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 March 31, 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   (IRS Employer Identification Number)
incorporation or organization)    
     
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 279,360,885 shares outstanding as of May 7, 2007.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page
Part I — Financial Information
       
Item 1. Financial Statements
       
    4  
    5  
    6  
    7  
    8  
    9  
    54  
    82  
    85  
Part II – Other Information
       
    85  
    86  
    87  
    87  
    88  
 EX-10.1 AMENDMENT TO 2005 AMENDED AND RESTATED INCENTIVE AWARD AGREEMENT
 EX-12.1 COMPUTATION OF RATIOS 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)
                         
    March 31,   December 31,   March 31,
(In thousands, except share information)   2007   2006   2006
 
ASSETS
                       
Cash and due from banks
  $ 753,550     $ 950,158     $ 860,606  
 
Money market investments:
                       
Federal funds sold
    389,000       84,350       488,200  
Securities purchased under agreements to resell
    227,046       202,181       491,710  
Time deposits with other banks
    24,162       15,177       10,005  
 
 
    640,208       301,708       989,915  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    3,729,502       3,743,924       5,934,017  
Other investment securities available-for-sale
    5,748,859       6,106,938       5,576,651  
Investment securities held-to-maturity, at amortized cost (market value at March 31, 2007 - $88,868; December 31, 2006 - $92,764; March 31, 2006 – $345,217)
    87,483       91,340       344,385  
Other investment securities, at lower of cost or realizable value (realizable value at March 31, 2007 - $153,339; December 31, 2006 - $412,593; March 31, 2006 – $415,131)
    152,951       297,394       304,609  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    344,401       193,619       365,096  
Other trading securities
    303,749       188,706       144,516  
Loans held-for-sale, at lower of cost or market value
    1,049,230       719,922       535,719  
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
    563,871       306,320       21,210  
Other loans held-in-portfolio
    31,578,452       32,019,044       31,174,832  
Less – Unearned income
    310,936       308,347       301,376  
Allowance for loan losses
    541,748       522,232       468,321  
 
 
    31,289,639       31,494,785       30,426,345  
 
Premises and equipment, net
    591,008       595,140       600,792  
Other real estate
    89,479       84,816       82,352  
Accrued income receivable
    284,791       248,240       274,620  
Other assets
    1,326,044       1,611,890       1,388,662  
Goodwill
    668,616       667,853       655,743  
Other intangible assets
    105,154       107,554       107,675  
 
 
  $ 47,164,664     $ 47,403,987     $ 48,591,703  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,177,446     $ 4,222,133     $ 4,453,965  
Interest bearing
    20,560,607       20,216,198       18,957,847  
 
 
    24,738,053       24,438,331       23,411,812  
Federal funds purchased and assets sold under agreements to repurchase
    6,272,417       5,762,445       8,315,380  
Other short-term borrowings
    3,201,972       4,034,125       2,645,521  
Notes payable
    8,368,825       8,737,246       9,933,218  
Other liabilities
    846,979       811,424       798,102  
 
 
    43,428,246       43,783,571       45,104,033  
 
Commitments and contingencies (See Note 12)
                       
 
Minority interest in consolidated subsidiaries
    110       110       113  
 
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; 292,448,935 shares issued (December 31, 2006 – 292,190,924; March 31, 2006 – 291,497,120) and 279,073,657 outstanding (December 31, 2006 – 278,741,547; March 31, 2006 – 278,072,323)
    1,754,694       1,753,146       1,748,983  
Surplus
    530,073       526,856       486,863  
Retained earnings
    1,673,826       1,594,144       1,526,634  
Accumulated other comprehensive loss, net of tax of ($74,005) (December 31, 2006 – ($84,143); March 31, 2006 – ($82,657))
    (203,935 )     (233,728 )     (255,265 )
Treasury stock – at cost, 13,375,278 shares (December 31, 2006 – 13,449,377; March 31, 2006 – 13,424,797)
    (205,225 )     (206,987 )     (206,533 )
 
 
    3,736,308       3,620,306       3,487,557  
 
 
  $ 47,164,664     $ 47,403,987     $ 48,591,703  
 
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
    March 31,
(In thousands, except per share information)   2007   2006
 
INTEREST INCOME:
               
Loans
  $ 644,114     $ 591,835  
Money market investments
    4,609       7,982  
Investment securities
    115,491       133,533  
Trading account securities
    9,381       8,860  
 
 
    773,595       742,210  
 
INTEREST EXPENSE:
               
Deposits
    173,102       124,411  
Short-term borrowings
    124,809       124,803  
Long-term debt
    120,702       133,232  
 
 
    418,613       382,446  
 
Net interest income
    354,982       359,764  
Provision for loan losses
    96,346       48,947  
 
Net interest income after provision for loan losses
    258,636       310,817  
Service charges on deposit accounts
    48,471       47,469  
Other service fees (See Note 13)
    87,849       80,346  
Net gain on sale and valuation adjustments of investment securities
    81,771       12,340  
Trading account (loss) profit
    (14,164 )     11,475  
Gain on sale of loans and valuation adjustments on loans held-for-sale
    3,434       47,261  
Other operating income
    44,815       29,942  
 
 
    510,812       539,650  
 
OPERATING EXPENSES:
               
Personnel costs:
               
Salaries
    136,479       135,532  
Pension, profit sharing and other benefits
    41,896       42,520  
 
 
    178,375       178,052  
Net occupancy expenses
    32,014       28,638  
Equipment expenses
    32,396       33,197  
Other taxes
    11,847       10,241  
Professional fees
    35,987       37,078  
Communications
    17,062       17,300  
Business promotion
    28,372       32,823  
Printing and supplies
    4,276       4,632  
Other operating expenses
    32,016       28,831  
Impact of change in fiscal period of certain subsidiaries
          9,741  
Amortization of intangibles
    2,983       2,721  
 
 
    375,328       383,254  
 
Income before income tax
    135,484       156,396  
Income tax
    16,837       37,893  
 
NET INCOME
  $ 118,647     $ 118,503  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 115,669     $ 115,525  
 
BASIC EARNINGS PER COMMON SHARE (EPS)
  $ 0.41     $ 0.42  
 
DILUTED EPS
  $ 0.41     $ 0.42  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16  
 
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)
                 
    Quarter ended
    March 31,
(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
    1,488       1,184  
Issuance of common stock
          11,312  
Stock options exercised
    60       44  
 
Balance at end of period
    1,754,694       1,748,983  
 
Surplus:
               
Balance at beginning of year
    526,856       452,398  
Common stock issued under the Dividend Reinvestment Plan
    2,628       2,789  
Issuance of common stock
          28,281  
Issuance cost of common stock
          1,527  
Stock options expense on unexercised options, net of forfeitures
    440       768  
Stock options exercised
    149       100  
Transfer from retained earnings
          1,000  
 
Balance at end of period
    530,073       486,863  
 
Retained earnings:
               
Balance at beginning of year
    1,594,144       1,456,612  
Net income
    118,647       118,503  
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)
    8,667        
Cash dividends declared on common stock
    (44,654 )     (44,503 )
Cash dividends declared on preferred stock
    (2,978 )     (2,978 )
Transfer to surplus
          (1,000 )
 
Balance at end of period
    1,673,826       1,526,634  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (233,728 )     (176,000 )
Other comprehensive income (loss), net of tax
    29,793       (79,265 )
 
Balance at end of period
    (203,935 )     (255,265 )
 
Treasury stock – at cost:
               
Balance at beginning of year
    (206,987 )     (207,081 )
Purchase of common stock
    (10 )      
Reissuance of common stock
    1,772       548  
 
Balance at end of period
    (205,225 )     (206,533 )
 
Total stockholders’ equity
  $ 3,736,308     $ 3,487,557  
 
Disclosure of changes in number of shares:
                         
    March 31, 2007   December 31, 2006   March 31, 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
    247,947       858,905       197,196  
Issuance of common stock
          1,885,380       1,885,380  
Stock options exercised
    10,064       39,449       7,354  
 
Balance at end of period
    292,448,935       292,190,924       291,497,120  
 
Treasury stock
    (13,375,278 )     (13,449,377 )     (13,424,797 )
 
Common Stock – outstanding
    279,073,657       278,741,547       278,072,323  
 
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
    March 31,
(In thousands)   2007   2006
 
Net income
  $ 118,647     $ 118,503  
 
Other comprehensive income (loss), before tax:
               
Foreign currency translation adjustment
    1,780       (686 )
Adjustment of pension and postretirement benefit plans
    (519 )    
Unrealized holding gains (losses) on securities available-for-sale arising during the period
    39,520       (91,965 )
Reclassification adjustment for gains included in net income
    (119 )     (12,340 )
Net (loss) gain on cash flow hedges
    (892 )     1,200  
Reclassification adjustment for losses included in net income
    161       161  
 
 
39,931     (103,630 )
Income tax (expense) benefit
    (10,138 )     24,365
 
Total other comprehensive income (loss), net of tax
    29,793       (79,265 )
 
Comprehensive income
  $ 148,440     $ 39,238  
 
Disclosure of accumulated other comprehensive loss:
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
 
Foreign currency translation adjustment
  $ (34,921 )   $ (36,701 )   $ (37,001 )
 
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
    (172,842 )     (212,243 )     (299,995 )
Tax effect
    46,567       57,146       82,162  
 
Net of tax amount
    (126,275 )     (155,097 )     (217,833 )
 
Unrealized (losses) gains on cash flows hedges
    (641 )     90       1,185  
Tax effect
    224       (37 )     (423 )
 
Net of tax amount
    (417 )     53       762  
 
Cumulative effect of accounting change, net of tax
    243       243       243  
 
 
                       
Accumulated other comprehensive loss, net of tax
  $ (203,935 )   $ (233,728 )   $ (255,265 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands)   2007   2006
 
Cash flows from operating activities:
               
Net income
  $ 118,647     $ 118,503  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
          (6,129 )
 
Net income before change in fiscal period
    118,647       124,632  
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation and amortization of premises and equipment
    19,994       21,437  
Provision for loan losses
    96,346       48,947  
Amortization of intangibles
    2,983       2,721  
Amortization and fair value adjustment of servicing assets
    10,229       13,501  
Net gain on sale and valuation adjustment of investment securities
    (81,771 )     (12,340 )
Net gain on disposition of premises and equipment
    (3,677 )     (1,512 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
    (3,434 )     (47,261 )
Net amortization of premiums and accretion of discounts on investments
    6,331       7,012  
Net amortization of premiums and deferred loan origination fees and costs
    23,930       31,887  
Earnings from investments under the equity method
    (14,229 )     (4,261 )
Stock options expense
    490       800  
Deferred income taxes
    (19,394 )     (5,411 )
Net disbursements on loans held-for-sale
    (1,685,149 )     (1,923,081 )
Acquisitions of loans held-for-sale
    (282,110 )     (447,046 )
Proceeds from sale of loans held-for-sale
    1,280,146       2,166,951  
Net decrease in trading securities
    346,150       835,124  
Net increase in accrued income receivable
    (36,551 )     (30,589 )
Net decrease (increase) in other assets
    35,160       (18,428 )
Net (decrease) increase in interest payable
    (315 )     23,849  
Net increase in postretirement benefit obligation
    728       1,585  
Net increase in other liabilities
    1,208       3,286  
 
Total adjustments
    (302,935 )     667,171  
 
Net cash (used in) provided by operating activities
    (184,288 )     791,803  
 
Cash flows from investing activities:
               
Net increase in money market investments
    (272,064 )     (240,350 )
Purchases of investment securities:
               
Available-for-sale
    (28,186 )     (175,975 )
Held-to-maturity
    (5,670,466 )     (7,747,198 )
Other
    (6,744 )     (10,580 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    399,204       247,055  
Held-to-maturity
    5,674,358       7,556,192  
Other
    2,454       25,074  
Proceeds from sale of investment securities available-for-sale
          43,894  
Proceeds from sale of other investment securities
    246,352        
Net repayments on loans
    50,493       201,051  
Proceeds from sale of loans
    962       73,038  
Acquisition of loan portfolios
    (784 )     (141,658 )
Assets acquired, net of cash
    (1,823 )     (218 )
Acquisition of premises and equipment
    (26,117 )     (38,799 )
Proceeds from sale of premises and equipment
    14,307       14,452  
Proceeds from sale of foreclosed assets
    41,835       33,516  
 
Net cash provided by (used in) investing activities
    423,781       (160,506 )
 
Cash flows from financing activities:
               
Net increase in deposits
    297,872       769,477  
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase
    509,972       (500,232 )
Net decrease in other short-term borrowings
    (832,153 )     (161,597 )
Payments of notes payable
    (416,272 )     (900,117 )
Proceeds from issuance of notes payable
    47,719       106,252  
Dividends paid
    (47,591 )     (45,768 )
Proceeds from issuance of common stock
    4,362       42,983  
Treasury stock acquired
    (10 )      
 
Net cash used in financing activities
    (436,101 )     (689,002 )
 
Cash effect of change in fiscal period of certain subsidiaries
          11,914  
 
Net decrease in cash and due from banks
    (196,608 )     (45,791 )
Cash and due from banks at beginning of period
    950,158       906,397  
 
Cash and due from banks at end of period
  $ 753,550     $ 860,606  
 
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. Popular Financial Holdings (“PFH”) offers mortgage and personal loans, 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. 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 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of March 31, 2007, December 31, 2006 and March 31, 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. The statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in the first quarter of 2007 did not have a material impact on the Corporation’s consolidated financial statements.

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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 FIN 48 disclosures.
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 present 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 of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and

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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 Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this recently issued accounting standard may have on its consolidated financial statements.
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 $614 million at March 31, 2007 (December 31, 2006 — $621 million; March 31, 2006 — $607 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 March 31, 2007, the Corporation had securities with a market value of $445 thousand (December 31, 2006 — $445 thousand; March 31, 2006 — $446 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 March 31, 2007, 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 (December 31, 2006 — $600 thousand; March 31, 2006 — $600 thousand).
The Corporation had restricted securities available-for-sale with a market value of $1.3 million at March 31, 2007 (December 31, 2006 — $1.2 million; March 31, 2006 — $1.3 million) to comply with certain requirements of the Insurance Code of Puerto Rico.
As part of a line of credit facility with a financial institution, at March 31, 2007, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2006 — $1.9 million; March 31, 2006 — $1.9 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

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Note 4 – Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, borrowings and other available credit facilities. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
 
Investment securities available-for-sale
  $ 2,825,470     $ 2,645,272     $ 2,648,586  
Investment securities held-to-maturity
    502       658       810  
Loans held-for-sale
          332,058       28,398  
Loans held-in-portfolio
    9,548,747       10,260,198       11,667,733  
 
 
  $ 12,374,719     $ 13,238,186     $ 14,345,527  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.
Note 5 — Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2007, December 31, 2006 and March 31, 2006 were as follows:
                                 
    AS OF MARCH 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 502,445           $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    6,322,704     $ 392       115,897       6,207,199  
Obligations of Puerto Rico, States and political subdivisions
    117,895       282       3,116       115,061  
Collateralized mortgage obligations
    1,597,684       5,378       13,055       1,590,007  
Mortgage-backed securities
    1,021,608       1,770       22,739       1,000,639  
Equity securities
    70,109       4,197       3,399       70,907  
Others
    18,515       690             19,205  
 
 
  $ 9,650,960     $ 12,709     $ 185,308     $ 9,478,361  
 
                                 
    AS OF DECEMBER 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 504,653           $ 29,818     $ 474,835  
Obligations of U.S. Government sponsored entities
    6,603,252     $ 57       147,524       6,455,785  
Obligations of Puerto Rico, States and political subdivisions
    118,214       265       3,537       114,942  
Collateralized mortgage obligations
    1,657,613       4,904       17,191       1,645,326  
Mortgage-backed securities
    1,061,850       1,458       26,492       1,036,816  
Equity securities
    70,954       6,692       3,901       73,745  
Others
    46,326       3,087             49,413  
 
 
  $ 10,062,862     $ 16,463     $ 228,463     $ 9,850,862  
 

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    AS OF MARCH 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 526,258           $ 39,042     $ 487,216  
Obligations of U.S. Government sponsored entities
    7,814,649             222,747       7,591,902  
Obligations of Puerto Rico, States and political subdivisions
    108,047     $ 499       1,892       106,654  
Collateralized mortgage obligations
    1,868,088       6,944       19,374       1,855,658  
Mortgage-backed securities
    1,350,993       4,510       36,249       1,319,254  
Equity securities
    59,511       7,030       199       66,342  
Others
    82,874       1,109       341       83,642  
 
 
  $ 11,810,420     $ 20,092     $ 319,844     $ 11,510,668  
 
The following table 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 March 31, 2007, December 31, 2006 and March 31, 2006:
                         
    AS OF MARCH 31, 2007
    Less than 12 Months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 320,519     $ 6,849     $ 313,670  
Obligations of Puerto Rico, States and political subdivisions
    19,329       293       19,036  
Collateralized mortgage obligations
    333,165       2,187       330,978  
Mortgage-backed securities
    15,728       184       15,544  
Equity securities
    22,639       3,372       19,267  
 
 
  $ 711,380     $ 12,885     $ 698,495  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 502,445     $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    5,847,813       109,048       5,738,765  
Obligations of Puerto Rico, States and political subdivisions
    58,452       2,823       55,629  
Collateralized mortgage obligations
    570,196       10,868       559,328  
Mortgage-backed securities
    912,630       22,555       890,075  
Equity securities
    300       27       273  
 
 
  $ 7,891,836     $ 172,423     $ 7,719,413  
 

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    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 502,445     $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    6,168,332       115,897       6,052,435  
Obligations of Puerto Rico, States and political subdivisions
    77,781       3,116       74,665  
Collateralized mortgage obligations
    903,361       13,055       890,306  
Mortgage-backed securities
    928,358       22,739       905,619  
Equity securities
    22,939       3,399       19,540  
 
 
  $ 8,603,216     $ 185,308     $ 8,417,908  
 
                         
    AS OF 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 MARCH 31, 2006
    Less than 12 Months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 29,259     $ 323     $ 28,936  
Obligations of U.S. Government sponsored entities
    4,249,522       118,785       4,130,737  
Obligations of Puerto Rico, States and political subdivisions
    15,572       77       15,495  
Collateralized mortgage obligations
    651,405       7,333       644,072  
Mortgage-backed securities
    266,027       4,734       261,293  
Equity securities
    35       1       34  
Others
    14,104       341       13,763  
 
 
  $ 5,225,924     $ 131,594     $ 5,094,330  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 496,999     $ 38,719     $ 458,280  
Obligations of U.S. Government sponsored entities
    3,565,127       103,962       3,461,165  
Obligations of Puerto Rico, States and political subdivisions
    66,501       1,815       64,686  
Collateralized mortgage obligations
    367,529       12,041       355,488  
Mortgage-backed securities
    887,313       31,515       855,798  
Equity securities
    300       198       102  
 
 
  $ 5,383,769     $ 188,250     $ 5,195,519  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 526,258     $ 39,042     $ 487,216  
Obligations of U.S. Government sponsored entities
    7,814,649       222,747       7,591,902  
Obligations of Puerto Rico, States and political subdivisions
    82,073       1,892       80,181  
Collateralized mortgage obligations
    1,018,934       19,374       999,560  
Mortgage-backed securities
    1,153,340       36,249       1,117,091  
Equity securities
    335       199       136  
Others
    14,104       341       13,763  
 
 
  $ 10,609,693     $ 319,844     $ 10,289,849  
 
At March 31, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $58 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, or 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 March 31, 2007, these Appropriation Bonds represented approximately $2.5 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-

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than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities at March 31, 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 March 31, 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 quarter ended March 31, 2007, the Corporation recognized through earnings approximately $29.3 million in losses in interest-only securities classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired.
The following table states the 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.
                                                 
    March 31, 2007   December 31, 2006   March 31, 2006
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,307,581     $ 1,292,296     $ 1,539,651     $ 1,517,525     $ 1,715,490     $ 1,691,774  
FHLB
    6,015,720       5,902,317       6,230,841       6,086,885       7,652,208       7,435,051  
Freddie Mac
    1,073,605       1,063,275       1,149,185       1,134,853       1,291,314       1,271,426  
 

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Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of March 31, 2007, December 31, 2006 and March 31, 2006 were as follows:
                                 
    AS OF MARCH 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 70,862     $ 1,493     $ 145     $ 72,210  
Collateralized mortgage obligations
    368             20       348  
Others
    16,253       68       11       16,310  
 
 
  $ 87,483     $ 1,561     $ 176     $ 88,868  
 
                                 
    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 MARCH 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 238,520     $ 57     $ 2     $ 238,575  
Obligations of Puerto Rico, States and political subdivisions
    73,045       925       216       73,754  
Collateralized mortgage obligations
    456             25       431  
Others
    32,364       108       15       32,457  
 
 
  $ 344,385     $ 1,090     $ 258     $ 345,217  
 
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 March 31, 2007, December 31, 2006 and March 31, 2006:
                         
    AS OF MARCH 31, 2007
    12 months or more and Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 25,272     $ 145     $ 25,127  
Collateralized mortgage obligations
    368       20       348  
Others
    1,250       11       1,239  
 
 
  $ 26,890     $ 176     $ 26,714  
 

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    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 MARCH 31, 2006
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 13,577     $ 2     $ 13,575  
Obligations of Puerto Rico, States and political subdivisions
    11,255       102       11,153  
Others
    1,250       15       1,235  
 
 
  $ 26,082     $ 119     $ 25,963  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 22,389     $ 114     $ 22,275  
Collateralized mortgage obligations
    456       25       431  
Others
    250             250  
 
 
  $ 23,095     $ 139     $ 22,956  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 13,577     $ 2     $ 13,575  
Obligations of Puerto Rico, States and political subdivisions
    33,644       216       33,428  
Collateralized mortgage obligations
    456       25       431  
Others
    1,500       15       1,485  
 
 
  $ 49,177     $ 258     $ 48,919  
 
Management believes that the unrealized losses in the held-to-maturity portfolio at March 31, 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.

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Note 7 – Mortgage Servicing Rights
The Corporation recognizes as assets the rights to service loans for others whether these are purchased or the servicing rights result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights for on-balance sheet securitization transactions.
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 market inputs used in estimating the fair value of the servicing assets in the different markets or types of assets served. Although the Corporation currently does not hedge the risk of changes in the fair value of MSRs, it may do so in the future as part of the Corporation’s risk management practices. 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   Total
(In thousands)   Residential MSRs   Residential MSRs        
 
Balance at December 31, 2006
  $ 77,801     $ 82,338     $ 160,139  
Remeasurement upon adoption of SFAS No. 156 (a)
    13,630       1,700       15,330  
 
Balance at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
 
(a)   The remeasurement effect, net of deferred taxes, amounted to $9.6 million on a consolidated basis.
 
At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs, which is benchmarked against third party opinions of value. The discounted cash flow model incorporates assumptions that market participants 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 March 31, 2007.

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The change in MSRs measured using the fair value method for the quarter ended March 31, 2007 was:
                         
    Banking              
    subsidiaries     PFH     Total  
(In thousands)   Residential MSRs     Residential MSRs          
 
Fair value at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
Purchases
    795             795  
Servicing from securitizations or asset transfers
    6,054             6,054  
Changes due to payments on loans (1)
    (2,120 )     (8,412 )     (10,532 )
Changes in fair value due to changes in valuation model inputs or assumptions
    2,261       (1,404 )     857  
 
Fair value at March 31, 2007
  $ 98,421     $ 74,222     $ 172,643  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
The changes in amortized MSRs for the quarter ended March 31, 2006 were:
         
(In thousands)   Residential MSRs
 
Balance at December 31, 2005
  $ 137,701  
Rights originated
    31,407  
Rights purchased
    8,272  
Amortization
    (16,759 )
 
Balance at March 31, 2006
  $ 160,621  
Less: Valuation allowance
    446  
 
Balance at March 31, 2006, net of valuation allowance
  $ 160,175  
 
Fair value at March 31, 2006
  $ 182,288  
 
Residential mortgage loans serviced for others were $14.8 billion at March 31, 2007 (December 31, 2006 — $13.3 billion; March 31, 2006 — $11.5 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 interest-only securities (“IOs” or “residual interests”) on securitizations of subprime mortgage loans.
IOs 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 IOs classified as available-for-sale as of March 31, 2007 amounted to $19 million. In the quarter ended March 31, 2007, the Corporation recognized other-than-temporary impairment losses of $29.3 million on these IOs.
Commencing in January 2006, the IOs derived from newly-issued PFH’s off-balance sheet securitizations are accounted as trading securities. As such, any valuation adjustment related to these particular IOs is being recorded as part of trading account profit (loss) in the consolidated statements of income. IOs accounted for as trading securities from PFH’s securitizations approximated $14 million at March 31, 2007. In the first quarter of 2007, the Corporation recognized trading losses of $23.5 million on these IOs.

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Key economic assumptions used to estimate the fair value of IOs and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                                                   
    March 31, 2007     December 31, 2006
            MSRs             MSRs
            Fixed-rate   ARM             Fixed-rate    
(In thousands)   IOs   loans   loans     IOs   loans   ARM loans
       
Carrying amount of retained interests
  $ 32,870     $ 32,983     $ 26,830       $ 85,965     $ 38,017     $ 29,838  
Fair value of retained interests
  $ 32,870     $ 32,983     $ 26,830       $ 85,965     $ 37,815     $ 32,212  
Weighted average life of collateral (in years)
  2.7 years   3.1 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
  ($ 1,425 )   $ 312     ($ 147 )     ($ 5,543 )   $ 210     ($ 149 )
Impact on fair value of 20% increase in prepayment rate
  ($ 2,234 )   $ 457     ($ 192 )     ($ 9,284 )   $ 234     ($ 200 )
Weighted average discount rate (annual rate)
    25 %     17 %     17 %       17 %     16 %     16 %
Impact on fair value of 10% adverse change
  ($ 1,915 )   ($ 795 )   ($ 537 )     ($ 4,172 )   ($ 901 )   ($ 542 )
Impact on fair value of 20% adverse change
  ($ 3,718 )   ($ 1,555 )     ($1,012 )     ($ 8,081 )   ($ 1,761 )   ($ 1,060 )
 
                                                 
Expected credit losses (annual rate)
  3.17% to 6.46%                 1.28% to 3.19%            
Impact on fair value of 10% adverse change
  ($ 6,539 )                 ($ 4,792 )            
Impact on fair value of 20% adverse change
  ($ 12,307 )                 ($ 9,558 )            
     
PFH as servicer collects prepayment penalties on a substantial portion of the underlying serviced loans; as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.
The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation. Purchased MSRs are valued under the same framework and the valuations are based on substantially similar assumptions.
Banking subsidiaries
The Corporation’s banking subsidiaries also retain servicing responsibilities in connection with the wholesale 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.

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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 March 31, 2007 were:
         
    MSRs
 
Prepayment speed
    13.0 %
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:
                 
    March 31, 2007   December 31, 2006
(In thousands)   MSRs   MSRs
 
Fair value of retained interests
  $ 81,687     $ 73,332  
Weighted average life (in years)
  9.9 years     9.2 years  
Weighted average prepayment speed (annual rate)
    10.1 %     14.0 %
Impact on fair value of 10% adverse change
  ($ 3,259 )   ($ 1,868 )
Impact on fair value of 20% adverse change
  ($ 5,490 )   ($ 4,151 )
Weighted average discount rate (annual rate)
    10.6 %     10.3 %
Impact on fair value of 10% adverse change
  ($ 3,751 )   ($ 2,142 )
Impact on fair value of 20% adverse change
  ($ 6,420 )   ($ 4,200 )
 
The amounts of MSRs presented in the table above exclude purchased MSRs.
The expected credit losses for the residential mortgage loans securitized / sold by the Corporation’s banking subsidiaries, including securitizations effected 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.
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.

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Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of March 31, 2007 and December 31, 2006 were as follows:
                                         
As of March 31, 2007
                    Derivative        
(In thousands)   Notional amount   Derivative assets   liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 165,300     $ 47     $ 40     $ 4          
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 646     $ 1,012       ($238 )        
 
                                         
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 forwards are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These 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 March 31, 2007 have a maximum remaining maturity of 79 days.
Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding at March 31, 2007 and December 31, 2006 were as follows:
                         
As of March 31, 2007
            Fair Values
    Notional   Derivative   Derivative
(In thousands)   amount   assets   liabilities
 
Forward contracts
  $ 637,141     $ 570     $ 258  
Futures contracts
    2,000       4        
Call options and put options
    75,500       291       63  
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       1,355        
- bond certificates offered in an on-balance sheet securitization
    478,358       560       1,357  
- financing of auto loan portfolio held-for-investment
    429,622             212  
- swaps with corporate clients
    510,138             1,274  
- swaps offsetting position of corporate client swaps
    510,138       1,274        
- investment securities
    89,385             2,054  
- mortgage loan portfolio prior to securitization
    325,000       134       1,262  
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    158             2  
Foreign currency and exchange rate commitments w/ counterparty
    157       3        
Interest rate caps
    798,576       2,861        
Interest rate caps for benefit of corporate clients
    50,000             42  
Indexed options on deposits
    196,296       39,372        
Indexed options on S&P Notes
    31,152       5,781        
Bifurcated embedded options
    218,966             44,372  
Mortgage rate lock commitments
    294,190       418       299  
 
Total
  $ 5,080,240     $ 52,623     $ 51,195  
 

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As of December 31, 2006
            Fair Values
    Notional   Derivative   Derivative
(In thousands)   amount   assets   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-for-investment
    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 Rate Swaps
The Corporation has an interest rate swap outstanding to economically hedge the payments of the bond certificates offered as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized gains of $281 thousand for the quarter ended March 31, 2007 due to changes in their fair value.
The Corporation has interest rate swaps to economically hedge the cost of short-term debt. For the first quarter of 2007, the Corporation recognized as part of short-term interest expense a loss of $798 thousand due to changes in these swaps’ fair value.
Additionally, the Corporation entered into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with a “held-for-investment” auto loan portfolio. For the quarter ended March 31, 2007, losses of $940 thousand were recognized as part of long-term interest expense.
The Corporation has interest rate swaps to economically hedge the changes in fair value of loans acquired and originated prior to securitization. During the quarter ended March 31, 2007, losses of $1.4 million were recognized as part of long-term interest expense.
Interest Rate Caps
The Corporation has interest rate caps in conjunction with a series of mortgage loan securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income. Losses of $1.2 million for the first quarter of 2007 were recognized as part of long-term interest expense.
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 sale agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair value with changes directly reported in income as part of gain on sale of loans. For the first quarter of 2007, losses of $672 thousand were recognized due to changes in fair value of these forward sale commitments.

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Note 10 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the quarters ended March 31, 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   March 31, 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                   4,391  
Popular North America:
                               
Banco Popular North America
    568,647                   568,647  
Popular Financial Holdings
                       
EVERTEC
    45,142     $ 775       ($12 )     45,905  
 
Total Popular, Inc.
  $ 667,853     $ 775       ($12 )   $ 668,616  
 
                                 
    2006
            Purchase            
    Balance at   accounting           Balance at
(In thousands)   January 1, 2006   adjustments   Other   March 31, 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     $ 1,966       ($210 )     544,590  
Popular Financial Holdings
    14,236       3             14,239  
EVERTEC
    43,131                   43,131  
 
Total Popular, Inc.
  $ 653,984     $ 1,969       ($210 )   $ 655,743  
 
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 quarter of 2006 at the PNA reportable segment were mostly related to the E-LOAN acquisition.
During the fourth quarter of 2006, a goodwill impairment loss of $14 million was recognized in the Popular North America segment, specifically at Popular Financial Holdings, due to a restructuring plan. Refer to Note 22 for information on this plan.
At March 31, 2007, other than goodwill, the Corporation had $65 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (December 31, 2006 — $65 million; March 31, 2006 — $59 million).

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The following table reflects the components of other intangible assets subject to amortization:
                                                 
    March 31, 2007   December 31, 2006   March 31, 2006
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 76,708     $ 50,285     $ 76,708     $ 48,367     $ 76,956     $ 42,795  
 
                                               
Other customer relationships
    11,672       2,670       11,156       2,171       8,393       884  
 
                                               
Other intangibles
    9,099       3,980       9,099       3,426       9,320       2,234  
 
 
                                               
Total
  $ 97,479     $ 56,935     $ 96,963     $ 53,964     $ 94,669     $ 45,913  
 
During the quarter ended March 31, 2007, the Corporation recognized $3.0 million in amortization expense related to other intangible assets with definite lives (March 31, 2006 — $2.7 million).
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
  $ 10,346  
2008
    8,564  
2009
    6,742  
2010
    5,787  
2011
    4,112  
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:
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
 
Federal funds purchased
  $ 1,390,015     $ 1,276,818     $ 1,448,640  
Assets sold under agreements to repurchase
    4,882,402       4,485,627       6,866,740  
 
 
  $ 6,272,417     $ 5,762,445     $ 8,315,380  
 

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Other short-term borrowings consisted of:
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
 
Advances with FHLB paying interest at:
                       
-fixed rates ranging from 5.40% to 5.44% (March 31, 2006 – 4.81% to 5.00%)
  $ 355,000     $ 230,000     $ 250,000  
-a floating rate of 0.06% over the fed funds rate (Fed funds rate at March 31, 2006 was 4.88%)
                105,000  
 
                       
Advances under credit facilities with other institutions at:
                       
-fixed rates ranging from 5.32% to 5.57% (March 31, 2006 – 4.32% to 4.96%)
    433,000       386,000       144,214  
-floating rates ranging from 0.45% to 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at March 31, 2006 was 4.83%)
          481,062       24,202  
-a floating rate of 0.20% (March 31, 2006 – 0.16%) over the 3-month LIBOR rate (3-month LIBOR rate at March 31, 2007 was 5.35%; March 31, 2006 – 5.00%)
    10,000       10,000       20,000  
 
                       
Commercial paper at rates ranging from 4.80% to 5.41% (March 31, 2006 – 3.97% to 4.89%)
    99,578       193,383       376,813  
 
                       
Term funds purchased at:
                       
-fixed rates ranging from 5.28% to 5.38% (March 31, 2006 – 4.59% to 4.81%)
    1,935,000       2,140,900       1,375,000  
-a floating rate of 0.08% over the fed funds rate (Fed funds rate at March 31, 2007 was 5.38%; March 31, 2006 - 4.88%)
    275,000       500,000       350,000  
 
                       
Others
    94,394       92,780       292  
 
 
  $ 3,201,972     $ 4,034,125     $ 2,645,521  
 
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:
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
 
Advances with FHLB:
                       
-maturing from 2007 through 2018 paying interest at fixed rates ranging from 3.07% to 6.55% (March 31, 2006 – 1.77% to 6.98%)
  $ 237,289     $ 289,881     $ 663,847  
-maturing in 2008 paying interest monthly at a floating rate of 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at March 31, 2007 was 5.32%; March 31, 2006 – 4.83%)
    250,000       250,000       250,000  
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 4 basis points (3-month LIBOR rate at March 31, 2007 was 5.35%; March 31, 2006 – 5.00%)
    6,000       6,000       7,250  
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 2 basis points (1-month LIBOR rate at March 31, 2007 was 5.32%; March 31, 2006 – 4.83%)
    5,000       5,000       5,000  
 
                       
Advances under revolving lines of credit maturing in 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at March 31, 2007 was 5.32%; March 31, 2006 – 4.83%)
    410,737       426,687       279,626  
 
                       
Advances under revolving lines of credit with maturities until 2008 paying interest quarterly at a floating rate of 0.35% (March 31, 2006 — 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at March 31, 2007 was 5.35%; March 31, 2006 – 5.00%)
    69,996       69,994       94,989  
 
                       
Term notes with maturities ranging from 2007 through 2011 paying interest semiannually at fixed rates ranging from 3.35% to 5.65% (March 31, 2006 – 2.70% to 6.80%)
    2,014,533       2,014,928       2,461,984  
 
                       
Term notes with maturities until 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% (March 31, 2006 – 0.35%) over the 3-month LIBOR rate (3-month LIBOR rate at March 31, 2007 was 5.35 %; March 31, 2006 – 5.00%)
    349,399       349,295       149,682  
 
                       
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 March 31, 2007 was 4.62%; March 31, 2006 – 4.85%)
    8,833       10,428       12,127  
 
                       
Secured borrowings with maturities until 2015 paying interest monthly at fixed rates ranging from 3.86% to 7.12% (March 31, 2006 – 2.48% to 7.12%)
    2,611,445       2,695,916       3,266,705  
 
                       
Secured borrowings with maturities until 2015 paying interest monthly at rates ranging from 0.10% to 3.50% over the 1-month LIBOR rate (1-month LIBOR rate at March 31, 2007 was 5.32%; March 31, 2006 – 4.83%)
    1,495,005       1,708,650       1,854,642  
 
                       
Notes linked to the S&P 500 Index maturing in 2008
    36,342       36,112       33,997  
 
                       
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
    21,474       21,583       597  
 
 
  $ 8,368,825     $ 8,737,246     $ 9,933,218  
 
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 $23 million and $186 million, respectively, at March 31, 2007 (December 31, 2006 — $21 million and $181 million; March 31, 2006 — $23 million and $183 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
At March 31, 2007, the Corporation recorded a liability of $774 thousand (December 31, 2006 — $658 thousand; March 31, 2006 — $688 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under standby 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 standby letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in standby 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 standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries which aggregated to $3.2 billion at March 31, 2007 (December 31, 2006 — $3.3 billion and March 31, 2006 — $4.1 billion). In addition, at March 31, 2007, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2006 and March 31, 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 March 31,
(In thousands)   2007   2006
 
Credit card fees and discounts
  $ 23,524     $ 22,573  
Debit card fees
    16,101       14,919  
Insurance fees
    12,949       12,141  
Processing fees
    12,112       10,279  
Net mortgage servicing fees
    6,436       2,952  
Other
    16,727       17,482  
 
Total
  $ 87,849     $ 80,346  
 

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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, for the quarter ended March 31, 2007 was as follows:
         
(In millions)    
 
Balance as of January 1, 2007
  $ 20.4  
Additions for tax positions of current period
    1.7  
 
Balance as of March 31, 2007
  $ 22.1  
 
As of March 31, 2007, the related accrued interest approximated $2.4 million. Management has determined that as of March 31, 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 $19.2 million.
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 March 31, 2007, the following years remain subject to examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto Rico – 2003 through 2006. The U.S. Internal Revenue Service (“IRS”) commenced 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 March 31, 2007, the IRS has not proposed any adjustment as a result of the audit. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the 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 March 31, 2007 under the original terms of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury

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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 as of March 31, 2007:
                                         
(Not in thousands)
            Weighted Average   Weighted Average           Weighted Average
Exercise Price   Options   Exercise Price of   Remaining Life of   Options   Exercise Price of
Range per Share   Outstanding   Options Outstanding   Options Outstanding   Exercisable   Options Exercisable
                    (in years)   (fully vested)        
 
$14.39 - $18.50
    1,524,788     $ 15.81       5.49       1,388,460     $ 15.71  
$19.25 - $27.20
    1,604,989     $ 25.27       7.25       1,016,366     $ 25.05  
 
$14.39 - $27.20
    3,129,777     $ 20.66       6.39       2,404,826     $ 19.66  
 
The aggregate intrinsic value of options outstanding and options exercisable as of March 31, 2007 was $13.4 million and $1.4 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
    (1,679 )     27.20  
Expired
    (3,279 )     24.05  
 
Outstanding at March 31, 2007
    3,129,777     $ 20.66  
 
The stock options exercisable at March 31, 2007 totaled 2,404,826 (March 31, 2006 – 1,964,536). The total intrinsic value of options exercised during the quarter ended March 31, 2007 was $28 thousand (March 31, 2006 — $42 thousand).
There were no new grants issued by the Corporation under the Stock Option Plan during 2006 and 2007.
The cash received from the stock options exercised during the quarter ended March 31, 2007 amounted to $159 thousand.
The Corporation recognized $0.5 million in stock option expense for the quarter ended March 31, 2007 (March 31, 2006 — $0.8 million), with a tax benefit of $0.2 million (March 31, 2006 — $0.3 million). The total unrecognized compensation cost at March 31, 2007 related to non-vested stock option awards was $3.0 million and is expected to be recognized over a weighted-average period of 1.5 years.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance

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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 March 31, 2007, no shares have been granted under this plan.
The following table summarizes the restricted stock activity under the Incentive Plan and related information:
                 
    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
    (588 )     19.95  
 
Non-vested at March 31, 2007
    541,411     $ 22.81  
 
During the quarter ended March 31, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (March 31, 2006 – 444,036).
During the quarter ended March 31, 2007, the Corporation recognized $1.4 million (March 31, 2006 - $1.3 million) of restricted stock expense related to management incentive awards, with an income tax benefit of $0.5 million (March 31, 2006 — $0.5 million). The total unrecognized compensation cost related to non-vested restricted stock awards was $5.1 million and is expected to be recognized over a weighted-average period of 3.0 years.
A vesting of restricted stocks triggered a shortfall of $0.2 million for the quarter ended March 31, 2007, which was recorded as an additional income tax expense.

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The following table summarizes the restricted stock under Incentive Award to members of the Board of Directors and related information:
                 
    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
    2,612       18.66  
Vested
    (15,011 )     22.01  
Forfeited
           
 
Non-vested at March 31, 2007
    64,215     $ 21.88  
 
During the quarter ended March 31, 2007, the Corporation granted 2,612 (March 31, 2006 – 1,276) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $160 thousand, with a tax benefit of $62 thousand (March 31, 2006 — $150 thousand, with a tax benefit of $59 thousand) 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 ended March 31, 2007 and 2006 were as follows:
                                 
    Pension Plans   Benefit Restoration Plans
    March 31,   March 31,
(In thousands)   2007   2006   2007   2006
 
Service cost
  $ 3,106     $ 3,135     $ 237     $ 262  
Interest cost
    7,973       7,641       420       400  
Expected return on plan assets
    (10,524 )     (9,978 )     (368 )     (264 )
Amortization of prior service cost
    52       44       (13 )     (13 )
Amortization of net loss
          488       248       276  
 
Net periodic cost
    607       1,330       524       661  
Curtailment gain
    (246 )           (258 )      
 
Total cost
  $ 361     $ 1,330     $ 266     $ 661  
 
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 March 31, 2007 disclosures.
For the quarter ended March 31, 2007, contributions made to the pension and restoration plans approximated $1.4 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 ended March 31, 2007 and 2006 were as follows:
                 
    March 31,
(In thousands)   2007   2006
 
Service cost
  $ 578     $ 712  
Interest cost
    1,889       1,927  
Amortization of prior service cost
    (262 )     (262 )
Amortization of net loss
          240  
 
Total net periodic cost
  $ 2,205     $ 2,617  
 
For the quarter ended March 31, 2007, contributions made to the postretirement benefit plan approximated $1.7 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 March 31, 2007 and 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under 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 March 31, 2007 (December 31, 2006 — $346 million; March 31, 2006 — $317 million). During the three months ended March 31, 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 quarter ended March 31, 2007.

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Note 19 — Earnings per Common Share
The computation of earnings per common share (“EPS”) follows:
                 
    Quarter ended
    March 31,
(In thousands, except share information)   2007   2006
 
Net income
  $ 118,647     $ 118,503  
Less: Preferred stock dividends
    2,978       2,978  
 
 
               
Net income applicable to common stock
  $ 115,669     $ 115,525  
 
 
               
Average common shares outstanding
    279,046,312       278,085,861  
Average potential common shares
    147,512       329,676  
 
Average common shares outstanding – assuming dilution
    279,193,824       278,415,537  
 
 
               
Basic and diluted EPS
  $ 0.41     $ 0.42  
 
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 ended March 31, 2007, there were 1,761,311 weighted average antidilutive stock options outstanding (March 31, 2006 – 1,898,838). 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.
         
    Quarter ended
(In thousands)   March 31, 2006
 
Net cash used in operating activities
  ($ 80,906 )
Net cash (used in) provided by investing activities
    (104,732 )
Net cash provided by financing activities
    197,552  
 
Net increase (decrease) in cash and due from banks
  $ 11,914  
 
Loans receivable transferred to other real estate and other property for the three months ended March 31, 2007 amounted to $38 million and $9 million, respectively (March 31, 2006 — $36 million and $7 million, respectively).
During the three months ended March 31, 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 $343 million and $157 million in non-cash reclassifications of loans held-for-sale securitized into trading securities for the three months ended March 31, 2007 and 2006, respectively.

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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.
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 73% of the Corporation’s net income for the quarter ended March 31, 2007, and 54% of its total assets as of March 31, 2007, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
 
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses

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      of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.
Popular North America:
Popular North America, which includes the Corporation’s U.S. operations, consists of:
    BPNA, including its subsidiaries E-LOAN, Popular Leasing, U.S.A. and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Leasing, U.S.A. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.
 
    PFH, 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 March 31, 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 March 31, 2007
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 232,224     $ 132,095     ($ 233 )         $ 364,086  
Provision for loan losses
    46,998       49,341                   96,339  
Non-interest income
    116,752       (18,306 )     59,622     ($ 34,333 )     123,735  
Amortization of intangibles
    662       2,073       248             2,983  
Depreciation expense
    10,724       4,636       4,062       (18 )     19,404  
Other operating expenses
    173,828       156,655       43,898       (34,364 )     340,017  
Income tax
    30,495       (35,024 )     3,935       19       (575 )
 
Net income (loss)
  $ 86,269       ($63,892 )   $ 7,246     $ 30     $ 29,653  
 
Segment Assets
  $ 25,644,976     $ 21,180,850     $ 230,080     ($ 63,735 )   $ 46,992,171  
 
For the quarter ended March 31, 2007
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 364,086     ($ 9,403 )   $ 299     $ 354,982  
Provision for loan losses
    96,339       7             96,346  
Non-interest income
    123,735       129,663       (1,222 )     252,176  
Amortization of intangibles
    2,983                   2,983  
Depreciation expense
    19,404       588             19,992  
Other operating expenses
    340,017       13,943       (1,607 )     352,353  
Income tax
    (575 )     17,136       276       16,837  
 
Net income (loss)
  $ 29,653     $ 88,586     $ 408     $ 118,647  
 
Segment Assets
  $ 46,992,171     $ 6,436,771     ($ 6,264,278 )   $ 47,164,664  
 

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                          2006                                  
For the quarter ended March 31, 2006
                                         
                                    Total
    Banco Popular de   Popular North           Intersegment   Reportable
(In thousands)   Puerto Rico   America   EVERTEC   Eliminations   Segments
           
Net interest income (loss)
  $ 226,303     $ 143,179     ($ 427 )         $ 369,055  
Provision for loan losses
    23,789       25,158                   48,947  
Non-interest income
    115,085       74,117       54,888     ($ 33,930 )     210,160  
Amortization of intangibles
    633       1,983       105             2,721  
Depreciation expense
    11,030       5,758       4,106       (19 )     20,875  
Other operating expenses
    169,225       154,547       42,457       (33,944 )     332,285  
Impact of change in fiscal period
    (2,072 )     6,181                   4,109  
Income tax
    38,653       8,968       2,718       13       50,352  
           
Net income (loss)
  $ 100,130     $ 14,701     $ 5,075     $ 20     $ 119,926  
 
Segment Assets
  $ 26,847,081     $ 21,289,438     $ 201,204     ($ 111,962 )   $ 48,225,761  
 
For the quarter ended March 31, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
         
Net interest income (loss)
  $ 369,055     ($ 9,591 )   $ 300     $ 359,764  
Provision for loan losses
    48,947                   48,947  
Non-interest income
    210,160       18,989       (316 )     228,833  
Amortization of intangibles
    2,721                   2,721  
Depreciation expense
    20,875       564             21,439  
Other operating expenses
    332,285       17,225       (157 )     349,353  
Impact of change in fiscal period
    4,109       3,495       2,137       9,741  
Income tax
    50,352       (11,592 )     (867 )     37,893  
         
Net income (loss)
  $ 119,926     ($ 294 )   ($ 1,129 )   $ 118,503  
 
Segment Assets
  $ 48,225,761     $ 6,432,286     ($ 6,066,344 )   $ 48,591,703  
 
During the three months ended March 31, 2007, the holding companies realized gains on sale of securities (before tax) of approximately $118.7 million, compared with gains on sale of securities, mainly marketable equity securities (before tax) of approximately $13.6 million in the quarter ended March 31, 2006. These net gains are included in “non-interest income” within the “Corporate” group.

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Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
                          2007                                  
For the quarter ended March 31, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
           
Net interest income
  $ 90,428     $ 139,410     $ 2,247     $ 139     $ 232,224  
Provision for loan losses
    12,933       34,065                   46,998  
Non-interest income
    23,107       73,894       19,851       (100 )     116,752  
Amortization of intangibles
    220       333       109             662  
Depreciation expense
    3,804       6,645       275             10,724  
Other operating expenses
    44,305       113,449       16,174       (100 )     173,828  
Income tax
    14,893       14,019       1,525       58       30,495  
           
Net income
  $ 37,380     $ 44,793     $ 4,015     $ 81     $ 86,269  
 
Segment Assets
  $ 11,292,949     $ 18,134,909     $ 596,197     ($ 4,379,079 )   $ 25,644,976  
 
                          2006                                  
For the quarter ended March 31, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
           
Net interest income
  $ 81,153     $ 142,946     $ 2,723     ($ 519 )   $ 226,303  
Provision for loan losses
    5,655       18,134                   23,789  
Non-interest income
    23,139       71,487       21,980       (1,521 )     115,085  
Amortization of intangibles
    218       338       77             633  
Depreciation expense
    3,454       7,301       275             11,030  
Other operating expenses
    43,673       110,216       15,629       (293 )     169,225  
Impact of change in fiscal period
                (2,072 )           (2,072 )
Income tax
    16,073       19,353       3,712       (485 )     38,653  
           
Net income (loss)
  $ 35,219     $ 59,091     $ 7,082     ($ 1,262 )   $ 100,130  
 
Segment Assets
  $ 10,750,862     $ 18,372,313     $ 1,025,734     ($ 3,301,828 )   $ 26,847,081  
 

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Additional disclosures with respect to the Popular North America reportable segment are as follows:
                          2007                                  
For the quarter ended March 31, 2007
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
         
Net interest income
  $ 89,784     $ 41,654     $ 657     $ 132,095  
Provision for loan losses
    10,433       38,908             49,341  
Non-interest income
    56,942       (62,354 )     (12,894 )     (18,306 )
Amortization of intangibles
    2,073                   2,073  
Depreciation expense
    4,023       613             4,636  
Other operating expenses
    105,687       51,320       (352 )     156,655  
Income tax
    8,997       (39,156 )     (4,865 )     (35,024 )
         
Net income (loss)
  $ 15,513     ($ 72,385 )   ($ 7,020 )   ($ 63,892 )
 
Segment Assets
  $ 12,862,809     $ 8,408,750     ($ 90,709 )   $ 21,180,850  
 
                          2006                                  
For the quarter ended March 31, 2006
                                 
    Banco Popular   Popular Financial           Total Popular
(In thousands)   North America   Holdings   Eliminations   North America
         
Net interest income
  $ 97,308     $ 45,871           $ 143,179  
Provision for loan losses
    10,492       14,666             25,158  
Non-interest income
    53,026       21,154     ($ 63 )     74,117  
Amortization of intangibles
    1,894       89             1,983  
Depreciation expense
    4,199       1,559             5,758  
Other operating expenses
    105,906       48,641             154,547  
Impact of change in fiscal period
          6,181             6,181  
Income tax
    10,551       (1,561 )     (22 )     8,968  
         
Net income (loss)
  $ 17,292     ($ 2,550 )   ($ 41 )   $ 14,701  
 
Segment Assets
  $ 12,504,608     $ 8,848,496     ($ 63,666 )   $ 21,289,438  
 
     A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:
                 
INTERSEGMENT REVENUES*   Quarter ended
    March 31,   March 31,
(In thousands)   2007   2006
 
Banco Popular dePuerto Rico:
               
P.R. Commercial Banking
  $ 6     ($ 304 )
P.R. Consumer and Retail Banking
    (15 )     (668 )
P.R. Other Financial Services
    (129 )     (78 )
Popular North America:
               
Banco Popular North America
    (27 )     934  
Popular Financial Holdings
           
EVERTEC
    (34,168 )     (33,814 )
     
Total
  ($ 34,333 )   ($ 33,930 )
 
*   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
    March 31,   March 31,
(In thousands)   2007   2006
 
Revenues**
               
Puerto Rico
  $ 477,985     $ 361,582  
United States
    107,239       206,802  
Other
    21,934       20,213  
     
Total consolidated revenues
  $ 607,158     $ 588,597  
 
         
**  Total revenues include net interest income, service charges on deposit accounts, other service fees, net (loss) gain 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.
                         
    March 31,   December 31,   March 31,
(In thousands)   2007   2006   2006
       
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 24,607,654     $ 24,621,684     $ 25,997,603  
Loans
    14,906,570       14,735,092       14,105,008  
Deposits
    13,602,697       13,504,860       13,794,832  
Mainland United States
                       
Total assets
  $ 21,330,513     $ 21,570,276     $ 21,445,054  
Loans
    17,319,205       17,363,382       16,737,800  
Deposits
    9,947,205       9,735,264       8,447,759  
Other
                       
Total assets
  $ 1,226,497     $ 1,212,027     $ 1,149,046  
Loans
    654,841       638,465       587,577  
Deposits *
    1,188,151       1,198,207       1,169,221  
       
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
Note 22 – Restructuring Costs
     During the first quarter of 2007, the Corporation recorded pre-tax restructuring costs in the Popular North America segment related to the Restructuring Plan as follows:
         
    First Quarter
(In thousands)   2007
 
Personnel costs
  $ 8,158 (a)
Net occupancy expenses
    4,413 (b)
Equipment expenses
    281  
Professional fees
    1,947 (c)
Communications
    67  
Other operating expenses
    269  
 
Total
  $ 15,135  
   
(a)   Severance, stay bonuses, related taxes, and other employee benefits
 
(b)   Lease terminations
 
(c)   Outplacement and professional service contract terminations

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Of the above restructuring costs, approximately $7.7 million were recognized as a liability as of March 31, 2007, and are expected to be paid out in the second and third quarter of 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 an impairment in goodwill of $14.2 million.
As of March 31, 2007, it is anticipated that the Restructuring Plan will result in estimated combined charges of approximately $36.6 million, broken out as follows:
                         
    Impairments        
    on goodwill        
    and long-lived        
(In thousands)   assets   Restructuring costs   Total
       
Quarter ended:
                       
December 31, 2006
  $ 21,471           $ 21,471  
March 31, 2007
        $ 15,135       15,135  
June 30, 2007
                 
September 30, 2007
                 
       
Total
  $ 21,471     $ 15,135     $ 36,606  
       
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 March 31, 2007, December 31, 2006 and March 31, 2006, and the results of their operations and cash flows for the periods ended March 31, 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., 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.

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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 certain minimum capital levels. At March 31, 2007, BPPR could have declared a dividend of approximately $164 million without the approval of the Federal Reserve Board (December 31, 2006 — $208 million; March 31, 2006 — $139 million) and BPNA could have declared a dividend of $191 million (December 31, 2006- $246 million; March 31, 2006 — $173 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 based on the growth it is undertaking in the U.S. mainland. 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
MARCH 31, 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
  $ 1,439     $ 97     $ 356     $ 838,907     ($ 87,249 )   $ 753,550  
Money market investments
    196,500       1,500       235       752,434       (310,461 )     640,208  
Investment securities available-for-sale, at fair value
    7,608       60,749               9,422,482       (12,478 )     9,478,361  
Investment securities held-to-maturity, at amortized cost
    430,000       2,153               85,330       (430,000 )     87,483  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       126,133               152,951  
Trading account securities, at fair value
                            648,150               648,150  
Investment in subsidiaries
    3,186,977       1,065,820       2,001,751       753,343       (7,007,891 )        
Loans held-for-sale, at lower of cost or market value
                            1,049,230               1,049,230  
     
Loans held-in-portfolio
    380,491               2,950,021       35,729,280       (6,917,469 )     32,142,323  
Less – Unearned income
                            310,936               310,936  
Allowance for loan losses
    40                       541,708               541,748  
       
 
    380,451               2,950,021       34,876,636       (6,917,469 )     31,289,639  
 
Premises and equipment, net
    25,226               134       565,797       (149 )     591,008  
Other real estate
                            89,479               89,479  
Accrued income receivable
    376       49       11,095       296,363       (23,092 )     284,791  
Other assets
    62,951       59,576       45,532       1,211,228       (53,243 )     1,326,044  
Goodwill
                            668,616               668,616  
Other intangible assets
    554                       104,600               105,154  
       
 
  $ 4,306,507     $ 1,189,945     $ 5,021,516     $ 51,488,728     ($ 14,842,032 )   $ 47,164,664  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,264,637     ($ 87,191 )   $ 4,177,446  
Interest bearing
                            20,798,968       (238,361 )     20,560,607  
       
 
                            25,063,605       (325,552 )     24,738,053  
 
                                               
Federal funds purchased and assets sold under agreements to repurchase
                  $ 126,115       6,206,402       (60,100 )     6,272,417  
Other short-term borrowings
                    919,525       4,505,077       (2,222,630 )     3,201,972  
Notes payable
  $ 484,637               2,835,305       9,714,966       (4,666,083 )     8,368,825  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    85,562     $ 93       90,372       761,199       (90,247 )     846,979  
             
 
    570,199       93       3,971,317       46,681,249       (7,794,612 )     43,428,246  
 
                                               
Minority interest in consolidated subsidiaries
                            110               110  
     
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,754,694       3,961       2       70,421       (74,384 )     1,754,694  
Surplus
    525,072       851,193       734,964       3,161,224       (4,742,380 )     530,073  
Retained earnings
    1,678,827       387,292       331,808       1,753,773       (2,477,874 )     1,673,826  
Accumulated other comprehensive loss, net of tax
    (203,935 )     (52,594 )     (16,575 )     (177,674 )     246,843       (203,935 )
Treasury stock, at cost
    (205,225 )                     (375 )     375       (205,225 )
         
 
    3,736,308       1,189,852       1,050,199       4,807,369       (7,047,420 )     3,736,308  
 
 
  $ 4,306,507     $ 1,189,945     $ 5,021,516     $ 51,488,728       ($14,842,032 )   $ 47,164,664  
 

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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
MARCH 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
  $ 975     $ 7,415     $ 439     $ 905,160     ($ 53,383 )   $ 860,606  
Money market investments
    314,600       300       183       1,170,659       (495,827 )     989,915  
Investment securities available-for-sale, at fair value
    11,319       63,986               11,441,847       (6,484 )     11,510,668  
Investment securities held-to-maturity, at amortized cost
    430,000       2,167               342,218       (430,000 )     344,385  
Other investment securities, at lower of cost or realizable value
    145,039       5,001       13,142       141,427               304,609  
Trading account securities, at fair value
                            510,099       (487 )     509,612  
Investment in subsidiaries
    3,047,205       1,166,381       2,085,191       818,175       (7,116,952 )        
Loans held-for-sale, at lower of cost or market value
                            535,719               535,719  
 
Loans held-in-portfolio
    47,465               2,712,867       34,103,750       (5,668,040 )     31,196,042  
Less – Unearned income
                            301,376               301,376  
Allowance for loan losses
    40                       468,281               468,321  
 
 
    47,425               2,712,867       33,334,093       (5,668,040 )     30,426,345  
 
Premises and equipment, net
    26,231                       574,783       (222 )     600,792  
Other real estate
    99                       82,253               82,352  
Accrued income receivable
    416       39       11,410       284,689       (21,934 )     274,620  
Other assets
    56,541       43,409       28,025       1,267,580       (6,893 )     1,388,662  
Goodwill
                            655,743               655,743  
Other intangible assets
    554                       107,121               107,675  
 
 
  $ 4,080,404     $ 1,288,698     $ 4,851,257     $ 52,171,566     ($ 13,800,222 )   $ 48,591,703  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,507,290     ($ 53,325 )   $ 4,453,965  
Interest bearing
                            19,059,837       (101,990 )     18,957,847  
 
 
                            23,567,127       (155,315 )     23,411,812  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 33,000       8,662,217       (379,837 )     8,315,380  
Other short-term borrowings
          $ 31,489       541,027       3,120,849       (1,047,844 )     2,645,521  
Notes payable
  $ 532,736               3,057,588       10,932,175       (4,589,281 )     9,933,218  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    60,111       1,188       62,859       713,895       (39,951 )     798,102  
 
 
    592,847       32,677       3,694,474       47,426,263       (6,642,228 )     45,104,033  
 
Minority interest in consolidated subsidiaries
                            113               113  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,748,983       3,961       2       70,385       (74,348 )     1,748,983  
Surplus
    484,252       815,193       734,964       3,131,508       (4,679,054 )     486,863  
Retained earnings
    1,529,245       498,823       452,861       1,780,841       (2,735,136 )     1,526,634  
Accumulated other comprehensive loss, net of tax
    (255,265 )     (61,956 )     (31,044 )     (233,639 )     326,639       (255,265 )
Treasury stock, at cost
    (206,533 )                     (3,905 )     3,905       (206,533 )
 
 
    3,487,557       1,256,021       1,156,783       4,745,190       (7,157,994 )     3,487,557  
 
 
  $ 4,080,404     $ 1,288,698     $ 4,851,257     $ 52,171,566     ($ 13,800,222 )   $ 48,591,703  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 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
  $ 5,381             $ 37,755     $ 681,687     ($ 80,709 )   $ 644,114  
Money market investments
    147     $ 17       1       6,326       (1,882 )     4,609  
Investment securities
    7,815       375       223       114,286       (7,208 )     115,491  
Trading account securities
                            9,381               9,381  
     
 
    13,343       392       37,979       811,680       (89,799 )     773,595  
 
INTEREST EXPENSE:
                                               
Deposits
                            173,662       (560 )     173,102  
Short-term borrowings
    1,887               14,468       138,705       (30,251 )     124,809  
Long-term debt
    8,366               36,852       137,364       (61,880 )     120,702  
 
 
    10,253               51,320       449,731       (92,691 )     418,613  
 
Net interest income (loss)
    3,090       392       (13,341 )     361,949       2,892       354,982  
Provision for loan losses
    7                       96,339               96,346  
 
Net interest income (loss) after provision for loan losses
    3,083       392       (13,341 )     265,610       2,892       258,636  
Service charges on deposit accounts
                            48,471               48,471  
Other service fees
                            115,311       (27,462 )     87,849  
Net gain (loss) on sale and valuation adjustment of investment securities
    118,724       (7,600 )             (29,353 )             81,771  
Trading account loss
                            (14,164 )             (14,164 )
Gain on sale of loans and valuation adjustments on loans held-for-sale
                            15,975       (12,541 )     3,434  
Other operating income (loss)
    9,233       10,009       (527 )     34,986       (8,886 )     44,815  
 
 
    131,040       2,801       (13,868 )     436,836       (45,997 )     510,812  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    6,100       96               130,725       (442 )     136,479  
Pension, profit sharing and other benefits
    2,040       20               39,967       (131 )     41,896  
 
 
    8,140       116               170,692       (573 )     178,375  
Net occupancy expenses
    553       7       1       31,453               32,014  
Equipment expenses
    288               2       32,155       (49 )     32,396  
Other taxes
    375                       11,472               11,847  
Professional fees
    2,482       11       64       68,541       (35,111 )     35,987  
Communications
    142                       16,963       (43 )     17,062  
Business promotion
    282                       28,430       (340 )     28,372  
Printing and supplies
    18                       4,258               4,276  
Other operating expenses
    (12,840 )     (100 )     116       45,224       (384 )     32,016  
Amortization of intangibles
                            2,983               2,983  
 
 
    (560 )     34       183       412,171       (36,500 )     375,328  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    131,600       2,767       (14,051 )     24,665       (9,497 )     135,484  
Income tax
    27,861               (4,918 )     (2,058 )     (4,048 )     16,837  
 
Income (loss) before equity in earnings of subsidiaries
    103,739       2,767       (9,133 )     26,723       (5,449 )     118,647  
Equity in earnings of subsidiaries
    14,908       (74,991 )     (66,466 )     (76,836 )     203,385          
 
NET INCOME (LOSS)
  $ 118,647     ($ 72,224 )   ($ 75,599 )   ($ 50,113 )   $ 197,936     $ 118,647  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 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
  $ 2,664             $ 36,901     $ 620,050       ($67,780 )   $ 591,835  
Money market investments
    1,072     $ 66       38       10,416       (3,610 )     7,982  
Investment securities
    7,609       313       223       132,368       (6,980 )     133,533  
Trading account securities
                            8,860               8,860  
 
 
    11,345       379       37,162       771,694       (78,370 )     742,210  
 
INTEREST EXPENSE:
                                               
Deposits
                            125,438       (1,027 )     124,411  
Short-term borrowings
    54       446       6,477       132,338       (14,512 )     124,803  
Long-term debt
    8,983               42,967       146,160       (64,878 )     133,232  
 
 
    9,037       446       49,444       403,936       (80,417 )     382,446  
 
Net interest income (loss)
    2,308       (67 )     (12,282 )     367,758       2,047       359,764  
Provision for loan losses
                            48,947               48,947  
 
Net interest income (loss) after provision for loan losses
    2,308       (67 )     (12,282 )     318,811       2,047       310,817  
Service charges on deposit accounts
                            47,469               47,469  
Other service fees
                            108,064       (27,718 )     80,346  
Net gain (loss) on sale and valuation adjustments of investment securities
    152       13,490               (1,714 )     412       12,340  
Trading account loss
                            (647 )     12,122       11,475  
Gain on sale of loans
                            47,054       207       47,261  
Other operating income
    2,842       2,893               32,853       (8,646 )     29,942  
 
 
    5,302       16,316       (12,282 )     551,890       (21,576 )     539,650  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    5,892       93               129,818       (271 )     135,532  
Pension, profit sharing and other benefits
    1,629       20               40,950       (79 )     42,520  
 
 
    7,521       113               170,768       (350 )     178,052  
Net occupancy expenses
    603       4               28,031               28,638  
Equipment expenses
    394       1       4       32,813       (15 )     33,197  
Other taxes
    266                       9,975               10,241  
Professional fees
    4,428       11       38       66,333       (33,732 )     37,078  
Communications
    137                       17,182       (19 )     17,300  
Business promotion
    2,463                       30,360               32,823  
Printing and supplies
    27                       4,605               4,632  
Other operating expenses
    (14,920 )     (104 )     107       44,072       (324 )     28,831  
Impact of change in fiscal period at certain subsidiaries
                    3,495       4,109       2,137       9,741  
Amortization of intangibles
                            2,721               2,721  
 
 
    919       25       3,644       410,969       (32,303 )     383,254  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    4,383       16,291       (15,926 )     140,921       10,727       156,396  
Income tax
    777               (5,574 )     40,617       2,073       37,893  
 
Income (loss) before equity in earnings of subsidiaries
    3,606       16,291       (10,352 )     100,304       8,654       118,503  
Equity in earnings of subsidiaries
    114,897       1,991       11,942       7,768       (136,598 )        
 
NET INCOME
  $ 118,503     $ 18,282     $ 1,590     $ 108,072       ($127,944 )   $ 118,503  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 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)
  $ 118,647       ($72,224 )     ($75,599 )     ($50,113 )   $ 197,936     $ 118,647  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (14,908 )     74,991       66,466       76,836       (203,385 )        
Depreciation and amortization of premises and equipment
    588               1       19,423       (18 )     19,994  
Provision for loan losses
    7                       96,339               96,346  
Amortization of intangibles
                            2,983               2,983  
Amortization and fair value adjustment of servicing assets
                            10,229               10,229  
Net (gain) loss on sale and valuation adjustment of investment securities
    (118,724 )     7,600               29,353               (81,771 )
Net gain on disposition of premises and equipment
                            (3,677 )             (3,677 )
Net gain on sale of loans
                            (15,975 )     12,541       (3,434 )
Net amortization of premiums and accretion of discounts on investments
            3               6,337       (9 )     6,331  
Net amortization of premiums and deferred loan origination fees and costs
                            26,198       (2,268 )     23,930  
Earnings from investments under the equity method
    (3,986 )     (10,009 )     527       (347 )     (414 )     (14,229 )
Stock options expense
    217                       273               490  
Deferred income taxes
    1,272               (4,918 )     (15,845 )     97       (19,394 )
Net disbursements on loans held-for-sale
                            (1,685,149 )             (1,685,149 )
Acquisitions of loans held-for-sale
                            (282,110 )             (282,110 )
Proceeds from sale of loans held-for-sale
                            1,280,146               1,280,146  
Net decrease in trading securities
                            346,150               346,150  
Net decrease (increase) in accrued income receivable
    682       (37 )     485       (32,274 )     (5,407 )     (36,551 )
Net decrease in other assets
    2,503       6       822       26,216       5,613       35,160  
Net (decrease) increase in interest payable
    (88 )             6,052       (11,686 )     5,407       (315 )
Net increase in postretirement benefit obligation
                            728               728  
Net increase (decrease) in other liabilities
    26,561       33       4,844       (20,136 )     (10,094 )     1,208  
 
Total adjustments
    (105,876 )     72,587       74,279       (145,988 )     (197,937 )     (302,935 )
 
Net cash provided by (used in) operating activities
    12,771       363       (1,320 )     (196,101 )     (1 )     (184,288 )
 
Cash flows from investing activities:
                                               
Net (increase) decrease in money market investments
    (187,800 )     (425 )     2,317       (177,573 )     91,417       (272,064 )
Purchases of investment securities:
                                               
Available-for-sale
                            (283,456 )     255,270       (28,186 )
Held-to-maturity
    (426,756 )                     (5,243,710 )             (5,670,466 )
Other
                    (928 )     (5,816 )             (6,744 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            645,202       (245,998 )     399,204  
Held-to-maturity
    420,000                       5,254,358               5,674,358  
Other
                            2,454               2,454  
Proceeds from sale of other investment securities
    245,484       2       865       1               246,352  
Net repayments (disbursements) on loans
    87,151               8,538       (406,936 )     361,740       50,493  
Proceeds from sale of loans
                            962           962  
Acquisition of loan portfolios
                            (784 )           (784 )
Capital contribution to subsidiary
                            (5,963 )     5,963          
Assets acquired, net of cash
                            (1,823 )             (1,823 )
Acquisition of premises and equipment
    (186 )                     (25,931 )             (26,117 )
Proceeds from sale of premises and equipment
                            14,307               14,307  
Proceeds from sale of foreclosed assets
                            41,835               41,835  
Dividends received from subsidiary
    44,700                       (44,700 )                
 
Net cash provided by (used in) investing activities
    182,593       (423 )     10,792       (237,573 )     468,392       423,781  
 
Cash flows from financing activities:
                                               
Net increase in deposits
                            490,446       (192,574 )     297,872  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
                    (33,714 )     466,986       76,700       509,972  
Net (decrease) increase in other short-term borrowings
    (150,787 )             24,566       (792,518 )     86,586       (832,153 )
Payments of notes payable
                    (3,720 )     (676,120 )     263,568       (416,272 )
Proceeds from issuance of notes payable
    99               3,430       762,354       (718,164 )     47,719  
Dividends paid
    (47,591 )                                     (47,591 )
Proceeds from issuance of common stock
    4,362                                       4,362  
Treasury stock acquired
    (10 )                                     (10 )
Capital contribution from parent
                            5,963       (5,963 )        
 
Net cash (used in) provided by financing activities
    (193,927 )             (9,438 )     257,111       (489,847 )     (436,101 )
 
Net increase (decrease) in cash and due from banks
    1,437       (60 )     34       (176,563 )     (21,456 )     (196,608 )
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
  $ 1,439     $ 97     $ 356     $ 838,907   $   (87,249 )   $ 753,550  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 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
  $ 118,503     $ 18,282     $ 1,590     $ 108,072       ($127,944 )   $ 118,503  
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
    118,503       18,282       3,861       110,710       (126,724 )     124,632  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (114,897 )     (1,991 )     (11,942 )     (7,768 )     136,598          
Depreciation and amortization of premises and equipment
    564                       20,891       (18 )     21,437  
Provision for loan losses
                            48,947               48,947  
Amortization of intangibles
                            2,721               2,721  
Amortization of servicing assets
                            13,510       (9 )     13,501  
Net (gain) loss on sale and valuation adjustment of investment securities
    (152 )     (13,490 )             1,714       (412 )     (12,340 )
Net gain on disposition of premises and equipment
                            (1,512 )             (1,512 )
Net gain on sale of loans
                            (47,054 )     (207 )     (47,261 )
Net amortization of premiums and accretion of discounts on investments
    (133 )     3               7,208       (66 )     7,012  
Net amortization of premiums and deferred loan origination fees and costs
    (23 )                     33,523       (1,613 )     31,887  
Earnings from investments under the equity method
    (792 )     (2,881 )             (193 )     (395 )     (4,261 )
Stock options expense
    187                       613               800  
Deferred income taxes
                    (3,075 )     (4,409 )     2,073       (5,411 )
Net disbursements on loans held-for-sale
                            (1,923,081 )             (1,923,081 )
Acquisitions of loans held-for-sale
                            (447,046 )             (447,046 )
Proceeds from sale of loans held-for-sale
                            2,166,951               2,166,951  
Net decrease in trading securities
                            835,124               835,124  
Net decrease (increase) in accrued income receivable
    115       (6 )     1,133       (29,449 )     (2,382 )     (30,589 )
Net (increase) decrease in other assets
    (11,221 )     (1 )     551       (8,753 )     996       (18,428 )
Net increase in interest payable
    264       69       18,188       2,959       2,369       23,849  
Net increase in postretirement benefit obligation
                            1,585               1,585  
Net increase (decrease) in other liabilities
    9,725       485       (1,262 )     (6,827 )     1,165       3,286  
 
Total adjustments
    (116,363 )     (17,812 )     3,593       659,654       138,099       667,171  
 
Net cash provided by operating activities
    2,140       470       7,454       770,364       11,375       791,803  
 
Cash flows from investing activities:
                                               
 
Net increase in money market investments
    (84,600 )             (37 )     (110,530 )     (45,183 )     (240,350 )
Purchases of investment securities:
                                               
Available-for-sale
            (7,954 )             (273,651 )     105,630       (175,975 )
Held-to-maturity
                            (7,747,198 )             (7,747,198 )
Other
                            (10,580 )             (10,580 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            346,354       (99,299 )     247,055  
Held-to-maturity
                            7,556,192               7,556,192  
Other
    496                       24,578               25,074  
Proceeds from sale of investment securities available for sale
    6,655       27,924               9,315               43,894  
Net (disbursements) repayments  on loans
    (21,789 )             119,522       89,952       13,366       201,051  
Proceeds from sale of loans
                            73,038               73,038  
Acquisition of loan portfolios
                            (141,658 )             (141,658 )
Capital contribution to subsidiary
            (505 )     (797 )     (29,881 )     31,183          
Assets acquired, net of cash
                            (218 )             (218 )
Acquisition of premises and equipment
    (3,769 )                     (35,030 )             (38,799 )
Proceeds from sale of premises and equipment
                            14,452               14,452  
Proceeds from sale of foreclosed assets
                            33,516               33,516  
Dividends received from subsidiary
    104,000                       60,763       (164,763 )        
 
Net cash provided by (used in) investing activities
    993       19,465       118,688       (140,586 )     (159,066 )     (160,506 )
 
Cash flows from financing activities:
                                               
 
Net increase in deposits
                            726,357       43,120       769,477  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
                    (108,700 )     (406,192 )     14,660       (500,232 )
Net (decrease) increase in other short-term borrowings
            (14,623 )     181,925       (534,464 )     205,565       (161,597 )
Payments of notes payable
                    (203,001 )     (1,102,079 )     404,963       (900,117 )
Proceeds from issuance of notes payable
    98               3,547       743,373       (640,766 )     106,252  
Dividends paid to parent company
                            (164,762 )     164,762          
Dividends paid
    (45,768 )                                     (45,768 )

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    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Proceeds from issuance of common stock
    42,816                               167       42,983  
Capital contribution from parent
                            31,184       (31,184 )        
 
Net cash used in financing activities
    (2,854 )     (14,623 )     (126,229 )     (706,583 )     161,287       (689,002 )
 
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
    279       5,312       (9 )     (57,235 )     5,862       (45,791 )
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
  $ 975     $ 7,415     $ 439     $ 905,160       ($53,383 )   $ 860,606  
 

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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. Popular Financial Holdings (“PFH”) offers mortgage and personal loans, 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. 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 main events impacting the financial results for the quarter ended March 31, 2007 included: (1) a one time gain on the sale of certain equity securities, (2) unfavorable adjustments in the value of interest-only securities (also known as residual assets or interests), (3) restructuring charges related to the U.S. operations and (4) an unfavorable lower of cost or market adjustment in the valuation of loans held-for-sale, all of which are described in the MD&A. Table A provides selected financial data and performance metrics for the quarters ended March 31, 2007 and 2006.
Financial highlights for the quarter ended March 31, 2007, compared with the same quarter in 2006, are described below.
    Reduction in net interest income primarily due to a higher cost in funding earning assets. Table B summarizes the principal changes in average earning assets and funding sources and their corresponding yields and costs, on a taxable equivalent basis, for the quarter ended March 31, 2007, compared with the same quarter in 2006.
 
    The provision for loan losses for the quarter ended March 31, 2007, when compared with the same quarter in 2006, reflects higher net charge-offs, mainly in the consumer loan portfolio in Puerto Rico and in the mortgage loan portfolio in the U.S. operations, especially in the subprime market, and growth in the commercial loan portfolio. Also, the level of provision for the quarter ended March 31, 2007, compared with the same quarter in the previous year, reflects current economic conditions and deteriorating credit quality trends, primarily in the subprime mortgage loan sector and in the commercial portfolio, evidenced by an increase in non-performing assets. Refer to the Credit Risk Management and Loan Quality section, including Tables K, L and M, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality metrics.
 
    Non-interest income increased 10% compared with the same quarter in 2006, influenced by the net impact of factors such as:
  o   Recognition of a pre-tax capital gain of $118.7 million on the sale of the Corporation’s shares of common stock of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to Sercotel

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      S.A. de C.V. in March 2007.
  o   Unfavorable valuation adjustments recorded in the first quarter of 2007 of $52.8 million in the fair value of interest-only securities originated by PFH in off-balance sheet securitizations performed in 2005 and 2006. As of March 31, 2007, the aggregate balance of PFH’s interest-only securities recognized in the Corporation’s statement of financial condition was $33 million. The reduction in the value of the interest-only securities since December 31, 2006 was the result of revisions in the discount rate and credit loss assumptions that were incorporated in the internal valuation models as of March 31, 2007 based on recent negative trends in the U.S. subprime market. As indicated in a prior Form 8-K filed in January 2007 and in the Corporation’s 2006 Annual Report to Shareholders incorporated by reference in Popular, Inc.’s Form 10-K, the Corporation exited the wholesale subprime mortgage loan origination business during the first quarter of 2007. In connection with this decision, it shut down the wholesale broker, retail and call center business divisions. Subprime mortgage loan securitizations that resulted in the accounting for interest-only securities involved loans originated through those channels.
 
  o   Unfavorable valuation adjustment recorded in the first quarter of 2007 of $16.9 million in the value of mortgage loans held-for-sale related primarily to the lower of cost or market analysis of the Corporation’s U.S. portfolio. The loan portfolios subject to the valuation adjustment consist principally of subprime mortgage loans originated in the latter part of 2006 and in 2007 by the aforementioned business divisions that were transitionally shut down. The Corporation expects to sell or securitize most of this portfolio in 2007.
    Refer to the Non-Interest Income section of this MD&A for other factors influencing the variance in non-interest income. Also, refer to the Critical Accounting Policies / Estimates section of this MD&A for more detailed information on the valuation of interest-only securities and changes in assumptions.
    Lower operating expenses for the quarter ended March 31, 2007 by $7.9 million, or 2%, compared with the same quarter in 2006. Isolating the restructuring costs incurred in the first quarter of 2007 of $15.1 million, operating expenses decreased by approximately $23 million, or 6%, compared with the same quarter in 2006. This variance was impacted in part by the fact that operating expenses for 2006 included $9.7 million corresponding to the negative results for the month of December 2005 of those subsidiaries that changed the ends of their fiscal year in 2006 to align their year-end closings to December 31st, in line with the year end of the parent holding company. Also, there were lower personnel and business promotion costs in the quarter ended March 31, 2007. Refer to the Operating Expenses section for a breakdown of the restructuring charges by income statement category. Furthermore, refer to the Restructuring Plan section for information on PFH’s restructuring and integration plan.
 
    Total earning assets at March 31, 2007 decreased $1.2 billion, or 3%, compared with March 31, 2006 in part due to the implementation of strategies to reduce the Corporation’s financial leverage by means of loan sales and not reinvesting the proceeds received upon maturity of low yielding investment securities. When compared to December 31, 2006, earning assets increased less than 1%. Refer to the Financial Condition section of this MD&A for descriptive information on the composition of assets, deposits, borrowings and capital of the Corporation.

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TABLE A
Financial Highlights
                                                 
Financial Condition Highlights   At March 31,   Average for the three months
(In thousands)   2007   2006   Variance   2007   2006   Variance
 
Money market investments
  $ 640,208     $ 989,915       ($ 349,707 )   $ 375,516     $ 644,978       ($ 269,462 )
Investment and trading securities
    10,366,945       12,669,274       (2,302,329 )     10,944,249       13,034,368       (2,090,119 )
Loans*
    32,880,617       31,430,385       1,450,232       32,657,846       31,924,429       733,417  
Total earning assets
    43,887,770       45,089,574       (1,201,804 )     43,977,611       45,603,775       (1,626,164 )
Total assets
    47,164,664       48,591,703       (1,427,039 )     47,310,284       48,956,516       (1,646,232 )
Deposits
    24,738,053       23,411,812       1,326,241       24,332,692       22,643,620       1,689,072  
Borrowings
    17,843,214       20,894,119       (3,050,905 )     18,321,696       21,931,525       (3,609,829 )
Stockholders’ equity
    3,736,308       3,487,557       248,751       3,821,808       3,658,269       163,539  
 
                         
Operating Highlights   First Quarter
(In thousands, except per share information)   2007   2006   Variance
 
Net interest income
  $ 354,982     $ 359,764     ($ 4,782 )
Provision for loan losses
    96,346       48,947       47,399  
Non-interest income
    252,176       228,833       23,343  
Operating expenses
    375,328       383,254       (7,926 )
Income tax
    16,837       37,893       (21,056 )
Net income
  $ 118,647     $ 118,503     $ 144  
Net income applicable to common stock
  $ 115,669     $ 115,525     $ 144  
Basic EPS
  $ 0.41     $ 0.42     ($ 0.01 )
Diluted EPS
  $ 0.41     $ 0.42     ($ 0.01 )
 
                 
Selected Statistical Information   First Quarter
    2007   2006
 
Common Stock Data – Market price
               
High
  $ 18.94     $ 21.20  
Low
    15.82       19.54  
End
    16.56       20.76  
Book value per share at period end
    12.72       11.87  
Dividends declared per share
    0.16       0.16  
Dividend payout ratio
    38.57 %     35.62 %
Price/earnings ratio
    13.46 x     11.53 x
 
               
 
 
               
Profitability Ratios – Return on assets
    1.02 %     1.02 %
Return on common equity
    12.91       14.04  
Net interest spread (taxable equivalent)
    2.90       2.99  
Net interest margin (taxable equivalent)
    3.43       3.40  
Effective tax rate
    12.43       24.23  
Overhead ratio**
    34.69       42.92  
Efficiency ratio ***
    71.84       66.51  
 
               
 
 
               
Capitalization Ratios - Equity to assets
    8.08 %     7.47 %
Tangible equity to assets
    6.55       6.01  
Equity to loans
    11.70       11.46  
Internal capital generation
    7.43       8.27  
Tier I capital to risk – adjusted assets
    10.80       11.33  
Total capital to risk – adjusted assets
    12.05       12.59  
Leverage ratio
    8.17       7.62  
 
               
 
*   Includes loans held-for-sale.
 
**   Non-interest expense less non-interest income divided by net interest income.
 
***   Non-interest expense divided by net interest income plus recurring non-interest income (refer to the “Operating expenses” section of this MD&A for a description of items not considered “recurring”).
The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation

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will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. In addition, the Corporation is subject to legal, compliance and reputational risks, among others.
As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.
The description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for the year ended December 31, 2006, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control, that in addition to the other information in this Form 10-Q, readers should consider.
Further discussion of operating results, financial condition and credit, market and liquidity risks is presented in the narrative and tables included herein.
The shares of the Corporation’s common and preferred stock are traded on the National Association of Securities Dealers Automated Quotation (“NASDAQ”) system under the symbols BPOP and BPOPO, respectively.
CRITICAL ACCOUNTING POLICIES / ESTIMATES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.
Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, retained interests on transfers of financial assets – subprime mortgage loans securitizations (valuations of interest-only strips and mortgage servicing rights), income taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations. For a summary of the Corporation’s critical accounting policies, refer to that particular section in the MD&A included in Popular, Inc.’s 2006 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2006 Annual Report for a summary of the Corporation’s significant accounting policies.
As indicated in the 2006 Annual Report, one of the accounting policies / estimates considered critical by the Corporation’s management is that associated with the valuation of interest-only securities (also known as residual interests). During the quarter ended March 31, 2007, management reviewed the critical assumptions used in the valuation of interest-only securities derived from off-balance sheet securitizations performed by PFH. As indicated in the Overview section, the Corporation recognized unfavorable valuation adjustments of $52.8 million in the fair value of interest-only securities. Of this amount, $29.3 million of the adjustment corresponded to interest-only securities classified as available-for-sale and $23.5 million corresponded to interest-only securities classified as trading securities. As of March 31, 2007, the aggregate balance of PFH’s interest-only securities recognized in the

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Corporation’s statement of financial condition was $33 million. The unpaid principal balance of mortgage loans sold in off-balance sheet securitizations to which these interest-only securities are associated amounted to approximately $2.1 billion at March 31, 2007. This portfolio consisted of approximately 47% of fixed-rate mortgage loans and 53% of adjustable-rate mortgage loans.
As previously mentioned, during the first quarter of 2007, adjustments were made to two critical assumptions utilized for the valuation of interest-only securities, namely the discount rate and expected credit losses. There were no significant changes in the methodology or models used to value the interest- only securities that are described in the 2006 Annual Report.
During the first quarter of 2007, the subprime mortgage market experienced (1) deteriorating credit performance trends, particularly in loans originated in 2005 and 2006, (2) continued turmoil with subprime lenders due to increases in losses, bankruptcies and liquidity problems, (3) lower levels of housing activity and home price appreciation, and (4) a general tightening of credit standards that may adversely affect sub prime borrowers when trying to refinance their mortgages. These factors have led to an increase in cash flow uncertainty for investors in subprime mortgage securities thereby causing risk premiums to increase. Given the increase in risk premiums along with lower liquidity for subprime securities observed in the market, the Corporation changed the discount rate utilized to discount projected residual cash flows at the end of the first quarter of 2007 to 25% from 17% at the end of the fourth quarter in 2006.
With respect to credit losses, lower levels of home price appreciation, declining demand for housing units leading to rising inventories, housing affordability challenges and a general tightening of underwriting standards are expected to lead to higher future cumulative credit losses. Based on an analysis by management of PFH’s historical collateral performance, risk model estimates and rating agency loss coverage levels, the cumulative credit loss assumptions were also changed during the first quarter of 2007. The changes reflect an increase in the cumulative credit loss estimate range for the nine securitization transactions completed and accounted for as gain on sale transactions between 2005 and 2006 of between 112 and 364 basis points.
The analysis performed showed that all transactions, from a cumulative loss standpoint, are performing better than the median loss projection calculated by Loan Performance Corporation’s Risk Model (“Risk Model”). Notwithstanding, leading credit indicators of future loss performance (60 day delinquency, 90 day delinquency, foreclosure and REO levels) for the most recent four transactions show underperformance compared to the model projections. Although that tendency (i.e. higher delinquency but lower loss levels) has not been inconsistent with the historical performance of PFH’s collateral when compared to the risk model, conditions in the housing and credit markets have changed materially. Furthermore, the overall industry credit performance of mortgage collateral originated in 2005 and 2006 is showing considerable underperformance relative to other vintages (i.e. higher delinquency levels at the same stage of seasoning), which implies higher cumulative losses than originally estimated.
Refer to Note 8 to the consolidated financial statements for information on key economic assumptions used in

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measuring the fair value of the interest-only securities as of March 31, 2007. Also, such note provides a sensitivity analysis based on immediate changes to the most critical assumptions used in the valuations at March 31, 2007.
One of the Corporation’s critical accounting policies relates to the valuation of mortgage servicing rights. As further described in Note 2 to the consolidated financial statements and in the Recent Accounting Pronouncements and Interpretations section included in this MD&A, in January 2007, the Corporation adopted SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140.” The provisions of SFAS No. 156 will not have an impact on the estimation techniques, valuation assumptions and other subjective assessments associated with the mortgage servicing rights computations. Refer to Note 8 to the consolidated financial statements for information on key economic assumptions used in measuring the fair value of the mortgage servicing rights as of March 31, 2007 and to Note 7 for SFAS No. 156 required disclosures.
Also, during the quarter ended March 31, 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (FIN 48), which also relates to one of the Corporation’s critical accounting policies, namely income taxes. As indicated in the section below, the impact of the FIN 48 adoption in the first quarter of 2007 was not material to the Corporation. Refer to Note 14 to the consolidated financial statements for information on the financial impact and required disclosures.
RECENT ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS
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 the first quarter of 2007 did not have a material impact on the Corporation’s consolidated financial statements.
SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”
SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation 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

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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. 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 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 Instruments”. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159

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commencing in January 2008. Management is evaluating the impact that this recently issued accounting standard may have on its consolidated financial statements.
NET INTEREST INCOME
Table B presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the quarter ended March 31, 2007, as compared with the same period in 2006, segregated by major categories of interest earning assets and interest bearing liabilities.
The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico (P.R.). The main sources of tax-exempt interest income are investments in obligations of some U.S. Government agencies and sponsored entities of the P.R. Commonwealth and its agencies, and assets held by the Corporation’s international banking entities, which are tax-exempt under P.R. laws. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates at each respective quarter end. During the third quarter of 2005, the Government of P.R. approved a temporary, two-year additional tax of 2.5% for corporations, which increased the marginal tax rate from 39% to 41.5% for the years 2005-2006. In addition, during the second quarter of 2006, the Government of P.R. approved a temporary one-year additional tax of 2.0% for banking entities. The statutory income tax rate considered for the Corporation’s P.R. operations in the quarter ended March 31, 2006 was 41.5%, compared to 39% for the quarter ended March 31, 2007. The taxable equivalent computation considers the interest expense disallowance required by the P.R. tax law, also affected by the mentioned increases in tax rates. The expiration of the temporary additional tax for the P.R. operations was the main reason for the decrease in the taxable equivalent benefit.
Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loan categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Interest income for the quarter ended March 31, 2007 included an unfavorable impact of $2.8 million, consisting principally of amortization of net loan origination costs (net of origination fees), and the amortization of net premiums on loans purchased. This negative impact was partially offset by prepayment penalties and late payment charges. The unfavorable impact for the quarter ended March 31, 2006 amounted to $7.4 million. The reduction for the first quarter 2007 as compared to the same quarter in the previous year was mainly the result of a lower balance of premium amortized related to mortgage loans purchased in the U.S. operations, mainly in years prior to 2006, due to reduced loan prepayments and to the direct impact of the maturity run-off of the purchased mortgage loan portfolio. During late 2005, as part of a strategic business decision, the Corporation reduced the volume of mortgage loans purchased, which in the past were used as part of securitization transactions.
Unfavorable items impacting net interest margin are detailed as follows:
    Higher cost of short-term borrowings as a result of the Federal Reserve (FED) tightening monetary policy. During 2006, the FED raised the federal funds target rate 75 basis points from March 2006 to June 2006, leaving it flat at 5.25%, the current level at March 31, 2007.
 
    Increased cost of interest bearing deposits as a result of savings and time deposits raised through the E-LOAN platform in the second half of 2006, which carry higher rates due to the competitive interest rates offered as part of the initial promotional campaign. Also, the Corporation raised a greater volume of certificates of deposit through non-internet channels, a higher cost deposit category. Furthermore, there was an increase in the costs of certain NOW and money market accounts influenced by competitive campaigns to attract and retain customers, mainly in the U.S. operations, as well as certain accounts with floating rates.
 
    Increased cost of long-term debt resulting mainly from secured debt with floating rates derived from on-balance sheet mortgage loan securitizations.

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TABLE B
Analysis of Levels & Yields on a Taxable Equivalent Basis
Quarter ended March 31,
                                                                                         
                                                                            Variance
Average Volume   Average Yields / Costs       Interest   Attributable to
2007   2006   Variance   2007   2006   Variance       2007   2006   Variance   Rate   Volume
($ in millions)                                 (In thousands)
$ 376     $ 645     $ (269 )     5.33 %     5.29 %     0.04 %  
Money market investments
  $ 4,932     $ 8,415     $ (3,483 )   $ 48     $ (3,531 )
  10,352       12,433       (2,081 )     5.08       5.03       0.05    
Investment securities
    131,532       156,338       (24,806 )     1,223       (26,029 )
  592       601       (9 )     6.70       6.32       0.38    
Trading securities
    9,775       9,374       401       555       (154 )
         
  11,320       13,679       (2,359 )     5.18       5.10       0.08    
 
    146,239       174,127       (27,888 )     1,826       (29,714 )
         
                                               
Loans:
                                       
  14,654       12,938       1,716       7.80       7.30       0.50    
Commercial
    281,670       232,927       48,743       15,866       32,877  
  1,205       1,320       (115 )     7.89       7.47       0.42    
Leasing
    23,771       24,633       (862 )     1,351       (2,213 )
  11,511       12,773       (1,262 )     7.05       6.74       0.31    
Mortgage
    202,964       215,101       (12,137 )     9,792       (21,929 )
  5,288       4,894       394       10.78       10.23       0.55    
Consumer
    141,113       124,052       17,061       4,517       12,544  
         
  32,658       31,925       733       8.02       7.53       0.49    
 
    649,518       596,713       52,805       31,526       21,279  
         
$ 43,978     $ 45,604     $ (1,626 )     7.29 %     6.80 %     0.49 %  
Total earning assets
  $ 795,757     $ 770,840     $ 24,917     $ 33,352     $ (8,435 )
         
                                               
Interest bearing deposits:
                                       
$ 4,144     $ 3,790     $ 354       2.50 %     1.73 %     0.77 %  
NOW and money market*
  $ 25,548     $ 16,204     $ 9,344     $ 6,783     $ 2,561  
  5,798       5,519       279       1.96       1.28       0.68    
Savings
    27,985       17,373       10,612       1,552       9,060  
  10,400       9,473       927       4.66       3.89       0.77    
Time deposits
    119,569       90,834       28,735       18,083       10,652  
         
  20,342       18,782       1,560       3.45       2.69       0.76    
 
    173,102       124,411       48,691       26,418       22,273  
         
  9,733       11,477       (1,744 )     5.20       4.41       0.79    
Short-term borrowings
    124,809       124,803       6       24,646       (24,640 )
  8,588       10,455       (1,867 )     5.69       5.16       0.53    
Medium and long-term debt
    120,702       133,232       (12,530 )     11,974       (24,504 )
         
                                               
Total interest bearing
                                       
  38,663       40,714       (2,051 )     4.39       3.81       0.58    
liabilities
    418,613       382,446       36,167       63,038       (26,871 )
                                               
Non-interest bearing
                                       
  3,991       3,861       130                            
demand deposits
                                       
  1,324       1,029       295                            
Other sources of funds
                                       
         
$ 43,978     $ 45,604     $ (1,626 )     3.86 %     3.40 %     0.46 %  
 
                                       
                                             
                          3.43 %     3.40 %     0.03 %  
Net interest margin
                                       
                                                                     
                                               
Net interest income on a taxable equivalent basis
    377,144       388,394       (11,250 )   $ (29,686 )   $ 18,436  
                                                                             
                          2.90 %     2.99 %     (0.09 %)  
Net interest spread
                                       
                                                                     
                                               
Taxable equivalent adjustment
    22,162       28,630       (6,468 )                
                                                                     
                                               
Net interest income
  $ 354,982     $ 359,764     $ (4,782 )                
                                                                     
 
Note:   The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
 
*   Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
     
     Partially offsetting the unfavorable variances were the following:
    Higher yields in commercial loans and construction loans, mainly in the portfolio with short-term repricing terms, which are favorably impacted by the rising interest rates. As of March 31, 2007, approximately 62% of the commercial and construction loan portfolio had floating or adjustable interest rates.
 
    Higher yields in the mortgage loan portfolio in part as a result of higher rates for new loans, a reduction in the premium amortized for secured mortgage loans due to a reduction in prepayment speeds, and the sale of low yielding mortgage loans from the P.R. operations during 2006.

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    Increase in the yield of consumer loans driven in part by home equity lines of credit with floating rates, an increase in the average balance of credit cards, which are mainly floating rate and the Corporation benefits from the increase in market rates, and an increase in the rate for the P.R.consumer loan portfolio.
The decrease in the average balance of earning assets was mainly the result of activities that occurred during 2006. These include the maturity of low yielding agency securities, sales of low yielding mortgage loans from the P.R. operations, and the reduction in origination volume experienced in the U.S. mortgage sector.
NON-INTEREST INCOME
Refer to Table C for a breakdown of non-interest income by major categories for the quarters ended March 31, 2007 and 2006.
TABLE C
Non-Interest Income
                         
(In thousands)   Quarter ended March 31,
  2007   2006   $ Variance
 
Service charges on deposit accounts
  $ 48,471     $ 47,469     $ 1,002  
 
Other service fees:
                       
Credit card fees and discounts
  $ 23,524     $ 22,573     $ 951  
Debit card fees
    16,101       14,919       1,182  
Insurance fees
    12,949       12,141       808  
Processing fees
    12,112       10,279       1,833  
Sale and administration of investment products
    7,260       7,457       (197 )
Mortgage servicing fees, net of amortization and fair value adjustments
    6,436       2,952       3,484  
Trust fees
    2,396       2,331       65  
Other fees
    7,071       7,694       (623 )
 
Total other service fees
  $ 87,849     $ 80,346     $ 7,503  
 
Net gain on sale and valuation adjustment of investment securities
  $ 81,771     $ 12,340     $ 69,431  
Trading account (loss) profit
    (14,164 )     11,475       (25,639 )
Gain on sale of loans and valuation adjustments on loans held-for-sale
    3,434       47,261       (43,827 )
Other operating income
    44,815       29,942       14,873  
 
Total non-interest income
  $ 252,176     $ 228,833     $ 23,343  
 
The increase in non-interest income for the quarter ended March 31, 2007 compared with the same quarter in the previous year was mostly impacted by:
    Higher net gain on sale and valuation adjustments of investment securities, which is broken down as follows:
                         
    Quarter ended        
(In thousands)   March 31, 2007     March 31, 2006     $ Variance  
 
Net gain on sale of investment securities
  $ 118,725     $ 14,273     $ 104,452  
Valuation adjustments of investment securities
    (36,954 )     (1,933 )     (35,021 )
 
Total
  $ 81,771     $ 12,340     $ 69,431  
 
As indicated in the Overview section of this MD&A, during the quarter ended March 31, 2007, the Corporation realized approximately $118.7 million in gains on the sale of the Corporation’s interest in TELPRI. Gain on sale of investment securities in 2006 included $13.5 million in gains on sale of equity securities.

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As also indicated earlier in this MD&A, in the first quarter of 2007, the Corporation recorded an impairment in the value of interest-only securities classified as available-for-sale of $29.3 million associated with the adverse changes in the subprime market. Refer to the Critical Accounting Policies / Estimates section of this MD&A for further information on the factors that impacted the fair value reduction. Furthermore, in the quarter ended March 31, 2007, the Corporation recorded a $7.6 million unfavorable valuation adjustment in certain equity securities of a U.S. financial institution.
    Trading account losses in the first quarter of 2007, compared with trading account profits in the same quarter in the previous year. This category is broken down as follows:
                         
    Quarter ended        
(In thousands)   March 31, 2007     March 31, 2006     $ Variance  
 
Mark-to-market of PFH’s interest-only securities
  $ (23,477 )   $ 395     $ (23,872 )
Other trading account profit (loss)
    9,313       11,080       (1,767 )
 
Total
  $ (14,164 )   $ 11,475     $ (25,639 )
 
Similar to PFH’s interest-only securities classified as available-for-sale, the interest-only securities classified as trading securities were also unfavorably impacted by the current conditions in the subprime market.
During the first quarter of 2007, the Corporation experienced higher unrealized gains on mortgage-backed securities included in the trading portfolio due to higher volume and higher price margins. This favorable variance was offset by $8.5 million in trading profits realized in the quarter ended March 31, 2006 associated with the pooling of approximately $464 million in mortgage loans at Banco Popular de Puerto Rico into Fannie Mae mortgage-backed securities that were sold to investors during that same quarter of 2006.
    Lower gains on sales of loans and higher unfavorable valuation adjustments of loans held-for-sale as follows:
                         
    Quarter ended        
(In thousands)   March 31, 2007     March 31, 2006     $ Variance  
 
Gain on sales of loans
  $ 20,356     $ 47,261     $ (26,905 )
Lower of cost or market valuation adjustment on loans held-for-sale
    (16,922 )           (16,922 )
 
Total
  $ 3,434     $ 47,261     $ (43,827 )
 
The decrease in gains on the sale of loans was primarily related to PFH, which experienced a lower volume of loans originated and sold due to exiting the wholesale subprime mortgage business. Also, in the first quarter of 2006, PFH completed two off-balance sheet mortgage loan securitizations involving approximately $652 million in loans, in which the Corporation realized approximately $11.5 million in gains during that quarter.
As indicated in the Overview section of this MD&A, the unfavorable valuation adjustment of mortgage loans held-for-sale resulted principally from deterioration in the U.S. subprime market experienced during the period.
    Higher other service fees which are detailed by category in Table C. In general terms, the main increases in credit and debit card fees were the result of higher volume of credit card accounts, increased transactional volume, and reward program membership fees, among others. The favorable variance in mortgage servicing fee income was impacted in part by the adoption of SFAS No. 156 in the first quarter of 2007. As indicated earlier in this MD&A, the Corporation elected the fair value measurement to account for mortgage servicing rights. The residential mortgage servicing rights are no longer amortized in proportion to and over the period of estimated net servicing income. Refer to Note 7 to the consolidated financial statements for detailed information on the adoption of SFAS No. 156 and the impact to the financial statements. Any fair value adjustment of MSRs is being recorded in “other service fees” in the consolidated statement of operations together with the loan servicing fees charged to third-parties on the serviced portfolio.

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    Higher other operating income in the first quarter of 2007, compared with the same quarter in 2006, resulted mainly from increased revenues from equity investments, miscellaneous gains on the sale of certain real estate properties and other mixed revenue sources.
OPERATING EXPENSES
Refer to Table D for a breakdown of operating expenses by major categories. Also, this table identifies the categories of the statement of income impacted by the restructuring costs related to PFH. These costs are segregated to ease in the financial comparison analysis.
TABLE D
Operating Expenses
                                         
            Restructuring Costs     1st QTR             $ Variance  
(In thousands)   1st QTR 2007     (“RC”)     2007 excluding RC     1st QTR 2006     excluding RC  
 
Personnel costs
  $ 178,375     $ 8,158     $ 170,217     $ 178,052       ($  7,835 )
Net occupancy expenses
    32,014       4,413       27,601       28,638       (1,037 )
Equipment expenses
    32,396       281       32,115       33,197       (1,082 )
Other taxes
    11,847             11,847       10,241       1,606  
Professional fees
    35,987       1,947       34,040       37,078       (3,038 )
Communications
    17,062       67       16,995       17,300       (305 )
Business promotion
    28,372             28,372       32,823       (4,451 )
Printing and supplies
    4,276             4,276       4,632       (356 )
Other operating expenses
    32,016       269       31,747       28,831       2,916  
Impact of change in fiscal period of certain subsidiaries
                      9,741       (9,741 )
Amortization of intangibles
    2,983             2,983       2,721       262  
 
Total
  $ 375,328     $ 15,135     $ 360,193     $ 383,254       ($23,061 )
 
Isolating the severance costs associated with PFH’s restructuring and integration plan (refer to the Restructuring Plan section later in this MD&A for details), personnel costs for the first quarter of 2007 decreased 4%, compared with the same quarter in 2006. Full-time equivalent employees (FTEs) were 11,995 at March 31, 2007, a decrease of 1,055 from the same date in 2006, primarily as a result of PFH’s restructuring and integration plan, and restrictions on the recruiting for vacant positions as part of cost control measures throughout the Corporation. Other variances in personnel costs included lower accrual for medical insurance expenses and lower pension plan costs in part due to the freeze of BPNA’s plan as disclosed in Note 16 to the consolidated financial statements. These favorable variances were partially offset by lower deferral of loan origination costs due in part to lower volume of originations resulting from the exited operations of PFH.
The reduction in business promotion resulted in part from lower sponsorship expenses and cost control measures on marketing expenditures. The decrease in professional fees, excluding the restructuring costs, included lower legal and audit fees, business strategy consulting fees, temporary services, and title, appraisal and recording fees associated with the loan business, among others.
As presented in Table A, the Corporation’s efficiency ratio increased from 66.51% for the quarter ended March 31, 2006 to 71.84% in the same quarter in 2007. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. As stated in the Glossary of Selected Financial Terms included in the 2006 Annual Report, in determining the efficiency ratio the Corporation includes recurring non-interest income items, thus isolating income items that may be considered volatile in nature. Management believes that the exclusion of those items would permit greater comparability for analytical purposes. Amounts within non-interest income not considered recurring in nature by the Corporation amounted to $84.7 million in the quarter ended March 31, 2007, compared with $12.3 million in the same quarter of the previous year. These amounts corresponded principally to net gains on sale and valuation adjustments of investment securities available-for-sale and gains on the sale of real estate property. The efficiency ratio for the first quarter of 2007 was unfavorably impacted by the restructuring costs

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related to PFH. Also, the unfavorable mark-to-market of interest-only securities classified as trading, lower gains on the sales of loans and higher unfavorable valuation adjustments of loans held-for-sale more than offset the decrease in operating expenses.
INCOME TAX
Income tax expense for the quarter ended March 31, 2007 amounted to $16.8 million, a decrease of $21.1 million, or 56%, compared with $37.9 million in the same quarter of 2006. The effective tax rate for these quarters were 12.43% and 24.23%, respectively. The decrease was primarily due to lower income before tax mainly related to losses incurred in the U.S. operations. Also, the first quarter of 2007 was affected by higher income subject to a lower preferential tax rate on capital gains of 20%, namely the gain from the sale of TELPRI shares, and by the expiration in 2007 of the transitory provision approved by the Government of Puerto Rico which increased the statutory tax rate to all Puerto Rico corporations from 39% to 41.5% for the years 2005 and 2006. The decrease in income tax expense was partially offset by lower exempt interest income net of the disallowance of expenses attributed to such exempt income.
REPORTABLE SEGMENT RESULTS
The Corporation’s reportable segments for managerial reporting consist of Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by this latter group are not allocated to the three reportable segments.
As described later in the Restructuring Plan section of this MD&A, during the first quarter of 2007, the Corporation reorganized the legal structure of its U.S. operations taking into account the changes and expectations of PFH’s restructuring and integration plan. These changes also impacted the Corporation’s determination of reportable segments for managerial reporting purposes. Commencing in the first quarter of 2007, the U.S. operations constitute one reportable segment defined as Popular North America. This segment includes the operations of BPNA, including its wholly-owned subsidiary E-LOAN (legally transferred from PFH to BPNA in January 2007), and Popular Financial Holdings. For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 21 to the consolidated financial statements. Financial information for periods prior to 2007 was restated to conform to the 2007 presentation.
The Corporate group had a net gain of $88.6 million in the first quarter of 2007, compared with a net loss of $0.3 million in the same quarter of 2006. During the first quarter of 2007, the Corporation’s holding companies realized gains on the sale of securities, net of other-than-temporary impairments, approximating $111.1 million, compared with $13.6 million in the first quarter of 2006. The variance in gain on sale of securities was mainly due to the sale of the Corporation’s ownership interest in TELPRI.
Highlights on the earnings results for the reportable segments are discussed below.
Banco Popular de Puerto Rico
The Banco Popular de Puerto Rico reportable segment reported net income of $86.3 million for the quarter ended March 31, 2007, a decrease of $13.9 million, or 14%, when compared with the same quarter in the previous year. The main factors that contributed to the variance in results for the quarter ended March 31, 2007 when compared to the first quarter of 2006 included:
    higher net interest income by $5.9