POPULAR, INC.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2008
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, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 par value 281,738,612 shares outstanding as of August 5, 2008.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page
Part I — Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    70  
 
       
    110  
 
       
    115  
 
       
       
 
       
    115  
 
       
    115  
 
       
    115  
 
       
    116  
 
       
    116  
 
       
    117  
 EX-12.1 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 EX-31.1 302 CERTIFICATION OF CEO
 EX-31.2 302 CERTIFICATION OF CFO
 EX-32.1 906 CERTIFICATION OF CEO
 EX-32.2 906 CERTIFICATION OF CFO

2


Table of Contents

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

3


Table of Contents

ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
                         
(In thousands, except share information)   June 30, 2008     December 31, 2007   June 30, 2007
 
ASSETS
                       
Cash and due from banks
  $ 887,619     $ 818,825     $ 762,085  
 
Money market investments:
                       
Federal funds sold
    710,000       737,815       345,400  
Securities purchased under agreements to resell
    170,497       145,871       212,138  
Time deposits with other banks
    17,299       123,026       17,449  
 
 
    897,796       1,006,712       574,987  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    3,418,708       4,249,295       3,421,716  
Other investment securities available-for-sale
    4,283,619       4,265,840       5,552,752  
Investment securities held-to-maturity, at amortized cost (market value as of June 30, 2008 - $231,210; December 31, 2007 - $486,139; June 30, 2007 - $429,536)
    232,483       484,466       429,479  
Other investment securities, at lower of cost or realizable value (realizable value as of June 30, 2008 - $299,827; December 31, 2007 - $216,819; June 30, 2007 - $160,372)
    240,731       216,584       160,150  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    417,437       673,958       355,484  
Other trading securities
    82,051       93,997       321,374  
Loans held-for-sale measured at lower of cost or market value
    337,552       1,889,546       605,990  
Loans measured at fair value pursuant to SFAS No. 159:
                       
Loans measured at fair value pledged with creditors’ right to repledge
    45,758              
Other loans measured at fair value
    799,134              
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
          149,610       195,661  
Other loans
    26,636,004       28,053,956       32,274,058  
Less — Unearned income
    186,770       182,110       323,864  
Allowance for loan losses
    652,730       548,832       564,847  
 
 
    25,796,504       27,472,624       31,581,008  
 
Premises and equipment, net
    633,450       588,163       587,505  
Other real estate
    102,809       81,410       112,858  
Accrued income receivable
    163,274       216,114       249,746  
Servicing assets (at fair value on June 30, 2008 - $186,155; December 31, 2007 - $191,624; June 30, 2007 - $197,873)
    190,778       196,645       201,861  
Other assets (See Note 8)
    2,455,842       1,456,994       1,297,600  
Goodwill
    628,826       630,761       668,469  
Other intangible assets
    64,223       69,503       102,299  
 
 
  $ 41,678,594     $ 44,411,437     $ 46,985,363  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,482,287     $ 4,510,789     $ 4,280,195  
Interest bearing
    22,633,441       23,823,689       21,105,800  
 
 
    27,115,728       28,334,478       25,385,995  
Federal funds purchased and assets sold under agreements to repurchase
    4,738,677       5,437,265       5,655,936  
Other short-term borrowings
    1,337,210       1,501,979       3,384,105  
Notes payable at cost
    3,750,647       4,621,352       8,068,638  
Notes payable at fair value pursuant to SFAS No. 159
    173,725              
Other liabilities
    856,504       934,372       793,500  
 
 
    37,972,491       40,829,446       43,288,174  
 
Commitments and contingencies (See Note 16)
                       
 
Minority interest in consolidated subsidiaries
    109       109       109  
 
Stockholders’ equity:
                       
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 Class A shares issued and outstanding in all periods presented; 16,000,000 Class B shares issued and outstanding at June 30, 2008
    586,875       186,875       186,875  
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 294,620,193 shares issued (December 31, 2007 - 293,651,398; June 30, 2007 - 292,722,761) and 280,983,132 outstanding (December 31, 2007 - 280,029,215; June 30, 2007 - 279,326,816)
    1,767,721       1,761,908       1,756,337  
Surplus
    563,100       568,184       533,152  
Retained earnings
    1,086,373       1,319,467       1,701,100  
Accumulated other comprehensive loss, net of tax of ($22,392) (December 31, 2007 - ($15,438); June 30, 2007 - ($96,065))
    (90,448 )     (46,812 )     (274,817 )
Treasury stock — at cost, 13,637,061 shares (December 31, 2007 - 13,622,183; June 30, 2007 - 13,395,945)
    (207,627 )     (207,740 )     (205,567 )
 
 
    3,705,994       3,581,882       3,697,080  
 
 
  $ 41,678,594     $ 44,411,437     $ 46,985,363  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands, except per share information)   2008   2007   2008   2007
 
INTEREST INCOME:
                               
Loans
  $ 497,418     $ 656,485     $ 1,058,535     $ 1,300,599  
Money market investments
    3,476       5,752       10,204       10,361  
Investment securities
    83,128       113,063       177,533       228,554  
Trading account securities
    16,133       9,611       34,826       18,992  
 
 
    600,155       784,911       1,281,098       1,558,506  
 
INTEREST EXPENSE:
                               
Deposits
    168,045       182,730       362,985       355,832  
Short-term borrowings
    42,502       119,466       107,647       244,275  
Long-term debt
    51,723       111,298       115,392       232,000  
 
 
    262,270       413,494       586,024       832,107  
 
Net interest income
    337,885       371,417       695,074       726,399  
Provision for loan losses
    190,640       115,167       358,862       211,513  
 
Net interest income after provision for loan losses
    147,245       256,250       336,212       514,886  
Service charges on deposit accounts
    51,799       48,392       102,886       96,863  
Other service fees (See Note 17)
    110,079       89,590       215,546       177,439  
Net gain on sale and valuation adjustments of investment securities
    27,763       1,175       75,703       82,946  
Trading account profit (loss)
    16,711       10,377       21,175       (3,787 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (35,922 )           (38,942 )      
(Loss) gain on sale of loans and valuation adjustments on loans held-for- sale
    (1,453 )     28,294       67,292       31,728  
Other operating income
    24,595       25,547       57,887       70,362  
 
 
    340,817       459,625       837,759       970,437  
 
OPERATING EXPENSES:
                               
Personnel costs:
                               
Salaries
    125,423       126,950       262,132       263,429  
Pension, profit sharing and other benefits
    36,462       37,338       74,932       79,234  
 
 
    161,885       164,288       337,064       342,663  
Net occupancy expenses
    26,362       26,501       61,354       58,515  
Equipment expenses
    30,724       32,245       62,722       64,641  
Other taxes
    13,879       11,835       27,022       23,682  
Professional fees
    31,627       38,642       68,252       74,629  
Communications
    13,145       16,973       28,448       34,035  
Business promotion
    18,251       30,369       35,467       58,741  
Printing and supplies
    3,899       4,549       8,174       8,825  
Other operating expenses
    45,471       32,838       86,763       64,854  
Amortization of intangibles
    2,490       2,813       4,982       5,796  
 
 
    347,733       361,053       720,248       736,381  
 
(Loss) income before income tax
    (6,916 )     98,572       117,511       234,056  
Income tax (benefit) expense
    (31,166 )     23,622       (10,029 )     40,459  
 
NET INCOME
  $ 24,250     $ 74,950     $ 127,540     $ 193,597  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 18,247     $ 71,972     $ 118,559     $ 187,641  
 
BASIC EARNINGS PER COMMON SHARE (“EPS”)
  $ 0.06     $ 0.26     $ 0.42     $ 0.67  
 
DILUTED EPS
  $ 0.06     $ 0.26     $ 0.42     $ 0.67  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16     $ 0.32     $ 0.32  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Six months ended June 30,
(In thousands)   2008   2007
 
Preferred stock:
               
Balance at beginning of year
  $ 186,875     $ 186,875  
Issuance of preferred stock
    400,000        
 
Balance at end of period
    586,875       186,875  
 
Common stock:
               
Balance at beginning of year
    1,761,908       1,753,146  
Common stock issued under the Dividend Reinvestment Plan
    5,813       3,131  
Stock options exercised
          60  
 
Balance at end of period
    1,767,721       1,756,337  
 
Surplus:
               
Balance at beginning of year
    568,184       526,856  
Common stock issued under the Dividend Reinvestment Plan
    4,307       5,290  
Issuance cost of preferred stock
    (9,950 )      
Stock options expense on unexercised options, net of forfeitures
    559       857  
Stock options exercised
          149  
 
Balance at end of period
    563,100       533,152  
 
Retained earnings:
               
Balance at beginning of year
    1,319,467       1,594,144  
Net income
    127,540       193,597  
Cumulative effect of accounting change-adoption of SFAS No. 159 in 2008 (2007-SFAS No. 156 and EITF 06-5)
    (261,831 )     8,667  
Cash dividends declared on common stock
    (89,822 )     (89,352 )
Cash dividends declared on preferred stock
    (8,981 )     (5,956 )
 
Balance at end of period
    1,086,373       1,701,100  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (46,812 )     (233,728 )
Other comprehensive loss, net of tax
    (43,636 )     (41,089 )
 
Balance at end of period
    (90,448 )     (274,817 )
 
Treasury stock — at cost:
               
Balance at beginning of year
    (207,740 )     (206,987 )
Purchase of common stock
    (358 )     (352 )
Reissuance of common stock
    471       1,772  
 
Balance at end of period
    (207,627 )     (205,567 )
 
Total stockholders’ equity
  $ 3,705,994     $ 3,697,080  
 
Disclosure of changes in number of shares:
                         
    June 30,   December 31,   June 30,
    2008   2007   2007
 
Preferred Stock:
                       
Balance at beginning of year
    7,475,000       7,475,000       7,475,000  
New shares issued
    16,000,000              
 
Balance at end of period
    23,475,000       7,475,000       7,475,000  
 
Common Stock — Issued:
                       
Balance at beginning of year
    293,651,398       292,190,924       292,190,924  
Issued under the Dividend Reinvestment Plan
    968,795       1,450,410       521,773  
Stock options exercised
          10,064       10,064  
 
Balance at end of period
    294,620,193       293,651,398       292,722,761  
 
Treasury stock
    (13,637,061 )     (13,622,183 )     (13,395,945 )
 
Common Stock — outstanding
    280,983,132       280,029,215       279,326,816  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Net income
  $ 24,250     $ 74,950     $ 127,540     $ 193,597  
 
Other comprehensive loss before tax:
                               
Foreign currency translation adjustment
    (1,411 )     1,200       (1,192 )     2,980  
Adjustment of pension and postretirement benefit plans
    (37 )           (74 )     (519 )
Unrealized losses on securities available-for-sale arising during the period
    (149,927 )     (95,452 )     (22,437 )     (55,969 )
Reclassification adjustment for gains included in net income
    (27,685 )     (1 )     (26,373 )     (83 )
Unrealized net gains (losses) on cash flow hedges
    2,963       1,840       (2,107 )     948  
Reclassification adjustment for losses (gains) included in net income
    92       (286 )     1,593       (125 )
Cumulative effect of accounting change
          (243 )           (243 )
 
 
    (176,005 )     (92,942 )     (50,590 )     (53,011 )
Income tax benefit
    41,838       22,060       6,954       11,922  
 
Total other comprehensive loss, net of tax
    (134,167 )     (70,882 )     (43,636 )     (41,089 )
 
Comprehensive (loss) income
  ($ 109,917 )   $ 4,068     $ 83,904     $ 152,508  
 
Tax Effects Allocated to Each Component of Other Comprehensive Loss:
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Underfunding of pension and postretirement benefit plans
                    $ 180  
Unrealized losses on securities available-for-sale arising during the period
  $ 38,943     $ 22,615     $ 3,680       12,022  
Reclassification adjustment for gains included in net income
    4,025             3,124       14  
Unrealized net gains (losses) on cash flows hedges
    (1,094 )     (669 )     775       (352 )
Reclassification adjustment for (gains) losses included in net income
    (36 )     114       (625 )     58  
 
Income tax benefit
  $ 41,838     $ 22,060     $ 6,954     $ 11,922  
 
Disclosure of accumulated other comprehensive loss:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Foreign currency translation adjustment
  ($ 35,780 )   ($ 34,588 )   ($ 33,721 )
 
Underfunding of pension and postretirement benefit plans
    (51,213 )     (51,139 )     (69,779 )
Tax effect
    20,108       20,108       27,214  
 
Net of tax amount
    (31,105 )     (31,031 )     (42,565 )
 
Unrealized (losses) gains on securities available-for-sale
    (21,718 )     27,092       (268,295 )
Tax effect
    854       (5,950 )     69,182  
 
Net of tax amount
    (20,864 )     21,142       (199,113 )
 
Unrealized (losses) gains on cash flows hedges
    (4,129 )     (3,615 )     913  
Tax effect
    1,430       1,280       (331 )
 
Net of tax amount
    (2,699 )     (2,335 )     582  
 
Accumulated other comprehensive loss, net of tax
  ($ 90,448 )   ($ 46,812 )   ($ 274,817 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

7


Table of Contents

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Six months ended June 30,
(In thousands)   2008   2007
 
Cash flows from operating activities:
               
Net income
  $ 127,540     $ 193,597  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    37,318       39,973  
Provision for loan losses
    358,862       211,513  
Amortization of intangibles
    4,982       5,796  
Amortization and fair value adjustments of servicing assets
    25,122       22,606  
Net gain on sale and valuation adjustments of investment securities
    (75,703 )     (82,946 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    38,942        
Net gain on disposition of premises and equipment
    (3,111 )     (4,851 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
    (67,292 )     (31,728 )
Net amortization of premiums and accretion of discounts on investments
    12,656       11,235  
Net amortization of premiums and deferred loan origination fees and costs
    28,951       47,938  
Earnings from investments under the equity method
    (6,899 )     (16,590 )
Stock options expense
    559       907  
Deferred income taxes
    (83,836 )     (48,112 )
Net disbursements on loans held-for-sale
    (1,509,819 )     (3,087,103 )
Acquisitions of loans held-for-sale
    (185,053 )     (403,712 )
Proceeds from sale of loans held-for-sale
    1,006,208       2,833,030  
Net decrease in trading securities
    732,067       645,680  
Net decrease (increase) in accrued income receivable
    42,301       (1,506 )
Net increase in other assets
    (264,170 )     (16,261 )
Net decrease in interest payable
    (53,440 )     (14,013 )
Net increase in postretirement benefit obligation
    203       1,824  
Net decrease in other liabilities
    (24,429 )     (52,071 )
 
Total adjustments
    14,419       61,609  
 
Net cash provided by operating activities
    141,959       255,206  
 
Cash flows from investing activities:
               
Net decrease (increase) in money market investments
    108,916       (206,843 )
Purchases of investment securities:
               
Available-for-sale
    (3,427,660 )     (65,385 )
Held-to-maturity
    (3,631,141 )     (12,293,611 )
Other
    (136,775 )     (16,935 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    1,851,899       810,710  
Held-to-maturity
    3,884,838       11,957,964  
Other
    112,628       5,445  
Proceeds from sale of investment securities available-for-sale
    2,406,504       28,981  
Proceeds from sale of other investment securities
    49,330       246,352  
Net disbursements on loans
    (596,548 )     (362,569 )
Proceeds from sale of loans
    1,715,330       3,549  
Acquisition of loan portfolios
    (6,669 )     (784 )
Assets acquired, net of cash
          (1,633 )
Mortgage servicing rights purchased
    (2,986 )     (23,988 )
Acquisition of premises and equipment
    (98,028 )     (49,652 )
Proceeds from sale of premises and equipment
    19,743       21,951  
Proceeds from sale of foreclosed assets
    51,684       80,278  
 
Net cash provided by investing activities
    2,301,065       133,830  
 
Cash flows from financing activities:
               
Net (decrease) increase in deposits
    (1,198,512 )     936,810  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
    (698,588 )     (106,509 )
Net decrease in other short-term borrowings
    (164,769 )     (650,020 )
Payments of notes payable
    (1,243,674 )     (773,731 )
Proceeds from issuance of notes payable
    630,186       103,249  
Dividends paid
    (98,685 )     (95,223 )
Proceeds from issuance of common stock
    10,120       8,667  
Proceeds from issuance of preferred stock
    390,050        
Treasury stock acquired
    (358 )     (352 )
 
Net cash used in financing activities
    (2,374,230 )     (577,109 )
 
Net increase (decrease) in cash and due from banks
    68,794       (188,073 )
Cash and due from banks at beginning of period
    818,825       950,158  
 
Cash and due from banks at end of period
  $ 887,619     $ 762,085  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

8


Table of Contents

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 in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and the beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale origination / refinancing unit and to carry a maturing loan portfolio. The Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in technology as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 24 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. 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 2008 presentation.
The statement of condition data as of December 31, 2007 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the statements presented as of June 30, 2008, December 31, 2007 and June 30, 2007 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, 2007, included in the Corporation’s 2007 Annual Report. The Corporation’s Form 10-K filed on February 29, 2008 incorporates by reference the 2007 Annual Report.
Note 2 — Recent Accounting Developments
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the Financial Accounting Standards Board (“FASB”) issued financial staff position FSP FAS No. 157-2 which defers for one year the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis.

9


Table of Contents

The staff position also amends SFAS No. 157 to exclude SFAS No. 13 “Accounting for Leases” and its related interpretive accounting pronouncements that address leasing transactions. The Corporation adopted the provisions of SFAS No. 157 that were not deferred by FSP FAS No. 157-2, commencing in the first quarter of 2008. The provisions of SFAS No. 157 are to be applied prospectively. Refer to Note 12 to these consolidated financial statements for the disclosures required for the quarter and six months ended June 30, 2008. The adoption of SFAS No. 157 in January 1, 2008 did not have an impact in beginning retained earnings.
SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115”
In February 2007, the FASB issued SFAS No. 159, which provided companies with an option to report selected financial assets and liabilities at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between the carrying amount and the fair value at the election date is recorded as a transition adjustment to beginning retained earnings. Subsequent changes in fair value are recognized in earnings. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The Corporation adopted the provisions of SFAS No. 159 in January 2008.
The Corporation elected the fair value option for approximately $1.2 billion of whole loans held-in-portfolio by PFH. Additionally, management adopted the fair value option for approximately $287 million of loans and $287 million of bond certificates associated with PFH’s on-balance sheet securitizations that were outstanding as of December 31, 2007. These loans serve as collateral for the bond certificates.
Refer to Note 11 to these consolidated financial statements for the impact of the initial adoption of SFAS No. 159 to beginning retained earnings as of January 1, 2008 and additional disclosures as of June 30, 2008.
FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1, which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of condition. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. The adoption of FSP FIN No. 39-1 in January 2008 did not have a material impact on the Corporation’s consolidated financial statements and disclosures. The Corporation’s policy is not to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement nor to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments.
SFAS No. 141-R “Statement of Financial Accounting Standards No. 141(R), Business Combinations (a revision of SFAS No. 141)”
SFAS No. 141(R), issued in December 2007, will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Corporation will account for business combinations under this statement include the following: the acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by

10


Table of Contents

the acquirer. Additionally, SFAS No. 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Corporation will be required to prospectively apply SFAS No. 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS No. 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS No. 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented on the consolidated financial statements.
SFAS No. 160 “Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51”
In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity on the consolidated financial statements and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted. Management will be evaluating the effects, if any, that the adoption of this statement will have on its consolidated financial statements.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities”
In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. The standard will be effective for all of the Corporation’s interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how the Corporation accounts for these instruments. Management will be evaluating the enhanced disclosure requirements.
SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles”
SFAS No. 162, issued by the FASB in May 2008, identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Management does not expect SFAS No. 162 to have a material impact on the Corporation’s consolidated financial statements. The Board does not expect that this statement will result in a change in current accounting practice. However, transition provisions have been provided in the unusual circumstance that the application of the provisions of this statement results in a change in accounting practice.
Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair Value through Earnings”
On November 5, 2007, the SEC issued Staff SAB 109, which requires that the fair value of a written loan commitment that is marked-to-market through earnings should include the future cash flows related to the loan’s servicing rights. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets). SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans that will be held-for-sale when funded that are marked-to-market as derivatives under SFAS No. 133 (derivative loan commitments); and (2) other written loan commitments that are accounted for at fair value through earnings under SFAS No. 159’s fair-value election.

11


Table of Contents

SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the expected future cash flows related to the associated servicing of the loan to be recognized only after the servicing asset had been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB 109 will be applied prospectively to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The implementation of SAB 109 did not have a material impact to the Corporation’s consolidated financial statements, including disclosures, for the six months ended June 30, 2008.
FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”
The objective of FSP FAS 140-3, issued by the FASB in February 2008, is to provide implementation guidance on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate de-linked transactions.
Current practice records the transfer as a sale and the repurchase agreement as a financing. The FSP FAS 140-3 requires the recognition of the transfer and the repurchase agreement as one linked transaction, unless all of the following criteria are met: (1) the initial transfer and the repurchase financing are not contractually contingent on one another; (2) the initial transferor has full recourse upon default, and the repurchase agreement’s price is fixed and not at fair value; (3) the financial asset is readily obtainable in the marketplace and the transfer and repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing is before the maturity of the financial asset. The scope of this FSP is limited to transfers and subsequent repurchase financings that are entered into contemporaneously or in contemplation of one another.
FSP FAS 140-3 will be effective for the Corporation on January 1, 2009. Early adoption is prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets”
FSP FAS 142-3, issued by the FASB in April 2008, amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets”. In developing these assumptions, an entity should consider its own historical experience in renewing or extending similar arrangements adjusted for entity specific factors or, in the absence of that experience, the assumptions that market participants would use about renewals or extensions adjusted for the entity specific factors.
FSP FAS 142-3 shall be applied prospectively to intangible assets acquired after the effective date. This FSP will be effective for the Corporation on January 1, 2009. Early adoption is prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
Note 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 other banks. Those required average reserve balances were $665 million as of June 30, 2008 (December 31, 2007 — $678 million; June 30, 2007 — $603 million). Cash and due from banks as well as other short-term, highly-liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, at June 30, 2008, the Corporation had securities with a market value of $274 thousand (December 31, 2007 - securities with a market value of $273 thousand; June 30, 2007 — securities with a market value of $445 thousand); segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities were classified in the consolidated statement of condition within the other trading securities category.

12


Table of Contents

As required by the Puerto Rico International Banking Center Regulatory Act, as of June 30, 2008, December 31, 2007, and June 30, 2007, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally divided for the two IBEs, which were considered restricted assets.
As part of a line of credit facility with a financial institution, as of June 30, 2008, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2007 — $1.9 million; June 30, 2007 — $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.
As of June 30, 2008, the Corporation had restricted cash of $3.5 million (December 31, 2007 — $3.5 million) to support a letter of credit related to a service settlement agreement.
Note 4 — Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Investment securities available-for-sale, at fair value
  $ 2,716,718     $ 2,944,643     $ 3,264,299  
Investment securities held-to-maturity, at amortized cost
          339       501  
Loans held-for-sale measured at lower of cost or market value
    36,613       42,428        
Loans measured at fair value pursuant to SFAS No. 159
    167,646              
Loans held-in-portfolio
    7,727,951       8,489,814       9,062,900  
 
 
  $ 10,648,928     $ 11,477,224     $ 12,327,700  
 
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 June 30, 2008, December 31, 2007 and June 30, 2007 were as follows:
                                 
    AS OF JUNE 30, 2008
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 461,404     $ 542     $ 1,195     $ 460,751  
Obligations of U.S. Government sponsored entities
    4,588,854       27,677       10,781       4,605,750  
Obligations of Puerto Rico, States and political subdivisions
    126,775       243       1,836       125,182  
Collateralized mortgage obligations
    1,626,202       3,487       21,079       1,608,610  
Mortgage-backed securities
    889,613       5,743       11,318       884,038  
Equity securities
    28,607       441       13,642       15,406  
Others
    2,590                   2,590  
 
 
  $ 7,724,045     $ 38,133     $ 59,851     $ 7,702,327  
 

13


Table of Contents

                                 
    AS OF DECEMBER 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 476,104     $ 3     $ 5,011     $ 471,096  
Obligations of U.S. Government sponsored entities
    5,450,028       52,971       5,885       5,497,114  
Obligations of Puerto Rico, States and political subdivisions
    103,206       470       2,184       101,492  
Collateralized mortgage obligations
    1,403,292       3,754       10,506       1,396,540  
Mortgage-backed securities
    1,017,302       4,690       11,864       1,010,128  
Equity securities
    33,299       690       36       33,953  
Others
    4,812                   4,812  
 
 
  $ 8,488,043     $ 62,578     $ 35,486     $ 8,515,135  
 
                                 
    AS OF JUNE 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 500,193           $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    6,016,206             174,448       5,841,758  
Obligations of Puerto Rico, States and political subdivisions
    117,372     $ 170       3,754       113,788  
Collateralized mortgage obligations
    1,544,362       6,122       18,435       1,532,049  
Mortgage-backed securities
    991,440       1,529       32,771       960,198  
Equity securities
    55,250       1,173       11,074       45,349  
Others
    17,940       809             18,749  
 
 
  $ 9,242,763     $ 9,803     $ 278,098     $ 8,974,468  
 

14


Table of Contents

The table below shows the Corporation’s amortized cost, 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 as of June 30, 2008, December 31, 2007 and June 30, 2007.
                         
    AS OF JUNE 30, 2008
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 277,645     $ 1,195     $ 276,450  
Obligations of U.S. Government sponsored entities
    2,104,165       10,781       2,093,384  
Obligations of Puerto Rico, States and political subdivisions
    31,745       112       31,633  
Collateralized mortgage obligations
    923,625       10,626       912,999  
Mortgage-backed securities
    277,464       3,388       274,076  
Equity securities
    27,268       13,634       13,634  
 
 
  $ 3,641,912     $ 39,736     $ 3,602,176  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 49,012     $ 1,724     $ 47,288  
Collateralized mortgage obligations
    218,656       10,453       208,203  
Mortgage-backed securities
    276,775       7,930       268,845  
Equity securities
    29       8       21  
 
 
  $ 544,472     $ 20,115     $ 524,357  
 
                         
    Total
            Gross        
    Amortized   Unrealized Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 277,645     $ 1,195     $ 276,450  
Obligations of U.S. Government sponsored entities
    2,104,165       10,781       2,093,384  
Obligations of Puerto Rico, States and political subdivisions
    80,757       1,836       78,921  
Collateralized mortgage obligations
    1,142,281       21,079       1,121,202  
Mortgage-backed securities
    554,239       11,318       542,921  
Equity securities
    27,297       13,642       13,655  
 
 
  $ 4,186,384     $ 59,851     $ 4,126,533  
 

15


Table of Contents

                         
    AS OF DECEMBER 31, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 67,107     $ 185     $ 66,922  
Obligations of Puerto Rico, States and political subdivisions
    2,600       2       2,598  
Collateralized mortgage obligations
    349,084       2,453       346,631  
Mortgage-backed securities
    99,328       667       98,661  
Equity securities
    28       10       18  
 
 
  $ 518,147     $ 3,317     $ 514,830  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 466,111     $ 5,011     $ 461,100  
Obligations of U.S. Government sponsored entities
    1,807,457       5,700       1,801,757  
Obligations of Puerto Rico, States and political subdivisions
    65,642       2,182       63,460  
Collateralized mortgage obligations
    430,034       8,053       421,981  
Mortgage-backed securities
    656,879       11,197       645,682  
Equity securities
    300       26       274  
 
 
  $ 3,426,423     $ 32,169     $ 3,394,254  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 466,111     $ 5,011     $ 461,100  
Obligations of U.S. Government sponsored entities
    1,874,564       5,885       1,868,679  
Obligations of Puerto Rico, States and political subdivisions
    68,242       2,184       66,058  
Collateralized mortgage obligations
    779,118       10,506       768,612  
Mortgage-backed securities
    756,207       11,864       744,343  
Equity securities
    328       36       292  
 
 
  $ 3,944,570     $ 35,486     $ 3,909,084  
 

16


Table of Contents

                         
    AS OF JUNE 30, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 475,542     $ 13,283     $ 462,259  
Obligations of Puerto Rico, States and political subdivisions
    21,652       473       21,179  
Collateralized mortgage obligations
    189,570       2,077       187,493  
Mortgage-backed securities
    39,132       873       38,259  
Equity securities
    53,683       11,047       42,636  
 
 
  $ 779,579     $ 27,753     $ 751,826  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 500,193     $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    5,540,664       161,165       5,379,499  
Obligations of Puerto Rico, States and political subdivisions
    69,136       3,281       65,855  
Collateralized mortgage obligations
    647,337       16,358       630,979  
Mortgage-backed securities
    869,343       31,898       837,445  
Equity securities
    310       27       283  
 
 
  $ 7,626,983     $ 250,345     $ 7,376,638  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 500,193     $ 37,616     $ 462,577  
Obligations of U.S. Government sponsored entities
    6,016,206       174,448       5,841,758  
Obligations of Puerto Rico, States and political subdivisions
    90,788       3,754       87,034  
Collateralized mortgage obligations
    836,907       18,435       818,472  
Mortgage-backed securities
    908,475       32,771       875,704  
Equity securities
    53,993       11,074       42,919  
 
 
  $ 8,406,562     $ 278,098     $ 8,128,464  
 
As of June 30, 2008, “Obligations of Puerto Rico, States and political subdivisions” include approximately $55 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) in the Corporation’s available-for-sale and held-to-maturity securities portfolios. The rating on these bonds by Moody’s Investors Service (“Moody’s”) is Ba1, one notch below investment grade, while Standard & Poor’s (“S&P”) rates them as investment grade. As of June 30, 2008, these Appropriation Bonds represented approximately $1.6 million in net unrealized losses in the Corporation’s investment securities available-for-sale portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities as of June 30, 2008, except for the obligations of the Puerto Rico government described above and certain equity securities which have recently declined in value during 2008, are primarily associated with U.S. Agency and government sponsored-issued mortgage-backed securities and

17


Table of Contents

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. Management believes that the unrealized losses in these available-for-sale securities as of June 30, 2008 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the six months ended June 30, 2008, the Corporation recognized through earnings approximately $2.9 million in losses considered other-than-temporary on residual interests classified as available-for-sale. During the six months ended June 30, 2007, the Corporation recognized through earnings approximately $30.7 million in losses in residual interests classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired.
The following table states the names of issuers and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
                                                 
    June 30, 2008   December 31, 2007   June 30, 2007
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,137,288     $ 1,131,842     $ 1,132,834     $ 1,128,544     $ 1,261,541     $ 1,238,499  
FHLB
    4,506,509       4,521,314       5,649,729       5,693,170       6,069,496       5,897,748  
Freddie Mac
    816,570       810,182       918,976       913,609       1,011,125       996,046  
 
Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of June 30, 2008, December 31, 2007 and June 30, 2007 were as follows:
                                 
    AS OF JUNE 30, 2008
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 34,084           $ 8     $ 34,076  
Obligations of Puerto Rico, States and political subdivisions
    185,852     $ 280       1,566       184,566  
Collateralized mortgage obligations
    267             15       252  
Others
    12,280       38       2       12,316  
 
 
  $ 232,483     $ 318     $ 1,591     $ 231,210  
 

18


Table of Contents

                                 
    AS OF DECEMBER 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 395,974     $ 15       $1,497     $ 394,492  
Obligations of Puerto Rico, States and political subdivisions
    76,464       3,108       26       79,546  
Collateralized mortgage obligations
    310             17       293  
Others
    11,718       94       4       11,808  
 
 
  $ 484,466     $ 3,217     $ 1,544     $ 486,139  
 
                                 
    AS OF JUNE 30, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 340,323     $ 13     $ 36     $ 340,300  
Obligations of Puerto Rico, States and political subdivisions
    72,406       441       374       72,473  
Collateralized mortgage obligations
    354             19       335  
Others
    16,396       39       7       16,428  
 
 
  $ 429,479     $ 493     $ 436     $ 429,536  
 
The following table shows the Corporation’s amortized cost, 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, as of June 30, 2008, December 31, 2007 and June 30, 2007:
                         
    AS OF JUNE 30, 2008
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 34,085     $ 8     $ 34,077  
Obligations of Puerto Rico, States and political subdivisions
    41,694       1,566       40,128  
 
 
  $ 75,779     $ 1,574     $ 74,205  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Collateralized mortgage obligations
  $ 267     $ 15     $ 252  
Others
    1,000       2       998  
 
 
  $ 1,267     $ 17     $ 1,250  
 

19


Table of Contents

                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 34,085     $ 8     $ 34,077  
Obligations of Puerto Rico, States and political subdivisions
    41,694       1,566       40,128  
Collateralized mortgage obligations
    267       15       252  
Others
    1,000       2       998  
 
 
  $ 77,046     $ 1,591     $ 75,455  
 
                         
    AS OF DECEMBER 31, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,129     $ 1,497     $ 194,632  
Obligations of Puerto Rico, States and political subdivisions
    1,883       26       1,857  
Others
    1,250       1       1,249  
 
 
  $ 199,262     $ 1,524     $ 197,738  
 
                         
    12 months or more
    Gross
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Collateralized mortgage obligations
  $ 310     $ 17     $ 293  
Others
    1,250       3       1,247  
 
 
  $ 1,560     $ 20     $ 1,540  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,129     $ 1,497     $ 194,632  
Obligations of Puerto Rico, States and political subdivisions
    1,883       26       1,857  
Collateralized mortgage obligations
    310       17       293  
Others
    2,500       4       2,496  
 
 
  $ 200,822     $ 1,544     $ 199,278  
 
                         
    AS OF JUNE 30, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 240,336     $ 36     $ 240,300  
Obligations of Puerto Rico, States and political subdivisions
    20,995       223       20,772  
Others
    250       2       248  
 
 
  $ 261,581     $ 261     $ 261,320  
 

20


Table of Contents

                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 24,545     $ 151     $ 24,394  
Collateralized mortgage obligations
    354       19       335  
Others
    1,250       5       1,245  
 
 
  $ 26,149     $ 175     $ 25,974  
 
                         
    Total
    Gross
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 240,336     $ 36     $ 240,300  
Obligations of Puerto Rico, States and political subdivisions
    45,540       374       45,166  
Collateralized mortgage obligations
    354       19       335  
Others
    1,500       7       1,493  
 
 
  $ 287,730     $ 436     $ 287,294  
 
Management believes that the unrealized losses in the held-to-maturity portfolio as of June 30, 2008 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.
Note 7 — Mortgage Servicing Rights and Residual Interests on Transfers of Mortgage Loans
The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers (sales and securitizations).
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.
Classes of mortgage servicing rights were determined based on the different markets or types of assets served. 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.
Effective January 1, 2007, upon the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation recorded a cumulative effect adjustment to increase the 2007 beginning balance of MSRs by $15.3 million, which resulted in a $9.6 million, net of tax, increase in the retained earnings account of stockholders’ equity in 2007.
At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior.

21


Table of Contents

The changes in MSRs measured using the fair value method for the six months ended June 30, 2008 and June 30, 2007 were:
                         
    Residential MSRs    
(In thousands)   Banking subsidiaries   PFH   Total
 
Fair value at January 1, 2008
  $ 110,612     $ 81,012     $ 191,624  
Purchases
    2,986             2,986  
Servicing from securitizations or asset transfers
    15,521             15,521  
Changes due to payments on loans (1)
    (5,618 )     (13,180 )     (18,798 )
Changes in fair value due to changes in valuation model inputs or assumptions
    6,390       (11,568 )     (5,178 )
 
Fair value as of June 30, 2008
  $ 129,891     $ 56,264     $ 186,155  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
                         
    Residential MSRs    
(In thousands)   Banking subsidiaries   PFH   Total
 
Fair value at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
Purchases
    2,030       21,958       23,988  
Servicing from securitizations or asset transfers
    11,968       8,040       20,008  
Changes due to payments on loans (1)
    (4,561 )     (16,837 )     (21,398 )
Changes in fair value due to changes in valuation model inputs or assumptions
    3,887       (4,015 )     (128 )
Other changes
          (66 )     (66 )
 
Fair value as of June 30, 2007
  $ 104,755     $ 93,118     $ 197,873  
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
Residential mortgage loans serviced for others were $20.4 billion as of June 30, 2008 (December 31, 2007 — $20.5 billion; June 30, 2007 — $15.4 billion).
Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in the 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.
The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased, as well as information on the residual interests derived from securitizations.

22


Table of Contents

Popular Financial Holdings
Key economic assumptions used to estimate the fair value of residual interests and MSRs derived from PFH’s securitization transactions and the sensitivity of residual cash flows to immediate changes in those assumptions as of period end were as follows:
                                                   
    June 30, 2008     December 31, 2007
            Originated MSRs             Originated MSRs
    Residual   Fixed-rate   ARM     Residual   Fixed-rate   ARM
(In thousands)   Interests   loans   loans     Interests   loans   loans
       
Carrying amount of retained interests (fair value)
  $ 37,490     $ 41,109     $ 2,080       $ 45,009     $ 47,243     $ 11,335  
Weighted average life of collateral
  7.8 years   5.4 years   3.4 years     7.6 years   4.3 years   2.6 years
Weighted average prepayment speed
(annual rate)
  16.6% (Fixed-rate loans)
24.0% (ARM loans)
    16.6 %     24.0 %     20.7% (Fixed-rate loans)
30.0% (ARM loans)
    20.7 %   30.0 %
Impact on fair value of 10% adverse change
  $ 3,428     ($ 723 )   $ 240       $ 5,031     ($ 192 )   $ 272  
Impact on fair value of 20% adverse change
  $ 6,820     ($ 1,831 )   $ 467       $ 6,766     ($ 886 )   $ 688  
Weighted average discount rate (annual rate)
    40.0 %     17.0 %     17.0 %       40.0 %     17.0 %     17.0 %
Impact on fair value of 10% adverse change
  ($ 2,756 )   ($ 1,452 )   ($ 18 )     ($ 2,884 )   ($ 1,466 )   ($ 225 )
Impact on fair value of 20% adverse change
  ($ 5,159 )   ($ 2,808 )   ($ 36 )     ($ 5,427 )   ($ 2,846 )   ($ 441 )
Cumulative credit losses
  5.62% to 16.29%                 3.35% to 11.03%            
Impact on fair value of 10% adverse change
  ($ 7,527 )                 ($ 8,829 )            
Impact on fair value of 20% adverse change
  ($ 14,359 )                 ($ 15,950 )            
       
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.
PFH also owns servicing rights purchased from other institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions as of period end were as follows:
                                   
    Purchased MSRs
    June 30, 2008     December 31, 2007
                               
(In thousands)   Fixed-rate loans   ARM loans     Fixed-rate loans   ARM loans
       
Carrying amount of retained interests (fair value)
  $ 9,416     $ 3,659       $ 7,808     $ 14,626  
Weighted average life of collateral
  6.6 years   3.5 years     4.7 years   3.4 years
Weighted average prepayment speed (annual rate)
    14.1 %     20.6 %       18.3 %     25.2 %
Impact on fair value of 10% adverse change
  ($ 415 )   ($ 208 )     ($ 329 )   ($ 719 )
Impact on fair value of 20% adverse change
  ($ 817 )   ($ 402 )     ($ 631 )   ($ 1,377 )
Weighted average discount rate (annual rate)
    17.0 %     17.0 %       17.0 %     17.0 %
Impact on fair value of 10% adverse change
  ($ 522 )   ($ 136 )     ($ 330 )   ($ 509 )
Impact on fair value of 20% adverse change
  ($ 994 )   ($ 262 )     ($ 633 )   ($ 981 )
       
Another key assumption used to estimate the fair value of PFH’s MSRs was the default/delinquency rate which varies by the delinquency bucket in which the particular loans are categorized. The sensitivity to changes in the default curve as of June 30, 2008 was as follows:
                                   
    Originated MSRs     Purchased MSRs
                               
(In thousands)   Fixed-rate loans   ARM loans     Fixed-rate loans   ARM loans
       
Fair value
  $ 41,109     $ 2,080       $ 9,416     $ 3,659  
Impact on fair value of 10% adverse change
  ($ 1,235 )   ($ 1,408 )     ($ 315 )   ($ 1,978 )
Impact on fair value of 20% adverse change
  ($ 2,471 )   ($ 2,795 )     ($ 630 )   ($ 3,935 )
       

23


Table of Contents

Banking subsidiaries
The Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans and under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the banking subsidiaries have fixed rates. Under these servicing agreements, the banking subsidiaries do not earn significant prepayment penalty fees on the underlying loans serviced.
Key economic assumptions used in measuring the servicing rights retained at the date of the residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during the quarter ended June 30, 2008 and year ended December 31, 2007 were:
                 
    June 30, 2008   December 31, 2007
 
Prepayment speed
    12.8 %     9.5 %
Weighted average life
  7.8 years   10.6 years
Discount rate (annual rate)
    11.5 %     10.7 %
 
Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                 
    Originated MSRs
(In thousands)   June 30, 2008   December 31, 2007
 
Fair value of retained interests
  $ 105,235     $ 86,453  
Weighted average life (in years)
  12.4 years   12.5 years
Weighted average prepayment speed (annual rate)
    8.1 %     8.0 %
Impact on fair value of 10% adverse change
  ($ 4,126 )   ($ 1,983 )
Impact on fair value of 20% adverse change
  ($ 7,154 )   ($ 3,902 )
Weighted average discount rate (annual rate)
    11.49 %     10.83 %
Impact on fair value of 10% adverse change
  ($ 5,524 )   ($ 2,980 )
Impact on fair value of 20% adverse change
  ($ 9,757 )   ($ 5,795 )
 
The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions as of period end were as follows:
                   
    Purchased MSRs
(In thousands)   June 30, 2008     December 31, 2007
       
Fair value of retained interests
  $ 24,656       $ 24,159  
Weighted average life of collateral
  12.3 years     12.4 years
Weighted average prepayment speed (annual rate)
    8.2 %       8.0 %
Impact on fair value of 10% adverse change
  ($ 1,204 )     ($ 719 )
Impact on fair value of 20% adverse change
  ($ 1,943 )     ($ 1,407 )
Weighted average discount rate (annual rate)
    13.1 %       10.8 %
Impact on fair value of 10% adverse change
  ($ 1,560 )     ($ 956 )
Impact on fair value of 20% adverse change
  ($ 2,597 )     ($ 1,846 )
       
The sensitivity analyses presented in the tables above for residual interests and servicing rights of PFH and the banking subsidiaries are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity

24


Table of Contents

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 8 — Other Assets
The caption of other assets in the consolidated statements of condition consists of the following major categories:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Net deferred tax assets
  $ 807,884     $ 525,369     $ 419,611  
Trade receivables from brokers and counterparties
    515,273       1,160       19,685  
Securitization advances and related assets
    299,519       168,599       106,123  
Bank-owned life insurance program
    219,867       215,171       210,333  
Prepaid expenses
    198,286       188,237       200,307  
Investments under the equity method
    108,008       89,870       82,620  
Derivative assets
    50,121       76,958       77,484  
Others
    256,884       191,630       181,437  
 
Total
  $ 2,455,842     $ 1,456,994     $ 1,297,600  
 
Note 9 — Derivative Instruments and Hedging
Refer to Note 30 to the consolidated financial statements included in the 2007 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities during the second quarter of 2008.
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of June 30, 2008 and December 31, 2007 were as follows:
                                         
As of June 30, 2008
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 180,900     $ 742     $ 354     $ 237        
 
Liability Hedges
                                       
Interest rate swaps
  $ 200,000           $ 4,517     ($ 2,936 )      
 
                                         
As of December 31, 2007
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 142,700     $ 169     $ 509     ($ 207 )      
 
Liability Hedges
                                       
Interest rate swaps
  $ 200,000           $ 3,179     ($ 2,066 )      
 
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding as of June 30, 2008 have a maximum remaining maturity of 84 days.

25


Table of Contents

The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 9.3 months.

26


Table of Contents

Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding as of June 30, 2008 and December 31, 2007 were as follows:
                         
As of June 30, 2008
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 379,115     $ 1,383     $ 987  
Interest rate swaps associated with:
                       
- bond certificates offered in an on-balance sheet securitization
    67,985             2,557  
- swaps with corporate clients
    963,773             23,969  
- swaps offsetting position of corporate client swaps
    963,773       23,969        
Foreign currency and exchange rate commitments w/ clients
    28              
Foreign currency and exchange rate commitments w/ counterparty
    28              
Interest rate caps
    214,500       803        
Interest rate caps for benefit of corporate clients
    114,500             802  
Indexed options on deposits
    198,307       21,156        
Indexed options on S&P Notes
    31,152       2,286        
Bifurcated embedded options
    214,766             24,784  
Mortgage rate lock commitments
    98,139       122       812  
 
Total
  $ 3,246,066     $ 49,719     $ 53,911  
 
                         
As of December 31, 2007
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 693,096     $ 74     $ 3,232  
Interest rate swaps associated with:
                       
- short-term borrowings
    200,000             1,129  
- bond certificates offered in an on-balance sheet securitization
    185,315             2,918  
- swaps with corporate clients
    802,008             24,593  
- swaps offsetting position of corporate client swaps
    802,008       24,593        
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    146             1  
Foreign currency and exchange rate commitments w/ counterparty
    146       2        
Interest rate caps
    150,000       27        
Interest rate caps for benefit of corporate clients
    50,000             18  
Indexed options on deposits
    211,267       45,954        
Indexed options on S&P Notes
    31,152       5,962        
Bifurcated embedded options
    218,327             50,227  
Mortgage rate lock commitments
    148,501       258       386  
 
Total
  $ 3,525,429     $ 76,870     $ 82,504  
 
Interest Rates Swaps
The Corporation has an interest rate swap outstanding with a notional amount of $68 million to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized gains of $2.4 million for the second quarter and $0.4 million for the six months ended June 30, 2008 due to changes in the fair value of this swap. The Corporation recognized gains of $1.7 million for the second quarter and $1.9 million for the six months ended June 30, 2007 due to changes in its fair value.
In addition, the Corporation also utilizes interest rate swaps in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and conditions with credit limit approvals and monitoring procedures.
Interest Rate Caps

27


Table of Contents

The Corporation has interest rate caps to economically hedge the exposure to rising interest rates of certain short-term borrowings. Additionally, the Corporation enters into interest rate caps as an intermediary on behalf of its customers and simultaneously takes offsetting positions with creditworthy counterparts under the same terms and conditions thus minimizing its market and credit risks.
Forward Contracts
The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter and six months ended June 30, 2008, gains of $1.1 million and $2.2 million, respectively, were recognized due to changes in fair value of these forward sales commitments. For the quarter and six months ended June 30, 2007, gains of $2.3 million and $1.6 million, respectively, were recognized due to changes in fair value of these forward sales commitments. Additionally, the Corporation has forward commitments to hedge the changes in fair value of certain MBS securities classified as trading securities. For the quarter and six months ended June 30, 2008, the Corporation recognized gains of $611 thousand and $1.4 million, respectively, due to changes in the fair value of these forward commitments, which were recognized as part of trading gains and losses. For the quarter and six months ended June 30, 2007, gains of $428 thousand and $259 thousand, respectively, were recognized due to changes in fair value of these forward commitments.
Mortgage Rate Lock Commitments
The Corporation has mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed for a specified period of time. The mortgage rate lock commitments are accounted as derivatives pursuant to SFAS No. 133. These contracts are recognized at fair value with changes directly reported in income as part of gain on sale of loans. For the quarter and six months ended June 30, 2008, losses of $639 thousand and $562 thousand, respectively, were recognized due to changes in fair value of these commitments. For the quarter and six months ended June 30, 2007, the Corporation recognized losses of $2.3 million and $1.5 million, respectively, related to these commitments.
Note 10 — Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2008 and 2007, allocated by reportable segments, were as follows (refer to Note 24 for the definition of the Corporation’s reportable segments):
                                         
2008
    Balance at   Goodwill   Purchase
accounting
          Balance at
(In thousands)   January 1, 2008   acquired   adjustments   Other   June 30, 2008
 
Banco Popular de Puerto Rico:
                                       
Commercial Banking
  $ 35,371           ($ 115 )         $ 35,256  
Consumer and Retail Banking
    136,407             (562 )           135,845  
Other Financial Services
    8,621     $ 153           $ 3       8,777  
Banco Popular North America:
                                       
Banco Popular North America
    404,237                         404,237  
E-LOAN
                             
Popular Financial Holdings
                             
EVERTEC
    46,125       1,000             (2,414 )     44,711  
 
Total Popular, Inc.
  $ 630,761     $ 1,153     ($ 677 )   ($ 2,411 )   $ 628,826  
 

28


Table of Contents

                                 
2007
    Balance at   Goodwill           Balance at
(In thousands)   January 1, 2007   acquired   Other   June 30, 2007
 
Banco Popular de Puerto Rico:
                               
Commercial Banking
  $ 14,674                 $ 14,674  
Consumer and Retail Banking
    34,999                   34,999  
Other Financial Services
    4,391     $ 24             4,415  
Banco Popular North America:
                               
Banco Popular North America
    404,237                   404,237  
E-LOAN
    164,410                       164,410  
Popular Financial Holdings
                       
EVERTEC
    45,142       775       ($183 )     45,734  
 
Total Popular, Inc.
  $ 667,853     $ 799       ($183 )   $ 668,469  
 
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 six months ended June 30, 2008 at the BPPR reportable segment were mostly related to the acquisition of Citibank’s retail branches in Puerto Rico (acquisition completed in December 2007). The reduction in goodwill in the EVERTEC reportable segment during the six months ended June 30, 2008 was the result of the sale of substantially all assets of EVERTEC’s health processing division during the second quarter of 2008.
As of June 30, 2008, other than goodwill, the Corporation had $17 million of identifiable intangibles with indefinite useful lives (December 31, 2007 — $17 million; June 30, 2007 — $65 million).
The following table reflects the components of other intangible assets subject to amortization:
                                                 
    June 30, 2008   December 31, 2007   June 30, 2007
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 66,040     $ 26,141     $ 66,381     $ 23,171     $ 71,629     $ 46,982  
 
                                               
Other customer relationships
    9,852       4,803       10,375       4,131       11,543       3,113  
 
                                               
Other intangibles
    8,219       6,150       8,164       5,385       9,146       4,534  
 
 
                                               
Total
  $ 84,111     $ 37,094     $ 84,920     $ 32,687     $ 92,318     $ 54,629  
 
Certain core deposit intangibles with a gross amount of $699 thousand became fully amortized or written off during the six months ended June 30, 2008 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.
During the quarter and six months ended June 30, 2008, the Corporation recognized $2.5 million and $5.0 million, respectively, in amortization expense related to other intangible assets with definite lives (June 30, 2007 - $2.8 million and $5.8 million in the quarter and six months ended June 30, 2007, respectively).

29


Table of Contents

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)
2008
  $ 4,717  
2009
    8,332  
2010
    7,479  
2011
    6,125  
2012
    5,105  
No significant events or circumstances have occurred during the quarter ended June 30, 2008 that would reduce the fair value of any reporting unit below its carrying amount.
Note 11 — Fair Value Option
As indicated in Note 2 to the consolidated financial statements, the Corporation elected to measure at fair value certain loans and borrowings outstanding at January 1, 2008 pursuant to the fair value option provided by SFAS No. 159. These financial instruments, all of which pertained to the operations of Popular Financial Holdings that are running off, were as follows:
    Approximately $1.2 billion of whole loans held-in-portfolio by PFH that were outstanding as of December 31, 2007. These whole loans consist principally of first lien residential mortgage loans and closed-end second lien loans that were originated through the exited origination channels of PFH (e.g. asset acquisition, broker and retail channels), and home equity lines of credit that had been originated by E-LOAN, but sold to PFH as part of the Corporation’s 2007 U.S. reorganization whereby E-LOAN became a subsidiary of BPNA. Also, to a lesser extent, the loan portfolio included mixed-use / multi-family loans (small commercial category) and manufactured housing loans.
 
      Management believes that accounting for these loans at fair value provides a more relevant and transparent measurement of the realizable value of the assets and differentiates the PFH portfolio from the loan portfolios that the Corporation will continue to originate through channels other than PFH.
 
    Approximately $287 million of “owned-in-trust” loans and $287 million of bond certificates associated with PFH securitization activities that were outstanding as of December 31, 2007. The “owned-in-trust” loans are pledged as collateral for the bond certificates as a financing vehicle through on-balance sheet securitization transactions. These loan securitizations conducted by the Corporation did not meet the sale criteria under SFAS No. 140; accordingly, the transactions are treated as on-balance sheet securitizations for accounting purposes. Due to the terms of the transactions, particularly the existence of an interest rate swap agreement and to a lesser extent clean up calls, the Corporation was unable to recharacterize these loan securitizations as sales for accounting purposes in 2007. The “owned-in-trust” loans include first lien residential mortgage loans, closed-end second lien loans, mixed-use / multi-family loans (small commercial category) and manufactured housing loans. The majority of the portfolio is comprised of first lien residential mortgage loans.
 
      These “owned-in-trust” loans do not pose the same magnitude of risk to the Corporation as those loans owned outright because certain of the potential losses related to “owned-in-trust” loans are born by the bondholders and not the Corporation. Upon the adoption of SFAS No. 159, the loans and related bonds are both measured at fair value, thus their net position better portrays the credit risk born by the Corporation.
Excluding the PFH loans elected for the fair value option as described above, PFH’s reportable segment held approximately $1.8 billion of additional loans at the time of fair value option election on January 1, 2008. Of these remaining loans, $1.4 billion were classified as loans held-for-sale and were not subject to the fair value option as the loans were intended to be sold to an institutional buyer during the first quarter of 2008. These loans were sold in March 2008. The remaining $0.4 billion in other loans held-in-portfolio at PFH as of that same date consisted principally of a small portfolio of auto loans that was acquired from E-LOAN, warehousing revolving lines of credit

30


Table of Contents

with monthly advances and pay-downs, and construction credit agreements in which permanent financing will be with a lender other than PFH. Although these businesses are running off, PFH must contractually continue to fund the revolving credit arrangements.
There were no other assets or liabilities elected for the fair value option after January 1, 2008.
Upon adoption of SFAS No. 159 the Corporation recognized a $262 million negative after-tax adjustment ($409 million before tax) to beginning retained earnings due to the transitional adjustment for electing the fair value option, as detailed in the following table.
                         
            Cumulative effect    
    January 1, 2008   adjustment to   January 1, 2008
    (Carrying value   January 1, 2008   fair value
    prior to   retained earnings-   (Carrying value
(In thousands)   adoption)   Gain (Loss)   after adoption)
 
Loans
  $ 1,481,297     ($ 494,180 )   $ 987,117  
 
Notes payable (bond certificates)
  ($ 286,611 )   $ 85,625     ($ 200,986 )
 
 
                       
Pre-tax cumulative effect of adopting fair value option accounting
          ($ 408,555 )        
Net increase in deferred tax asset
            146,724          
 
After-tax cumulative effect of adopting fair value option accounting
          ($ 261,831 )        
 
As of January 1, 2008, the Corporation eliminated $37 million in allowance for loan losses associated to the loan portfolio elected for fair value option accounting and recognized it as part of the cumulative effect adjustment.
The following table presents the differences as of June 30, 2008 between the aggregate fair value, including accrued interest, and aggregate unpaid principal balance (“UPB”) of those loans / notes payable for which the fair value option has been elected. Also, the table presents information of non-accruing loans accounted under the fair value option.
                         
    Aggregate        
    fair value   Aggregate    
    as of   UPB as of   Unrealized
(In thousands)   June 30, 2008   June 30, 2008   (loss) gain
 
Loans
  $ 844,892     $ 1,345,573     ($ 500,681 )
 
Loans past due 90 days or more
  $ 110,433     $ 194,767       ($84,334 )
 
Non-accrual loans (1)
  $ 110,433     $ 194,767       ($84,334 )
 
Notes payable (bond certificates)
  ($ 173,725 )   ($ 253,541 )   $ 79,816  
 
(1)   It is the Corporation’s policy to recognize interest income separately from other changes in fair value. Interest income is included as part of net interest income in the consolidated statement of operations and is based on the note’s contractual rate. Interest income is reversed, if necessary, in accordance with the Corporation’s non-accruing policy for each particular loan type.
 
During the quarter and six-months ended June 30, 2008, the Corporation recognized $31.0 million and $32.7 million, respectively, in estimated net losses attributable to changes in the fair value of loans, including net losses attributable to changes in instrument-specific credit spreads. These estimated net losses were included in the caption “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the consolidated statement of operations. The change in fair value included estimated losses of $6.9 million for the quarter and $43.5 million for the six months ended June 30, 2008 that were attributable to changes in instrument-specific credit spreads. Instrument-specific credit spreads were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.
During the quarter and six months ended June 30, 2008, the Corporation recognized $4.9 million and $6.2 million, respectively, in estimated net losses attributable to changes in the fair value of notes payable (bond certificates),

31


Table of Contents

including changes in instrument-specific credit spreads. The estimated net losses were included in the caption “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the consolidated statement of operations. The change in fair value included estimated losses of $5.3 million for the quarter and $10.0 million for the six months ended June 30, 2008 that were attributable to changes in instrument-specific credit spreads.
As indicated in Note 12 to the consolidated financial statements, these assets and liabilities are categorized as Level 3 under the requirements of SFAS No. 157.
Note 12 — Fair Value Measurement
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2008, the Corporation adopted SFAS No. 157, which provides a framework for measuring fair value under accounting principles generally accepted.
Under SFAS No. 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for the fair value measurement are observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Corporation’s estimates about assumptions that market participants would use in pricing the asset or liability based on the best information available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
    Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.
 
    Level 2- Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.
 
    Level 3- Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability.
The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed price or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently.
The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. Therefore, the estimated fair value may materially differ from the value that could actually be realized on a sale.

32


Table of Contents

Fair Value on a Recurring Basis
The following fair value hierarchy table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at June 30, 2008:
                                 
  At June 30, 2008
    Quoted prices in            
    active markets            
    for identical   Significant other   Significant  
    assets or   observable   unobservable   Balance as of
    liabilities   inputs   inputs   June 30,
(In millions)   Level 1   Level 2   Level 3   2008
 
Assets
                               
 
Investment securities available-for-sale
  $ 10     $ 7,651     $ 41     $ 7,702  
Trading account securities
          154       345       499  
Loans measured at fair value (SFAS No. 159)
                845       845  
Derivatives
          51             51  
Mortgage servicing rights
                186       186  
 
Total
  $ 10     $ 7,856     $ 1,417     $ 9,283  
 
 
                               
Liabilities
                               
 
Notes payable measured at fair value (SFAS No. 159)
              ($ 174 )   ($ 174 )
Derivatives
        ($ 59 )           (59 )
 
Total
        ($ 59 )   ($ 174 )   ($ 233 )
 
The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter and six months ended June 30, 2008:
                                                         
  Quarter ended June 30, 2008
                                                    Changes in
                                                    unrealized
                                                    gains
                                                    (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
    Balance   Gains   included in   in accrued   paydowns           liabilities
    as of   (losses)   other   interest   and   Balance as   still held
    March 31,   included in   comprehensive   receivable   maturities   of June 30,   as of June
(In millions)   2008   earnings   income   / payable   (net)   2008   30, 2008
 
Assets
                                                       
 
Investment securities available-for-sale (e)
  $ 42                       ($ 1 )   $ 41       (a)
Trading account securities
    280     $ 2                   63       345     ($ 1) (b)
Loans measured at fair value (SFAS No. 159)
    927       (31 )         ($ 1 )     (50 )     845       (9) (c)
Mortgage servicing rights
    184       (9 )                 11       186       (1) (d)
 
Total
  $ 1,433     ($ 38 )         ($ 1 )   $ 23     $ 1,417     ($ 11 )
 
 
                                                       
Liabilities
                                                       
 
Notes payable measured at fair value (SFAS No. 159)
  ($ 186 )   ($ 5 )               $ 17     ($ 174 )   ($ 5 )(c)
 
Total
  ($ 186 )   ($ 5 )               $ 17     ($ 174 )   ($ 5 )
 
(a)   Gains (losses) are included in “Net (loss) gain on sale and valuation adjustments of investment securities” in the statement of operations.
 
(b)   Gains (losses) are included in “Trading account profit (loss)” in the statement of operations.
 
(c)   Gains (losses) are included in “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the statement of operations.
 
(d)   Gains (losses) are included in “Other service fees” in the statement of operations.
 
(e)   Other-than-temporary impairment on residual interests classified as available-for-sale amounted to $0.6 million and is classified as realized losses.
 

33


Table of Contents

                                                         
    Six months ended June 30, 2008
                                                    Changes in
                                                    unrealized
                                                    gains
                                                    (losses)
                                    Purchases,           included in
                                    sales,           earnings
                            Increase   issuances,           related to
                    Gains (losses)   (decrease)   settlements,           assets and
    Balance   Gains   included in   in accrued   paydowns           liabilities
    as of   (losses)   other   interest   and   Balance as   still held
    January 1,   included in   comprehensive   receivable   maturities   of June 30,   as of June
(In millions)   2008   earnings   income   / payable   (net)   2008   30, 2008
 
Assets
                                                       
 
Investment securities available-for-sale (e)
  $ 43     $ (2 )   $ 1           $ (1 )   $ 41       (a)
Trading account securities
    273                         72       345     $ (7) (b)
Loans measured at fair value (SFAS No. 159)
    987       (33 )         $ (2 )     (107 )     845       15 (c)
Mortgage servicing rights
    192       (24 )                 18       186       (5) (d)
 
Total
  $ 1,495     $ (59 )   $ 1     $ (2 )   $ (18 )   $ 1,417     $ 3  
 
 
                                                       
Liabilities
                                                       
 
Notes payable measured at fair value (SFAS No. 159)
  $ (201 )   $ (6 )               $ 33     $ (174 )   $ (6) (c)
 
Total
  $ (201 )   $ (6 )               $ 33     $ (174 )   $ (6 )
 
(a)   Gains (losses) are included in “Net (loss) gain on sale and valuation adjustments of investment securities” in the statement of operations.
 
(b)   Gains (losses) are included in “Trading account profit (loss)” in the statement of operations.
 
(c)   Gains (losses) are included in “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the statement of operations.
 
(d)   Gains (losses) are included in “Other service fees” in the statement of operations.
 
(e)   Other-than-temporary impairment on residual interests classified as available-for-sale amounted to $2.9 million and is classified as realized losses.
 
There were no transfers in and / or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarter and six months ended June 30, 2008.
Gains and losses (realized and unrealized) included in earnings for the quarter and six months ended June 30, 2008 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:
                 
    Quarter ended June 30, 2008
            Change in unrealized gains
            or losses relating to assets /
    Total gains (losses)   liabilities still held at
(In millions)   included in earnings   reporting date
 
Interest income
  $ 4        
Other service fees
    (9 )   $ (1 )
Net loss on sale and valuation adjustments of investment securities
    (1 )      
Trading account loss
    (1 )     (1 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (36 )     (14 )
 
Total
  $ (43 )   $ (16 )
 

34


Table of Contents

                 
    Six months ended June 30, 2008
            Change in unrealized gains
            or losses relating to assets /
    Total gains (losses)   liabilities still held at
(In millions)   included in earnings   reporting date
 
Interest income
  $ 9        
Other service fees
    (24 )   ($5 )
Net loss on sale and valuation adjustments of investment securities
    (3 )      
Trading account loss
    (8 )     (7 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (39 )     9
 
Total
  $ (65 )     ($3 )
 
Additionally, the Corporation may be required to measure certain assets at fair value on a nonrecurring basis in accordance with accounting principles generally accepted. The adjustments to fair value usually result from the application of lower of cost or market accounting, identification of impaired loans requiring specific reserves under SFAS No. 114, or write-downs of individual assets. The following table presents those financial assets that were subject to a fair value measurement on a non-recurring basis during the six months ended June 30, 2008 and which are still included in the consolidated statement of condition as of June 30, 2008. The amounts disclosed represent the aggregate of the fair value measurements of those assets as of the end of the reporting period.
 
                                 
    Quoted prices in                        
    active markets   Significant other   Significant        
    for identical   observable   unobservable        
    assets   inputs   inputs    
(In millions)   Level 1   Level 2   Level 3   Total
 
Assets
                               
 
Loans (1)
              $ 426     $ 426  
 
Loans held-for-sale (2)
                5       5  
 
(1)   Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of SFAS No. 114 (as amended by SFAS No. 118).
 
(2)   Relates to lower of cost or market adjustments on transfers from loans held-in-portfolio to loans held-for-sale.
 
Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments presented in Note 12 do not represent management’s estimate of the underlying value of the Corporation.
Trading Account Securities and Investment Securities Available-for-Sale
    U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2.
 
    Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S agency securities. The fair value of U.S. agency securities, except for structured notes, is based on an active exchange market and is based on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value incorporates an option adjusted spread in deriving their fair value. These securities are classified as Level 2.
 
    Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as MSRB, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2.

35


Table of Contents

    Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3.
 
    Collateralized mortgage obligations: Agency and private collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These investment securities are classified as Level 2.
 
    Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1.
 
    Corporate securities and mutual funds: Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, the corporate securities and mutual funds are classified as Level 2. The important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently are classified as Level 3.
 
    Residual interests: Residual interests do not trade in an active market with readily observable prices and, based on their valuation methodology, are classified as Level 3. The estimated fair value of the residual interests associated to PFH’s securitizations is determined by using a cash flow valuation model to calculate the present value of projected future cash flows. All economic assumptions are internally-developed (internal-based valuation). The assumptions, which are highly uncertain and require a high degree of judgment, include primarily market discount rates, anticipated prepayment speeds, delinquency and loss rates. The assumptions used are drawn from a combination of internal and external data sources.
Derivatives
Interest rate swaps, interest rate caps and index options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using present value and option pricing models using observable inputs. The derivatives are substantially classified as Level 2. Other derivatives that are exchange-traded, such as futures and options, or that are liquid and have quoted prices, such as forward contracts or TBA’s, are classified as Level 2.
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayments assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3.

36


Table of Contents

Loans held-in-portfolio considered impaired under SFAS No. 114 that are collateral dependent
The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of SFAS No. 114 (as amended by SFAS No. 118). Currently, the associated loans considered impaired as of June 30, 2008 are classified as Level 3.
Loans measured at fair value pursuant to SFAS No. 159
The fair value of loans measured at fair value pursuant to the SFAS No. 159 election was estimated using discounted cash flow analyses that incorporate assumptions or considerations such as prepayment rates, credit loss estimates, delinquency rates, loss severities, among others. Due to the subprime characteristics of the loan portfolio measured at fair value, the lack of trading activity in that market, and the nature of the valuation inputs, these loans are classified as Level 3. The assumptions used in the valuations were validated by management with market data and other pricing indicators obtained from other sources.
Notes payable measured at fair value pursuant to SFAS No. 159 (bond certificates associated with PFH’s on-balance sheet securitizations)
Bond certificates associated with PFH’s on-balance sheet securitizations are measured at fair value on a recurring basis due to the election of the fair value option of SFAS No. 159. The fair value of these bond certificates is derived from discounted cash flow analyses based on historical performance measures, credit risks, interest rate assumptions, and rates of return for similar instruments given the current market environment. The notes payable measured at fair value pursuant to SFAS No. 159 are classified as Level 3.

37


Table of Contents

Note 13 — Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Federal funds purchased
  $ 625,000     $ 303,492     $ 1,430,952  
Assets sold under agreements to repurchase
    4,113,677       5,133,773       4,224,984  
 
 
  $ 4,738,677     $ 5,437,265     $ 5,655,936  
 
Other short-term borrowings consisted of:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Advances with the FHLB paying interest monthly at fixed rates (June 30, 2007 - 5.24% to 5.44%)
        $ 72,000     $ 305,000  
 
                       
Advances with the FHLB paying interest at maturity at fixed rates ranging from 2.23% to 2.40%
  $ 675,000       570,000        
 
                       
Advances under credit facilities with other institutions at fixed rates ranging from 2.50% to 2.94% (June 30, 2007 — 5.35% to 5.50%)
    214,000       487,000       262,675  
 
                       
Commercial paper paying interest at fixed rates (June 30, 2007 - 4.75% to 5.37%)
          7,329       264,239  
 
                       
Term notes purchased paying interest at maturity at fixed rates ranging from 2.20% to 3.40%
    6,453              
 
                       
Term funds purchased at:
                       
-fixed rates ranging from 2.26% to 2.45% (June 30, 2007 — 5.28% to 5.38%)
    439,000       280,000       2,065,000  
-a floating rate of 0.08% over the fed funds rate
                400,000  
 
                       
Other
    2,757       85,650       87,191  
 
 
  $ 1,337,210     $ 1,501,979     $ 3,384,105  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to the borrowings outstanding as of such date. Fed funds rate at June 30, 2008 was 2.50% and 5.38% at June 30, 2007.

38


Table of Contents

Notes payable consisted of:
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Advances with the FHLB:
                       
-with maturities ranging from 2008 through 2018 paying interest at fixed rates ranging from 2.67% to 6.98% (June 30, 2007 — 3.07% to 6.98%)
  $ 1,026,817     $ 813,958     $ 204,195  
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate
          250,000       250,000  
 
                       
Advances under revolving lines of credit maturing in 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate
                362,787  
 
                       
Advances under revolving lines of credit with maturities ranging from 2008 to 2009
paying interest quarterly at floating rates ranging from 0.20% to 0.27% (June 30, 2007 —
0.20% to 0.35%) over the 3-month LIBOR rate
    85,000       110,000       124,997  
 
                       
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%
    3,100       3,100       3,100  
 
                       
Term notes with maturities ranging from 2008 to 2013 paying interest semiannually at fixed rates ranging from 3.88% to 6.85% (June 30, 2007 — 3.35% to 5.65%)
    1,519,021       2,038,259       2,014,659  
 
                       
Term notes with maturities ranging from 2008 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate
    5,358       6,805       8,168  
 
                       
Term notes maturing in 2009 paying interest quarterly at a floating rate of 0.40% (June 30, 2007 — 0.35% to 0.40%) over the 3-month LIBOR rate
    199,822       199,706       349,504  
 
                       
Secured borrowings with maturities ranging from 2009 to 2032 paying interest monthly at fixed rates ranging from 6.04% to 7.04% (June 30, 2007 — 3.86% to 7.12%)
    35,224 *     59,241       2,489,329  
 
                       
Secured borrowings with maturities ranging from 2008 to 2046 paying interest monthly at floating rates ranging from 2.53% to 3.38% (June 30, 2007 — 0.05% to 3.50%) over the 1-month LIBOR rate
    138,501 *     227,743       1,352,710  
 
                       
Notes linked to the S&P 500 Index maturing in 2008
    32,838       36,498       38,118  
 
                       
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 14)
    849,672       849,672       849,672  
 
                       
Other
    29,019       26,370       21,399  
 
 
  $ 3,924,372     $ 4,621,352     $ 8,068,638  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to the borrowings outstanding as of such date. Key index rates as of June 30, 2008 and June 30, 2007, respectively, were as follows: 1-month LIBOR = 2.46% and 5.32%; 3-month LIBOR rate = 2.78% and 5.36%; 10-year U.S. Treasury note = 3.97% and 5.03%.
*   These secured borrowings are measured at fair value as of June 30, 2008 pursuant to the fair value option election under SFAS No. 159.

39


Table of Contents

Note 14 — Trust Preferred Securities
As of June 30, 2008 and 2007, 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.
 
(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.

40


Table of Contents

Note 15 — Stockholders’ Equity
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.
On May 28, 2008, the Corporation closed the public offering of its Series B Preferred Stock pursuant to an Underwriting Agreement, dated May 22, 2008. The Corporation issued 16,000,000 shares of Series B Preferred Stock at a purchase price of $25.00 per share.
The Corporation’s preferred stock outstanding at June 30, 2008 consists of:
    6.375% non-cumulative 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 with the consent of the Board of Governors of the Federal Reserve System 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.
 
    8.25% non-cumulative monthly income preferred stock, 2008 Series B. These shares of preferred stock are perpetual, nonconvertible and are redeemable, in whole or in part, solely at the option of the Corporation with the consent of the Board of Governors of the Federal Reserve System beginning on May 28, 2013. The redemption price per share is $25.50 from May 28, 2013 through May 28, 2014, $25.25 from May 28, 2014 through May 28, 2015 and $25.00 from May 28, 2015 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 $374 million as of June 30, 2008 (December 31, 2007 — $374 million; June 30, 2007 — $346 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarter and six months ended June 30, 2008 and 2007.
Note 16 — Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $21 million and $163 million, respectively, as of June 30, 2008 (December 31, 2007 — $26 million and $174 million; June 30, 2007 — $15 million and $181 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
As of June 30, 2008, the Corporation recorded a liability of $607 thousand (December 31, 2007 - $636 thousand; June 30, 2007 — $753 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under stand-by letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The stand-by letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in stand-by letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s stand-by letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
Popular, Inc. at the holding company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which aggregated to $2.5 billion as of June 30, 2008

41


Table of Contents

(December 31, 2007 — $2.9 billion and June 30, 2007 - $3.4 billion). In addition, as of June 30, 2008, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2007 and June 30, 2007 — $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 17 — Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the following major categories:
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Credit card fees and discounts
  $ 27,282     $ 24,999     $ 54,526     $ 48,523  
Debit card fees
    26,340       16,855       51,710       32,956  
Insurance fees
    13,507       14,720       26,202       27,669  
Processing fees
    13,158       11,677       25,543       23,789  
Sale and administration of investment products
    8,079       7,311       19,076       14,571  
Mortgage servicing fees, net of amortization and fair value adjustments
    11,868       4,641       18,817       10,869  
Other fees
    9,845       9,387       19,672       19,062  
 
Total
  $ 110,079     $ 89,590     $ 215,546     $ 177,439  
 
Note 18 — Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary benefit pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and six months ended June 30, 2008 and 2007 were as follows:
                                                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Six months ended   Quarters ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2008   2007   2008   2007   2008   2007   2008   2007
 
Service cost
  $ 2,315     $ 2,639     $ 4,630     $ 5,745     $ 182     $ 220     $ 364     $ 457  
Interest cost
    8,611       7,959       17,222       15,932       461       419       922       839  
Expected return on plan assets
    (10,169 )     (10,533 )     (20,338 )     (21,057 )     (420 )     (368 )     (840 )     (736 )
Amortization of prior service cost
    67       52       134       104       (13 )     (13 )     (26 )     (26 )
Amortization of net loss
                            172       247       343       495  
 
Net periodic cost
    824       117       1,648       724       382       505       763       1,029  
Curtailment gain
                      (246 )                       (258 )
 
Total cost
  $ 824     $ 117     $ 1,648     $ 478     $ 382     $ 505     $ 763     $ 771  
 
For the six months ended June 30, 2008, contributions made to the pension and restoration plans amounted to approximately $0.8 million. The total contributions expected to be paid during the year 2008 for the pension and restoration plans amount to approximately $5.2 million.

42


Table of Contents

The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six months ended June 30, 2008 and 2007 were as follows:
                                 
    Quarters ended   Six months ended
    June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Service cost
  $ 485     $ 578     $ 970     $ 1,156  
Interest cost
    1,967       1,889       3,934       3,778  
Amortization of prior service cost
    (262 )     (261 )     (524 )     (523 )
 
Total net periodic cost
  $ 2,190     $ 2,206     $ 4,380     $ 4,411  
 
For the six months ended June 30, 2008, contributions made to the postretirement benefit plan amounted to approximately $2.8 million. The total contributions expected to be paid during the year 2008 for the postretirement benefit plan amount to approximately $6.3 million.
Note 19 — Restructuring Plans
PFH Branch Network Restructuring Plan
The Corporation closed Equity One’s consumer service branches during the first quarter of 2008 as part of the initiatives to exit its subprime loan origination operations at PFH (the “PFH Branch Network Restructuring Plan”). PFH continues to hold a $1.2 billion maturing loan portfolio as of June 30, 2008. The PFH Branch Network Restructuring Plan followed the sale on March 1, 2008 of approximately $1.4 billion of PFH consumer and mortgage loans that were originated through Equity One’s consumer branch network to American General Financial (“American General”). The gain on sale of loans and valuation adjustments on loans held-for-sale associated to this portfolio approximated $47.4 million for the six months ended June 30, 2008. American General hired certain of Equity One’s consumer services employees and retained certain branch locations. During the quarter ended March 31, 2008, Equity One closed substantially all branches not assumed by American General. Full-time equivalent employees at the PFH reportable segment were 321 as of June 30, 2008, compared with 932 as of June 30, 2007. PFH continues to operate a mortgage loan servicing unit, a small scale origination / refinancing unit and to carry a maturing loan portfolio.
During the quarter and six months ended June 30, 2008 and as part of this particular restructuring plan, the Corporation incurred (reversed) certain costs, on a pre-tax basis, as detailed in the table below.
                         
    Quarter ended   Six months ended        
(In thousands)   June 30, 2008   June 30, 2008        
 
Personnel costs
  $ 412     $ 8,405 (a)        
Net occupancy expenses
    (845 )     5,905 (b)        
Equipment expenses
          675          
Communications
          590          
Other operating expenses
          1,021 (c)        
 
Total restructuring charges
  ($ 433 )   $ 16,596          
 
(a)   Severance, retention bonuses and other benefits
 
(b)   Lease terminations
 
(c)   Contract cancellations and branch closing costs
Also, during the fourth quarter of 2007, and as disclosed in the 2007 Annual Report, the Corporation recognized impairment charges on long-lived assets of $1.9 million, mainly associated with leasehold improvements, furniture and equipment.

43


Table of Contents

As of June 30, 2008, the PFH Branch Network Restructuring Plan has resulted in combined charges for 2007 and 2008, broken down as follows:
                         
    Impairments on   Restructuring    
(In thousands)   long-lived assets   costs   Total
 
Quarter ended:
                       
December 31, 2007
  $ 1,892           $ 1,892  
March 31, 2008
        $ 17,029       17,029  
June 30, 2008
          (433 )     (433 )
 
Total
  $ 1,892     $ 16,596     $ 18,488  
 
The following table presents the changes during 2008 in the reserve for restructuring costs associated with the PFH Branch Network Restructuring Plan.
         
    Restructuring
(In thousands)   costs
 
Balance at January 1, 2008
     
Charges in quarter ended March 31, 2008
  $ 17,029  
Cash payments
    (4,728 )
 
Balance at March 31, 2008
  $ 12,301  
Charges in quarter ended June 30, 2008
    412  
Cash payments
    (7,913 )
Reversals
    (845 )
 
Balance as of June 30, 2008
  $ 3,955  
 
E-LOAN Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the Corporation began a restructuring plan for its Internet financial services subsidiary E-LOAN (the “E-LOAN Restructuring Plan”). This plan included a substantial reduction of marketing and personnel costs at E-LOAN and changes in E-LOAN’s business model. The changes include concentrating marketing investment toward the Internet and the origination of first mortgage loans that qualify for sale to government sponsored entities (“GSEs”). Also, as a result of escalating credit costs in the current economic environment and lower liquidity in the secondary markets for mortgage related products, in the fourth quarter of 2007, the Corporation determined to hold back the origination by E-LOAN of home equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting to $231.9 million, which included $211.8 million in non-cash impairment losses related to its goodwill and trademark intangible assets.
The cost-control plan initiative and changes in loan origination strategies incorporated as part of the plan resulted in the elimination of over 400 positions between the fourth quarter of 2007 and second quarter of 2008.
The following table presents the changes in restructuring costs reserves for 2008 associated with the E-LOAN Restructuring Plan.
         
    Restructuring
(In thousands)   costs
 
Balance at January 1, 2008
  $ 8,808  
Payments
    (4,628 )
Reversals
    (301 )
 
Balance at March 31, 2008
    3,879  
Payments
    (936 )
 
Balance as of June 30, 2008
  $ 2,943  
 
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment.

44


Table of Contents

Note 20 — Income Taxes
The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
         
(In millions)        
 
Balance as of January 1, 2008
  $ 22.2  
Additions for tax positions January — March 2008
    1.4  
 
Balance as of March 31, 2008
    23.6  
Additions for tax positions April — June 2008
    4.4  
 
Balance as of June 30, 2008
  $ 28.0  
 
As of June 30, 2008, the related accrued interest approximated $3.6 million (June 30, 2007 — $2.8 million). Management determined that as of June 30, 2008 and 2007 there was no need to accrue for the payment of penalties.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation’s effective tax rate, was approximately $26.7 million as of June 30, 2008 (June 30, 2007 — $23.2 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 June 30, 2008, the following years remain subject to examination in the U.S. Federal jurisdiction: 2006 and thereafter; and in the Puerto Rico jurisdiction, 2003 and thereafter. The U.S. Internal Revenue Service (“IRS”) commenced an examination of the Corporation’s U.S. operations tax return for 2006. As of June 30, 2008, the IRS has not proposed any adjustment as a result of the audit. Although the outcomes of the tax audits are uncertain, the Corporation believes that adequate amounts of tax and interest 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 21 — Stock-Based Compensation
The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. Nevertheless, all outstanding award grants under the Stock Option Plan continue to remain in effect as of June 30, 2008 under the original terms of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all 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.

45


Table of Contents

The following table presents information on stock options outstanding as of June 30, 2008:
                                             
(Not in thousands)                                
 
 
                        Weighted-Average        
                Weighted-Average   Remaining Life of   Options   Weighted-Average
Exercise Price       Options   Exercise Price of   Options Outstanding   Exercisable   Exercise Price of
Range per Share       Outstanding   Options Outstanding   In Years   (fully vested)   Options Exercisable
 
$14.39 – $18.50  
 
    1,509,952     $ 15.81       4.23       1,508,752     $ 15.80  
$19.25 – $27.20  
 
    1,547,327     $ 25.24       5.99       1,229,760     $ 25.05  
 
$14.39 – $27.20  
 
    3,057,279     $ 20.58       5.12       2,738,512     $ 19.96  
 
The aggregate intrinsic value of options outstanding as of June 30, 2008 was $2.1 million (June 30, 2007 — $12.6 million). There was no intrinsic value of options exercisable as of June 30, 2008 (June 30, 2007 — $1.0 million).
The following table summarizes the stock option activity and related information:
                 
 
 
    Options   Weighted-Average
(Not in thousands)   Outstanding   Exercise Price
 
Outstanding at January 1, 2007
    3,144,799     $ 20.65  
Granted
           
Exercised
    (10,064 )     15.83  
Forfeited
    (19,063 )     25.50  
Expired
    (23,480 )     20.08  
 
Outstanding as of December 31, 2007
    3,092,192     $ 20.64  
Granted
           
Exercised
           
Forfeited
    (30,620 )     26.13  
Expired
    (4,293 )     27.20  
 
Outstanding as of June 30, 2008
    3,057,279     $ 20.58  
 
The stock options exercisable as of June 30, 2008 totaled 2,738,512 (June 30, 2007 — 2,380,590). There were no stock options exercised during the quarters ended June 30, 2008 and 2007. Thus, there was no intrinsic value of options exercised during the quarters ended June 30, 2008 and 2007. There were no stock options exercised during the six-month period ended June 30, 2008 (June 30, 2007 — 10,064). Thus, there was no intrinsic value of options exercised during the six-month period ended June 30, 2008 (June 30, 2007 — $28 thousand).
There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2007 and 2008.
The Corporation recognized $0.3 million of stock option expense, with a tax benefit of $0.1 million, for the quarter ended June 30, 2008 (June 30, 2007 — $0.4 million, with a tax benefit of $0.2 million). For the six months ended June 30, 2008, the Corporation recognized $0.6 million of stock option expense, with a tax benefit of $0.2 million (June 30, 2007 — $0.9 million, with a tax benefit of $0.4 million). The total unrecognized compensation cost as of June 30, 2008 related to non-vested stock option awards was $1.1 million and is expected to be recognized over a weighted-average period of 1 year.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury

46


Table of Contents

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 restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. 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.
The following table summarizes the restricted stock activity under the Incentive Plan and related information to members of management:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2007
    611,470     $ 22.55  
Granted
           
Vested
    (304,003 )     22.76  
Forfeited
    (3,781 )     19.95  
 
Non-vested as of December 31, 2007
    303,686     $ 22.37  
Granted
           
Vested
    (50,233 )     20.33  
Forfeited
    (4,134 )     19.95  
 
Non-vested as of June 30, 2008
    249,319     $ 22.82  
 
During the quarters and six-month periods ended June 30, 2008 and 2007, no shares of restricted stock were awarded to management under the Incentive Plan.
Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the 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, except when the participant’s employment is terminated by the Corporation without cause. In such case, the participant will receive a pro-rata amount of shares calculated as if the Corporation would have met the performance goal for the performance period. As of June 30, 2008, 6,217 shares have been granted under this plan.
During the quarter ended June 30, 2008, the Corporation recognized $0.3 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.1 million (June 30, 2007 — $0.5 million, with a tax benefit of $0.2 million). For the six-month period ended June 30, 2008, the Corporation recognized $1.2 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.5 million (June 30, 2007 — $1.8 million, with a tax benefit of $0.7 million). The fair market value of the restricted stock vested was $1.6 million at grant date and $0.8 million at vesting date. This triggers a shortfall of $0.8 million that was recorded as an additional income tax expense since the Corporation does not have any surplus due to windfalls. The fair market value of the restricted stock earned was $20 thousand. During the quarter and six-month period ended June 30, 2008, the Corporation recognized $0.5 million and $0.9 million, respectively, of performance shares expense, with a tax benefit of $0.2 million and $0.3 million, respectively. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management as of June 30, 2008 was $11 million and is expected to be recognized over a weighted-average period of 2 years.

47


Table of Contents

The following table summarizes the restricted stock under the Incentive Plan and related information to members of the Board of Directors:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2007
    76,614     $ 22.02  
Granted
    38,427       15.89  
Vested
    (115,041 )     19.97  
Forfeited
           
 
Non-vested as of December 31, 2007
           
Granted
    45,348       11.58  
Vested
    (45,348 )     11.58  
Forfeited
           
 
Non-vested as of June 30, 2008
           
 
During the quarter ended June 30, 2008, the Corporation granted 41,926 (June 30, 2007 — 26,751) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date. During the quarter ended June 30, 2008, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $46 thousand (June 30, 2007 — $0.1 million, with a tax benefit of $58 thousand). For the six-month period ended June 30, 2008, the Corporation granted 45,348 (June 30, 2007 — 29,363) shares of restricted stock to members of the Board of Directors of Popular Inc. and BPPR, which became vested at grant date. During the six-month period ended June 30, 2008, the Corporation recognized $0.2 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $91 thousand (June 30, 2007 — $0.3 million, with a tax benefit of $0.1 million). The fair value at vesting date of the restricted stock vested during 2008 for directors was $0.5 million.
Note 22 — Earnings per Common Share
The computation of earnings per common share (“EPS”) follows:
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands, except share information)   2008   2007   2008   2007
 
Net income
  $ 24,250     $ 74,950     $ 127,540     $ 193,597  
Less: Preferred stock dividends
    6,003       2,978       8,981       5,956  
 
 
                               
Net income applicable to common stock
  $ 18,247     $ 71,972     $ 118,559     $ 187,641  
 
 
                               
Average common shares outstanding
    280,773,513       279,355,701       280,514,164       279,218,147  
Average potential common shares
          88,158             117,671  
 
Average common shares outstanding — assuming dilution
    280,773,513       279,443,859       280,514,164       279,335,818  
 
 
                               
Basic and diluted EPS
  $ 0.06     $ 0.26     $ 0.42     $ 0.67  
 
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and six-month period ended June 30, 2008, there were 3,057,279 and 3,068,430 weighted average antidilutive stock options outstanding, respectively (June 30, 2007 — 1,752,235 and 1,756,748).

48


Table of Contents

Note 23 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
Additional disclosures on non-cash activities for the six-month period are listed in the following table:
                 
(In thousands)   June 30, 2008   June 30, 2007
 
Non-cash activities:
               
Loans transferred to other real estate
  $ 52,926     $ 90,271  
Loans transferred to other property
    21,219       18,106  
 
Total loans transferred to foreclosed assets
    74,145       108,377  
Transfers from loans held-in-portfolio to loans held-for-sale
    422,103        
Transfers from loans held-for-sale to loans held-in-portfolio
    35,482       56,850  
Loans securitized into investment securities (a)
    1,033,032       721,413  
Recognition of mortgage servicing rights on securitizations or asset transfers
    15,521       20,008  
Business acquisitions:
               
Fair value of assets acquired
          703  
Goodwill and other intangible assets acquired
          1,657  
Other liabilities assumed
          (726 )
 
(a)   Includes loans securitized into investment securities and subsequently sold before quarter end.
Note 24 — Segment Reporting
The Corporation’s corporate structure consists of four reportable segments — Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments. Also, management has considered its business strategies with respect to the discontinuance of certain loan origination operations of PFH and runoff of its loan portfolio.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets as of June 30, 2008, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
 
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

49


Table of Contents

Banco Popular North America:
Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a branch network with presence in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc. specializes in financing manufacturing, commercial and healthcare equipment in various markets. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.
Due to the significant losses in the E-LOAN operations during 2007, impacted in part by the restructuring charges and impairment losses that resulted from the restructuring plan effected in 2007, management has determined to provide as additional disclosure the results of E-LOAN apart from the other BPNA subsidiaries.
Popular Financial Holdings:
PFH, after certain restructuring events discussed in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a small scale origination / refinancing unit, to carry a maturing loan portfolio and to operate a mortgage loan servicing unit. PFH’s clientele is primarily subprime borrowers. PFH continues to carry a maturing loan portfolio that approximated $1.2 billion as of June 30, 2008.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC, with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC USA, Inc. incorporated in the United States; and ATH Costa Rica, S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.
The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations are included as part of the EVERTEC segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, and Communications. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the reportable segments.
The Corporation may periodically reclassify reportable segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.

50


Table of Contents

The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.
2008
 
For the quarter ended June 30, 2008
                                         
                    Popular            
    Banco Popular de   Banco Popular   Financial           Intersegment
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 243,211     $ 92,363     $ 7,595     $ (234 )      
Provision for loan losses
    107,755       81,410       1,475              
Non-interest income (loss)
    185,072       29,275       (43,575 )     65,862     $ (36,569 )
Amortization of intangibles
    765       1,506             219        
Depreciation expense
    10,537       3,674       275       3,570       (18 )
Other operating expenses
    197,188       94,146       17,121       44,002       (37,307 )
Income tax expense (benefit)
    19,553       (24,779 )     (19,057 )     4,346       240  
 
Net income (loss)
  $ 92,485     $ (34,319 )   $ (35,794 )   $ 13,491     $ 516  
 
Segment Assets
  $ 26,524,462     $ 12,873,833     $ 2,012,956     $ 249,160     $ (183,029 )
 
For the quarter ended June 30, 2008
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 342,935     $ (5,349 )   $ 299     $ 337,885  
Provision for loan losses
    190,640                   190,640  
Non-interest income
    200,065       976       (7,469 )     193,572  
Amortization of intangibles
    2,490                   2,490  
Depreciation expense
    18,038       569             18,607  
Other operating expenses
    315,150       15,086       (3,600 )     326,636  
Income tax benefit
    (19,697 )     (11,555 )     86       (31,166 )
 
Net income (loss)
  $ 36,379     $ (8,473 )     ($3,656 )   $ 24,250  
 
Segment Assets
  $ 41,477,382     $ 5,902,462     $ (5,701,250 )   $ 41,678,594  
 
For the six months ended June 30, 2008
                                         
                    Popular            
    Banco Popular de   Banco Popular   Financial           Intersegment
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 487,883     $ 187,803     $ 28,991     $ (469 )   $ 53  
Provision for loan losses
    210,234       140,127       8,461              
Non-interest income (loss)
    362,758       83,097       (352 )     135,572       (74,232 )
Amortization of intangibles
    1,508       3,021             453        
Depreciation expense
    21,004       7,268       649       7,280       (36 )
Other operating expenses
    384,517       184,820       65,965       92,265       (74,812 )
Income tax expense (benefit)
    42,065       (28,044 )     (14,681 )     9,852       208  
 
Net income (loss)
  $ 191,313     $ (36,292 )   $ (31,755 )   $ 25,253     $ 461  
 

51


Table of Contents

For the six months ended June 30, 2008
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 704,261     $ (9,785 )   $ 598     $ 695,074  
Provision for loan losses
    358,822       40             358,862  
Non-interest income
    506,843       3,719       (9,015 )     501,547  
Amortization of intangibles
    4,982                   4,982  
Depreciation expense
    36,165       1,153             37,318  
Other operating expenses
    652,755       30,789       (5,596 )     677,948  
Income tax expense (benefit)
    9,400       (19,808 )     379       (10,029 )
 
Net income (loss)
  $ 148,980     $ (18,240 )   $ (3,200 )   $ 127,540  
 
2007
 
For the quarter ended June 30, 2007
                                         
            Banco   Popular            
    Banco Popular de   Popular North   Financial           Intersegment
(In thousands)   Puerto Rico   America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 237,154     $ 91,954     $ 46,755     $ (240 )   $ 867  
Provision for loan losses
    63,482       12,217       39,468              
Non-interest income
    125,090       45,667       11,751       59,853       (35,078 )
Amortization of intangibles
    656       1,938             219        
Depreciation expense
    10,441       4,059       647       4,256       (18 )
Other operating expenses
    179,164       107,070       30,018       44,729       (35,108 )
Income tax expense (benefit)
    27,887       3,905       (3,552 )     3,814       374  
 
Net income (loss)
  $ 80,614     $ 8,432     $ (8,075 )   $ 6,595     $ 541  
 
Segment Assets
  $ 25,863,421     $ 12,914,122     $ 7,759,262     $ 233,167     $ (150,730 )
 
For the quarter ended June 30, 2007
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 376,490     $ (5,373 )   $ 300     $ 371,417  
Provision for loan losses
    115,167                   115,167  
Non-interest income (loss)
    207,283       (1,614 )     (2,294 )     203,375  
Amortization of intangibles
    2,813                   2,813  
Depreciation expense
    19,385       594             19,979  
Other operating expenses
    325,873       14,218       (1,830 )     338,261  
Income tax expense (benefit)
    32,428       (8,750 )     (56 )     23,622  
 
Net income (loss)
  $ 88,107     $ (13,049 )   $ (108 )   $ 74,950  
 
Segment Assets
  $ 46,619,242     $ 6,471,299     $ (6,105,178 )   $ 46,985,363  
 

52


Table of Contents

For the six months ended June 30, 2007
                                         
            Banco   Popular            
    Banco Popular de   Popular North   Financial           Intersegment
(In thousands)   Puerto Rico   America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 469,378     $ 181,738     $ 88,409     $ (473 )   $ 1,524  
Provision for loan losses
    110,480       22,650       78,376              
Non-interest income (loss)
    241,842       102,609       (50,603 )     119,475       (82,305 )
Amortization of intangibles
    1,318       4,011             467        
Depreciation expense
    21,165       8,082       1,260       8,320       (36 )
Other operating expenses
    352,992       212,757       81,338       88,625       (69,824 )
Income tax expense (benefit)
    58,382       12,902       (42,708 )     7,749       (4,472 )
 
Net income (loss)
  $ 166,883     $ 23,945     $ (80,460 )   $ 13,841     $ (6,449 )
 
For the six months ended June 30, 2007
                                 
    Total Reportable                   Total Popular,
(In thousands)   Segments   Corporate   Eliminations   Inc.
 
Net interest income (expense)
  $ 740,576     $ (14,776 )   $ 599     $ 726,399  
Provision for loan losses
    211,506       7             211,513  
Non-interest income
    331,018       128,049       (3,516 )     455,551  
Amortization of intangibles
    5,796                   5,796  
Depreciation expense
    38,791       1,182             39,973  
Other operating expenses
    665,888       28,161       (3,437 )     690,612  
Income tax expense
    31,853       8,386       220       40,459  
 
Net income
  $ 117,760     $ 75,537     $ 300     $ 193,597  
 
During the six months ended June 30, 2007, the Corporate group realized net gains on sale and valuation adjustments of investment securities, mainly marketable equity securities, of approximately $108.1 million before tax. There were no realized net gains on sale of securities recorded by the Corporate group during the six-month period ended June 30, 2008. These net gains are included in “non-interest income” within the “Corporate” group.
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
2008
For the quarter ended June 30, 2008
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 88,401     $ 151,596     $ 3,070     $ 144     $ 243,211  
Provision for loan losses
    61,150       46,605                   107,755  
Non-interest income
    35,755       118,265       31,145       (93 )     185,072  
Amortization of intangibles
    31       572       162             765  
Depreciation expense
    3,825       6,416       296             10,537  
Other operating expenses
    55,244       123,846       18,194       (96 )     197,188  
Income tax (benefit) expense
    (5,875 )     20,025       5,334       69       19,553  
 
Net income
  $ 9,781     $ 72,397     $ 10,229     $ 78     $ 92,485  
 
Segment Assets
  $ 11,461,433     $ 19,066,945     $ 791,390     $ (4,795,306 )   $ 26,524,462  
 

53


Table of Contents

For the six months ended June 30, 2008
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 181,759     $ 299,986     $ 5,857     $ 281     $ 487,883  
Provision for loan losses
    118,018       92,216                   210,234  
Non-interest income
    61,156       245,946       55,775       (119 )     362,758  
Amortization of intangibles
    61       1,144       303             1,508  
Depreciation expense
    7,352       13,043       609             21,004  
Other operating expenses
    102,273       246,905       35,497       (158 )     384,517  
Income tax (benefit) expense
    (6,405 )     39,402       8,915       153       42,065  
 
Net income
  $ 21,616     $ 153,222     $ 16,308     $ 167     $ 191,313  
 
2007
For the quarter ended June 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 93,754     $ 140,326     $ 2,933     $ 141     $ 237,154  
Provision for loan losses
    22,889       40,593                   63,482  
Non-interest income
    22,000       80,681       22,956       (547 )     125,090  
Amortization of intangibles
    220       325       111             656  
Depreciation expense
    3,574       6,569       298             10,441  
Other operating expenses
    44,048       118,478       16,717       (79 )     179,164  
Income tax expense
    12,507       12,703       2,803       (126 )     27,887  
 
Net income
  $ 32,516     $ 42,339     $ 5,960     $ (201 )   $ 80,614  
 
Segment Assets
  $ 11,422,905     $ 18,081,721     $ 724,346     $ (4,365,551 )   $ 25,863,421  
 
For the six months ended June 30, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 184,182     $ 279,736     $ 5,180     $ 280     $ 469,378  
Provision for loan losses
    35,822       74,658                   110,480  
Non-interest income
    45,107       154,575       42,807       (647 )     241,842  
Amortization of intangibles
    440       658       220             1,318  
Depreciation expense
    7,378       13,214       573             21,165  
Other operating expenses
    88,353       231,927       32,891       (179 )     352,992  
Income tax expense
    27,400       26,722       4,328       (68 )     58,382  
 
Net income
  $ 69,896     $ 87,132     $ 9,975     $ (120 )   $ 166,883  
 

54


Table of Contents

Additional disclosures with respect to the Banco Popular North America reportable segment are as follows:
2008
For the quarter ended June 30, 2008
                                 
                            Total
    Banco Popular                   Banco Popular
(In thousands)   North America   E-LOAN   Eliminations   North America
 
Net interest income
  $ 84,666     $ 7,350     $ 347     $ 92,363  
Provision for loan losses
    55,066       26,344             81,410  
Non-interest income
    26,246       3,263       (234 )     29,275  
Amortization of intangibles
    1,057       449             1,506  
Depreciation expense
    3,205       469             3,674  
Other operating expenses
    73,976       20,167       3       94,146  
Income tax benefit
    (9,723 )     (15,094 )     38       (24,779 )
 
Net loss
  $ (12,669 )   $ (21,722 )   $ 72     $ (34,319 )
 
Segment Assets
  $ 13,151,497     $ 1,053,195     $ (1,330,859 )   $ 12,873,833  
 
For the six months ended June 30, 2008
                                 
                            Total
    Banco Popular                   Banco Popular
(In thousands)   North America   E-LOAN   Eliminations   North America
 
Net interest income
  $ 173,133     $ 13,996     $ 674     $ 187,803  
Provision for loan losses
    87,347       52,780             140,127  
Non-interest income
    72,169       11,267       (339 )     83,097  
Amortization of intangibles
    2,122       899             3,021  
Depreciation expense
    6,318       950             7,268  
Other operating expenses
    146,970       37,844       6       184,820  
Income tax benefit
    (603 )     (27,556 )     115       (28,044 )
 
Net income (loss)
  $ 3,148     $ (39,654 )   $ 214     $ (36,292 )
 
2007
For the quarter ended June 30, 2007
                                 
                            Total Banco
    Banco Popular                   Popular North
(In thousands)   North America   E-LOAN   Eliminations   America
 
Net interest income
  $ 87,949     $ 3,795     $ 210     $ 91,954  
Provision for loan losses
    10,756       1,461             12,217  
Non-interest income
    24,261       21,762       (356 )     45,667  
Amortization of intangibles
    1,240       698             1,938  
Depreciation expense
    3,240       819             4,059  
Other operating expenses
    69,086       37,973       11       107,070  
Income tax expense (benefit)
    10,271       (6,312 )     (54 )     3,905  
 
Net income (loss)
  $ 17,617     $ (9,082 )   $ (103 )   $ 8,432  
 
Segment Assets
  $ 12,897,767     $ 1,006,336     $ (989,981 )   $ 12,914,122  
 

55


Table of Contents

For the six months ended June 30, 2007
                                 
                            Total Banco
    Banco Popular                   Popular North
(In thousands)   North America   E-LOAN   Eliminations   America
 
Net interest income
  $ 173,913     $ 7,441     $ 384     $ 181,738  
Provision for loan losses
    19,635       3,015             22,650  
Non-interest income
    48,386       54,844       (621 )     102,609  
Amortization of intangibles
    2,616       1,395             4,011  
Depreciation expense
    6,491       1,591             8,082  
Other operating expenses
    138,607       74,127       23       212,757  
Income tax expense (benefit)
    20,312       (7,319 )     (91 )     12,902  
 
Net income (loss)
  $ 34,638     $ (10,524 )   $ (169 )   $ 23,945  
 
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:
INTERSEGMENT REVENUES*
                                 
    Quarter ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Banco Popular de Puerto Rico:
                               
Commercial Banking
  $ 212     $ (64 )   $ 612     $ (58 )
Consumer and Retail Banking
    491       (163 )     1,414       (178 )
Other Financial Services
    (97 )     (102 )     (130 )     (231 )
Banco Popular North America:
                               
Banco Popular North America
    (1,347 )     (1,081 )     (4,335 )     (1,108 )
E-LOAN
          (73 )     (627 )     (12,613 )
Popular Financial Holdings
    1,999       1,943       3,721       2,246  
EVERTEC
    (37,827 )     (34,671 )     (74,834 )     (68,839 )
 
Total
  $ (36,569 )   $ (34,211 )   $ (74,179 )   $ (80,781 )
 
*   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.

56


Table of Contents

A breakdown of revenues and selected balance sheet information by geographical area follows:
Geographic Information
                                 
    Quarter ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2008   2007   2008   2007
 
Revenues**
                               
Puerto Rico
  $ 426,504     $ 362,811     $ 849,106     $ 840,796  
United States
    78,272       190,244       288,844       297,483  
Other
    26,681       21,737       58,671       43,671  
 
Total consolidated revenues
  $ 531,457     $ 574,792     $ 1,196,621     $ 1,181,950  
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159, gain on sale of loans and valuation adjustments on loans held- for-sale, and other operating income.
                         
    June 30,   December 31,   June 30,
(In thousands)   2008   2007   2007
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 25,352,860     $ 26,017,716     $ 24,996,466  
Loans
    15,442,742       15,679,181       15,129,703  
Deposits
    16,462,795       17,341,601       14,237,308  
Mainland United States
                       
Total assets
  $ 15,033,702     $ 17,093,929     $ 20,733,903  
Loans
    11,524,665       13,517,728       16,955,769  
Deposits
    9,342,281       9,737,996       9,900,375  
Other
                       
Total assets
  $ 1,292,032     $ 1,299,792     $ 1,254,994  
Loans
    664,271       714,093       666,373  
Deposits *
    1,310,652       1,254,881       1,248,312  
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
Note 25 — Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of June 30, 2008, December 31, 2007 and June 30, 2007, and the results of their operations and cash flows for the periods ended June 30, 2008 and 2007.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA, T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;
 
    Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc., 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.

57


Table of Contents

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 PNA.
The principal source of income for the PIHC consists of dividends from BPPR. As members subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by each entity during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. As of June 30, 2008, BPPR could have declared a dividend of approximately $110 million (December 31, 2007 — $45 million; June 30, 2007 — $192 million) without the approval of the Federal Reserve Board. As of June 30, 2008, BPNA was required to obtain the approval of the Federal Reserve Board to declare a dividend. The Corporation has never received dividend payments from its U.S. subsidiaries. Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2007 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

58


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2008
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 904     $ 285     $ 7,646     $ 879,893     $ (1,109 )   $ 887,619  
Money market investments
    435,200       38,700       207       897,796       (474,107 )     897,796  
Investment securities available-for-sale, at fair value
            10,077               7,692,250               7,702,327  
Investment securities held-to-maturity, at amortized cost
    456,490       1,250               204,743       (430,000 )     232,483  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       213,913               240,731  
Trading account securities, at fair value
                            499,989       (501 )     499,488  
Investment in subsidiaries
    2,546,533       306,970       1,485,245               (4,338,748 )        
Loans held-for-sale measured at lower of cost or market value
                            337,552               337,552  
Loans measured at fair value pursuant to SFAS No. 159
                            844,892               844,892  
 
Loans held-in-portfolio
    739,360               1,685,000       26,633,984       (2,422,340 )     26,636,004  
Less — Unearned income
                            186,770               186,770  
Allowance for loan losses
    60                       652,670               652,730  
 
 
    739,300               1,685,000       25,794,544       (2,422,340 )     25,796,504  
 
Premises and equipment, net
    22,679               131       610,640               633,450  
Other real estate
    47                       102,762               102,809  
Accrued income receivable
    725       119       8,044       162,829       (8,443 )     163,274  
Servicing assets
                            190,778               190,778  
Other assets
    34,320       63,450       66,159       2,335,114       (43,201 )     2,455,842  
Goodwill
                            628,826               628,826  
Other intangible assets
    554                       63,669               64,223  
 
 
  $ 4,251,177     $ 420,852     $ 3,264,824     $ 41,460,190     $ (7,718,449 )   $ 41,678,594  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,483,338     $ (1,051 )   $ 4,482,287  
Interest bearing
                            22,672,348       (38,907 )     22,633,441  
 
 
                            27,155,686       (39,958 )     27,115,728  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 223,500       4,950,377       (435,200 )     4,738,677  
Other short-term borrowings
                    479,193       1,796,357       (938,340 )     1,337,210  
Notes payable at cost
  $ 476,639               2,212,215       2,546,294       (1,484,501 )     3,750,647  
Notes payable at fair value
                            173,725               173,725  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    68,544     $ 93       69,684       769,459       (51,276 )     856,504  
 
 
    545,183       93       2,984,592       37,821,898       (3,379,275 )     37,972,491  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    586,875                                       586,875  
Common stock
    1,767,721       3,961       2       51,819       (55,782 )     1,767,721  
Surplus
    554,306       851,193       734,964       2,810,895       (4,388,258 )     563,100  
Retained earnings
    1,095,167       (378,975 )     (448,860 )     815,083       3,958       1,086,373  
Accumulated other comprehensive loss, net of tax
    (90,448 )     (55,420 )     (5,874 )     (39,122 )     100,416       (90,448 )
Treasury stock, at cost
    (207,627 )                     (492 )     492       (207,627 )
 
 
    3,705,994       420,759       280,232       3,638,183       (4,339,174 )     3,705,994  
 
 
  $ 4,251,177     $ 420,852     $ 3,264,824     $ 41,460,190     $ (7,718,449 )   $ 41,678,594  
 

59


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2007
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 1,391     $ 376     $ 400     $ 818,455     $ (1,797 )   $ 818,825  
Money market investments
    46,400       300       151       1,083,212       (123,351 )     1,006,712  
Trading account securities, at fair value
                            768,274       (319 )     767,955  
Investment securities available-for-sale, at fair value
            31,705               8,483,430               8,515,135  
Investment securities held-to-maturity, at amortized cost
    626,129       1,250               287,087       (430,000 )     484,466  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       189,766               216,584  
Investment in subsidiaries
    2,817,934       648,720       1,717,823               (5,184,477 )        
Loans held-for-sale measured at lower of cost or market value
                            1,889,546               1,889,546  
 
Loans held-in-portfolio
    725,426       25,150       2,978,528       28,282,440       (3,807,978 )     28,203,566  
Less — Unearned income
                            182,110               182,110  
Allowance for loan losses
    60                       548,772               548,832  
 
 
    725,366       25,150       2,978,528       27,551,558       (3,807,978 )     27,472,624  
 
Premises and equipment, net
    23,772               131       564,260               588,163  
Other real estate
                            81,410               81,410  
Accrued income receivable
    1,675       62       14,271       215,719       (15,613 )     216,114  
Servicing assets
                            196,645               196,645  
Other assets
    40,740       60,814       47,210       1,336,674       (28,444 )     1,456,994  
Goodwill
                            630,761               630,761  
Other intangible assets
    554                       68,949               69,503  
 
 
  $ 4,298,386     $ 768,378     $ 4,770,906     $ 44,165,746     $ (9,591,979 )   $ 44,411,437  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,512,527     $ (1,738 )   $ 4,510,789  
Interest bearing
                            23,824,140       (451 )     23,823,689  
 
 
                            28,336,667       (2,189 )     28,334,478  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 168,892       5,391,273       (122,900 )     5,437,265  
Other short-term borrowings
  $ 165,000               1,155,773       1,707,184       (1,525,978 )     1,501,979  
Notes payable
    480,117               2,754,339       3,669,216       (2,282,320 )     4,621,352  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    71,387     $ 116       62,059       843,892       (43,082 )     934,372  
 
 
    716,504       116       4,141,063       40,378,232       (4,406,469 )     40,829,446  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,761,908       3,961       2       51,619       (55,582 )     1,761,908  
Surplus
    563,183       851,193       734,964       2,709,595       (4,290,751 )     568,184  
Retained earnings
    1,324,468       (46,897 )     (99,806 )     1,037,153       (895,451 )     1,319,467  
Treasury stock, at cost
    (207,740 )                     (664 )     664       (207,740 )
Accumulated other comprehensive loss, net of tax
    (46,812 )     (39,995 )     (5,317 )     (10,298 )     55,610       (46,812 )
 
 
    3,581,882       768,262       629,843       3,787,405       (5,185,510 )     3,581,882  
 
 
  $ 4,298,386     $ 768,378     $ 4,770,906     $ 44,165,746     $ (9,591,979 )   $ 44,411,437  
 

60


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2007
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 1,775     $ 317     $ 377     $ 761,533     $ (1,917 )   $ 762,085  
Money market investments
            19,025       212       632,987       (77,237 )     574,987  
Investment securities available-for-sale, at fair value
    6,354       36,261               8,940,703       (8,850 )     8,974,468  
Investment securities held-to-maturity, at amortized cost
    670,336       1,501               187,642       (430,000 )     429,479  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       133,332               160,150  
Trading account securities, at fair value
                            676,923       (65 )     676,858  
Investment in subsidiaries
    3,144,484       1,052,636       1,995,552               (6,192,672 )        
Loans held-for-sale measured at lower of cost or market value
                            605,990               605,990  
 
Loans held-in-portfolio
    340,197               2,958,637       32,454,522       (3,283,637 )     32,469,719  
Less — Unearned income
                            323,864               323,864  
Allowance for loan losses
    40                       564,807               564,847  
 
 
    340,157               2,958,637       31,565,851       (3,283,637 )     31,581,008  
 
Premises and equipment, net
    24,891               133       562,481               587,505  
Other real estate
                            112,858               112,858  
Accrued income receivable
    446       110       12,473       249,104       (12,387 )     249,746  
Servicing assets
                            201,861               201,861  
Other assets
    42,239       59,686       53,233       1,199,718       (57,276 )     1,297,600  
Goodwill
                            668,469               668,469  
Other intangible assets
    554                       101,745               102,299  
 
 
  $ 4,245,661     $ 1,169,537     $ 5,033,009     $ 46,601,197     $ (10,064,041 )   $ 46,985,363  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,282,054     $ (1,859 )   $ 4,280,195  
Interest bearing
                            21,125,036       (19,236 )     21,105,800  
 
 
                            25,407,090       (21,095 )     25,385,995  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 153,952       5,559,984       (58,000 )     5,655,936  
Other short-term borrowings
                    857,763       4,018,829       (1,492,487 )     3,384,105  
Notes payable
  $ 486,479               2,890,535       6,491,688       (1,800,064 )     8,068,638  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    62,102     $ 66       94,464       705,236       (68,368 )     793,500  
 
 
    548,581       66       3,996,714       42,612,827       (3,870,014 )     43,288,174  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,756,337       3,961       2       51,619       (55,582 )     1,756,337  
Surplus
    528,151       851,193       734,964       2,571,295       (4,152,451 )     533,152  
Retained earnings
    1,706,101       380,548       323,165       1,601,501       (2,310,215 )     1,701,100  
Accumulated other comprehensive loss, net of tax
    (274,817 )     (66,231 )     (21,836 )     (235,490 )     323,557       (274,817 )
Treasury stock, at cost
    (205,567 )                     (664 )     664       (205,567 )
 
 
    3,697,080       1,169,471       1,036,295       3,988,261       (6,194,027 )     3,697,080  
 
 
  $ 4,245,661     $ 1,169,537     $ 5,033,009     $ 46,601,197     $ (10,064,041 )   $ 46,985,363  
 

61


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2008
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
INTEREST AND DIVIDEND INCOME:
                                               
Dividend income from subsidiaries
  $ 45,000                             $ (45,000 )        
Loans
    5,876             $ 23,502     $ 497,163       (29,123 )   $ 497,418  
Money market investments
    475     $ 299       15       3,511       (824 )     3,476  
Investment securities
    7,367       316       224       82,236       (7,015 )     83,128  
Trading account securities
                            16,133               16,133  
 
 
    58,718       615       23,741       599,043       (81,962 )     600,155  
 
INTEREST EXPENSE:
                                               
Deposits
                            168,343       (298 )     168,045  
Short-term borrowings
    589               4,520       44,967       (7,574 )     42,502  
Long-term debt
    8,283               30,483       42,346       (29,389 )     51,723  
 
 
    8,872               35,003       255,656       (37,261 )     262,270  
 
Net interest income (loss)
    49,846       615       (11,262 )     343,387       (44,701 )     337,885  
Provision for loan losses
                            190,640               190,640  
 
Net interest income (loss) after provision for loan losses
    49,846       615       (11,262 )     152,747       (44,701 )     147,245  
Service charges on deposit accounts
                            51,799               51,799  
Other service fees
                            116,391       (6,312 )     110,079  
Net gain on sale and valuation adjustments of investment securities
                            27,763               27,763  
Trading account profit
                            16,711               16,711  
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
                            (35,922 )             (35,922 )
Loss on sale of loans and valuation adjustments on loans held-for-sale
                            (1,453 )             (1,453 )
Other operating (loss) income
    (76 )     3,604       (2,045 )     24,270       (1,158 )     24,595  
 
 
    49,770       4,219       (13,307 )     352,306       (52,171 )     340,817  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    5,909       106               121,182       (1,774 )     125,423  
Pension, profit sharing and other benefits
    1,414       19               35,039       (10 )     36,462  
 
 
    7,323       125               156,221       (1,784 )     161,885  
Net occupancy expenses
    614       8       1       25,739               26,362  
Equipment expenses
    892                       29,832               30,724  
Other taxes
    461                       13,418               13,879  
Professional fees
    3,289       2       90       29,679       (1,433 )     31,627  
Communications
    73       4       9       13,059               13,145  
Business promotion
    482                       17,769               18,251  
Printing and supplies
    19                       3,880               3,899  
Other operating expenses
    (12,683 )     (101 )     68       58,570       (383 )     45,471  
Amortization of intangibles
                            2,490               2,490  
 
 
    470       38       168       350,657       (3,600 )     347,733  
 
Income (loss) before income tax and equity in losses of subsidiaries
    49,300       4,181       (13,475 )     1,649       (48,571 )     (6,916 )
Income tax benefit
    (1,003 )             (4,721 )     (25,529 )     87       (31,166 )
 
Income (loss) before equity in losses of subsidiaries
    50,303       4,181       (8,754 )     27,178       (48,658 )     24,250  
Equity in undistributed losses of subsidiaries
    (26,053 )     (76,247 )     (70,488 )             172,788          
 
NET INCOME (LOSS)
  $ 24,250     $ (72,066 )   $ (79,242 )   $ 27,178     $ 124,130     $ 24,250  
 

62


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2007
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
INTEREST AND DIVIDEND INCOME:
                                               
Dividend income from subsidiaries
  $ 44,700                             $ (44,700 )        
Loans
    4,158             $ 38,419     $ 656,059       (42,151 )   $ 656,485  
Money market investments
    793     $ 98       10       6,701       (1,850 )     5,752  
Investment securities
    9,548       821       224       109,671       (7,201 )     113,063  
Trading account securities
                            9,611               9,611  
 
 
    59,199       919       38,653       782,042       (95,902 )     784,911  
 
INTEREST EXPENSE:
                                               
Deposits
                            183,564       (834 )     182,730  
Short-term borrowings
    78               14,418       124,934       (19,964 )     119,466  
Long-term debt
    8,366               37,033       96,602       (30,703 )     111,298  
 
 
    8,444               51,451       405,100       (51,501 )     413,494  
 
Net interest income (loss)
    50,755       919       (12,798 )     376,942       (44,401 )     371,417  
Provision for loan losses
                            115,167               115,167  
 
Net interest income (loss) after provision for loan losses
    50,755       919       (12,798 )     261,775       (44,401 )     256,250  
Service charges on deposit accounts
                            48,392               48,392  
Other service fees
                            91,163       (1,573 )     89,590  
Net (loss) gain on sale and valuation adjustments of investment securities
    (2,132 )     (907 )             4,214               1,175  
Trading account gain
                            10,377               10,377  
Gain on sale of loans and valuation adjustment on loans held-for-sale
                            28,294               28,294  
Other operating income (loss)
    529       1,201       (102 )     24,640       (721 )     25,547  
 
 
    49,152       1,213       (12,900 )     468,855       (46,695 )     459,625  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    5,518       98               121,742       (408 )     126,950  
Pension, profit sharing and other benefits
    1,277       17               36,162       (118 )     37,338  
 
 
    6,795       115               157,904       (526 )     164,288  
Net occupancy expenses
    612       8       1       25,880               26,501  
Equipment expenses
    385                       31,860               32,245  
Other taxes
    335                       11,500               11,835  
Professional fees
    3,295       8       57       36,204       (922 )     38,642  
Communications
    136                       16,837               16,973  
Business promotion
    881                       29,488               30,369  
Printing and supplies
    24                       4,525               4,549  
Other operating expenses
    (12,112 )     (100 )     117       45,317       (384 )     32,838  
Amortization of intangibles
                            2,813               2,813  
 
 
    351       31       175       362,328       (1,832 )     361,053  
 
Income (loss) before income tax and equity in earnings (losses) of subsidiaries
    48,801       1,182       (13,075 )     106,527       (44,863 )     98,572  
Income tax expense (benefit)
    1,385               (4,576 )     26,870       (57 )     23,622  
 
Income (loss) before equity in earnings (losses) of subsidiaries
    47,416       1,182       (8,499 )     79,657       (44,806 )     74,950  
Equity in undistributed earnings (losses) of subsidiaries
    27,534       (7,926 )     (143 )             (19,465 )        
 
NET INCOME (LOSS)
  $ 74,950     $ (6,744 )   $ (8,642 )   $ 79,657     $ (64,271 )   $ 74,950  
 

63


Table of Contents

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
INTEREST AND DIVIDEND INCOME:
                                               
Dividend income from subsidiaries
  $ 89,900                             ($ 89,900 )        
Loans
    12,773     $ 219     $ 58,592     $ 1,058,688       (71,737 )   $ 1,058,535  
Money market investments
    557       405       195       11,262       (2,215 )     10,204  
Investment securities
    16,076       632       447       174,409       (14,031 )     177,533  
Trading account securities
                            34,826               34,826  
 
 
    119,306       1,256       59,234       1,279,185       (177,883 )     1,281,098  
 
INTEREST EXPENSE:
                                               
Deposits
                            363,384       (399 )     362,985  
Short-term borrowings
    2,609               14,373       113,318       (22,653 )     107,647  
Long-term debt
    16,567               67,035       97,319       (65,529 )     115,392  
 
 
    19,176               81,408       574,021       (88,581 )     586,024  
 
Net interest income (loss)
    100,130       1,256       (22,174 )     705,164       (89,302 )     695,074  
Provision for loan losses
    40                       358,822               358,862  
 
Net interest income (loss) after provision for loan losses
    100,090       1,256       (22,174 )     346,342       (89,302 )     336,212  
Service charges on deposit accounts
                            102,886               102,886  
Other service fees
                            222,668       (7,122 )     215,546  
Net gain on sale and valuation adjustments of investment securities
                            75,703               75,703  
Trading account profit
                            21,175               21,175  
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
                            (38,942 )             (38,942 )
Gain on sale of loans and valuation adjustments on loans held-for-sale
                            67,292               67,292  
Other operating (loss) income
    (111 )     7,154       (2,041 )     54,779       (1,894 )     57,887  
 
 
    99,979       8,410       (24,215 )     851,903       (98,318 )     837,759  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    11,993       197               251,951       (2,009 )     262,132  
Pension, profit sharing and other benefits
    2,923       42               72,039       (72 )     74,932  
 
 
    14,916       239               323,990       (2,081 )     337,064  
Net occupancy expenses
    1,243       15       2       60,094               61,354  
Equipment expenses
    1,741                       60,981               62,722  
Other taxes
    900                       26,122               27,022  
Professional fees
    7,445       5       180       63,304       (2,682 )     68,252  
Communications
    195       9       18       28,226               28,448  
Business promotion
    771                       34,696               35,467  
Printing and supplies
    42                       8,132               8,174  
Other operating expenses
    (26,740 )     (201 )     121       114,415       (832 )     86,763  
Amortization of intangibles
                            4,982               4,982  
 
 
    513       67       321      </