8,667        
Cash dividends declared on common stock
    (89,352 )     (89,041 )
Cash dividends declared on preferred stock
    (5,956 )     (5,956 )
Transfer to surplus
          (1,000 )
 
Balance at end of period
    1,701,100       1,576,499  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (233,728 )     (176,000 )
Other comprehensive loss, net of tax
    (41,089 )     (158,789 )
 
Balance at end of period
    (274,817 )     (334,789 )
 
Treasury stock – at cost:
               
Balance at beginning of year
    (206,987 )     (207,081 )
Purchase of common stock
    (352 )      
Reissuance of common stock
    1,772       548  
 
Balance at end of period
    (205,567 )     (206,533 )
 
Total stockholders’ equity
  $ 3,697,080     $ 3,462,993  
 
Disclosure of changes in number of shares:
                         
    June 30, 2007   December 31, 2006   June 30, 2006
 
Preferred Stock:
                       
Balance at beginning and end of period
    7,475,000       7,475,000       7,475,000  
Common Stock – Issued:
                       
Balance at beginning of year
    292,190,924       289,407,190       289,407,190  
Issued under the Dividend Reinvestment Plan
    521,773       858,905       412,445  
Issuance of common stock
          1,885,380       1,885,380  
Stock options exercised
    10,064       39,449       13,343  
 
Balance at end of period
    292,722,761       292,190,924       291,718,358  
 
Treasury stock
    (13,395,945 )     (13,449,377 )     (13,424,797 )
 
Common Stock – outstanding
    279,326,816       278,741,547       278,293,561  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands)   2007   2006   2007   2006
 
Net income
  $ 74,950     $ 97,381     $ 193,597     $ 215,884  
 
Other comprehensive loss, before tax:
                               
Foreign currency translation adjustment
    1,200       369       2,980       (317 )
Adjustment of pension and postretirement benefit plans
                (519 )      
Unrealized holding losses on securities available-for-sale arising during the period
    (95,452 )     (123,859 )     (55,969 )     (215,824 )
Reclassification adjustment for (gains) losses included in net income
    (1 )     14,424       (83 )     2,084  
Net gain on cash flow hedges
    1,840       2,710       948       3,910  
Reclassification adjustment for gains included in net income
    (286 )     (778 )     (125 )     (617 )
Cumulative effect of accounting change
    (243 )           (243 )      
 
 
    (92,942 )     (107,134 )     (53,011 )     (210,764 )
Income tax benefit
    22,060       27,610       11,922       51,975  
 
Total other comprehensive loss, net of tax
    (70,882 )     (79,524 )     (41,089 )     (158,789 )
 
Comprehensive income
  $ 4,068     $ 17,857     $ 152,508     $ 57,095  
 
Disclosure of accumulated other comprehensive loss:
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Foreign currency translation adjustment
  $ (33,721 )   $ (36,701 )   $ (36,632 )
 
Minimum pension liability adjustment
          (3,893 )     (2,354 )
Tax effect
          1,518       918  
Adoption of SFAS No. 158
          3,893        
Tax effect
          (1,518 )      
 
Net of tax amount
                (1,436 )
 
Underfunding of pension and postretirement benefit plans
    (69,779 )     (69,260 )      
Tax effect
    27,214       27,034        
 
Net of tax amount
    (42,565 )     (42,226 )      
 
Unrealized losses on securities available-for-sale
    (268,295 )     (212,243 )     (409,430 )
Tax effect
    69,182       57,146       110,440  
 
Net of tax amount
    (199,113 )     (155,097 )     (298,990 )
 
Unrealized gains on cash flows hedges
    913       90       3,117  
Tax effect
    (331 )     (37 )     (1,091 )
 
Net of tax amount
    582       53       2,026  
 
Cumulative effect of accounting change, net of tax
          243       243  
 
Accumulated other comprehensive loss, net of tax
  $   (274,817 )   $ (233,728 )   $ (334,789 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Six months ended June 30,
(In thousands)   2007   2006
 
Cash flows from operating activities:
               
Net income
  $ 193,597     $ 215,884  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
          (6,129 )
 
Net income before change in fiscal period
    193,597       222,013  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    39,973       42,506  
Provision for loan losses
    211,513       116,043  
Amortization of intangibles
    5,796       5,552  
Amortization and fair value adjustment of servicing assets
    22,606       28,290  
Net (gain) loss on sale and valuation adjustment of investment securities
    (82,946 )     2,084  
Net gain on disposition of premises and equipment
    (4,851 )     (2,269 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
    (31,728 )     (76,315 )
Net amortization of premiums and accretion of discounts on investments
    11,235       14,358  
Net amortization of premiums and deferred loan origination fees and costs
    47,938       66,709  
Earnings from investments under the equity method
    (16,590 )     (6,163 )
Stock options expense
    907       1,585  
Deferred income taxes
    (48,112 )     (28,381 )
Net disbursements on loans held-for-sale
    (3,087,103 )     (3,559,262 )
Acquisitions of loans held-for-sale
    (403,712 )     (846,117 )
Proceeds from sale of loans held-for-sale
    2,833,030       3,834,624  
Net decrease in trading securities
    645,680       1,000,341  
Net increase in accrued income receivable
    (1,506 )     (1,966 )
Net increase in other assets
    (16,261 )     (79,280 )
Net (decrease) increase in interest payable
    (14,013 )     9,886  
Net increase in postretirement benefit obligation
    1,824       2,755  
Net decrease in other liabilities
    (52,071 )     (63,653 )
 
Total adjustments
    61,609       461,327  
 
Net cash provided by operating activities
    255,206       683,340  
 
Cash flows from investing activities:
               
Net (increase) decrease in money market investments
    (206,843 )     129,048  
Purchases of investment securities:
               
Available-for-sale
    (65,385 )     (211,139 )
Held-to-maturity
    (12,293,611 )     (16,847,432 )
Other
    (16,935 )     (32,202 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    810,710       761,858  
Held-to-maturity
    11,957,964       16,580,599  
Other
    5,445       39,263  
Proceeds from sale of investment securities available-for-sale
    28,981       44,474  
Proceeds from sale of other investment securities
    246,352        
Net disbursements on loans
    (362,569 )     (472,274 )
Proceeds from sale of loans
    3,549       212,791  
Acquisition of loan portfolios
    (784 )     (175,856 )
Assets acquired, net of cash
    (1,633 )     (418 )
Mortgage servicing rights purchased
    (23,988 )     (9,599 )
Acquisition of premises and equipment
    (49,652 )     (63,469 )
Proceeds from sale of premises and equipment
    21,951       26,762  
Proceeds from sale of foreclosed assets
    80,278       66,685  
 
Net cash provided by investing activities
    133,830       49,091  
 
Cash flows from financing activities:
               
Net increase in deposits
    936,810       811,499  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
    (106,509 )     (888,881 )
Net decrease in other short-term borrowings
    (650,020 )     (150,183 )
Payments of notes payable
    (773,731 )     (1,210,735 )
Proceeds from issuance of notes payable
    103,249       682,406  
Dividends paid
    (95,223 )     (93,249 )
Proceeds from issuance of common stock
    8,667       47,293  
Treasury stock acquired
    (352 )      
 
Net cash used in financing activities
    (577,109 )     (801,850 )
 
Cash effect of change in fiscal period of certain subsidiaries
          11,914  
 
Net decrease in cash and due from banks
    (188,073 )     (57,505 )
Cash and due from banks at beginning of period
    950,158       906,397  
 
Cash and due from banks at end of period
  $ 762,085     $ 848,892  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
Note 1 – Nature of Operations and Basis of Presentation
Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution based in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in California, Texas, Illinois, New York, New Jersey and Florida, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation also owns a financial transaction processing operation, EVERTEC, which strives to use its expertise in technology and electronic banking as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 21 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Corporation also consolidates the variable interest entities for which it is the primary beneficiary and, therefore, will absorb the majority of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2007 presentation.
The statement of condition data as of December 31, 2006 were derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of June 30, 2007, December 31, 2006 and June 30, 2006 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2006, included in the Corporation’s 2006 Annual Report. The Corporation’s Form 10-K filed on March 1, 2007 incorporates by reference the 2006 Annual Report.
Note 2 – Recent Accounting Developments
SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits companies to elect, on a transaction-by-transaction basis, to apply a fair value measurement to hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation under SFAS No. 133. This statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in 2007 did not have a material impact on the Corporation’s consolidated financial statements during the six months ended June 30, 2007.

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SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”
SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation adopted SFAS No. 156 in January 2007. The Corporation elected the fair value measurement for mortgage servicing rights (“MSRs”). Servicing rights associated with Small Business Administration (“SBA”) commercial loans will continue to be accounted at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs was included as a cumulative effect of a change in accounting principle directly in stockholders’ equity and resulted in a net increase in stockholders’ equity of approximately $9.6 million, net of deferred taxes. Refer to Note 7 to the consolidated financial statements for required SFAS No. 156 disclosures.
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (FIN 48)
In 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to income taxes. The accounting provisions of FIN 48 were effective for the Corporation beginning in the first quarter of 2007. Based on management’s assessment, there was no impact on retained earnings as of January 1, 2007 due to the initial application of the provisions of FIN 48. Also, as a result of the implementation, the Corporation did not recognize any change in the liability for unrecognized tax benefits. Refer to Note 14 to the consolidated financial statements for further information on the impact of FIN 48.
EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-03)
EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Corporation’s accounting policy is to account on a net basis for the taxes collected from customers and remitted to governmental authorities on a net basis. The corresponding amounts recognized in the consolidated financial statements are not significant.
EITF Issue No. 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5)
EITF 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis. At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable in cash to the policyholder should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $0.9 million cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and

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reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation will adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its consolidated financial statements and disclosures.
SFAS No. 159 “Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities”
In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, “Fair Value Measurements,” and No. 107, “Disclosures about Fair Value of Financial Instrument.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this accounting standard may have on its consolidated financial statements.
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB issued Staff Position FSP FIN 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 39-1 is not expected to have a material impact on the Corporation’s consolidated financial statements.
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), which amends the scope of the exception to FIN 46 (R) to indicate that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, are not subject to consolidation under FIN No. 46 (R). This interpretation is effective for fiscal years beginning on or after December 15, 2007. Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements.
SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”
The Statement of Position SOP 07-01 issued in June 2007 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies (“AICPA Guide”). Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the AICPA Guide. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007, with early application encouraged. Management is evaluating the impact, if any, that the adoption of SOP 07-1 may have on its consolidated financial statements.

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Note 3 – Restrictions on Cash and Due from Banks and Highly Liquid Securities
The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $603 million at June 30, 2007 (December 31, 2006 — $621 million; June 30, 2006 — $583 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, at June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation had securities with a market value of $445 thousand segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Law, at June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand 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 June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation maintained restricted cash of $1.9 million as collateral. The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.
Note 4 – Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, borrowings and other available credit facilities. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Investment securities available-for-sale
  $ 3,264,299     $ 2,645,272     $ 2,799,279  
Investment securities held-to-maturity
    501       658       808  
Loans held-for-sale
          332,058       56,898  
Loans held-in-portfolio
    9,062,900       10,260,198       11,440,294  
 
 
  $ 12,327,700     $ 13,238,186     $ 14,297,279  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

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Note 5 – Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of June 30, 2007, December 31, 2006 and June 30, 2006 were as follows:
                                 
    AS OF JUNE 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 500,193           $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    6,016,206             174,448       5,841,758  
Obligations of Puerto Rico, States and political subdivisions
    117,372     $ 170       3,754       113,788  
Collateralized mortgage obligations
    1,544,362       6,122       18,435       1,532,049  
Mortgage-backed securities
    991,440       1,529       32,771       960,198  
Equity securities
    55,250       1,173       11,074       45,349  
Others
    17,940       809             18,749  
 
 
  $ 9,242,763     $ 9,803     $ 278,098     $ 8,974,468  
 
                                 
    AS OF DECEMBER 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 504,653           $ 29,818     $ 474,835  
Obligations of U.S. Government sponsored entities
    6,603,252     $ 57       147,524       6,455,785  
Obligations of Puerto Rico, States and political subdivisions
    118,214       265       3,537       114,942  
Collateralized mortgage obligations
    1,657,613       4,904       17,191       1,645,326  
Mortgage-backed securities
    1,061,850       1,458       26,492       1,036,816  
Equity securities
    70,954       6,692       3,901       73,745  
Others
    46,326       3,087             49,413  
 
 
  $ 10,062,862     $ 16,463     $ 228,463     $ 9,850,862  
 
                                 
    AS OF JUNE 30, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 524,093           $ 46,330     $ 477,763  
Obligations of U.S. Government sponsored entities
    7,440,298             288,943       7,151,355  
Obligations of Puerto Rico, States and political subdivisions
    120,410     $ 70       5,801       114,679  
Collateralized mortgage obligations
    1,790,277       6,762       28,898       1,768,141  
Mortgage-backed securities
    1,285,786       2,464       50,331       1,237,919  
Equity securities
    68,294       2,748       925       70,117  
Others
    69,327       698       701       69,324  
 
 
  $ 11,298,485     $ 12,742     $ 421,929     $ 10,889,298  
 

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The table below shows the Corporation’s gross unrealized losses and market value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2007, December 31, 2006 and June 30, 2006.
                         
    AS OF JUNE 30, 2007
    Less than 12 Months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 475,542     $ 13,283     $ 462,259  
Obligations of Puerto Rico, States and political subdivisions
    21,652       473       21,179  
Collateralized mortgage obligations
    189,570       2,077       187,493  
Mortgage-backed securities
    39,132       873       38,259  
Equity securities
    53,683       11,047       42,636  
 
 
  $ 779,579     $ 27,753     $ 751,826  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 500,193     $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    5,540,664       161,165       5,379,499  
Obligations of Puerto Rico, States and political subdivisions
    69,136       3,281       65,855  
Collateralized mortgage obligations
    647,337       16,358       630,979  
Mortgage-backed securities
    869,343       31,898       837,445  
Equity securities
    310       27       283  
 
 
  $ 7,626,983     $ 250,345     $ 7,376,638  
 
                         
    Total
 
    Amortized   Gross Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 500,193     $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    6,016,206       174,448       5,841,758  
Obligations of Puerto Rico, States and political subdivisions
    90,788       3,754       87,034  
Collateralized mortgage obligations
    836,907       18,435       818,472  
Mortgage-backed securities
    908,475       32,771       875,704  
Equity securities
    53,993       11,074       42,919  
 
 
  $ 8,406,562     $ 278,098     $ 8,128,464  
 

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

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    AS OF JUNE 30, 2006
    Less than 12 Months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 19,418     $ 342     $ 19,076  
Obligations of U.S. Government sponsored entities
    3,519,349       157,756       3,361,593  
Obligations of Puerto Rico, States and political subdivisions
    44,386       1,024       43,362  
Collateralized mortgage obligations
    732,872       16,340       716,532  
Mortgage-backed securities
    205,765       29,321       176,444  
Equity securities
    35,716       925       34,791  
Others
    14,261       701       13,560  
 
 
  $ 4,571,767     $ 206,409     $ 4,365,358  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 504,675     $ 45,988     $ 458,687  
Obligations of U.S. Government sponsored entities
    3,920,949       131,187       3,789,762  
Obligations of Puerto Rico, States and political subdivisions
    55,232       4,777       50,455  
Collateralized mortgage obligations
    313,094       12,558       300,536  
Mortgage-backed securities
    957,443       21,010       936,433  
 
 
  $ 5,751,393     $ 215,520     $ 5,535,873  
 
                         
    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 524,093     $ 46,330     $ 477,763  
Obligations of U.S. Government sponsored entities
    7,440,298       288,943       7,151,355  
Obligations of Puerto Rico, States and political subdivisions
    99,618       5,801       93,817  
Collateralized mortgage obligations
    1,045,966       28,898       1,017,068  
Mortgage-backed securities
    1,163,208       50,331       1,112,877  
Equity securities
    35,716       925       34,791  
Others
    14,261       701       13,560  
 
 
  $ 10,323,160     $ 421,929     $ 9,901,231  
 
At June 30, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $59 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) the rating on which was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, one notch below investment grade. Standard & Poor’s (“S&P”), another nationally-recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of June 30, 2007, these Appropriation Bonds represented approximately $2.9 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

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The unrealized loss positions of available-for-sale securities at June 30, 2007, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly-liquid securities, which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at June 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the six months ended June 30, 2007, the Corporation recognized through earnings approximately $30.7 million in losses in residual interests classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired. The equity securities that generated this other-than-temporary impairment in the first quarter of 2007 were sold in the second quarter of 2007.
The following table states the 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.
                                                 
    June 30, 2007   December 31, 2006   June 30, 2006
 
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,261,541     $ 1,238,499     $ 1,539,651     $ 1,517,525     $ 1,797,323     $ 1,758,590  
FHLB
    6,069,496       5,897,748       6,230,841       6,086,885       7,354,827       7,073,831  
Freddie Mac
    1,011,125       996,046       1,149,185       1,134,853       1,243,039       1,212,853  
 
Note 6 – Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of June 30, 2007, December 31, 2006 and June 30, 2006 were as follows:
                                 
    AS OF JUNE 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 340,323     $ 13     $ 36     $ 340,300  
Obligations of Puerto Rico, States and political subdivisions
    72,406       441       374       72,473  
Collateralized mortgage obligations
    354             19       335  
Others
    16,396       39       7       16,428  
 
 
  $ 429,479     $ 493     $ 436     $ 429,536  
 

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    AS OF DECEMBER 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 3,017                 $ 3,017  
Obligations of Puerto Rico, States and political subdivisions
    72,152     $ 1,559     $ 161       73,550  
Collateralized mortgage obligations
    381             21       360  
Others
    15,790       60       13       15,837  
 
 
  $ 91,340     $ 1,619     $ 195     $ 92,764  
 
                                 
    AS OF JUNE 30, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 314,408           $ 64     $ 314,344  
Obligations of Puerto Rico, States and political subdivisions
    73,043     $ 367       527       72,883  
Collateralized mortgage obligations
    433             24       409  
Others
    32,514       50       28       32,536  
 
 
  $ 420,398     $ 417     $ 643     $ 420,172  
 
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 June 30, 2007, December 31, 2006 and June 30, 2006:
                         
    AS OF JUNE 30, 2007
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 240,336     $ 36     $ 240,300  
Obligations of Puerto Rico, States and political subdivisions
    20,995       223       20,772  
Others
    250       2       248  
 
 
  $ 261,581     $ 261     $ 261,320  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 24,545     $ 151     $ 24,394  
Collateralized mortgage obligations
    354       19       335  
Others
    1,250       5       1,245  
 
 
  $ 26,149     $ 175     $ 25,974  
 

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    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 240,336     $ 36     $ 240,300  
Obligations of Puerto Rico, States and political subdivisions
    45,540       374       45,166  
Collateralized mortgage obligations
    354       19       335  
Others
    1,500       7       1,493  
 
 
  $ 287,730     $ 436     $ 287,294  
 
                         
    AS OF DECEMBER 31, 2006
    12 months or more and Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 26,623     $ 161     $ 26,462  
Collateralized mortgage obligations
    381       21       360  
Others
    1,250       13       1,237  
 
 
  $ 28,254     $ 195     $ 28,059  
 
                         
    AS OF JUNE 30, 2006
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 307,460     $ 61     $ 307,399  
Obligations of Puerto Rico, States and political subdivisions
    25,830       328       25,502  
Others
    7,636       28       7,608  
 
 
  $ 340,926     $ 417     $ 340,509  
 
                         
    12 months or more
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 6,948     $ 3     $ 6,945  
Obligations of Puerto Rico, States and political subdivisions
    25,993       199       25,794  
Collateralized mortgage obligations
    433       24       409  
Others
    250             250  
 
 
  $ 33,624     $ 226     $ 33,398  
 
                         
    Total
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 314,408     $ 64     $ 314,344  
Obligations of Puerto Rico, States and political subdivisions
    51,823       527       51,296  
Collateralized mortgage obligations
    433       24       409  
Others
    7,886       28       7,858  
 
 
  $ 374,550     $ 643     $ 373,907  
 

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Management believes that the unrealized losses in the held-to-maturity portfolio at June 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.
Note 7 – Mortgage Servicing Rights
The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights in connection with on-balance sheet mortgage loan securitizations.
Effective January 1, 2007, under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage loans as a class of servicing rights and elected to apply fair value accounting to these mortgage servicing rights (“MSRs”). These MSRs are segregated between loans serviced by PFH and by the Corporation’s banking subsidiaries. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served (i.e. PFH — primarily subprime mortgage loans vs. banking subsidiaries – primarily conforming loans). Servicing rights associated with Small Business Administration (“SBA”) commercial loans, the other class of servicing assets held by the Corporation, will continue to be accounted at the lower of cost or market method.
Classes of servicing rights were determined based on the different markets or types of assets served. Management also considered trends in the markets and elections by other major participants in the industries served in determining the accounting methodology to be followed for the different types of servicing rights.
Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting from asset transfers are capitalized and carried at fair value. Prior to the adoption of SFAS No. 156, the Corporation capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the relative fair value of the servicing right and the residential mortgage loan at the time of sale. Prior to SFAS No. 156, both purchased MSRs and MSRs from asset transfers were accounted 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 retained earnings in 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 value. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. The Corporation uses assumptions in the model that it believes are comparable to those used by brokers or other service providers. Refer to Note 8 – Retained Interests on Mortgage Loan Sales / Securitizations for information on assumptions used in the valuation model of MSRs as of June 30, 2007.

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The change in MSRs measured using the fair value method for the six months ended June 30, 2007 was:
                         
    Banking        
    subsidiaries   PFH    
 
(In thousands)   Residential MSRs     Residential MSRs     Total
 
Fair value at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
Purchases
    2,030       21,958       23,988  
Servicing from securitizations or asset transfers
    11,968       8,040       20,008  
Changes due to payments on loans (1)
    (4,561 )     (16,837 )     (21,398 )
Changes in fair value due to changes in valuation model inputs or assumptions
    3,887       (4,015 )     (128 )
Other changes
          (66 )     (66 )
 
Fair value at June 30, 2007
  $ 104,755     $ 93,118     $ 197,873  
 
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
The changes in amortized MSRs for the six months ended June 30, 2006 were:
         
(In thousands)   Residential MSRs  
 
Balance at January 1, 2006
  $ 137,701  
Rights originated
    40,014  
Rights purchased
    9,599  
Amortization
    (31,721 )
 
Balance at June 30, 2006
    155,593  
Less: Valuation allowance
    351  
 
Balance at June 30, 2006, net of valuation allowance
  $ 155,242  
 
Fair value at June 30, 2006
  $ 171,068  
 
Residential mortgage loans serviced for others were $15.4 billion at June 30, 2007 (December 31, 2006 — $13.3 billion; June 30, 2006 — $11.0 billion).
Net mortgage servicing fees, a component of other service fees in the consolidated statement of income, include the changes from period to period in fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, representing changes due to collection / realization of expected cash flows. Prior to the adoption of SFAS No. 156, the Corporation carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net mortgage servicing fees.
Note 8 – Retained Interests on Sales of Mortgage Loans
Popular Financial Holdings
The Corporation, through its consumer lending subsidiary PFH, has retained mortgage servicing rights and residual interests (also referred to as interest-only securities or “IOs”) in connection with securitizations of subprime mortgage loans.
Residual interests retained as part of off-balance sheet securitizations of subprime mortgage loans prior to 2006 are classified as investment securities available-for-sale and are presented at fair value in the unaudited consolidated statements of condition. PFH’s residual interests classified as available-for-sale as of June 30, 2007 amounted to $19 million. In the quarter and six-month periods ended June 30, 2007, the Corporation recognized other-than-temporary impairment losses of $1.3 million and $30.7 million, respectively, on these residual interests.
Commencing in January 2006, the residual interests derived from newly-issued PFH’s off-balance sheet securitizations are accounted for as trading securities. As such, any valuation adjustment related to these particular residual interests is being recorded as part of trading account profit (loss) in the consolidated statements of income. Residual interests accounted for as trading securities from PFH’s securitizations approximated $17 million at June 30, 2007. For the second quarter and six-month periods ended June 30, 2007, the Corporation recognized trading losses of $0.8 million and $24.3 million, respectively, on these residual interests.

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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 tittles to a different trust, thus isolating those loans from the Corporation’s assets. Approximately, $461 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH as part of this transaction, with a gain on sale of approximately $13.5 million. As part of this transaction, the Corporation recognized MSRs of $8 million and IOs of $4.7 million.
Key economic assumptions used in measuring the retained interests at the date of this off-balance sheet securitization were:
                         
            MSRs
            Fixed-    
            rate   ARM
    Residual Interests   loans   Loans
 
Average prepayment speed
  28% (Fixed-rate loans )       28 %     35 %
 
  35% (ARM loans )              
Weighted average life of collateral (in years)
  4.2 years       4.8 years     2.2 years  
Cumulative credit losses
  4.75% (Fixed-rate loans )              
 
  8.40% (ARM loans )              
Discount rate (annual rate)
    25 %       17 %     17 %
 
Key economic assumptions used to estimate the fair value of residual interests and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                                                   
    June 30, 2007     December 31, 2006
            MSRs             MSRs
(In thousands)   Residual Interests   Fixed-rate loans   ARM loans     Residual Interests   Fixed-rate loans   ARM loans
       
Carrying amount of retained interests
  $ 36,013     $ 34,081     $ 25,544       $ 85,965     $ 38,017     $ 29,838  
Fair value of retained interests
  $ 36,013     $ 34,081     $ 25,544       $ 85,965     $ 37,815     $ 32,212  
Weighted average life of collateral (in years)
  2.8 years     3.2 years     2.0 years       3.2 years     3.1 years     2.1 years  
Weighted average prepayment speed (annual rate)
  28% (Fixed-rate loans)                       28% (Fixed-rate loans)                  
  35% (ARM loans)       28 %     35 %     35% (ARM loans)       28 %     35 %
Impact on fair value of 10% increase in prepayment rate
  $ (1,405 )   $ 263     $ (120 )     $ (5,543 )   $ 210     $ (149 )
Impact on fair value of 20% increase in prepayment rate
  $ (2,235 )   $ 404     $ (165 )     $ (9,284 )   $ 234     $ (200 )
Weighted average discount rate (annual rate)
    25 %     17 %     17 %       17 %     16 %     16 %
Impact on fair value of 10% adverse change
  $ (2,139 )   $ (827 )   $ (120 )     $ (4,172 )   $ (901 )   $ (542 )
Impact on fair value of 20% adverse change
  $ (4,106 )   $ (1,617 )   $ (936 )     $ (8,081 )   $ (1,761 )   $ (1,060 )
Cumulative credit losses
  3.17% to 6.50%                   1.28% to 3.19%              
Impact on fair value of 10% adverse change
  $ (7,415 )                 $ (4,792 )            
Impact on fair value of 20% adverse change
  $ (15,351 )                 $ (9,558 )            
       
PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced loans; as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.

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The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation.
Banking subsidiaries
The Corporation’s banking subsidiaries also retain servicing responsibilities in connection with the sale of mortgage loans to third parties. Also, servicing responsibilities are retained under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the Corporation’s banking subsidiaries, in which the Corporation retains a servicing right, have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.
Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the quarter ended June 30, 2007 were:
         
    MSRs
 
Prepayment speed
    13.1 %
Weighted average life (in years)
  7.7 years  
Discount rate (annual rate)
    10.0 %
 
Key economic assumptions used to estimate the fair value of MSRs derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                 
    June 30, 2007   December 31, 2006
(In thousands)   MSRs   MSRs
 
Fair value of retained interests
  $ 83,171     $ 73,332  
Weighted average life (in years)
  11.3 years     9.2 years  
Weighted average prepayment speed (annual rate)
    8.8 %     14.0 %
Impact on fair value of 10% adverse change
  $ (2,903 )   $ (1,868 )
Impact on fair value of 20% adverse change
  $ (5,017 )   $ (4,151 )
Weighted average discount rate (annual rate)
    10.9 %     10.3 %
Impact on fair value of 10% adverse change
  $ (3,714 )   $ (2,142 )
Impact on fair value of 20% adverse change
  $ (6,542 )   $ (4,200 )
 
The amounts of MSRs presented in the table above exclude purchased MSRs.
The expected credit losses for the residential mortgage loans serviced by the Corporation’s banking subsidiaries, including securitizations serviced on a recourse basis, are minimal.
The sensitivity analyses presented above for IOs and MSRs are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

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Note 9 – Derivative Instruments and Hedging Activities
Refer to Note 28 to the consolidated financial statements included in the 2006 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the second quarter of 2007:
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of June 30, 2007 and December 31, 2006 were as follows:
                                         
As of June 30, 2007
                    Derivative        
(In thousands)   Notional amount   Derivative assets   liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 180,000     $ 477     $ 194     $ 173        
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 853           $ 554        
 
                                         
As of December 31, 2006
                    Derivative        
(In thousands)   Notional amount   Derivative assets   liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 190,000     $ 175     $ 2     $ 106        
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 887     $ 523     $ 237        
 
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at June 30, 2007 have a maximum remaining maturity of 80 days.
The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 1.8 years.

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Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding at June 30, 2007 and December 31, 2006 were as follows:
                         
June 30, 2007
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 634,365     $ 3,732     $ 683  
Futures contracts
    4,000             29  
Call options and put options
    98,000       94       164  
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       1,989        
- bond certificates offered in an on-balance sheet securitization
    441,555       855        
- financing of auto loans held-in-portfolio
    385,872       1,564        
- swaps with corporate clients
    509,607             8,252  
- swaps offsetting position of corporate client swaps
    509,607       8,252        
- investment securities
    79,385       160       483  
Credit default swap
    33,463              
Interest rate caps
    818,365       2,996        
Interest rate caps for benefit of corporate clients
    50,000             77  
Indexed options on deposits
    212,192       50,309        
Index options on S&P Notes
    31,152       7,523        
Bifurcated embedded options
    237,861             56,412  
Mortgage rate lock commitments
    254,092       6       2,147  
 
Total
  $ 4,699,516     $ 77,480     $ 68,247  
 
                         
As of December 31, 2006
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 400,572     $ 1,277     $ 125  
Call options and put options
    37,500       83       46  
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       2,153        
- bond certificates offered in an on-balance sheet securitization
    516,495       90       1,168  
- financing of auto loan portfolio held-in-portfolio
    470,146       728        
- auto loans approvals locked interest rates
    17,442       22        
- swaps with corporate clients
    410,533             2,146  
- swaps offsetting position of corporate client swaps
    410,533       2,146        
- investment securities
    89,385             1,645  
- mortgage loan portfolio prior to securitization
    75,000       302        
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    103             2  
Foreign currency and exchange rate commitments w/ counterparty
    103       2        
Interest rate caps
    889,417       4,099        
Interest rate caps for benefit of corporate clients
    50,000             90  
Indexed options on deposits
    204,946       38,323        
Indexed options on S&P Notes
    31,152       5,648        
Bifurcated embedded options
    229,455             43,844  
Mortgage rate lock commitments
    215,676       13       635  
 
Total
  $ 4,481,921     $ 54,886     $ 49,701  
 
Interest Rates Swaps
The Corporation has an interest rate swap outstanding to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The

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Corporation recognized gains of $1.7 million for the second quarter and $1.9 million for the six months ended June 30, 2007 due to changes in its fair value. There was no impact in interest expense associated with these swaps during the quarter and six-month periods ended June 30, 2006.
The Corporation has interest rate swaps to economically hedge the cost of short-term debt. For the second quarter of 2007, the Corporation recognized a gain of $634 thousand, and for the six months ended June 30, 2007, recognized losses of $164 thousand due to changes in their fair value, which were included as part of short-term interest expense. During the quarter and six-month periods ended June 30, 2006, the Corporation recognized gains of $4.0 million and $5.4 million, respectively, associated with changes in the fair value of these interest rate swaps.
Additionally, the Corporation entered into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with auto loans held-in-portfolio. Gains of $1.8 million and $836 thousand for the quarter and six months ended June 30, 2007, respectively, were recognized as part of long-term interest expense. During the quarter and six-month periods ended June 30, 2006, the Corporation recognized gains of $1.4 million and $2.9 million, respectively, associated with changes in the fair value of these swaps.
The Corporation had interest rate swaps to economically hedge the changes in fair value of loans acquired and originated prior to securitization. These swaps were unwound during the second quarter of 2007 as a result of the completion of an off-balance sheet securitization. Changes in the fair value of these swaps were reported as part of interest income. Gains of $1.5 million and $107 thousand were recorded in the quarter and six-month periods ended June 30, 2007, respectively, as part of long-term interest expense.
Interest Rate Caps
The Corporation has interest rate caps in conjunction with a series of mortgage loans securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income.
During the quarter ended June 30, 2007, the Corporation entered into a $100 million interest rate cap to mitigate its exposure to rising interest rates on short-term borrowings.
Losses of $125 thousand and $1.3 million for the quarter and six months ended June 30, 2007, respectively, were recognized as part of long-term interest expense related to these interest rate cap contracts. For the quarter and six months ended June 30, 2006, these losses amounted to $0.7 million and $3.1 million.
Forward Contracts
The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter and six months ended June 30, 2007, gains of $2.3 million and $1.6 million, respectively, were recognized due to changes in fair value of these forward sales commitments. During the second quarter and six months ended June 30, 2006, the Corporation recognized losses of $0.5 million and gains of $1.8 million, respectively, related to these forward contracts.

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Note 10 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2007 and 2006, allocated by reportable segment, were as follows (refer to Note 21 for the definition of the Corporation’s reportable segments):
                                 
2007
    Balance at   Goodwill           Balance at
(In thousands)   January 1, 2007   acquired   Other   June 30, 2007
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    4,391     $ 24             4,415  
Popular North America:
                               
Banco Popular North America
    568,647                   568,647  
Popular Financial Holdings
                       
EVERTEC
    45,142       775     $ (183 )     45,734  
 
Total Popular, Inc.
  $ 667,853     $ 799     $ (183 )   $ 668,469  
 
                                 
2006
            Purchase            
    Balance at   accounting           Balance at
(In thousands)   January 1, 2006   adjustments   Other   June 30, 2006
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    4,110                   4,110  
Popular North America:
                               
Banco Popular North America
    542,834     $ 2,412     $ (210 )     545,036  
Popular Financial Holdings
    14,236       3             14,239  
EVERTEC
    43,131                   43,131  
 
Total Popular, Inc.
  $ 653,984     $ 2,415     $ (210 )   $ 656,189  
 
Purchase accounting adjustments consist of adjustments to the value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs, if any, and contingent consideration paid during a contractual contingency period. The purchase accounting adjustments during the first six months of 2006 at the PNA reportable segment were mostly related to the E-LOAN acquisition.
At June 30, 2007 and December 31, 2006, other than goodwill, the Corporation had $65 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (June 30, 2006 — $59 million).
The following table reflects the components of other intangible assets subject to amortization:
                                                 
    June 30, 2007   December 31, 2006   June 30, 2006
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 71,629     $ 46,982     $ 76,708     $ 48,367     $ 76,956     $ 44,741  
 
                                               
Other customer relationships
    11,543       3,113       11,156       2,171       8,593       1,273  
 
                                               
Other intangibles
    9,146       4,534       9,099       3,426       9,320       2,729  
 
 
                                               
Total
  $ 92,318     $ 54,629     $ 96,963     $ 53,964     $ 94,869     $ 48,743  
 
During the quarter and six months ended June 30, 2007, the Corporation recognized $2.8 million and $5.8 million,

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respectively, in amortization expense related to other intangible assets with definite lives (June 30, 2006 — $2.8 million and $5.6 million, respectively).
The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:
         
    (In thousands)
2007
  $ 10,067  
2008
    8,368  
2009
    6,546  
2010
    5,588  
2011
    3,925  
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 11 – Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Federal funds purchased
  $ 1,430,952     $ 1,276,818     $ 1,164,177  
Assets sold under agreements to repurchase
    4,224,984       4,485,627       6,762,554  
 
 
  $ 5,655,936     $ 5,762,445     $ 7,926,731  
 
Other short-term borrowings consisted of:
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Advances with FHLB paying interest at:
                       
-fixed rates ranging from 5.24% to 5.44% (June 30, 2006 – 5.24% to 5.39%)
  $ 305,000     $ 230,000     $ 400,000  
-a floating rate of 0.06% over the fed funds rate (Fed funds rate at June 30, 2006 was 5.00%)
                105,000  
 
                       
Advances under credit facilities with other institutions at:
                       
-fixed rates ranging from 5.35% to 5.50% (June 30, 2006 – 5.33% to 5.35%)
    262,675       386,000       60,000  
-floating rates ranging from 0.45% to 2.00% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%)
          481,062       87,872  
-a floating rate of 0.20% over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2006 – 5.48%)
          10,000       10,000  
 
                       
Commercial paper at rates ranging from 4.75% to 5.37% (June 30, 2006 – 4.75% to 5.37%)
    264,239       193,383       62,224  
 
                       
Term funds purchased at:
                       
-fixed rates ranging from 5.28% to 5.38% (June 30, 2006 – 5.02% to 5.36%)
    2,065,000       2,140,900       1,275,000  
-a floating rate of 0.08% (June 30, 2006 – 0.06% to 0.08%) over the fed funds rate (Fed funds rate at June 30, 2007 was 5.38%; June 30, 2006 – 5.00%)
    400,000       500,000       647,200  
 
                       
Others
    87,191       92,780       9,640  
 
 
  $ 3,384,105     $ 4,034,125     $ 2,656,936  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable consisted of:
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Advances with FHLB:
                       
-maturing from 2007 through 2016 paying interest at fixed rates ranging from 3.07% to 6.98% (June 30, 2006 – 2.51% to 6.98%)
  $ 204,195     $ 289,881     $ 527,625  
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)
    250,000       250,000       250,000  
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04%
          6,000        
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02% (1-month LIBOR rate at June 30, 2006 – 5.33%)
          5,000       11,000  
 
                       
Advances under revolving lines of credit maturing in 2008 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)
    362,787       426,687       347,178  
 
                       
Advances under revolving lines of credit with maturities until 2009 paying interest quarterly at a floating rate of 0.20% to 0.35% (June 30, 2006 – 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2007 was 5.36%)
    124,997       69,994        
 
                       
Term notes with maturities ranging from 2007 through 2011 paying interest semiannually at fixed rates ranging from 3.35% to 5.65% (June 30, 2006 – 3.25% to 6.39%)
    2,014,659       2,014,928       2,712,601  
 
                       
Term notes with maturities ranging from 2007 until 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2007 was 5.36 %; June 30, 2006 – 5.48%)
    349,504       349,295       469,074  
 
                       
Term notes with maturities until 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%
    3,100       3,100       3,100  
 
                       
Term notes with maturities until 2013 paying interest monthly at a floating rate of 3.00% over the 10-year US treasury notes rate (average 10-year US treasury notes rate at June 30, 2007 was 5.10%; June 30, 2006 – 5.11%)
    8,168       10,428       11,589  
 
                       
Secured borrowings with maturities until 2015 paying interest monthly at fixed rates ranging from 3.86% to 7.12% (June 30, 2006 – 3.05% to 7.12%)
    2,489,329       2,695,916       3,093,397  
 
                       
Secured borrowings with maturities until 2012 paying interest monthly at rates ranging from 0.05% to 3.50% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)
    1,352,710       1,708,650       1,888,914  
 
                       
Notes linked to the S&P 500 Index maturing in 2008
    38,118       36,112       34,014  
 
                       
Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 17)
    849,672       849,672       849,672  
 
                       
Other
    21,399       21,583       511  
 
 
  $ 8,068,638     $ 8,737,246     $ 10,198,675  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Note 12 – Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $15 million and $181 million, respectively, at June 30, 2007 (December 31, 2006 — $21 million and $181 million; June 30, 2006 — $18 million and $161 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
At June 30, 2007, the Corporation recorded a liability of $753 thousand (December 31, 2006 — $658 thousand; June 30, 2006 — $696 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under stand-by letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The stand-by letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in stand-by letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s stand-by letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which aggregated to $3.4 billion at June 30, 2007 (December 31, 2006 — $3.3 billion and June 30, 2006 — $4.2 billion). In addition, at June 30, 2007, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2006 and June 30, 2006 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.
Note 13 – Other Service Fees
The caption of other service fees in the consolidated statements of income consists of the following major categories:
                                 
    Quarter ended June 30,   Six months ended June 30,
(In thousands)   2007   2006   2007   2006
 
Credit card fees and discounts
  $ 24,999     $ 22,371     $ 48,523     $ 44,944  
Debit card fees
    16,855       15,085       32,956       30,004  
Insurance fees
    14,720       14,411       27,669       26,552  
Processing fees
    11,677       10,939       23,789       21,218  
Sale and administration of investment products
    7,311       6,649       14,571       14,106  
Mortgage servicing fees, net of amortization and fair value adjustments
    4,641       (919 )     10,869       (667 )
Other
    9,387       11,481       19,062       24,206  
 
Total
  $ 89,590     $ 80,017     $ 177,439     $ 160,363  
 

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Note 14 – Income Taxes
As indicated in Note 2, the Corporation adopted FIN 48 effective January 1, 2007. The initial adoption of FIN 48 had no impact on the Corporation’s financial statements since management determined that there was no need to recognize changes in the liability for unrecognized tax benefits.
The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
         
    Six months
    ended June
(In millions)   30, 2007
 
Balance as of January 1, 2007
  $ 20.4  
Additions for tax positions of current period
    4.0  
 
Balance as of June 30, 2007
  $ 24.4  
 
As of June 30, 2007, the related accrued interest approximated $2.8 million. Management has determined that as of June 30, 2007 there is no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, in other operating expenses in the consolidated statements of income.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $23.2 million for the six months ended June 30, 2007.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of June 30, 2007, the following years remain subject to examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto Rico – 2003 through 2006. The U.S. Internal Revenue Service (“IRS”) commenced its examination of the Corporation’s U.S. operations tax return for 2005 that is anticipated to be finished by the end of 2007. As of June 30, 2007, the IRS has not proposed any adjustment as a result of the audit. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Note 15 – Stock-Based Compensation
The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at June 30, 2007 under the original terms of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury

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stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
The following table presents information on stock options outstanding as of June 30, 2007:
                                         
(Not in thousands)
            Weighted Average   Weighted Average   Options    Weighted Average
    Exercise Price   Options   Exercise Price of   Remaining Life of   Exercisable   Exercise Price of
  Range per Share   Outstanding   Options Outstanding   Options Outstanding (in years)   (fully vested)   Options Exercisable
 
$14.39 - $18.50
    1,513,582     $ 15.81       5.24       1,371,858     $ 15.72  
$19.25 - $27.20
    1,586,035     $ 25.27       7.00       1,008,732     $ 25.02  
 
$14.39 - $27.20
    3,099,617     $ 20.65       6.14       2,380,590     $ 19.66  
 
The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2007 was $12.6 million and $1.0 million, respectively.
The following table summarizes the stock option activity and related information:
                 
    Options   Weighted-Average
(Not in thousands)   Outstanding   Exercise Price
 
Outstanding at January 1, 2006
    3,223,703     $ 20.63  
Granted
           
Exercised
    (39,449 )     15.78  
Forfeited
    (37,818 )     23.75  
Expired
    (1,637 )     24.05  
 
Outstanding at December 31, 2006
    3,144,799     $ 20.65  
Granted
           
Exercised
    (10,064 )     15.83  
Forfeited
    (19,063 )     25.50  
Expired
    (16,055 )     19.14  
 
Outstanding at June 30, 2007
    3,099,617     $ 20.65  
 
The stock options exercisable at June 30, 2007 totaled 2,380,590 (June 30, 2006 – 1,973,986). There were no stock options exercised during the quarter ended June 30, 2007. For the six months ended June 30, 2007, the cash received from stock options exercised amounted to $159 thousand. The total intrinsic value of options exercised during the quarter ended June 30, 2006 was $26 thousand. The total intrinsic value of options exercised during the six-month period ended June 30, 2007 was $28 thousand (June 30, 2006 — $68 thousand).
There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2006 or 2007.
The Corporation recognized $0.4 million in stock option expense, with a tax benefit of $0.2 million, for the quarter ended June 30, 2007 (June 30, 2006 — $0.8 million, with a tax benefit of $0.3 million). For the six months ended June 30, 2007, the Corporation recognized $0.9 million in stock option expense, with a tax benefit of $0.4 million (June 30, 2006 — $1.6 million, with a tax benefit of $0.6 million). The total unrecognized compensation cost at June 30, 2007 related to non-vested stock option awards was $2.5 million and is expected to be recognized over a weighted-average period of 1.4 years.

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Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance Share. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.
Under the Incentive Plan, the Corporation has issued only restricted shares, which become vested based on the employees’ continued service with Popular. The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.
Beginning in 2007, the Corporation authorized the issuance of performance shares in addition to restricted shares under a long-term incentive plan. The performance shares award consists of the opportunity to receive shares of Popular, Inc.’s common stock provided the Corporation achieves certain performance goals during a 3-year performance cycle. The compensation cost associated with the performance shares will be recorded ratably over a three-year performance period. The performance shares will be granted at the end of the three-year period and will be vested at grant date. As of June 30, 2007, no shares have been granted under this plan.
The following table summarizes the restricted stock activity under the Incentive Plan and related information to members of management:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2006
    172,622     $ 27.65  
Granted
    444,036       20.54  
Vested
           
Forfeited
    (5,188 )     19.95  
 
Non-vested at December 31, 2006
    611,470     $ 22.55  
Granted
           
Vested
    (69,471 )     20.56  
Forfeited
    (3,781 )     19.95  
 
Non-vested at June 30, 2007
    538,218     $ 22.83  
 
During the quarters ended June 30, 2007 and 2006, no shares of restricted stock were awarded to management under the Incentive Plan. During the six-month period ended June 30, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (June 30, 2006 – 444,036).
During the quarter ended June 30, 2007, the Corporation recognized $0.5 million (June 30, 2006 - $0.8 million) of restricted stock expense related to management incentive awards, with an income tax benefit of $0.2 million (June 30, 2006 — $0.3 million). For the six-month period ended June 30, 2007, the Corporation recognized $1.8 million (June 30, 2006 — $2.1 million) of restricted stock expense related to management incentive awards, with an income tax benefit of $0.7 million (June 30, 2006- $0.8 million). The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at June 30, 2007 was $5.0 million and is expected to be recognized over a weighted-average period of 2.9 years.

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The following table summarizes the restricted stock under Incentive Award and related information to members of the Board of Directors:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2006
    46,948     $ 23.61  
Granted
    32,267       19.82  
Vested
    (2,601 )     23.54  
Forfeited
           
 
Non-vested at December 31, 2006
    76,614     $ 22.02  
Granted
    29,363       17.35  
Vested
    (22,486 )     22.03  
Forfeited
           
 
Non-vested at June 30, 2007
    83,491     $ 20.37  
 
During the quarter ended June 30, 2007, the Corporation granted 26,751 (June 30, 2006 – 28,583) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $0.1 million, with a tax benefit of $0.06 million (June 30, 2006 — $0.1 million, with a tax benefit of $0.05 million), of restricted stock expense related to these restricted stock grants. For the six-month period ended June 30, 2007, the Corporation granted 29,363 (June 30, 2006 – 29,859) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $0.3 million, with a tax benefit of $0.1 million (June 30, 2006 — $0.3 million, with a tax benefit of $0.1 million), of restricted stock expense related to these restricted stock grants.
Note 16 – Pension and Other Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and six months ended June 30, 2007 and 2006 were as follows:
                                                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Six months ended   Quarters ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2007   2006   2007   2006   2007   2006   2007   2006
 
Service cost
  $ 2,639     $ 3,135     $ 5,745     $ 6,270     $ 220     $ 262     $ 457     $ 524  
Interest cost
    7,959       7,641       15,932       15,282       419       400       839       800  
Expected return on plan assets
    (10,533 )     (9,931 )     (21,057 )     (19,909 )     (368 )     (264 )     (736 )     (528 )
Amortization of prior service cost
    52       44       104       88       (13 )     (13 )     (26 )     (26 )
Amortization of net loss
          488             976       247       276       495       552  
 
Net periodic cost
    117       1,377       724       2,707       505       661       1,029       1,322  
Curtailment gain
                (246 )                       (258 )      
 
Total cost
  $ 117     $ 1,377     $ 478     $ 2,707     $ 505     $ 661     $ 771     $ 1,322  
 
During the first quarter of 2007, the Corporation adopted an amendment to freeze the benefits for all employees under the U.S. Retirement and Restoration plans. These plans were remeasured at January 31, 2007 to account for the freeze. The discount rate of the U.S. Retirement plan was changed to 4.5% to reflect the expected plan termination. The remeasurement and curtailment effects were considered for these plans and are included as part of the June 30, 2007 disclosures.
For the six months ended June 30, 2007, contributions made to the pension and restoration plans approximated $1.6 million. The total contributions expected to be paid during 2007 for the pension and restoration plans approximate $2.2 million.

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The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six months ended June 30, 2007 and 2006 were as follows:
                                 
    Quarters ended   Six months ended
    June 30,   June 30,
(In thousands)   2007   2006   2007   2006
 
Service cost
  $ 578     $ 687     $ 1,156     $ 1,399  
Interest cost
    1,889       1,927       3,778       3,854  
Amortization of prior service cost
    (261 )     (262 )     (523 )     (524 )
Amortization of net loss
          240             480  
 
Total net periodic cost
  $ 2,206     $ 2,592     $ 4,411     $ 5,209  
 
For the six months ended June 30, 2007, contributions made to the postretirement benefit plan approximated $3.3 million. The total contributions expected to be paid during 2007 for the postretirement benefit plan approximate $6.4 million.
Note 17 – Trust Preferred Securities
At June 30, 2007 and 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46(R).
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
Financial data pertaining to the trusts follows:
                                 
(In thousands, including reference notes)  
                    Popular North        
    BanPonce     Popular Capital     America Capital     Popular Capital  
Issuer   Trust I     Trust I     Trust I     Trust II  
 
Issuance date
  February 1997     October 2003     September 2004     November 2004  
Capital securities
  $ 144,000     $ 300,000     $ 250,000     $ 130,000  
Distribution rate
    8.327     6.700     6.564     6.125
Common securities
  $ 4,640     $ 9,279     $ 7,732     $ 4,021  
Junior subordinated debentures aggregate liquidation amount
  $ 148,640     $ 309,279     $ 257,732     $ 134,021  
Stated maturity date
  February 2027     November 2033     September 2034     December 2034  
Reference notes
    (a),(c),(e),(f),(g)       (b),(d),(f)       (a),(c),(f)       (b),(d),(f)  
 
(a)   Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(d)   These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

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

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Note 19 – Earnings per Common Share
The computation of earnings per common share (“EPS”) follows:
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands, except share information)   2007   2006   2007   2006
 
Net income
  $ 74,950     $ 97,381     $ 193,597     $ 215,884  
Less: Preferred stock dividends
    2,978       2,978       5,956       5,956  
 
 
                               
Net income applicable to common stock
  $ 71,972     $ 94,403     $ 187,641     $ 209,928  
 
 
                               
Average common shares outstanding
    279,355,701       278,354,043       279,218,147       278,220,693  
Average potential common shares
    88,158       282,176       117,671       305,794  
 
Average common shares outstanding – assuming dilution
    279,443,859       278,636,219       279,335,818       278,526,487  
 
 
                               
Basic and diluted EPS
  $ 0.26     $ 0.34     $ 0.67     $ 0.75  
 
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and six-month period ended June 30, 2007, there were 1,752,235 and 1,756,748 weighted average antidilutive stock options outstanding, respectively (June 30, 2006 – 1,900,071 and 1,899,458). All shares of restricted stock are treated as outstanding for purposes of this computation.
Note 20 – Supplemental Disclosure on the Consolidated Statements of Cash Flows
As mentioned in Note 1 of the Corporation’s 2006 Annual Report, as of the end of the first quarter of 2006, all subsidiaries of the Corporation had changed the reporting period to a December 31st calendar period. The impact of this change corresponds to the financial results for the month of December 2005 for those subsidiaries which implemented the change in the first reporting period of 2006.
The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above.
         
    Six months ended
(In thousands)   June 30, 2006
 
Net cash used in operating activities
  $ (80,906 )
Net cash used in investing activities
    (104,732 )
Net cash provided by financing activities
    197,552  
 
Net increase in cash and due from banks
  $ 11,914  
 
Loans receivable transferred to other real estate and other property for the six months ended June 30, 2007 amounted to $90 million and $18 million, respectively (June 30, 2006 — $64 million and $15 million, respectively).
During the six months ended June 30, 2006, $464 million in non-conforming loans classified as held-in-portfolio were pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $708 million and $354 million in non-cash reclassifications of loans held-for-sale securitized into trading securities for the six months ended June 30, 2007 and 2006, respectively.

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The Corporation recognized mortgage servicing rights of $20 million during the six months ended June 30, 2007 as a result of the securitization and sale of mortgage loans with servicing retained (June 30, 2006 — $40 million).
Note 21 – Segment Reporting
Commencing in the first quarter of 2007, the Corporation’s corporate structure consists of three reportable segments – Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.
As indicated in the 2006 Annual Report, in January 2007, the Corporation announced a restructuring and integration plan (the “Restructuring Plan”) for PFH’s businesses. The Restructuring Plan, which is being implemented throughout 2007, has the following four basic components:
  o   exiting the wholesale subprime mortgage origination business during the first quarter of 2007, which entailed shutting down the wholesale broker, retail and call center business divisions;
 
  o   consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA to reduce expenses;
 
  o   integrating PFH’s existing commercial lending businesses (mortgage warehouse, mixed use, and construction lending) into BPNA’s business lending groups; and
 
  o   focusing on the core Equity One network of 132 consumer finance branches in 15 states.
As part of the Restructuring Plan, the Corporation also executed an internal corporate reorganization of its U.S. subsidiaries. In January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH. E-LOAN continues to offer its broad range of products and conducts its direct activities through its online platform. Management will be leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.
This reorganization and the Restructuring Plan led management to redefine its business reportable segments. Commencing in 2007, the U.S. operations are defined as one reportable segment defined as “Popular North America”. This segment includes the operations of BPNA and PFH, including all of its wholly-owned subsidiaries.
The reportable segment disclosures for periods prior to 2007 were restated to reflect the new segmentation.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes approximately 86% of the Corporation’s net income for the six months ended June 30, 2007 and 55% of its total assets as of June 30, 2007, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income

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

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2007
For the quarter ended June 30, 2007
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 237,154     $ 139,576     $ (240 )         $ 376,490  
Provision for loan losses
    63,482       51,685                   115,167  
Non-interest income
    125,090       57,141       59,853     $ (34,801 )     207,283  
Amortization of intangibles
    656       1,938       219             2,813  
Depreciation expense
    10,441       4,706       4,258       (18 )     19,387  
Other operating expenses
    179,164       136,812       44,727       (34,832 )     325,871  
Income tax
    27,887       708       3,814       19       32,428  
 
Net income
  $ 80,614     $ 868     $ 6,595     $ 30     $ 88,107  
 
Segment Assets
  $ 25,863,421     $ 20,598,645     $ 233,167     $ (75,991 )   $ 46,619,242  
 
For the quarter ended June 30, 2007
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 376,490     $ (5,373 )   $ 300     $ 371,417  
Provision for loan losses
    115,167                   115,167  
Non-interest income (loss)
    207,283       (1,614 )     (2,294 )     203,375  
Amortization of intangibles
    2,813                   2,813  
Depreciation expense
    19,387       594             19,981  
Other operating expenses
    325,871       14,218       (1,830 )     338,259  
Income tax
    32,428       (8,750 )     (56 )     23,622  
 
Net income (loss)
  $ 88,107     $ (13,049 )   $ (108 )   $ 74,950  
 
Segment Assets
  $ 46,619,242     $ 6,471,299     $ (6,105,178 )   $ 46,985,363  
 
For the six months ended June 30, 2007
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 469,378     $ 271,671     $ (473 )         $ 740,576  
Provision for loan losses
    110,480       101,026                   211,506  
Non-interest income
    241,842       38,835       119,475     $ (69,134 )     331,018  
Amortization of intangibles
    1,318       4,011       467             5,796  
Depreciation expense
    21,165       9,342       8,320       (36 )     38,791  
Other operating expenses
    352,992       293,467       88,625       (69,196 )     665,888  
Income tax
    58,382       (34,316 )     7,749       38       31,853  
 
Net income (loss)
  $ 166,883     $ (63,024 )   $ 13,841     $ 60     $ 117,760  
 

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For the six months ended June 30, 2007
                                 
    Total Reportable                   Total Popular,
(In thousands)   Segments   Corporate   Eliminations   Inc.
 
Net interest income (expense)
  $ 740,576     $ (14,776 )   $ 599     $ 726,399  
Provision for loan losses
    211,506       7             211,513  
Non-interest income
    331,018       128,049       (3,516 )     455,551  
Amortization of intangibles
    5,796                   5,796  
Depreciation expense
    38,791       1,182             39,973  
Other operating expenses
    665,888       28,161       (3,437 )     690,612  
Income tax
    31,853       8,386       220       40,459  
 
Net income
  $ 117,760     $ 75,537     $ 300     $ 193,597  
 
2006
For the quarter ended June 30, 2006
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 228,498     $ 148,483     $ (640 )         $ 376,341  
Provision for loan losses
    33,676       33,420                   67,096  
Non-interest income
    101,639       46,591       57,154     $ (36,537 )     168,847  
Amortization of intangibles
    633       2,081       117             2,831  
Depreciation expense
    11,014       5,367       4,132       (16 )     20,497  
Other operating expenses
    169,451       147,674       43,265       (36,555 )     323,835  
Income tax
    25,071       2,766       3,555       13       31,405  
 
Net income
  $ 90,292     $ 3,766     $ 5,445     $ 21     $ 99,524  
 
Segment Assets
  $ 26,383,022     $ 21,335,337     $ 217,579     $ (117,420 )   $ 47,818,518  
 
For the quarter ended June 30, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 376,341     $ (10,792 )   $ 230     $ 365,779  
Provision for loan losses
    67,096                   67,096  
Non-interest income
    168,847       15,842       (703 )     183,986  
Amortization of intangibles
    2,831                   2,831  
Depreciation expense
    20,497       574             21,071  
Other operating expenses
    323,835       15,523       (280 )     339,078  
Income tax
    31,405       (9,009 )     (88 )     22,308  
 
Net income (loss)
  $ 99,524     $ (2,038 )   $ (105 )   $ 97,381  
 
Segment Assets
  $ 47,818,518     $ 6,576,522     $ (5,995,526 )   $ 48,399,514  
 

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For the six months ended June 30, 2006
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (expense)
  $ 454,801     $ 291,662     $ (1,067 )         $ 745,396  
Provision for loan losses
    57,465       58,578                   116,043  
Non-interest income
    216,724       120,708       112,042     $ (70,467 )     379,007  
Amortization of intangibles
    1,266       4,064       222             5,552  
Depreciation expense
    22,044       11,125       8,238       (39 )     41,368  
Other operating expenses
    338,676       302,221       85,722       (70,495 )     656,124  
Impact of change in fiscal period
    (2,072 )     6,181                   4,109  
Income tax
    63,724       11,734       6,273       26       81,757  
 
Net income
  $ 190,422     $ 18,467     $ 10,520     $ 41     $ 219,450  
 
For the six months ended June 30, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 745,396     $ (20,383 )   $ 530     $ 725,543  
Provision for loan losses
    116,043                   116,043  
Non-interest income
    379,007       34,831       (1,019 )     412,819  
Amortization of intangibles
    5,552                   5,552  
Depreciation expense
    41,368       1,138             42,506  
Other operating expenses
    656,124       32,748       (437 )     688,435  
Impact of change in fiscal period
    4,109       3,495       2,137       9,741  
Income tax
    81,757       (20,601 )     (955 )     60,201  
 
Net income (loss)
  $ 219,450     $ (2,332 )   $ (1,234 )   $ 215,884  
 
During the six months ended June 30, 2007, the holding companies realized net gains on sale and valuation adjustments of investment securities (before tax) of approximately $108.1 million, compared with $14.2 million for the six months ended June 30, 2006. These net gains are included in “non-interest income” within the “Corporate” group.
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
2007
For the quarter ended June 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 93,754     $ 140,326     $ 2,933     $ 141     $ 237,154  
Provision for loan losses
    22,889       40,593                   63,482  
Non-interest income
    22,000       80,681       22,956       (547 )     125,090  
Amortization of intangibles
    220       325       111             656  
Depreciation expense
    3,574       6,569       298             10,441  
Other operating expenses
    44,048       118,478       16,717       (79 )     179,164  
Income tax
    12,507       12,703       2,803       (126 )     27,887  
 
Net income
  $ 32,516     $ 42,339     $ 5,960     $ (201 )   $ 80,614  
 
Segment Assets
  $ 11,422,905     $ 18,081,721     $ 724,346     $ (4,365,551 )   $ 25,863,421  
 

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For the six months ended June 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 184,182     $ 279,736     $ 5,180     $ 280     $ 469,378  
Provision for loan losses
    35,822       74,658                   110,480  
Non-interest income
    45,107       154,575       42,807       (647 )     241,842  
Amortization of intangibles
    440       658       220             1,318  
Depreciation expense
    7,378       13,214       573             21,165  
Other operating expenses
    88,353       231,927       32,891       (179 )     352,992  
Income tax
    27,400       26,722       4,328       (68 )     58,382  
 
Net income
  $ 69,896     $ 87,132     $ 9,975     $ (120 )   $ 166,883  
 
2006
For the quarter ended June 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 85,070     $ 140,290     $ 2,332     $ 806     $ 228,498  
Provision for loan losses
    9,548       24,128                   33,676  
Non-interest income
    23,372       57,695       20,661       (89 )     101,639  
Amortization of intangibles
    223       333       77             633  
Depreciation expense
    3,538       7,194       282             11,014  
Other operating expenses
    44,415       110,501       14,744       (209 )     169,451  
Income tax
    12,037       10,179       2,752       103       25,071  
 
Net income
  $ 38,681     $ 45,650     $ 5,138     $ 823     $ 90,292  
 
Segment Assets
  $ 10,911,596     $ 18,032,662     $ 1,035,550     $ (3,596,786 )   $ 26,383,022  
 
For the six months ended June 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 166,223     $ 283,236     $ 5,055     $ 287     $ 454,801  
Provision for loan losses
    15,203       42,262                   57,465  
Non-interest income
    46,511       129,182       42,641       (1,610 )     216,724  
Amortization of intangibles
    441       671       154             1,266  
Depreciation expense
    6,992       14,495       557             22,044  
Other operating expenses
    88,088       220,717       30,373       (502 )     338,676  
Impact of change in fiscal period
                (2,072 )           (2,072 )
Income tax
    28,110       29,532       6,464       (382 )     63,724  
 
Net income
  $ 73,900     $ 104,741     $ 12,220     $ (439 )   $ 190,422  
 

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Additional disclosures with respect to the Popular North America reportable segment are as follows:
2007
For the quarter ended June 30, 2007
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 91,954     $ 46,755     $ 867     $ 139,576  
Provision for loan losses
    12,217       39,468             51,685  
Non-interest income
    45,667       11,751       (277 )     57,141  
Amortization of intangibles
    1,938                   1,938  
Depreciation expense
    4,059       647             4,706  
Other operating expenses
    107,070       30,018       (276 )     136,812  
Income tax
    3,905       (3,552 )     355       708  
 
Net income (loss)
  $ 8,432     $ (8,075 )   $ 511     $ 868  
 
Segment Assets
  $ 12,914,122     $ 7,759,262     $ (74,739 )   $ 20,598,645  
 
For the six months ended June 30, 2007
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 181,738     $ 88,409     $ 1,524     $ 271,671  
Provision for loan losses
    22,650       78,376             101,026  
Non-interest income (loss)
    102,609       (50,603 )     (13,171 )     38,835  
Amortization of intangibles
    4,011                   4,011  
Depreciation expense
    8,082       1,260             9,342  
Other operating expenses
    212,757       81,338       (628 )     293,467  
Income tax
    12,902       (42,708 )     (4,510 )     (34,316 )
 
Net income (loss)
  $ 23,945     $ (80,460 )   $ (6,509 )   $ (63,024 )
 
2006
For the quarter ended June 30, 2006
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 97,800     $ 50,683           $ 148,483  
Provision for loan losses
    12,953       20,467             33,420  
Non-interest income (loss)
    52,422       (5,133 )   $ (698 )     46,591  
Amortization of intangibles
    1,991       90             2,081  
Depreciation expense
    3,918       1,449             5,367  
Other operating expenses
    106,100       41,715       (141 )     147,674  
Income tax
    9,149       (6,188 )     (195 )     2,766  
 
Net income (loss)
  $ 16,111     $ (11,983 )   $ (362 )   $ 3,766  
 
Segment Assets
  $ 12,955,528     $ 8,741,514     $ (361,705 )   $ 21,335,337  
 

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For the six months ended June 30, 2006
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
 
Net interest income
  $ 195,108     $ 96,554           $ 291,662  
Provision for loan losses
    23,445       35,133             58,578  
Non-interest income
    105,448       16,021     $ (761 )     120,708  
Amortization of intangibles
    3,885       179             4,064  
Depreciation expense
    8,117       3,008             11,125  
Other operating expenses
    212,006       90,356       (141 )     302,221  
Impact of change in fiscal period
          6,181             6,181  
Income tax
    19,700       (7,749 )     (217 )     11,734  
 
Net income (loss)
  $ 33,403     $ (14,533 )   $ (403 )   $ 18,467  
 
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:
                                 
INTERSEGMENT REVENUES*   Quarter ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2007   2006   2007   2006
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ (64 )   $ (311 )   $ (58 )   $ (615 )
P.R. Consumer and Retail Banking
    (163 )     (683 )     (178 )     (1,351 )
P.R. Other Financial Services
    (102 )     (77 )     (231 )     (155 )
Popular North America:
                               
Banco Popular North America
    199       958       172       1,892  
Popular Financial Holdings
                       
EVERTEC
    (34,671 )     (36,424 )     (68,839 )     (70,238 )
 
Total
  $ (34,801 )   $ (36,537 )   $ (69,134 )   $ (70,467 )
 
*   For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to processing / information technology services.

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A breakdown of revenues and selected balance sheet information by geographical area follows:
                                 
Geographic Information   Quarter ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2007   2006   2007   2006
 
Revenues**
                               
Puerto Rico
  $ 362,811     $ 346,625     $ 840,796     $ 708,207  
United States
    190,244       185,091       297,483       391,893  
Other
    21,737       18,049       43,671       38,262  
 
Total consolidated revenues
  $ 574,792     $ 549,765     $ 1,181,950     $ 1,138,362  
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain on sale of loans and valuation adjustments on loans held-for-sale, and other operating income.
                         
    June 30,   December 31,   June 30,
(In thousands)   2007   2006   2006
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 24,996,466     $ 24,621,684     $ 25,696,083  
Loans
    15,129,703       14,735,092       14,583,979  
Deposits
    14,237,308       13,504,860       13,741,481  
Mainland United States
                       
Total assets
  $ 20,733,903     $ 21,570,276     $ 21,529,730  
Loans
    16,955,769       17,363,382       17,015,808  
Deposits
    9,900,375       9,735,264       8,494,076  
Other
                       
Total assets
  $ 1,254,994     $ 1,212,027     $ 1,173,701  
Loans
    666,373       638,465       616,845  
Deposits *
    1,248,312       1,198,207       1,213,963  
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
Note 22 – Restructuring Costs
During the second quarter and six months ended June 30, 2007, the Corporation recorded pre-tax restructuring costs in the Popular North America segment related to the Restructuring Plan as follows:
                 
    Quarter ended   Six months ended
(In thousands)   June 30, 2007   June 30, 2007
 
Personnel costs
  $ (34 )   $ 8,124 (a)
Net occupancy expenses
          4,413 (b)
Equipment expenses
          281  
Professional fees
    (185 )(d)     1,762 (c)
Communications
          67  
Other operating expenses
          269  
 
Total
  $ (219 )   $ 14,916  
 
(a)   Severance, stay bonuses, related taxes, and other employee benefits
 
(b)   Lease terminations
 
(c)   Outplacement and professional service contract terminations
 
(d)   Reversal of certain outplacement costs
 

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Of the above restructuring costs, approximately $5.5 million were recognized as a liability as of June 30, 2007.
During the fourth quarter of 2006, and as a result of the Restructuring Plan, the Corporation recognized impairment charges on long-lived assets of $7.2 million, mainly associated with software and leasehold improvements, and impairment in goodwill of $14.2 million.
As of June 30, 2007, it is anticipated that the Restructuring Plan will result in the estimated combined charges presented in the table below.
                         
    Impairments        
    on goodwill        
    and long-lived   Restructuring    
(In thousands)   assets   costs   Total
 
Quarter ended:
                       
December 31, 2006
  $ 21,471           $ 21,471  
March 31, 2007
        $ 15,135       15,135  
June 30, 2007
          (219 )     (219 )
 
Total
  $ 21,471     $ 14,916     $ 36,387  
 
The Corporation does not expect to incur additional significant restructuring costs in the remaining quarters of 2007. Settlement amounts in lease terminations may differ and are subject to the outcome of negotiations.
Note 23 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of June 30, 2007, December 31, 2006 and June 30, 2006, and the results of their operations and cash flows for the periods ended June 30, 2007 and 2006.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC Centroamérica S.A., T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;
 
    Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Leasing, U.S.A. (name being changed to Popular Equipment Finance, Inc.), Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN, Inc.;
 
    Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and
 
    EVERTEC USA, Inc.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the Securities and Exchange Commission.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.
The principal source of income for PIHC consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of

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certain minimum capital levels. At June 30, 2007, BPPR could have declared a dividend of approximately $192 million without the approval of the Federal Reserve Board (December 31, 2006 — $208 million; June 30, 2006 — $177 million) and BPNA could have declared a dividend of $197 million (December 31, 2006- $246 million; June 30, 2006 - $193 million). However, the Corporation has never received any dividend payments from its U.S. subsidiaries and it believes that the likelihood of receiving them in the foreseeable future is remote. Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2006 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 1,775     $ 317     $ 377     $ 842,176     $ (82,560 )   $ 762,085  
Money market investments
            19,025       212       700,317       (144,567 )     574,987  
Investment securities available-for-sale, at fair value
    6,354       36,261               8,940,725       (8,872 )     8,974,468  
Investment securities held-to-maturity, at amortized cost
    670,336       1,501               187,642       (430,000 )     429,479  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       133,332               160,150  
Trading account securities, at fair value
                            677,247       (389 )     676,858  
Investment in subsidiaries
    3,144,484       1,052,636       1,995,552       736,311       (6,928,983 )        
Loans held-for-sale, at lower of cost or market value
                            605,990               605,990  
 
Loans held-in-portfolio
    340,197               2,958,637       36,423,591       (7,252,706 )     32,469,719  
Less – Unearned income
                            323,864               323,864  
Allowance for loan losses
    40                       564,807               564,847  
 
 
    340,157               2,958,637       35,534,920       (7,252,706 )     31,581,008  
 
Premises and equipment, net
    24,891               133       562,613       (132 )     587,505  
Other real estate
                            112,858               112,858  
Accrued income receivable
    446       110       12,473       262,339       (25,622 )     249,746  
Other assets
    42,239       59,686       53,233       1,405,397       (61,094 )     1,499,461  
Goodwill
                            668,469               668,469  
Other intangible assets
    554                       101,745               102,299  
 
 
  $ 4,245,661     $ 1,169,537     $ 5,033,009     $ 51,472,081     $ (14,934,925 )   $ 46,985,363  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                     
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4.362,697     $ (82,502 )   $ 4,280,195  
Interest bearing
                            21,180,691       (74,891 )     21,105,800  
 
 
                            25,543,388       (157,393 )     25,385,995  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 153,952       5,559,984       (58,000 )     5,655,936  
Other short-term borrowings
                    857,763       4,938,587       (2,412,245 )     3,384,105  
Notes payable
  $ 486,479               2,890,535       9,502,276       (4,810,652 )     8,068,638  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    62,102     $ 66       94,464       736,241       (99,373 )     793,500  
 
 
    548,581       66       3,996,714       46,710,476       (7,967,663 )     43,288,174  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,756,337       3,961       2       70,421       (74,384 )     1,756,337  
Surplus
    528,151       851,193       734,964       3,158,688       (4,739,844 )     533,152  
Retained earnings
    1,706,101       380,548       323,165       1,775,179       (2,483,893 )     1,701,100  
Accumulated other comprehensive loss, net of tax
    (274,817 )     (66,231 )     (21,836 )     (242,128 )     330,195       (274,817 )
Treasury stock, at cost
    (205,567 )                     (664 )     664       (205,567 )
 
 
    3,697,080       1,169,471       1,036,295       4,761,496       (6,967,262 )     3,697,080  
 
 
  $ 4,245,661     $ 1,169,537     $ 5,033,009     $ 51,472,081     $ (14,934,925 )   $ 46,985,363  
 

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

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 954     $ 1,486     $ 395     $ 905,522     $ (59,465 )   $ 848,892  
Money market investments
            300       411       861,021       (241,210 )     620,522  
Investment securities available-for-sale, at fair value
    11,407       67,810       9,559       10,806,922       (6,400 )     10,889,298  
Investment securities held-to-maturity, at amortized cost
    629,692       2,164               218,542       (430,000 )     420,398  
Other investment securities, at lower of cost or realizable value
    144,994       5,001       13,392       148,655               312,042  
Trading account securities, at fair value
                            376,757       (487 )     376,270  
Investment in subsidiaries
    3,005,963       1,147,170       2,054,174       795,977       (7,003,284 )        
Loans held-for-sale, at lower of cost or market value
                            606,620               606,620  
 
Loans held-in-portfolio
    169,755               2,847,908       34,746,847       (5,849,504 )     31,915,006  
Less – Unearned income
                            304,994               304,994  
Allowance for loan losses
    40                       483,775               483,815  
 
 
    169,715               2,847,908       33,958,078       (5,849,504 )     31,126,197  
 
Premises and equipment, net
    26,244               136       566,528       (204 )     592,704  
Other real estate
                            83,658               83,658  
Accrued income receivable
    408       10       11,319       257,335       (23,074 )     245,998  
Other assets
    66,786       39,522       47,817       1,367,976       (6,419 )     1,515,682  
Goodwill
                            656,189               656,189  
Other intangible assets
    554                       104,490               105,044  
 
 
  $ 4,056,717     $ 1,263,463     $ 4,985,111     $ 51,714,270     $ (13,620,047 )   $ 48,399,514  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                     
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,429,844     $ (59,407 )   $ 4,370,437  
Interest bearing
                            19,223,844       (144,761 )     19,079,083  
 
 
                            23,653,688       (204,168 )     23,449,520  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 119,400       7,892,780       (85,449 )     7,926,731  
Other short-term borrowings
          $ 30,378       132,224       3,683,448       (1,189,114 )     2,656,936  
Notes payable
  $ 532,305               3,533,056       10,753,352       (4,620,038 )     10,198,675  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    61,419       138       62,929       622,096       (42,035 )     704,547  
 
 
    593,724       30,516       3,847,609       47,035,364       (6,570,804 )     44,936,409  
 
Minority interest in consolidated subsidiaries
                            112               112  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,750,310       3,961       2       70,385       (74,348 )     1,750,310  
Surplus
    485,630       815,193       734,964       3,098,740       (4,643,896 )     490,631  
Retained earnings
    1,581,500       493,693       446,943       1,826,634       (2,772,271 )     1,576,499  
Accumulated other comprehensive loss, net of tax
    (334,789 )     (79,900 )     (44,407 )     (315,151 )     439,458       (334,789 )
Treasury stock, at cost
    (206,533 )                     (1,814 )     1,814       (206,533 )
 
 
    3,462,993       1,232,947       1,137,502       4,678,794       (7,049,243 )     3,462,993  
 
 
  $ 4,056,717     $ 1,263,463     $ 4,985,111     $ 51,714,270     $ (13,620,047 )   $ 48,399,514  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 4,158             $ 38,419     $ 701,620     $ (87,712 )   $ 656,485  
Money market investments
    793     $ 98       10       7,082       (2,231 )     5,752  
Investment securities
    9,548       821       224       109,663       (7,193 )     113,063  
Trading account securities
                            9,611               9,611  
 
 
    14,499       919       38,653       827,976       (97,136 )     784,911  
 
INTEREST EXPENSE:
                                               
Deposits
                            184,114       (1,384 )     182,730  
Short-term borrowings
    78               14,418       134,435       (29,465 )     119,466  
Long-term debt
    8,366               37,033       135,323       (69,424 )     111,298  
 
 
    8,444               51,451       453,872       (100,273 )     413,494  
 
Net interest income (expense)
    6,055       919       (12,798 )     374,104       3,137       371,417  
Provision for loan losses
                            115,167               115,167  
 
Net interest income (expense) after provision for loan losses
    6,055       919       (12,798 )     258,937       3,137       256,250  
Service charges on deposit accounts
                            48,392               48,392  
Other service fees
                            118,143       (28,553 )     89,590  
Net (loss) gain on sale and valuation adjustment of investment securities
    (2,132 )     (907 )             4,214               1,175  
Trading account profit
                            10,377               10,377  
Gain on sale of loans and valuation adjustments on loans held-for-sale
                            28,293       1       28,294  
Other operating income (loss)
    529       1,201       (102 )     33,714       (9,795 )     25,547  
 
 
    4,452       1,213       (12,900 )     502,070       (35,210 )     459,625  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    5,518       98               121,991       (657 )     126,950  
Pension, profit sharing and other benefits
    1,277       17               36,234       (190 )     37,338  
 
 
    6,795       115               158,225       (847 )     164,288  
Net occupancy expenses
    612       8       1       25,880               26,501  
Equipment expenses
    385                       31,908       (48 )     32,245  
Other taxes
    335                       11,500               11,835  
Professional fees
    3,295       8       57       70,797       (35,515 )     38,642  
Communications
    136                       16,874       (37 )     16,973  
Business promotion
    881                       29,756       (268 )     30,369  
Printing and supplies
    24                       4,525               4,549  
Other operating expenses
    (12,112 )     (100 )     117       45,317       (384 )     32,838  
Amortization of intangibles
                            2,813               2,813  
 
 
    351       31       175       397,595       (37,099 )     361,053  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    4,101       1,182       (13,075 )     104,475       1,889       98,572  
Income tax
    1,385               (4,576 )     26,174       639       23,622  
 
Income (loss) before equity in earnings of subsidiaries
    2,716       1,182       (8,499 )     78,301       1,250       74,950  
Equity in earnings of subsidiaries
    72,234       (7,926 )     (143 )     (12,080 )     (52,085 )        
 
NET INCOME (LOSS)
  $ 74,950     $ (6,744 )   $ (8,642 )   $ 66,221     $ (50,835 )   $ 74,950  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 2,761             $ 36,267     $ 643,505     $ (68,741 )   $ 613,792  
Money market investments
    450     $ 52       399       9,740       (2,735 )     7,906  
Investment securities
    8,759       351       223       130,874       (6,933 )     133,274  
Trading account securities
                            7,065               7,065  
 
 
    11,970       403       36,889       791,184       (78,409 )     762,037  
 
INTEREST EXPENSE:
                                               
Deposits
                            137,034       (1,073 )     135,961  
Short-term borrowings
    49       395       3,625       137,142       (14,137 )     127,074  
Long-term debt
    9,067               47,370       142,116       (65,330 )     133,223  
 
 
    9,116       395       50,995       416,292       (80,540 )     396,258  
 
Net interest income (expense)
    2,854       8       (14,106 )     374,892       2,131       365,779  
Provision for loan losses
                            67,096               67,096  
 
Net interest income (expense) after provision for loan losses
    2,854       8       (14,106 )     307,796       2,131       298,683  
Service charges on deposit accounts
                            47,324               47,324  
Other service fees
                            106,949       (26,932 )     80,017  
Net gain (loss) on sale and valuation adjustments of investment securities
    580                       (15,004 )             (14,424 )
Trading account profit
                            1,830               1,830  
Gain on sale of loans
                            37,178       (8,124 )     29,054  
Other operating income
    11,629       608       2,819       35,675       (10,546 )     40,185  
 
 
    15,063       616       (11,287 )     521,748       (43,471 )     482,669  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    4,766       95               123,113       (1,274 )     126,700  
Pension, profit sharing and other benefits
    1,392       16               38,749       (374 )     39,783  
 
 
    6,158       111               161,862       (1,648 )     166,483  
Net occupancy expenses
    525       4               28,100               28,629  
Equipment expenses
    405       3       3       33,578       (16 )     33,973  
Other taxes
    234                       10,695               10,929  
Professional fees
    5,731       12       38       67,721       (35,014 )     38,488  
Communications
    182                       17,128       (17 )     17,293  
Business promotion
    624                       31,507       (140 )     31,991  
Printing and supplies
    10                       4,281               4,291  
Other operating expenses
    (15,279 )     (96 )     111       43,719       (383 )     28,072  
Amortization of intangibles
                            2,831               2,831  
 
 
    (1,410 )     34       152       401,422       (37,218 )     362,980  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    16,473       582       (11,439 )     120,326       (6,253 )     119,689  
Income tax
    1,939               (3,586 )     25,796       (1,841 )     22,308  
 
Income (loss) before equity in earnings of subsidiaries
    14,534       582       (7,853 )     94,530       (4,412 )     97,381  
Equity in earnings of subsidiaries
    82,847       (5,712 )     1,935       (18,402 )     (60,668 )        
 
NET INCOME (LOSS)
  $ 97,381     $ (5,130 )   $ (5,918 )   $ 76,128     $ (65,080 )   $ 97,381  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 9,539             $ 76,174     $ 1,383,307     $ (168,421 )   $ 1,300,599  
Money market investments
    940     $ 115       11       13,408       (4,113 )     10,361  
Investment securities
    17,363       1,196       447       223,949       (14,401 )     228,554  
Trading account securities
                            18,992               18,992  
 
 
    27,842       1,311       76,632       1,639,656       (186,935 )     1,558,506  
 
INTEREST EXPENSE:
                                               
Deposits
                            357,776       (1,944 )     355,832  
Short-term borrowings
    1,965               28,886       273,140       (59,716 )     244,275  
Long-term debt
    16,732               73,885       272,687       (131,304 )     232,000  
 
 
    18,697               102,771       903,603       (192,964 )     832,107  
 
Net interest income (expense)
    9,145       1,311       (26,139 )     736,053       6,029       726,399  
Provision for loan losses
    7                       211,506               211,513  
 
Net interest income (expense) after provision for loan losses
    9,138       1,311       (26,139 )     524,547       6,029       514,886  
Service charges on deposit accounts
                            96,863               96,863  
Other service fees
                            233,454       (56,015 )     177,439  
Net gain (loss) on sale and valuation adjustments of investment securities
    116,592       (8,507 )             (25,139 )             82,946  
Trading account loss
                            (3,787 )             (3,787 )
Gain on sale of loans
                            44,268       (12,540 )     31,728  
Other operating income (loss)
    9,762       11,210       (629 )     68,700       (18,681 )     70,362  
 
 
    135,492       4,014       (26,768 )     938,906       (81,207 )     970,437  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    11,618       194               252,716       (1,099 )     263,429  
Pension, profit sharing and other benefits
    3,317       37               76,201       (321 )     79,234  
 
 
    14,935       231               328,917       (1,420 )     342,663  
Net occupancy expenses
    1,165       15       2       57,333               58,515  
Equipment expenses
    673               2       64,063       (97 )     64,641  
Other taxes
    710                       22,972               23,682  
Professional fees
    5,777       19       121       139,338       (70,626 )     74,629  
Communications
    278                       33,837       (80 )     34,035  
Business promotion
    1,163                       58,186       (608 )     58,741  
Printing and supplies
    42                       8,783               8,825  
Other operating expenses
    (24,952 )     (200 )     233       90,541       (768 )     64,854  
Amortization of intangibles
                            5,796               5,796  
 
 
    (209 )     65       358       809,766       (73,599 )     736,381  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    135,701       3,949       (27,126 )     129,140       (7,608 )     234,056  
Income tax
    29,246               (9,494 )     24,116       (3,409 )     40,459  
 
Income (loss) before equity in earnings of subsidiaries
    106,455       3,949       (17,632 )     105,024       (4,199 )     193,597  
Equity in earnings of subsidiaries
    87,142       (82,917 )     (66,609 )     (88,916 )     151,300          
 
NET INCOME (LOSS)
  $ 193,597     $ (78,968 )   $ (84,241 )   $ 16,108     $ 147,101     $ 193,597  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 5,425             $ 73,168     $ 1,263,556     $ (136,522 )   $ 1,205,627  
Money market investments
    1,522     $ 118       437       20,156       (6,345 )     15,888  
Investment securities
    16,367       664       447       263,242       (13,913 )     266,807  
Trading account securities
                            15,925               15,925  
 
 
    23,314       782       74,052       1,562,879       (156,780 )     1,504,247  
 
INTEREST EXPENSE:
                                               
Deposits
                            262,472       (2,100 )     260,372  
Short-term borrowings
    103       841       10,103       269,480       (28,650 )     251,877  
Long-term debt
    18,049               90,337       288,276       (130,207 )     266,455  
 
 
    18,152       841       100,440       820,228       (160,957 )     778,704  
 
Net interest income (expense)
    5,162       (59 )     (26,388 )     742,651       4,177       725,543  
Provision for loan losses
                            116,043               116,043  
 
Net interest income (expense) after provision for loan losses
    5,162       (59 )     (26,388 )     626,608       4,177       609,500  
Service charges on deposit accounts
                            94,793               94,793  
Other service fees
                            215,013       (54,650 )     160,363  
Net gain (loss) on sale and valuation adjustments of investment securities
    732       13,490               (16,717 )     411       (2,084 )
Trading account profit
                            1,183       12,122       13,305  
Gain on sale of loans
                            84,231       (7,916 )     76,315  
Other operating income
    14,472       3,501       2,819       68,529       (19,194 )     70,127  
 
 
    20,366       16,932       (23,569 )     1,073,640       (65,050 )     1,022,319  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    10,658       188               252,932       (1,546 )     262,232  
Pension, profit sharing and other benefits
    3,020       36               79,700       (453 )     82,303  
 
 
    13,678       224               332,632       (1,999 )     344,535  
Net occupancy expenses
    1,128       8               56,131               57,267  
Equipment expenses
    800       3       7       66,391       (31 )     67,170  
Other taxes
    500                       20,670               21,170  
Professional fees
    10,160       23       76       134,054       (68,747 )     75,566  
Communications
    319                       34,310       (36 )     34,593  
Business promotion
    3,087                       61,867       (140 )     64,814  
Printing and supplies
    36                       8,887               8,923  
Other operating expenses
    (30,199 )     (200 )     218       87,790       (706 )     56,903  
Impact of change in fiscal period at certain subsidiaries
                    3,495       4,109       2,137       9,741  
Amortization of intangibles
                            5,552               5,552  
 
 
    (491 )     58       3,796       812,393       (69,522 )     746,234  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    20,857       16,874       (27,365 )     261,247       4,472       276,085  
Income tax
    2,717               (9,160 )     66,413       231       60,201  
 
Income (loss) before equity in earnings of subsidiaries
    18,140       16,874       (18,205 )     194,834       4,241       215,884  
Equity in earnings of subsidiaries
    197,744       (3,721 )     13,877       (10,634 )     (197,266 )        
 
NET INCOME (LOSS)
  $ 215,884     $ 13,153     $ (4,328 )   $ 184,200     $ (193,025 )   $ 215,884  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 193,597     $ (78,968 )   $ (84,241 )   $ 16,108     $ 147,101     $ 193,597  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (87,142 )     82,917       66,609       88,916       (151,300 )        
Depreciation and amortization of premises and equipment
    1,180               2       38,827       (36 )     39,973  
Provision for loan losses
    7                       211,506               211,513  
Amortization of intangibles
                            5,796               5,796  
Amortization and fair value adjustment of servicing assets
                            22,606               22,606  
Net (gain) loss on sale and valuation adjustment of investment securities
    (116,592 )     8,507               25,139               (82,946 )
Net loss (gain) on disposition of premises and equipment
    1                       (4,852 )             (4,851 )
Net gain on sale of loans
                            (44,268 )     12,540       (31,728 )
Net amortization of premiums and accretion of discounts on investments
    (2,665 )     6               13,911       (17 )     11,235  
Net amortization of premiums and deferred loan origination fees and costs
                            52,684       (4,746 )     47,938  
(Earnings) losses from investments under the equity method
    (4,515 )     (11,210 )     629       (682 )     (812 )     (16,590 )
Stock options expense
    364                       543               907  
Deferred income taxes
    1,470               (9,494 )     (53,203 )     13,115       (48,112 )
Net disbursements on loans held-for-sale
                            (3,087,103 )             (3,087,103 )
Acquisitions of loans held-for-sale
                            (403,712 )             (403,712 )
Proceeds from sale of loans held-for-sale
                            2,833,030               2,833,030  
Net decrease in trading securities
                            645,291       389       645,680  
Net decrease (increase) in accrued income receivable
    613       (98 )     (893 )     1,749       (2,877 )     (1,506 )
Net decrease (increase) in other assets
    23,320       2,541       (2,625 )     (40,341 )     844       (16,261 )
Net increase (decrease) in interest payable
    130               (533 )     (16,487 )     2,877       (14,013 )
Net increase in postretirement benefit obligation
                            1,824               1,824  
Net increase (decrease) in other liabilities
    3,108       6       16,532       (55,028 )     (16,689 )     (52,071 )
 
Total adjustments
    (180,721 )     82,669       70,227       236,146       (146,712 )     61,609  
 
Net cash provided by (used in) operating activities
    12,876       3,701       (14,014 )     252,254       389       255,206  
 
Cash flows from investing activities:
                                               
Net decrease (increase) in money market investments
    8,700       (17,950 )     2,341       (125,458 )     (74,476 )     (206,843 )
Purchases of investment securities:
                                               
Available-for-sale
    (6,808 )     (2 )             (520,700 )     462,125       (65,385 )
Held-to-maturity
    (1,215,671 )                     (11,077,940 )             (12,293,611 )
Other
                    (928 )     (16,007 )             (16,935 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            1,267,162       (456,452 )     810,710  
Held-to-maturity
    978,000       400               10,979,564               11,957,964  
Other
                            5,445               5,445  
Proceeds from sale of investment securities available -for- sale
            14,009               14,972               28,981  
Proceeds from sale of other investment securities
    245,484       2       865       1               246,352  
Net repayments (disbursements) on loans
    127,445               (78 )     (1,222,139 )     732,203       (362,569 )
Proceeds from sale of loans
                            3,549               3,549  
Acquisition of loan portfolios
                            (784 )             (784 )
Capital contribution to subsidiary
                            (3,428 )     3,428          
Assets acquired, net of cash
                            (1,633 )             (1,633 )
Mortgage servicing rights purchased
                            (23,988 )             (23,988 )
Acquisition of premises and equipment
    (445 )                     (49,207 )             (49,652 )
Proceeds from sale of premises and equipment
                            21,951               21,951  
Proceeds from sale of foreclosed assets
                            80,278               80,278  
Dividends received from subsidiary
    89,400                               (89,400 )        
 
Net cash provided by (used in) investing activities
    226,105       (3,541 )     2,200       (668,362 )     577,428       133,830  
 
Cash flows from financing activities:
                                               
Net increase in deposits
                            961,225       (24,415 )     936,810  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
                    (5,877 )     (179,432 )     78,800       (106,509 )
Net decrease in other short-term borrowings
    (150,787 )             (37,195 )     (359,008 )     (103,030 )     (650,020 )
Payments of notes payable
                    (3,920 )     (1,627,943 )     858,132       (773,731 )
Proceeds from issuance of notes payable
    198               58,861       1,534,233       (1,490,043 )     103,249  
Dividends paid to parent company
                            (89,400 )     89,400          
Dividends paid
    (95,223 )                                     (95,223 )
Proceeds from issuance of common stock
    8,667                                       8,667  
Treasury stock acquired
    (63 )                     (289 )             (352 )
Capital contribution from parent
                            3,428       (3,428 )        
 

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    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Net cash (used in) provided by financing activities
    (237,208 )             11,869       242,814       (594,584 )     (577,109 )
 
Net increase (decrease) in cash and due from banks
    1,773       160       55       (173,294 )     (16,767 )     (188,073 )
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
  $ 1,775     $ 317     $ 377     $ 842,176     $ (82,560 )   $ 762,085  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 215,884     $ 13,153     $ (4,328 )   $ 184,200     $ (193,025 )   $ 215,884  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
                    (2,271 )     (2,638 )     (1,220 )     (6,129 )
 
Net income before impact of change in fiscal period
    215,884       13,153       (2,057 )     186,838       (191,805 )     222,013  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (197,744 )     3,721       (13,877 )     10,634       197,266          
Depreciation and amortization of premises and equipment
    1,138                       41,404       (36 )     42,506  
Provision for loan losses
                            116,043               116,043  
Amortization of intangibles
                            5,552               5,552  
Amortization of servicing assets
                            28,307       (17 )     28,290  
Net (gain) loss on sale and valuation adjustment of investment securities
    (732 )     (13,490 )             16,717       (411 )     2,084  
Net gain on disposition of premises and equipment
                            (2,269 )             (2,269 )
Net gain on sale of loans
                            (84,231 )     7,916       (76,315 )
Net amortization of premiums and accretion of discounts on investments
    (261 )     7               14,763       (151 )     14,358  
Net amortization of premiums and deferred loan origination fees and costs
    (46 )                     70,055       (3,300 )     66,709  
Earnings from investments under the equity method
    (1,419 )     (3,490 )             (508 )     (746 )     (6,163 )
Stock options expense
    387                       1,198               1,585  
Deferred income taxes
    (454 )             (9,160 )     (18,998 )     231       (28,381 )
Net disbursements on loans held-for-sale
                            (3,559,262 )             (3,559,262 )
Acquisitions of loans held-for-sale
                            (846,117 )             (846,117 )
Proceeds from sale of loans held-for-sale
                            3,834,624               3,834,624  
Net decrease in trading securities
                            1,000,341               1,000,341  
Net decrease (increase) in accrued income receivable
    123       24       1,225       (2,326 )     (1,012 )     (1,966 )
Net (increase) decrease in other assets
    (20,366 )     4,492       315       (66,447 )     2,726       (79,280 )
Net increase in interest payable
    535       75       1,154       7,168       954       9,886  
Net increase in postretirement benefit obligation
                            2,755               2,755  
Net increase (decrease) in other liabilities
    11,318       (15 )     16,503       (91,725 )     266       (63,653 )
 
Total adjustments
    (207,521 )     (8,676 )     (3,840 )     477,678       203,686       461,327  
 
Net cash provided by (used in) operating activities
    8,363       4,477       (5,897 )     664,516       11,881       683,340  
 
Cash flows from investing activities:
                                               
 
Net decrease (increase) in money market investments
    230,000               (260 )     199,108       (299,800 )     129,048  
Purchases of investment securities:
                                               
Available-for-sale
            (17,284 )             (315,246 )     121,391       (211,139 )
Held-to-maturity
    (199,692 )                     (16,647,740 )             (16,847,432 )
Other
                    (250 )     (31,952 )             (32,202 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            876,918       (115,060 )     761,858  
Held-to-maturity
                            16,580,599               16,580,599  
Other
    541                       38,722               39,263  
Proceeds from sale of investment securities available for sale
    7,235       27,924               9,315               44,474  
Net disbursements on loans
    (144,056 )             (16,432 )     (501,092 )     189,306       (472,274 )
Proceeds from sale of loans
                            212,791               212,791  
Acquisition of loan portfolios
                            (175,856 )             (175,856 )
Capital contribution to subsidiary
                    (4,127 )     (29,891 )     34,018          
Assets acquired, net of cash
                            (418 )             (418 )
Mortgage servicing rights purchased
                            (9,599 )             (9,599 )
Acquisition of premises and equipment
    (4,356 )                     (59,113 )             (63,469 )
Proceeds from sale of premises and equipment
                            26,762               26,762  
Proceeds from sale of foreclosed assets
                            66,685               66,685  
Dividends received from subsidiary
    148,600                       60,763       (209,363 )        
 
Net cash provided by (used in) investing activities
    38,272       10,640       (21,069 )     300,756       (279,508 )     49,091  
 
Cash flows from financing activities:
                                               
 
Net increase in deposits
                            817,232       (5,733 )     811,499  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
                    (22,300 )     (1,175,629 )     309,048       (888,881 )
Net (decrease) increase in other short-term borrowings
            (15,734 )     (226,879 )     28,135       64,295       (150,183 )
Payments of notes payable
    (450 )             (205,462 )     (1,615,920 )     611,097       (1,210,735 )
Proceeds from issuance of notes payable
    196               481,476       1,079,305       (878,571 )     682,406  
Dividends paid to parent company
                            (209,362 )     209,362          

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    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Dividends paid
    (93,249 )                                     (93,249 )
Proceeds from issuance of common stock
    47,126                               167       47,293  
Capital contribution from parent
                            34,524       (34,524 )        
 
Net cash (used in) provided by financing activities
    (46,377 )     (15,734 )     26,835       (1,041,715 )     275,141       (801,850 )
 
Cash effect of change in fiscal period of certain subsidiaries
                    78       19,570       (7,734 )     11,914  
 
Net increase (decrease) in cash and due from banks
    258       (617 )     (53 )     (56,873 )     (220 )     (57,505 )
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
  $ 954     $ 1,486     $ 395     $ 905,522       ($59,465 )   $ 848,892  
 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.
OVERVIEW
Popular, Inc. 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 based in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in California, Texas, Illinois, New York, New Jersey and Florida, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation also owns a financial transaction processing operation, EVERTEC, which strives to use its expertise in technology and electronic banking 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.
The financial results for the quarter ended June 30, 2007 were principally impacted by a higher provision for loan losses which continues to reflect a difficult housing environment, particularly in the U.S. mainland, and weak economic conditions in Puerto Rico impacting both the consumer and commercial sectors. Table A provides selected financial data and performance metrics for the quarters and six months ended June 30, 2007 and 2006.
Financial highlights for the quarter ended June 30, 2007, compared with the same quarter in 2006, are described below.
    Net interest income improved as a result of a change in the mix of the Corporation’s earning assets and interest bearing liabilities. The investment portfolio declined due to the maturity of low yielding securities that were not replaced with securities, while the mortgage loan portfolio decreased due to sales of low yielding mortgage loans from the Puerto Rico operations in 2006 and lower origination volume experienced in the U.S. mortgage sector. These decreases were partially offset by an increase in the commercial and consumer loan portfolios, which due to their nature and characteristics have higher yields. Furthermore, earning assets were funded with a greater proportion of interest bearing deposits, which generally carry a lower average cost than other borrowings. The cost of short-term borrowings increased in part due to two interest rate tightenings by the Federal Reserve in the mid to latter part of the second quarter of 2006. Refer to the Net Interest Income section of this MD&A for further details on the variance in net interest income on a taxable equivalent basis.
 
    The financial results for the quarter ended June 30, 2007 were impacted by a $48.1 million increase in the provision for loan losses, which was mostly influenced by higher charge-offs in most portfolio categories due to weak economic conditions in Puerto Rico and a slowdown in the housing sector, particularly in the U.S. mainland. Further details on credit quality metrics are included later in the MD&A.
 
    No